I’ll admit it. The title of this article might seem a bit provocative. After all, using leverage to impose your will on people close to you isn’t something that most people would consider, is it? Please bear with me, though, and I think you’ll see that the title does a pretty good job of tying this discussion to that from my previous “The Good, the Bad and the Ugly” column in which the use of leverage in supply management was analyzed.
To provide a further framework for that tie-in, recall my article “The Strategy Behind Choosing Strategic Suppliers” which laid out a strategy for categorizing and managing suppliers. This categorization was based not on how strategic a supplier’s products were considered—the traditional way of defining such categories—but rather on the cost and order fulfillment risk involved in having to replace a supplier.
I like this approach to supplier categorization since in my experience there has always been confusion surrounding what the term “strategic” implies in this usage while, on the other hand, it is pretty straightforward what having to replace a particular supplier means. The more cost and order fulfillment risk involved in that replacement, the more critical a supplier’s status. For instance, resourcing from suppliers in Category I-Strategic exposes an OEM customer to excessive costs and order fulfillment risks, while resourcing from suppliers in Category II-Key results in only above average exposure. In fact, in many instances there actually may be limited options to replacing a particular strategic supplier. And while with Key suppliers there may be replacement options, breaking off from one usually involves pulling your company out of a tight symbiotic relationship involving much more than just parts.
Less critical are Category III-Approved and Category IV-Basic suppliers, where resourcing is more routine. In other words, these last two categories mostly span the range of products considered commodities.
Since this article is meant to be a continuation of the preceding one, I’ll use that preceding sentence as an entry to getting back on-topic. As previously discussed, leverage is a Good strategy for dealing with commodities, i.e., suppliers in the Approved and Basic categories. On the other hand, it was shown that leverage can be a Bad strategy to use in managing non-commodity suppliers—the Strategic and Key categories—where piece price represents only a portion of total cost. Both of those conclusions were previously reached through business-based reasoning. Here, I’ll try to back up these same conclusions using arguments based on something everyone can relate to—personal relationship management.
The Leveraging of Friends
First, let me admit that I have no formal training in psychology nor have I been awarded any certifications in relationship management, counseling, etc., that qualify me to preach on the subject of personal relationships. On the other hand I have spent significant experience studying the subject at TSHK (The School of Hard Knocks) University which, perhaps, gives me enough background to have some level of credibility. Based on this education I can confidently lay out meaningful parallels between interacting with Friends and managing Key suppliers. Let’s explore this analogy a bit.
Developing and maintaining friendships can be a lot of work and require a lot of investment. The same can be said of doing business with Key suppliers. Why? Because even though both types of relationships are based on a critical mass level of commonality between interests and philosophies, that commonality is rarely 100% aligned. And even when a lot of time and effort is spent in their development, neither type of relationship is guaranteed to last as interests and philosophies may diverge. The longer a relationship continues, though, the more difficult—costly—it can be when it breaks down since Friends and Key suppliers tend to weave themselves into the very fabric of your life and/or business. If this analogy makes sense, then understanding why Friendships fail is important since this knowledge can be applied to Key supplier business relationships.
The best Friendships are those where both sides feel they realize common benefits from the association. When one side starts feeling they are contributing more than the other, that should be seen as a sort of “red flag” warning of possible trouble ahead. A similar scenario can be laid out concerning relationships between Key suppliers and their customers. How does this relate to leverage? When you leverage a Friend or Key supplier, you are immediately setting up a transaction where one side wins at the other side’s expense, i.e., creating an imbalance. Over time such imbalances leads to one side or the other feeling like the relationship is no longer mutually beneficial. When this happens, costly problems are likely just over the horizon.
Friends are also who you go to when needing help. In my experience the biggest red flag that a Friendship is becoming imbalanced is when requests for assistance are seen as an opportunity for one side to take advantage of the other. When a Friend needs assistance, the last thing he or she wants is to have the person they’ve requested it from respond along the lines of, “Sure I can help, but here’s what you need to commit to if you want my help”—and the thing being asked of the requestor being something they likely would not agree to under normal circumstances. Sure, underlying all Friendships is an assumed quid quo pro that when one party aids another, return assistance will be expected. But applying leverage goes way beyond that kind of understanding.
