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Structuring Relationships With Suppliers Who Are Also Customers

As organizations go about building supplier relationships using segmentation approaches, several of the companies I’ve met with are also thinking about how to structure such relationships when their supplier also happens to be an organization that is a major customer.  While the dreaded “reciprocity” issue must be avoided at all costs, the fact is that organizations can rarely build a “Chinese Wall” between sales and procurement and completely ignore this issue.

As such, more and more companies (especially in financial services) are considering how suppliers can also contribute to front-office revenue,  and whether they can become future customers when sourcing segmentation decisions are made.  The landscape can be viewed in the matrix shown below.

As shown, the upper right quadrant involves customers with whom your organization has both a high spend from a supply side, and high revenue from the organization on the customer-facing side, this represents a win-win opportunity to grow the business.  However, if a hugely important client is one which is only a small supplier, there is a need to use caution and seek to create opportunity to expand supply opportunities, in an effort to nurture the relationship.  For example, supply management wouldn’t want to put their business out to bid, and destroy goodwill that could translate into lost customer revenue.  One executive noted:  “Conversely, if we are spending hundreds of millions of dollars with them and they aren’t even looking at us for institutional investing or transaction banking, we have to be careful to avoid reciprocity, but we can certainly take steps to be more aggressive and ensure that connectivity with our sales organization occurs so that they are aware of the situation.  Normal selection criteria should always be used, and we can’t ever cross the line when it comes to compliance, but these relationships do matter.  Purchasing can become a big influence when a senior Managing Director sees banks as a commodity, and they can change the perception and create a new dimension to these discussions.”

In effect, organizations must continue to apply independent supplier selection processes that are methodical in nature, and independent from the notion of the client relationship.  But in the process of negotiating, tendering, and evaluating suppliers around a requirement, there are separate and distinct sales operations occurring with the same organization.  This represents a real opportunity for procurement to operate in a way to create top line revenue with banking relationships, to work in a way that benefits both organization, or at a minimum to ensure that there isn’t a clash that occurs because of an oversight of this fact.

Some organizations have assigned managers to consider the idea of a client relationship as a component and decision factor with the right level of weight as part of the supplier selection decision.  Compliance officers need to be involved as well, and as the tendering process runs its course, this officer can review it to at a minimum ensure that bad news isn’t delivered to the supplier on a day that sales are pitching them on a proposal, or that there is good news on a day when the information can be exploited.  This is only the initial phases of this approach, but organizations are beginning to consider how best to manage these segmentation situations in the future, and structure the decision in a comprehensive manner.