What is the right length of time for a supplier relationship?

As part of a recent consulting assignment, ADR were reviewing the average length of the supplier relationships with our client’s organization.  The organization had recently introduced a supplier relationship management (SRM) program.  The program used a governance framework that detailed the type and frequency of review meetings and performance evaluation based on supplier criticality.

 

Relationship length information was gathered through interviews with supplier relationship managers, spend analysis and the organization’s contracts database.  

 

A summary is in the diagram below.

 

 

Duration (in years) of supplier relationships

Less than 3 years 3 to 5 years 5 to 10 years 10 to 15 years Over 15 years
60% 17% 12% 6% 5%

There was a good deal of one-off, transactional and off-contract spend, which is represented by the high proportion of short-term relationships (less than 3 years).

What was interesting to discover was that that the relationship group least likely to have a formal contract in place were the long-terms supplier relationships (over 15 years).  Any written agreements were often on suppliers’ terms, or simply a memorandum of understanding.

The remaining groups had more use of contract types including framework agreements and standard purchase terms and conditions.  Why were these key suppliers not operating under the typical contractual arrangements?

Several reasons were mentioned for these long-term suppliers not necessarily having long term (or any) contracts:

  • The purchase was for a leverage-type good or service, where any interruption in supply could be easily resolved by seeking a new supplier at short notice.
  • The supplier lacked the necessary infrastructure to commit to an agreement (perhaps a lack of IT tools or inadequate compliance to the required insurances or quality controls).
  • The purchase was relatively low value and not considered a priority for procurement attention.

But for many of these suppliers, long-term relationships had been chosen because the nature of the purchase was critical to the business, or there was a high risk / cost in switching sources.  This would support the importance of a legal agreement.

Some of the long-term supplier relationships had some similar characteristics:

  • Specifications were often co-developed with suppliers.
  • Co-developed specifications meant that business users expected to make full use of the solution before seeking alternative ideas.
  • Suppliers reluctant to agree to the buyer’s terms, often after lengthy negotiations where delivery of the work had commenced prior to conclusion.

However, for some suppliers in this group, the low churn was attributed to other factors – preference by stakeholders, fear of change and a culture of long service in other supplier relationships.

The data indicated that the longer a relationship with a supplier was, the less likely that a formal agreement was in place.  This appears counter-intuitive, as you would imagine that these suppliers had been supporting the business for a long time because they were valued (and therefore a buyer might wish to secure them).

“What is the right length for a supplier relationship?” one stakeholder queried.

The answer to this question could be “It depends on when supplier relationship management was established”.

Why?  The evidence showed that many of the supplier relationships that were over 15 years in length were either consistently performing to the expectation (although seldom any better), or were chronically failing, but replacing the supplier involved pain and cost.  Long-term relationships were not a great source of additional value or innovation in this organization.

This was often attributable to the way in which the relationship had been previously managed.  None of these suppliers previously had any governance framework that allocated roles and tasks for supplier management such as regular performance reviews and target setting.  Where the supplier was non-critical, this made sense; any investment in supplier relationship management was unlikely to yield much benefit here.  But it did not make sense for those strategic or critical suppliers where the supply markets were difficult.  Here, it is essential to have a business continuity plan in the event of supplier performance failure.

In the new SRM environment, legacy suppliers were reluctant to engage in what was perceived as “unpaid work”, such as attendance at corporate supplier days.

As a contrast, the supplier relationships that had been more recently established and were also under contract had been actively managed since their inception.  These typically displayed predictable performance patterns and swift corrective actions where lapses had occurred.  Suppliers had been set clear performance expectations in terms of service delivery and relationship controls such as review meetings.

In this organization, at least, the message was clear:  The length of the relationship may be influenced by a range of factors including intellectual property management, market conditions and business continuity requirements.  However, relationships left to drift often leak value over their lifetime and set a precedent of neglect that can be challenging to redress.

Therefore, the right length for a supplier relationship is dependent on market conditions and business criticality.  But the right time to introduce SRM to the organization is now.

