Most of us have at least on one occasion recognized the truth in the lyrics to Joni Mitchell’s Big Yellow Taxi. A senior executive with a construction equipment company recent did so as he described his company’s retrospective assessment of a decision relating to a key supplier:
“We had worked with [that key supplier] for many years, dating back to before I joined the company, and it was always a good relationship. But a couple of years ago, we were approached by a Chinese supplier with a very attractive proposition. They offered a product that seemed in all ways about identical to what we were buying from this supplier, at a most attractive price point.
“We did our due diligence. The Chinese supplier was a real company, not one of those outfits you hear about with no walls to the factory and interchangeable signs depending on who was visiting that day. Their product samples met all of our tests. Our only real issue was logistics, and for the price they were offering, we were easily able to come up with some workarounds. So we made the decision to switch.
“It’s taken us a few years, but we’ve now come to realize that we ‘didn’t know what we had till it was gone’. The Chinese company has met our expectations with respect to their product and their pricing. That’s not the problem. It’s just that our former supplier was important to us in so many ways that really weren’t connected to the actual product itself. This supplier just can’t substitute in those other ways, and while it’s hard to do a dollars-and-cents calculation, I suspect we lost more than we gained from the lower prices we’re paying for this product.”
This company’s lament is a familiar one, particularly in recent years with the combination of the pressure firms have felt during the recent recession to find ways to cut costs and with the increasingly frequent presence of Chinese Second Mouse firms offering almost-as-good products at a great price point. More and more firms are seeing options to save money without compromising on product features or quality by switching away from long-term suppliers. And many are choosing to do so.
What is often missing in these supplier comparisons are the intangibles embedded in such long-term relationships, ones that aren’t captured by head-to-head comparisons of physical products and prices. Almost every supplier with whom I’ve spoken can describe such contributions and the customers that have benefitted from them. Even more significantly, almost every customer that I’ve ever interviewed can provide multiple examples of “supplier success stories”, many of which involve contributions that aren’t embedded in the products they buy from those suppliers. Those truths motivate the question “Why all too often are such contributions ignored when firms consider options involving switching suppliers?”
The executive that provided the case study provided earlier offered his own thoughts on why it happened in his firm, citing factors that I’ve seen in many other circumstances:
“First, it was probably the case that the insights about the contributions made by [the former supplier] were best known to people in our firm that weren’t directly involved in the evaluation. You can say ‘shame on us’, and that’s true, but even after the fact, it took some time for us to begin to understand what we were missing. For example, that supplier’s contribution to our product development processes didn’t surface until we were into the next cycle, a full year after we had made the switch.
“Second, there is always the challenge of deciding who ‘talks the talk’ and who truly ‘walks the walk’. Every supplier is willing to say how valuable they are, how much they contribute. But it’s only a few that do so. It turned out that [the former supplier] was one of the ones that did so. We just didn’t recognize that at the time."
Intangible contributions that go beyond the physical product are in fact real and are important sources of value creation for the firms that get them from their suppliers, but they are elusive to spot. In the following section, some questions are suggested that can enable a firm to evaluate whether a supplier is in fact one of the ones that “walks the walk” in terms of bringing such contributions to the table.
Identifying Suppliers That Provide Intangible Contributions
Over the years, I’ve had the opportunity to discuss supplier contributions with literally thousands of business firms spanning numerous vertical markets. In those discussions, I’ve heard great supplier success stories told by these firms, spotlighting ways in which suppliers made a meaningful difference. I’ve had long discussions about the good, the bad, and the ugly sides of supplier relationships. I’ve heard about supplier relationships that failed and about ones that steadily progressed to higher and higher levels, reaching strategic levels involving “win-win” collaboration. A substantial number of those discussions involved intangible contributions, and, from analyzing the nature of those contributions, certain common characteristics emerge. Those common characteristics provide some tests that firms can use to determine if specific suppliers are in fact making important intangible contributions, ones that they don’t want to recognize what they had only after they were gone. Three of the most important such tests are described in this section.
