Managing from the Middle: How to Improve Customer and Supplier Relationships through Supply Chain Integration

Middle-market companies often lack the resources and bargaining power to influence terms and relationships within their supply chains. Big customers may pressure suppliers to keep large amounts of inventory on hand, which imposes profit-eroding carrying costs. For their part, large suppliers trying to stay lean may take longer to fill mid-sized companies' orders or require those firms to buy more than they need. Middle-market firms report feeling squeezed.

Supply chain integration (SCI) - defined as virtually any mechanism that promotes transparency, efficiency and coordination - can help ease the pressure. Firms use SCI to connect, tightly couple, and dynamically synchronize their own operations with the corresponding operations of strategic suppliers and customers. It improves operational and logistical performance metrics: making deliveries more timely and accurate, raising quality, increasing operational flexibility, and lowering unit cost.

Until recently, little attention has been paid to how middle-market companies incorporate SCI into their competitive strategies. In pursuit of insights, M. Johnny Rungtusanatham, Matthew A. Schwieterman, Thomas J. Goldsby, W.C. Benton and Martha C. Cooper conducted focus groups with managers from 39 business-to-business firms. The following recommendations are based on that research:

1. Integrate in both directions.

The efficiency of inputs naturally influences the efficiency of outputs, so a combination of upstream and downstream integration can provide the most benefit. Not surprisingly, SCI with customers often looks very similar to SCI with suppliers and, in fact, upstream and downstream integration may appear to virtually mirror one another. The intent to create parallel structures is a good one, but do not fall into the trap of thinking that upstream and downstream integration must be identical.

2. Don't assume technology is always the answer.

For most people, the term SCI suggests IT-based solutions. But technology is rarely the cheapest and may not be the most effective means of coordination. How a company implements SCI should depend on its goals. If a mid-level firm is more concerned with getting closer to its customers and suppliers than in speeding up decision-making, face-to-face meetings and other forms of personal communication may be the best mechanism. Technology facilitates information exchange. Personal communication can deepen transactions into relationships.

3. Prioritize the interests of the chain.

It is in the best interests of supply chain members to grow the business of the entire chain, even at some cost to themselves. If the total cost of carrying inventory is lower for the middle-market firm than for its supplier or customer, then the middle-market firm should consider assuming that burden. But the firm should also be compensated for its sacrifice, perhaps through premium pricing from the customer or reduced costs from its own suppliers or both. Trusting relationships formed by personal communication can make it easier to negotiate those terms.

4. Think about size.

A middle-market company's size affects what it can and should expect of customers and suppliers. A large customer may require a mid-sized vendor to adopt a specific form of SCI. If doing so would distract it from servicing customers that generate more revenue, then the mid-sized firm should consider walking away. Conversely, the middle-market firm should not impose technology mandates on its own small suppliers that could endanger them financially. Finally, firms on a trajectory to become large corporations may persuade their customers to support those ambitions by helping sync up their IT systems. But be forewarned: those customers may demand better service in return.

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