Building trust as a basis for more resilient supply chains
As the global economy adapts to what seems like continuous disruption, dependencies and vulnerabilities in supply chains are more than ever in the spotlight. Gordon Donovan (a leader at SAP) outlines why building trust across supply chains can be a key strategy for companies seeking to build more resilience.
In today’s environment, the relationship between buyers and suppliers is taking centre stage. Increasingly, the world of sourcing has been turned upside down, and it are now suppliers who have the upper hand, as buyers scramble to procure what they need from fragile supply chains.
According to a new study by the Haslam College of Business at the University of Tennessee (sponsored by SAP), trust can be a key success factor in the buyer-supplier relationship and form the fundament for more resilient supply chains. The trick for trading partners is to find ways to build that trust by connecting, collaborating, managing, and sharing information with each other.
What do we mean by trust?
I always like to start with definitions. Here’s how Cambridge Dictionary defines trust: “to believe that someone is good and honest and will not harm you, or that something is safe and reliable.”
However, as the University of Tennessee report notes, there is a difference between personal trust as the dictionary defines it, and “institutional and contractual trust between trading partners.” It cites the work of Mari Sako, a professor at the University of Oxford, who has identified three levels of trust:
- Contractual – a promise to carry out contractual obligations
- Competence – the ability to meet promises
- Goodwill – open-ended promises focused on the benefit of both parties
I believe all three levels of trust must be in place for organizations to achieve the transparency and collaboration needed to realise the true supply chain resilience we talk about these days.
The case for building trust
With supply chains in a seemingly constant state of disruption, organizations need to focus on strengthening business relationships to tackle challenges we sometimes have little control over. Because the integrity of commercial relationships is critical, buyers and suppliers need to reconsider their old ways of operating and ask themselves, “How can I improve my supplier relationships?”
The way forward is to create a productive ecosystem forged by joining forces with their partners. In other words, old-school transactional relationships must give way to collaborative ones. To drive innovation and gain a competitive advantage, partners must be viewed as strategic collaborators.
The case for trust in a commercial relationship has strengthened over the years. Trust forms the foundation of all such relationships and is particularly important in the procurement space.
So how do organizations build trust, and what’s the real payoff? The report offers three main insights:
Trust starts with cultural fit
Trust can be built easily when there is a very evident cultural fit between buyer and supplier. For example, if a business values flexibility but its supplier is more hierarchical, it could lead to conflicts in the relationship.
A good cultural fit would be characterised by similar working styles and a shared understanding of how they will work together. This fit extends to the cultures of other countries. As organizations look for suppliers in new geographical locations, cultural similarities (and differences) should be an important consideration.
Your business model matters
In game theory, both parties win when they choose to collaborate with each other. Unfortunately, some traditional business practices haven’t caught on to this concept. In fact, most contractual business models disregard the value that can be gained by treating one’s suppliers as strategic partners.
To foster trust, contracts should be structured to enable both parties to work together amicably toward common, pre-decided goals. By doing so, each can benefit from the innovation and creative perspectives of their partners.
Increasing trust is a strategic choice
Building trust in trading partner relationships starts when all parties make the conscious decision that they want to make it happen. Of course, to arrive at this decision they need to see the value. Which begs the question: Is it worth the effort? Along with the benefits of innovation, the University of Tennessee report says, “improving trust in your strategic business relationship can improve your bottom line by reducing transaction costs associated with friction in your relationship.”
Leading with technology
Although many businesses today are leveraging the value offered by tech solutions, they haven’t unlocked true transformation. This is largely attributed to varying maturity levels across organisations. There is an opportunity for businesses to optimise their digital infrastructure to drive a sustainable relationship with their suppliers.
Technology can be a critical component in driving trust in a buyer-supplier relationship by creating transparency and fuelling collaboration. Digital solutions such as business networks and digital procurement solutions help to align trading partners with accurate and consistent information sharing across the supply chain. This includes inventory management, logistics, capacity, and asset management.
Intelligent spend management solutions help businesses use data more seamlessly to mitigate risks, encourage collaboration, and save costs, to name a few benefits.
As an example, consider what professor Sako said about contractual trust – the promise to carry out contractual obligations. One of the biggest promises buyers make to suppliers is to pay them on time. Among the massive benefits of technology is the ability to compress time to ensure that payments can be made on time, thereby fostering trust.
In an increasingly volatile economic landscape, organisations need the right mix of partners to lead them to business success. While there is no handbook to managing business relationships, we can safely say that the level of trust organizations build into their relationships can make or break them. In the years to come, businesses that prioritise their supplier relationships will be well-placed to see an improvement in their bottom line.
About the author: Gordon Donovan is Global Market Research Director for Procurement & External Workforce at SAP.
