Customer-Supplier relations

Supplier community, comprises of the providers of raw materials, components, systems / sub-systems, other goods and services, depending on the nature of the customer’s business operations. Quality of the product or service, hence is heavily dependent on the activities of supplier organizations.

A customer organization spends substantial portion of every dollar on the purchase of raw materials, components, and services. In general, 60% of the cost of goods sold could be from purchased goods / services. Therefore, supplier quality can substantially affect the overall quality / cost of a product or service. One of the keys to obtaining high-quality products and services is for the customer to work with suppliers in a mutually beneficial business environment to achieve the same or even better quality level as attained within the organization.

Customers and suppliers have the same goal—to satisfy the end user community. Better the supplier quality, better is the supplier’s long-term status and position, as the customer is able to sustain satisfactory quality levels. As both the customer and suppliers have limited resources, they must work together as partners to maximize their returns on investments.

Historically, there have been number of forces that have changed supplier relations. Prior to the 1980s, procurement decisions were typically based on price, thereby awarding contracts to lowest bidder. As a result, quality and timely delivery could be sacrificed. Indeed, Deming’s 14 points for TQM include: End the practice of awarding business on price alone; instead, minimize total cost by working with a single supplier.

Another force changing supplier relations was the introduction of the just-in-time (JIT) concept. It calls for raw materials and components to reach the production operations in small quantities: when they are needed and, not before. The benefits of JIT is that inventory-related costs are kept to a minimum. Procurement lots are small and delivery is more frequent. As a result, the supplier may have many more process setups, thus becoming a JIT organization itself. The supplier must drastically reduce setup time or its cost will increase. For sustained operations with little or no inventory, the quality of incoming material must be very good or the production / delivery lines could halt. To sustain the beneficial supplier-customer relations, JIT requires exceptional commitment to quality and reduced setup time.

The practice of continuous / continual process improvements enables suppliers develop a partnership with their customers. Quality Management System standards such as ISO 9001 address the requirements for organizations to evolve and maintain supply chain development through the key factors: zero defects, 100% on-time delivery and, a process for continual improvement.

Dr. Kaoru Ishikawa suggested 10 principles to ensure quality of products and services and, eliminate unsatisfactory conditions between the customer and the supplier:

Both customers and the suppliers are fully responsible for the control of quality.
Both the customer and supplier should be independent of each other and respect each other’s independence.
The customer is responsible for providing the supplier with clear and sufficient requirements so that supplier can know precisely what to produce.
Both the customer and the supplier should enter into a non-adversarial contract with respect to quality, quantity, price, delivery method, and terms of payments
The supplier is responsible for providing the quality that will satisfy the customer and submitting necessary data upon customer’s request.
Both the customer and the supplier should decide the methods to evaluate the quality of the product or service to the satisfaction of both parties
Both the customer and the supplier should establish contractually, the methods by which they can reach an amicable settlement of any disputes that may arise.
Both the customer and the supplier should continually exchange information, sometimes using multifunctional teams, in order to improve the quality of product or service.
Both the customer and the supplier should perform business activities such as procurement, production / operations and inventory planning, clerical work, and systems so that an amicable and satisfactory relationship is maintained.
When dealing with business transactions, both the customer and supplier should always have the best interest of the end user in mind.

Although most of the principles are obvious and reflect common sense, a closer scrutiny shows that a true partnership exists within long-term customer-supplier relationships, where each party preserves their identity and independence.

The value chain beginning from the first supplier / originator in the supply chain, right up to the end user benefits enormously from an enduring customer-supplier relationship, in any business segment.