New research shows that deeper relationships with service providers are a leading contributor to the overall success of companies, especially those involved in the supply chain. That’s according to a global study of over 400 companies conducted by US-based research firm SCM World. “As with most things in life, rich rewards are the result of careful investment. Also, if your service providers relationships are purely transactional, disappointment is inevitable,” said Kevin O'Marah, SCM World research head and Sr. Research Fellow, Stanford University, at a recent SAPICS Professional Development event. According to O’Marah, the key to success in relationships with service providers across the entire supply chain, such as consultants, technology firms, logistics specialists and contract manufacturers, lies in the parties embedding themselves in each other’s operations in a mutually beneficial manner.

Global trend: deeper engagements with fewer service providers
The study revealed that companies from around the world, particularly in Europe where supply chain practitioners are at the top of their game, are moving towards engaging with fewer service providers with whom they enjoy deeper engagements. “When you find someone you like and they’re a good culture fit for your business, invest in them and you’ll get a lot of payback. Trust is key,” he said. “With a truly collaborative relationship, everyone learns faster and things start working better far more quickly, because decisions aren’t held up by internal processes or consulting legal all the time. However, if your relationship is purely defined by an SLA, don’t be surprised if you get fired!”

Rules of engagement: Beyond SLAs
Regarding methods of engagement, the study showed most of the usual practices still apply. However, the key finding was that performance trackers such as service level agreements (SLAs), key performance indicators (KPIs) and competitive sourcing processes (RFPs) need to be employed in a positive way as part of a successful collaborative relationship.

“An engagement with a service provider needs to be managed as a programme, not as a purchase – so merely tracking an SLA simply won’t do,” said O’Marah.
 Based on his experience in South Africa, O’Marah says he finds that most firms ‘buy hard’ – meaning that they generally don’t engage deeply with service providers - and are reluctant to listen to the advice of their expert service providers.

According to the study, the most satisfied companies enhance their service provider relationships by paying attention to things like governance structure and conducting strategy/innovation workshops upfront – as well as on an ongoing basis. Many of them also maintain project management offices to ensure their substantial investment is managed properly.

In addition to the tip on forming culturally-sound, collaborative relationships – “The kind where representatives of each company are deeply invested enough to fight on the other’s behalf” – O’Marah said it’s absolutely critical to be humble enough to receive good advice. “Listen to the specialists!” he said. “After all, you’ve engaged them to do what they do best so that your company can get on with doing what it does best –so, benefit from their experience.”

A few more keys
·         Avoid a short-term approach. “Anyone who’s not in it for the long run almost always ends up giving problems,” said O’Marah.
·         Work on communication – especially with well-meaning vendors who truly believe they can do what they promise in a certain time frame –“It’s not their fault, but if you don’t take time figuring out your relationship with your software provider, you’re going to get killed!”
·         Poor information – “It’s important to share forecast data and other business information in a way that helps your service providers to serve you better. Don’t surprise them.”
·         Develop an environment in which people freely raise issues and table creative ideas.

By applying many of these principles, German toy maker Lego went from a 63% fulfillment rate in 2004 to a 96% rate in 2010, while realising a 30% reduction in supply chain costs. “Lego engaged deeply with a supplier (DHL) who knew what they were doing, they took the time to build a system together having done the upfront homework and both worked hard.” Lastly, says O’Marah, the best supply chain success stories are built on a simple foundation: “Keep your word and deliver on your promises – on both sides.” By treating the other party’s business as if it were your own, the relationship can only bear good fruit.