Managing Supplier Relationships: The Difference between Strategic and Tactical Supplier Relationships
Relationships between distributors and suppliers range from highly tactical to extremely strategic. A wise distributor constantly attempts to calibrate the relationship with each supplier and makes adjustments to the energy it applies to each relationship. Personnel at all levels of a distributor must be able to describe the current relationship with its suppliers and simultaneously understand how the distributor is attempting to reshape the relationship in the future.
Tactical v. Strategic Relationships
While a distributor has a relationship with each of its suppliers and a supplier has a relationship with each of its distributors, not all of those relationships are equal. Not all distribution agreements are of equal importance. Some relationships are merely tactical while others are strategic. What's the difference? A tactical relationship can help both partners generate revenue, but little else. A strategic relationship can help both partners accomplish greater and longer-term objectives.
Perhaps an example is appropriate. In a grocery store, the relationship between a candle manufacturer and a retail grocery chain is most likely tactical. A grocery store's display and inventory of candles is unlikely to encourage a customer to make a specific trip to the store. The grocery store's objective is to generate a level of revenue per linear foot of shelf space. Customers for candles have several alternatives: hardware stores, drug stores, variety stores, department stores, and specialty candle stores. The relationship between a dairy supplier and a retail grocery chain however is most likely strategic. Dairy shelves are usually in the rear of the grocery store. A customer must walk past several aisles of other merchandise before coming to the counter to purchase a quart of milk. A grocer works hard to entice a customer to buy tomatoes, laundry detergent, steak sauce, breakfast cereal and shoe polish as she walks to and from the dairy counter.
Grocers understand that a customer's need for dairy products encourages customers make a specific trip to the grocery store. The value of a dairy producer to the grocery chain is directly proportional to the breadth of the dairy's product line. For this reason, dairy producers offer a broad family of products: regular, vitamin enriched, lactose-free, organic, low-carbohydrate, chocolate, acidophilus, soy, non-fat, low-fat, and fruit-flavored milk; salted, unsalted, organic, whipped and squeezable butter; regular and low-fat cottage cheese, with and without fruit; regular, light and low-fat sour cream; regular, non-fat, low-fat and low-carbohydrate ice cream; buttermilk, half-and-half, whipped and whipping cream, eggnog, yogurt and even non-dairy items like fruit juice, fruit punch, non-cream coffee creamers and more. The broad product offering and the strategic nature of the relationship between the dairy producer and the grocery chain explains why grocers don't often switch their dairy suppliers.
A distributor must understand whether its relationship with a supplier is strategic or tactical. Since it is more difficult to replace a strategic distributor than a tactical distributor, a distributor serving a tactical role must determine whether it can develop a more strategic relationship over time. In order for a distributor to develop and strengthen its strategic value to a supplier, it must thoroughly understand what is important to the supplier. What customers are very important? What customers are not highly valued?
What product lines are critical to the supplier's success? What product lines are unimportant? What regions of the world or territory are really important? How important is a distributor's share-of-market to the supplier? Does the supplier place greater value on share-of-market or sales growth? Does the supplier value a distributor's marketing programs targeted to strategic customers, if improving sales are several months in the future? By understanding how the supplier values the various components of the market, a distributor may apply resources that ultimately increase the distributor's strategic value.
Relationships are Bidirectional
Should a distributor decide to strengthen its strategic value to a supplier, it must proceed through two steps: First, it must determine what changes it must make to become more strategically important. Second, it must draft a list of qualities or benefits that it wants or expects from the supplier in the future. Never offer to do more for a supplier without simultaneously having a list of favors to ask of the supplier. When applying extra energy to a supplier relationship, ensure that the supplier is keenly aware of any added effort requested of the supplier. In order to further develop a supplier relationship, both the supplier and the distributor must apply energy. If either party applies little or no energy, the relationship frequently perishes.
Links at Several Levels
A successful distributor must manage supplier relationships at multiple levels simultaneously. Ground level personnel at the supplier, perhaps sales and marketing, must deal with their ground level counterparts at the distributor. Mid-level management must interface with its like number at the partner. There must be a healthy relationship between senior management of the supplier and distributor. Relationships at each level must have thoroughly developed and well-understood plans.
Ground level personnel may have the objective of achieving revenue goals. Mid-level management may direct resources in order to emphasize specific product lines or customers groups. Senior management must agree to longer-term objectives that set sales, share-of-market, and gross profit expectations. When planning for a series of meetings with suppliers, it is important to develop a blend of business-only meetings with social functions. Business-only meetings serve a purpose, but rarely allow the gathering of qualitative feedback that can be unearthed during social interaction. The feedback discovered in a social setting is invaluable when attempting to deepen a distributor's importance to a supplier.
5 Point Management Meeting
No distributor should ever propose going into a supplier management meeting without sufficient planning in advance. However, real-world pressures sometimes prevent complete and adequate planning for executive meetings between suppliers and distributors. Here is a simple outline to carry mentally when going into a meeting with a supplier. Discuss these five topics openly in every executive level and mid-level management meeting with suppliers:
- Let me explain what we've done for you since our last meeting.
- What priorities would you like us to engage in during the months ahead?
- Our sales of your product lines are very important to us and here's why.
- Here is what we'd like to see from you in the months ahead.
- Let me explain what we plan to do for you in the months ahead.
A distributor following this procedure for the first time will discover that it captures the supplier's attention. A distributor following this process at each and every executive and management meeting with suppliers will discover that it has differentiated itself from its competitors. That differentiation is important in order to grow share-of-mind and to extract special assistance and favors from the supplier. That special assistance, over time, translates to gains in market share, sales growth, and profit margin.
Relationships between suppliers and distributors are always evolving. Competitors and changing market conditions are among the external forces of change. A distributor planning for industry-leading growth and long-term success must actively plan course corrections to the relationship it has with each supplier on the line card. Distributors that strive to improve their strategic value to key suppliers outperform their competition over the long-term.
This article first appeared in the January/February 2013 issue of Industrial Supply magazine. Glen Balzer is president of New Era Consulting, a marketing and sales consulting firm. He has created, upgraded, and managed marketing and sales organizations around the world during the past 30 years. He has integrated divisions of companies upon merger and acquisition. He advises parties involved with contracts linking suppliers, global customers, manufacturers' representatives, and industrial distributors.