The relationship between a supplier and buyer can be complex, says Sara Ireton, assistant vice president with JPMorgan, because "each party wants to maximize its time, resources and cash investment; these may be competing priorities that can strain the relationship."
What's required to sustain a mutually beneficial relationship is an understanding of each other's business needs. That doesn't mean "driving for the lowest possible price with no regard for the true expense incurred," Ireton points out, "but rather recognizing that the success of one partner helps the success of the other.
To develop and subsequently maintain a positive supplier-buyer relationship, Ireton suggests that manufacturers should regularly address compliance, conduct and strategic financing concerns with their supply chain partners. She offers the following guidelines to building a successful partnership.
It's important that you know with whom you are conducting business, and that means knowing your customer, your supplier, and their suppliers and customers. The U.S. government, and many other governments around the world, have various lists of parties with whom one cannot conduct business. It is incumbent upon the importer or exporter to take necessary steps to ensure that all parties in the supply chain are approved and are not restricted in any way.
There are multiple methods to accomplish the screening of restricted parties, including subscribing to the issued lists and their corresponding updates directly, or increasingly common, utilizing a third-party provider to perform this service. As many businesses outsource pieces of the supply chain, outsourcing the screening function is a logical step.
Many importers are adopting the best practice of screening all their suppliers, both domestically and internationally. By adopting such procedures, a company sends the message to its partners (and the government) that it is serious about compliance and takes responsibility for supply chain security.
In the past year, global and regional legislative bodies and governments have introduced numerous changes to trade regulations that impact supply chain operations: revised classification standards; tighter export controls; new environmental packaging requirements. Safeguarding the environment is now a global concern. The USA's wood packaging requirements, European Union's REACH initiative, and the China RoHS program have gained momentum in the past year. It is critical suppliers support these regulations.
Suppliers for larger organizations are subject to more rigorous review than ever. Less-than-ethical labor practices have had severe impacts at major brands (e.g., Mattel), highlighting the need to know and trust suppliers. As companies are more in tune with social responsibility, they are cognizant of its presence (or lack thereof) throughout the supply chain, and need to ensure goods are sourced from suppliers that are fulfilling their codes of conduct and maintaining their own level of financial, environmental and social responsibility.
To protect its interest, a company should scrutinize potential suppliers' general and financial operational practices. Such a review could start with a questionnaire concerning the company's business practices, employee benefit information and facility information. Insight also can be gained through a site visit and by interviewing a selection of the company's employees.
The chosen supplier could then be placed on probation for a given time frame until they have proven themselves to be an ethical, conscientious and compliant member of the organization's global supply chain. From there, periodic physical audits are recommended to ensure conduct remains at a consistently high level while giving you the opportunity to further develop the relationship. By having a supplier code of conduct in place, businesses demonstrate their commitment to maintaining high ethical standards.
While the buyer is looking to get a fair (not always lowest) price, the supplier has to ensure he is covering costs and, of course, making a profit. It is not always in the buyer's interest to negotiate down to the very lowest price; the result can be less trust or loyalty from the vendor.
Many buyers and importers report that price is just one factor in the negotiation; quality is huge, and they appreciate knowing they can demand a lot from their supplier and it will be delivered. A real world example is a high-end apparel retailer whose merchandise buyers expect quality goods and have very high expectations. These buyers also have long-term relationships with their suppliers. The result is that both parties are grateful for the other partner and recognize that in order to succeed, they need to help each other.
This relationship extends to the payment terms. Especially in retail, the payment terms are often very favorable to the suppliers. These may include payment at sight of documents, payment at FOB port, or sight plus 15 days. For an international shipment, the goods are typically paid for well before they arrive at the final destination. Days are tied up in international transportation, as well as the journey through the inland transport, the distribution center and the retail stockroom before finally getting to the shelf and being purchased by the end consumer. Consequently, the importer may have weeks or even months of cash outlay prior to selling the goods, leading more importers to look for payment alternatives and extended terms.
Alternative payment methods could include changing from a traditional letter of credit to a Private Label Letter of Credit, or Open Account payment process, and payment terms of 30, 45 or 60 days. As with other aspects of the buyer/supplier relationship, changing payment terms leads to tradeoffs. One benefit of moving away from letters of credit is lower transaction fees from the banking channel and less paperwork; tradeoffs include reduced access to financing for the supplier, as well as increased transactional risk to both parties. There are typically many options available for a business with good creditand also for those with less-than-ideal credit. This is a conversation for the treasury department to have with the company's financial service providers.
Another option is to reduce the risk of currency fluctuation by buying the goods in local currency. Typically most buyers in North America purchase their goods in U.S. dollars. The recent decline of the dollar's strength has resulted in suppliers getting less "real money" for their goods by the time they are paid. Contracts and prices are negotiated months in advance; in some cases a negative fluctuation could spell the difference between profit and loss for a supplier.
Some importers are choosing to manage the currency risk through their own bank and remove the risk for the supplier/exporter. An additional benefit is it gives the importer more control over their capital and allows currency risk to be built into the product from the start, instead of seeing the costs gradually creep up over subsequent seasons while the supplier is trying to hedge risk.