March 24, 2017

As part of a recent consulting assignment, ADR were reviewing the average length of the supplier relationships with our client’s organization.  The organization had recently introduced a supplier relationship management (SRM) program.  The program used a governance framework that detailed the type and frequency of review meetings and performance evaluation based on supplier criticality.

 

Relationship length information was gathered through interviews with supplier relationship managers, spend analysis and the organization’s contracts database.  

 

A summary is in the diagram below.

 

 

Duration (in years) of supplier relationships

Less than 3 years 3 to 5 years 5 to 10 years 10 to 15 years Over 15 years
60% 17% 12% 6% 5%

There was a good deal of one-off, transactional and off-contract spend, which is represented by the high proportion of short-term relationships (less than 3 years).

What was interesting to discover was that that the relationship group least likely to have a formal contract in place were the long-terms supplier relationships (over 15 years).  Any written agreements were often on suppliers’ terms, or simply a memorandum of understanding.

The remaining groups had more use of contract types including framework agreements and standard purchase terms and conditions.  Why were these key suppliers not operating under the typical contractual arrangements?

Several reasons were mentioned for these long-term suppliers not necessarily having long term (or any) contracts:

  • The purchase was for a leverage-type good or service, where any interruption in supply could be easily resolved by seeking a new supplier at short notice.
  • The supplier lacked the necessary infrastructure to commit to an agreement (perhaps a lack of IT tools or inadequate compliance to the required insurances or quality controls).
  • The purchase was relatively low value and not considered a priority for procurement attention.

But for many of these suppliers, long-term relationships had been chosen because the nature of the purchase was critical to the business, or there was a high risk / cost in switching sources.  This would support the importance of a legal agreement.

Some of the long-term supplier relationships had some similar characteristics:

  • Specifications were often co-developed with suppliers.
  • Co-developed specifications meant that business users expected to make full use of the solution before seeking alternative ideas.
  • Suppliers reluctant to agree to the buyer’s terms, often after lengthy negotiations where delivery of the work had commenced prior to conclusion.

However, for some suppliers in this group, the low churn was attributed to other factors – preference by stakeholders, fear of change and a culture of long service in other supplier relationships.

The data indicated that the longer a relationship with a supplier was, the less likely that a formal agreement was in place.  This appears counter-intuitive, as you would imagine that these suppliers had been supporting the business for a long time because they were valued (and therefore a buyer might wish to secure them).

“What is the right length for a supplier relationship?” one stakeholder queried.

The answer to this question could be “It depends on when supplier relationship management was established”.

Why?  The evidence showed that many of the supplier relationships that were over 15 years in length were either consistently performing to the expectation (although seldom any better), or were chronically failing, but replacing the supplier involved pain and cost.  Long-term relationships were not a great source of additional value or innovation in this organization.

This was often attributable to the way in which the relationship had been previously managed.  None of these suppliers previously had any governance framework that allocated roles and tasks for supplier management such as regular performance reviews and target setting.  Where the supplier was non-critical, this made sense; any investment in supplier relationship management was unlikely to yield much benefit here.  But it did not make sense for those strategic or critical suppliers where the supply markets were difficult.  Here, it is essential to have a business continuity plan in the event of supplier performance failure.

In the new SRM environment, legacy suppliers were reluctant to engage in what was perceived as “unpaid work”, such as attendance at corporate supplier days.

As a contrast, the supplier relationships that had been more recently established and were also under contract had been actively managed since their inception.  These typically displayed predictable performance patterns and swift corrective actions where lapses had occurred.  Suppliers had been set clear performance expectations in terms of service delivery and relationship controls such as review meetings.

In this organization, at least, the message was clear:  The length of the relationship may be influenced by a range of factors including intellectual property management, market conditions and business continuity requirements.  However, relationships left to drift often leak value over their lifetime and set a precedent of neglect that can be challenging to redress.

Therefore, the right length for a supplier relationship is dependent on market conditions and business criticality.  But the right time to introduce SRM to the organization is now.