Blog I

Supplier collaboration in the building materials industry

Posted by Andrew Butt on December 12, 2018 10:41:00

We learn about collaboration from an early age.  As children we quickly learn that we need to collaborate with teachers, classmates and team players in order to be successful.  "There's no 'i' in 'team' is a common mantra in sports and work teams.  And "supply chain collaboration" has been a hot topic for decades.  

Despite that, there are very few systems that enable wholesale distribution companies and their suppliers in the building materials industry to truly collaborate on their trade agreements.

What is supplier collaboration?

Supplier collaboration means working with suppliers to determine improvements that can have a measurable, positive financial impact for both organizations. Supplier collaboration occurs when working with one or more suppliers closely, in pursuit of a common, shared objective. For the most part, the primary focus of the supplier relationship is ensuring the right materials are available at the right time and location.

According to the Chartered Institute of Purchasing and Supply (CIPS), collaborative relationships are characterised by shared goals, supplier development, and integration of business processes. They allow collaborating firms to realise benefits which they could otherwise not achieve (Cousins and Spekman, 2003). 

A McKinsey survey found that whilst over 30% of the 100 global companies who took part in the survey stated that they collaborated with suppliers, fewer than 10% could display any "systematic efforts".  Even more interesting, those who did collaborate displayed double EBIT growth rate compared with those who didn't.

According to Tradeshift, 92% of respondents to their survey said that supplier collaboration is essential to driving value in their own business. And in our own survey of US distributors, 92% agreed that the ease of being able to track deals in real time contributes to the successful outcome of those deals. Everyone wants true supplier collaboration, yet many companies find it difficult to achieve especially in the building materials industry.

Benefits of supplier collaboration

Building and construction companies that take hold of supplier collaboration have enjoyed dramatic reductions in inventories and costs, together with improvements in speed, service levels, and customer satisfaction. Plus, the following benefits:

  • Best practices shared – supplier collaboration results in best practice being shared and everyone is aware of what is required. There is a real understanding of what the goods supplied will be used for and what causes problems within the supply chain.
  • Improved communication is a direct result of closer collaboration with building materials suppliers. For them to be aware of the requirements that the customer has, and any problems can be eliminated, there has to be communication.
  • Managing supply chain risk is improved because the supplier is able to plan effectively for the future. Due to operating within an exceptionally competitive market, there is always a risk that the supplier will not survive, especially if they have cash flow problems. However, the collaborative approach means that the building materials supplier will be able to plan for the future, knowing what share of the market they will be able to retain or even expand into, with reasonable accuracy.
  • Reduced costs - many deals in the building and construction industry can take many months to complete. By concentrating on establishing and developing long term relationships these costs can be offset, with both parties actively looking to avoid any unnecessary costs which may arise from re-tendering, re-negotiating or being forced to exit an existing contract early. In fact, a 2012 survey by Deloitte found that organizations that engaged with suppliers were 38% more likely to achieve or surpass their expectations and have their initiatives result in cost reductions. 

What can the building materials industry do to improve supplier collaboration?

By sharing transactional detail and summaries, having a single version of the truth with regards to all agreements, and having access to powerful analysis tools, both parties in the building materials industry can avoid disputes over rebate claims and instead invest time in creating agreements that benefit them both.

Information on the products and their historical performance can help you identify gaps, areas of strength and assess supply chain risk more effectively. A consolidated view of all supplier data can support decision-making.

Increased transparency and trust can also improve supplier collaboration. For instance, general feedback whether positive or negative can help create harmony among stakeholders and tackle issues jointly, ultimately ensuring successful, long-standing supplier collaboration. Also documenting clear expectations from your suppliers is critical to performance and friction-free engagement.

What system is needed for greater supplier collaboration?

The starting point (one of our 7 keys to successful negotiations) is to share goals and use them as inputs to the negotiation. Other inputs include a clear picture of past performance, and tools to review what-if scenarios for the future.  With those things in place, negotiations can take place from a position of knowledge.

But agreeing and working towards mutual goals isn't easy when you have separate copies of the agreement, different systems for recording deliveries, and other systems for managing finance and calculating rebate claims.

Instead, what is needed is a single system that:

  • holds the agreement (in a systemised format as well as the actual electronically signed document)
  • provides a common language and data set for all parties
  • provides an audit trail for the sign off of the document and all activity beyond
  • holds transactional data at a granular level and analysis tools that provide shared views on the past
  • enables what-if analysis based on proposed deal structures
  • provides easy roll-up summary information by branch / category or other
  • displays appropriate views of the data for each type of user (finance, commercial, procurement, suppliers)

Those in the building materials industry (and others where rebates and special pricing agreements are prevalent) have an additional requirement to achieve true supplier collaboration.

A key element of negotiations in the building materials industry is the use of creative pricing mechanisms such as rebates, special pricing agreements, overriders, retrospective discounts, and others.  These are design to drive behaviour towards business goals.  So a system that supports supplier collaboration for plumbing and HVAC merchants, electrical distributors, and other building materials suppliers also needs to support rebate management.

Greater supplier collaboration is not going to happen overnight and is not going to be easy. In the next few years improving these relationships should be a priority for all procurement experts. Being able to choose the best-suited strategic suppliers will enhance the value of the suppliers and the overall return on investment. Plus, we are finding that companies in the building materials industry select our software to not simply to ensure that all rebate claims are made, but to provide a platform for mutually profitable growth with their suppliers. 

Find out more about our software functionality by downloading our eBook "The 7 keys to unlock mutual growth with B2B deals."

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Topics: Industry Sector: Building Materials, Supplier Collaboration