The first test involves the question “Does this supplier contribute to processes and activities that are adjacent to or otherwise linked to the products they supply?” For almost every firm, the products that they buy from suppliers impact on numerous processes and activities. There are obvious connections – whether the product simplifies manufacturing or complicates it, whether the supplier’s product is the source of warranty problems or not, whether the product is easily integrated with other ingredients in the final product, etc. And there are less obvious connections – whether this supplier contributes to new product development or complicates that process, whether this supplier helps to meet regulatory challenges or not, whether this supplier and its products facilitate the changes that are needed to move into new geographic markets, new vertical markets, or new points along the good-better-best spectrum or not, etc.
Examples of such contributions are heard over and over in discussions with firms about their suppliers. The executive who provided the case study in this article talked about [the former supplier’s contributions to product development:
“What we learned, after the fact, is that they were frequently herding us in the right directions in terms of our product development, a contribution that was valuable given the importance of their product to our own.”
In a discussion with another company, another similar example was provided:
“When we heard from one of our customers about a problem, we often involved [a certain supplier] in the discussions about how to respond and solve the problem. When we replaced them, we lost that. And we miss those contributions.”
A third example involves today’s pressures to reach global markets:
“Our former supplier had engineers in all of our key markets. Our new supplier has a good manufacturing footprint, but for technical support, we have to go to their headquarters, which adds a lot of time and complexity to even getting answers to simple questions.”
For virtually every company, the adjacent processes and activities that are meaningfully linked to the products purchased from suppliers are many and often involve costs far greater than the price of the supplier’s product. Recognizing these connections is important, and identifying whether the supplier makes intangible contributions to these adjacent processes and activities can allow a firm to avoid short-sighted decisions that are only based upon the product per se and its price.
The second test involves the question “What do we learn from this supplier?” Every supplier organization has its own intellectual capital, involving information and insights important to their line of business. In many instances, such information and insight can be of value to their customers, and some suppliers create value for their customers by proactively serving as a source of critical information to their customers.
In one extreme example, a firm described a decision to outsource a responsibility for a key technology to a supplier:
“We recognized that they are the leaders in this technology, with customers around the globe and spanning multiple vertical markets. Their ability to invest dwarfs what we could do with respect to that technology, and they have far more resources to allow them to stay ahead of the game. So we decided to tap into that, to rely on them as our source of information and leadership. And so far that’s paid off – what we learned from them has been far beyond what we could have learned on our own.”
There are numerous examples that are more limited than the previous one. One executive described a supplier’s role with respect to the regulatory environment:
“We know that they have to stay ahead of [a certain area of regulation] in order to stay in business. So we count on them as our window into that world. They tell us what we need to know and where we need to make changes, not only as it relates to the products we buy from them, but in general.”
Another executive in a different industry explained that a certain supplier:
“Has pretty much provided safety training to all of our employees” and said that they were “our go-to guys on safety issues”.
In still a third example, a supplier that was very active in doing end user market research was described as:
“The firm that got us ahead of the curve with respect to advanced diagnostics, sharing their research with us as to what users considered to be unmet needs and helping us bring some solutions to the market earlier than our competitors”.
The latter category of success story, one that involves a contribution that makes a difference in a firm’s competitive position, is at the top of the ladder in terms of the value of a contribution made by a supplier, but in fact all of the above examples are ones cherished by customers. And all of them are examples that involve the effective sharing of information by a supplier with its customers.
The third test that provides insight as to intangible contributions involves asking the following question to employees in various departments and divisions across the customer’s firm: “When you think of [name of the supplier], what comes to mind?” I have had the privilege of asking that question frequently to individuals across many organizations about many of their suppliers.
The answers span the spectrum. At the negative end are responses like “sleepless nights” and “looking for a new job”. When those are the answers, it’s probably time to aggressively look for a new supplier. Somewhat less negative are answers like “pretty expensive, which is a problem” and “an OK supplier, but nothing special”, answers that also motivate the consideration of alternatives. At another point on the spectrum are positive answers like “solid products”, “on-time deliveries and no hassles”, and “good responsiveness”. Such answers suggest that any decision to replace the supplier must ensure that there is no denigration along such important metrics.
But at another point on the spectrum are answers like the following:
“They are problem solvers. I can’t tell you how many times we’ve faced a challenge with some new application, and turned to them for help and got what we needed.”
“A critical ingredient to our product, one that is valued by our customers. They respect [that supplier’s] brand and it helps us make sales.”
“A key team member. In many ways, part of our eyes and ears to our market. They’ve helped us get ahead of challenges more times than I can count.”
