The Five Stages of Ethical Vendor Relations
This fictional letter prescribes the five stages of a vendor relationship, a part of supply chain management. The stories reflect a high ethical standard: shouldn’t we treat our vendors as we would want to be treated? The Golden Rule clearly applies.
This best practice was defined by one of The Center’s Best Practice Workgroups, including Bill Mitchell, Sarah Hoke, Erin Lavery, Corey Knautz, Mike Markiewicz, and Derrick Van Mell.
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Dear Jeffrey,
It was a pleasure to get to know you and your team at dinner on Tuesday. We’ve all had our moments raising teenagers, it seems! And it was interesting to hear more about Acme Widget, how you got started, and how you managed through Covid. After dinner, several of our folks said that they appreciated your candor. It was nip and tuck for us, too!
You were kind enough to ask about what it takes to be a “preferred” vendor for us. We always appreciate that question. The first clarification is semantics. There’s an unfortunate negative connotation to the word “vendor,” an implication that it’s a purely transactional relationship, devoid of new ideas and shared adventure. Maybe that’s why you asked about a formal “preferred” status.
The plain answer is that we don’t have a formal system because we think it’s counterproductive: creating a policy or system actually inhibits thinking about our vendors as people just like us. After all, every business is a vendor, including us! My question in return is, “How can we be a good customer for you?” Perhaps we’ll have dinner again and talk about that.
Our success is 100% dependent on our vendors. If they’re on time, reasonably priced, and provide products and service of high quality, then we can be on time, reasonably priced and provide high quality products and services. So, our management team has given your question a lot of thought.
After many years and working with hundreds of vendors, we’ve come to believe that the vendor relationship moves through five stages of trust. And if we have to choose a single headline, it’d be “money follows trust.”
The first stage is getting acquainted, simply getting to know each other as people and as a business. Our dinner last night (thanks again, by the way) was a good way to swap stories, learn about priorities and values, and see if there’s a fit in chemistry, scale, and interest. We don’t have any formal evaluation tool, but we ask each other how we feel about the people we met—and I hope they do the same for us! We’ve met some good firms and good people but didn’t pursue things further because it didn’t feel right. Hard experience has taught us that it’d lead to problems for us and problems for them. We’re not perfect and sometimes people have bad days. That’s why we try not to make snap judgements and make a point to meet people a few times. But having done business in China like us, you know the toll that can take on your liver!
Fundamentally, we want to know if the vendor is a) passionate about their work and b) genuine experts. The two go together and both need to marry with genuine integrity.
The second stage is usually to start small. You’d said you’d done that successfully with one of your own vendors in China. It should be an obvious start, shouldn’t it? It amazes me that purchasing people will want to consolidate a lot of accounts and problems into one big, new contract. Talk about risky! Not to mention, it makes attorneys write long contracts. While we usually prioritize price at this stage, we do look more carefully at how price is presented. If we suspect something’s hidden or too good to be true, we’ll just walk.
I said that we usually start small, but sometimes it’s a crisis that forges a great relationship. One of our team was organizing our annual customer fare, but had that vendor go out of business with two weeks to go. She called someone she hadn’t met (though through a trusted referral source) and said, “Please take over, keep it from being a disaster, and we’ll work out the money later.” Five years on, they’re running all our events and trade show appearances. That started by both of us getting to see the other under pressure—a good test of trust. We found we had a good culture fit, which of course is a key part of the answer to your original question.
The third stage in a vendor relationship is growth, adding more contracts or larger contracts or more complex pricing structures. Here we’re really ready to invest in the relationship, spending more time together, touring each other’s facilities, investing in planning meetings, sharing sales forecasts and market intelligence, assessing risks up and down the supply chain, streamlining our processes. At the bottom of all that is innovation: is the vendor bringing us ideas and information and are we able to help them? A headline for this stage might be “long-term value creation.”
I didn’t get to mention at dinner that we have fully embraced “Standards-Based Management,” and use The Index of Management Terms & Practices (and its toolkit) to make sure we’re all speaking the same language. We have over 100 significant vendors around the world, so using the standard lexicon really helps us past both internal and external communications barriers. I’d be happy to walk you through it. It’s free.
We’re never sure if this really is a fourth stage, or really just an extension of the third, but the sign of a really solid, mature vendor relationship is informality. Sure, we both need a good contract and clear expectations, but we trust each other and are confident we can work through mistakes, bad luck, and misunderstandings. A critical part of this is expanding contacts between the two firms. Manager turnover is unfortunately higher than we’d like, so we both can protect the relationship by making sure it’s not just the senior folks who know each other, but the emerging leaders, too. I remember that at dinner we’d discovered we’d both been married over twenty years: no relationships should ever be taken for granted!
(By the way, thanks for the email about “Cutting for Stone.” I passed it on to my daughter in time for her book report.)
The last stage is “mutual expansion.” By that I mean that we gather our best vendors together annually not only to recognize them (who doesn’t like recognition?), but to introduce them to each other. We’re all winners when we trade ideas for succeeding in the same market. Our “Vendor Days” always results in profitable new relationships among the participants.
One topic I’d like your thoughts on is how you pick your customers. Not only do we want to be a good customer for you guys, but we want to help our sales team target the kinds of relationships that produce good margins and satisfying work. We try hard to follow the “no jerk” rule, which we know is ultimately good for us and everyone else involved. Let me know if you want to run a short Zoom meeting on this.
I hope that answers your question about our vendors. I’ve tried to lay out our philosophy, expectations, and aspirations. How we work with our vendors is, in my opinion, a key differentiator for us. Or perhaps I should say, it lets us find new differentiators, defend old ones, or learn that our market message needs to be updated. What could be more important?
Happy to talk about this further. But in the meantime, thanks again for dinner, and I’m looking forward to working closely with you on our first purchase from Acme.
Best wishes,
Corey Gilson, Director, Supply Chain
cc: Purchasing Team