Business imperatives often require that one side or the other ask for favors, at least in the short term. These favors may not align exactly with the business plan of the other party but under a healthy Key supplier relationship, that party usually bends over backwards to try to support the request, or at least find some satisfactory middle ground. When the response to such a favor request is leverage—again, imposition of will that creates an imbalance—it ends up being anything but mutually beneficial. In fact, it sets the stage for a quid quo pro response of leverage when the roles are reversed, i.e., when you need a favor. And over time, you will need a favor.
Most of the time that I have personally walked away from a Friendship involves the other person making a habit out of leveraging—taking advantage of—me. In my experience, the healthiest relationships with Key suppliers were ones that were without—or at least had minimal—leverage. Sure, as stated above, there is always a quid quo pro for favors, but leverage takes that expectation further, tying support directly to something that normally wouldn’t occur in the relationship. Friendships and Key supplier relationships can be healthy and beneficial but when the other side too often resorts to leverage, I recommend assuming the costs and risks necessary to remove yourself from that relationship since, in my opinion, there is little chance the relationship will yield the needed outcomes over the long run.
The Leveraging of Spouses
All OEMs know that there are certain suppliers they are for all intents and purposes “stuck” with, i.e., Strategic suppliers. The question then becomes, “What happens when OEMs apply leverage against them?” Please don’t infer that I’m saying marriage is a condition of being “stuck” with your spouse, but I do think there is an analogy that came be made!
As I said before, I have no certifications on relationship management but I can offer some advice that I am 99.9% sure should be followed—namely, don’t try to “impose your will” on your spouse using leverage. Just trust me on this. I can tell you that if I had applied a strategy of leverage in working out issues with my wife I would likely be either missing some pretty important body parts, no longer married, or probably, both. Can you expect these same kinds of outcomes when you apply leverage to Strategic suppliers? In a word, yes!
When you know that you are going to have to work closely with a business partner on an ongoing basis, a strategy of leverage is akin to basing your marriage on a strategy of “imposing your will” on your spouse. At a minimum, this will not result in a very happy existence for either party. In my marriage I’ve tried (honey, if you’re reading this, honestly, I’ve tried) to approach issues in a collaborative manner. It must have worked at least somewhat since Cindy and I will have been married 36 years this coming June 30. In working out our issues we’ve usually tried to increase the “size of the pie” such that neither size had to feel like they had been pushed by the other into a position they didn’t want to be in.
Does this mean that there won’t be disagreements and points of contention between the two sides of a marriage or an OEM—strategic supplier relationship? No. The difference is how the two parties—whether husband and wife or OEM and supplier—settle those differences. Again, leverage is the not right approach to use in doing so. So what is?
I’ve always lived with a belief that “there is always middle ground if both sides want to find it,” and it has worked out well for me in both life and business. Over the years this single idea has produced a lot of mutual benefit for me personally and for the companies I’ve worked for/with. But what do you do if you run into a party that isn’t interested in finding middle ground? That depends. I personally have always given suppliers two chances at using this approach. After being spurned a second time, however, I have to admit I took the gloves off and used leverage or whatever I had to, to achieve the business results my company needed. And then I started an intense search for an alternate supplier who would be interested in working on a “finding the middle ground” basis.
Now I know that some people may have read the last two columns and said to themselves, “Blah, blah, blah—this guy is not talking real world. To do my job I need to use leverage whereever and whenever ever I can. He wouldn’t last a minute if he had to hold down a real world job like I have.”
My answer to this is that I strongly beg to differ.
I have very successfully held down real-world executive level supply management jobs and “hit” the numbers my bosses expected out of me without relying on short-term counterproductive strategies like leveraging. I know it can be done and that doing so leads to overall better results. Granted, if all you are measured on is month-to-month material variance, leveraging can a good tool for hitting those kinds of numbers… but only if you are nimble enough to stay ahead of the messes you create such that someone else has to do the cleaning up.
If you’ve read the last two columns and are still a non-believer about how counterproductive leveraging can be, I’ll end by putting the following question in front of you: “Would you elect to pick your friends and/or a spouse through results of an online auction—the nth degree of a leverage strategy? If not, why would you think that leverage should be applied to suppliers that you need to have a close, long-term working relationship with?”
In my next column I’ll explore more what I mean by “middle ground” and how it is an alternative to zero-sum based strategies.