When the top-of-mind descriptions of a supplier involve intangible contributions – and especially when they involve contributions seen as important to the firm’s own end customers – it is a strong signal that the supplier is probably in the strategic category, involving a relationship important in ways that go beyond product and price. As was the case with the firm involved in the case study in this article, the signals are usually there, but aren’t always processed by the decision makers considering alternative suppliers. That is all too often the case, and asking this third key question to people across the organization is a means of ensuring that key signals are not missed.
There are other themes that surface in terms of intangible contributions made by suppliers to their customers, but the three questions outlined in this section can help to uncover the most frequent types of such intangible contributions. It takes work to ask these questions and to build a solid foundation from which to evaluate the answers that emerge, but the effort is well worth the cost when it allows a firm to avoid a decision that later forces them to acknowledge that they didn’t know what they had till it was gone.
A supplier’s perspective
For suppliers serving business customers, the concepts presented here are also highly relevant. I have used the three questions in the previous section as part of an assessment process through which a supplier can evaluate whether it is making intangible contributions to its customers and whether it has the potential to do so in the future. For most suppliers to business markets, such contributions will become more and more important in the future, given the reality of increasingly-equivalent products and transparent prices. Intangible contributions involving services and solutions will grow in importance as a source of differentiation among suppliers.
In working with such suppliers, I’ve emphasized two important action items. The first involves developing an inventory of the intangible contributions that the firm is able to make. Typically, that list varies by customer, with the relevance and the value creation potential differing from customer to customer, depending on their product line, the markets served by the customer, the customer’s own capabilities, the nature of the relationship, and other factors. But for at least most of the larger customer relationships, suppliers have been surprised as to the length and breadth of the list of potential contributions.
They have also been surprised as to how many of those contributions are not being delivered to their customers. This can be due to any number of factors – day-to-day pressures, overstretched employees, the wrong touch points within the customer organization, a failure to communicate how important doing so is to the individuals capable of making the contributions, etc. Recognizing the gap between what is possible and what is being done can allow a supplier to take action and assign responsibilities to close the gap in the future. As noted above, doing so may make the difference between success and failure with that customer at some point in the future.
The second action item involves proactively bringing such contributions to the attention of the customer. It is too late to do so during a time of crisis or in the context of responding to a competitive threat. In those circumstances, the customer response is likely to be in the realm of “everyone talks the talk”, as suggested earlier. But when done as part of a strong and well managed relationship plan, communications about intangible contributions can be recognized by customers and at some point in the future can make a difference.
I cannot overemphasize the importance of embedding such discussions in the context of an overall relationship plan. Setting up a one-time visit with a customer to explain “how important we are and how much we are doing for your firm, so that you remember it the next time contract decisions come around” will fall flat with near certainty. But discussing intangible contributions as part of an ongoing dialogue with a customer, focusing on the future and focusing on that customer’s own challenges can work and will be remembered. Suppliers that want to be recognized as making such contributions and to be rewarded for them must incorporate the contributions that they can make as part of a long-term, ongoing relationship plan.
Suppliers have traditionally been a source of value to their business customers, traditionally centered in their products and in their ability to reach an attractive price point. Increasingly, however, more and more competitors will achieve parity along those dimensions, and differentiation will depend more on whether a supplier can provide intangible services and solutions of importance to their customers. Unlike products and pricing, however, customers will be challenged to identify and quantify the benefits of such contributions, especially as they are often not easily translated into “per piece” metrics. Such contributions, nonetheless, will matter both to customers and to the suppliers differentiated by their ability to deliver them.
To avoid the disappointments that will occur when a customer displaces a supplier that was providing high-value intangible contributions, it is necessary to have a process through which it can be determined which suppliers are making a difference through such contributions. Suppliers that are linked to a customer’s adjacent processes and activities, that bring high-value information and insight to the customer, and that are recognized positively for their services, solutions, and end customer appreciation are ones likely to be important sources of intangible contributions. Careful decision making is required when considering options to replace such suppliers, as a frequent lament after doing so is that “we didn’t know what we had till it was gone”.
Suppliers should themselves be attentive to those same sources of intangible contributions, both to identify where they have the potential to create and capture value and to identify gaps between such potential and what they are actually bringing to their customers. Those suppliers that are in fact delivering important intangible contributions should take actions to ensure that discussions of these contributions are an important and ongoing part of their customer relationship plan.