The global supply chain is more stressed than it’s ever been, and with fears of a looming recession looming large, it’s likely to get worse. To weather it and mitigate further damage, buyers and suppliers need to abandon their old ways of operating, and build more collaborative relationships that are rooted in trust. 

The buyer-supplier foundation is shaky and needs to be rebuilt. For decades, contracting models have been adversarial and power based, with the balance shifting toward buyers. Rather than seeing suppliers as partners to help drive innovation, competitive advantage and business growth, buyers have typically viewed them as a source of cost savings.

This model needs to change. The key to securing supply in one of tightest markets the world has ever seen isn’t squeezing suppliers for discounts. As revealed in 3 Ways to Build Trust with Your Suppliers, a study conducted by the Haslem School of Business at the University of Tennessee and sponsored by SAP, it involves building and increasing trust. 

Trust is particularly important when it comes to procurement, where the supplier is essentially an extension of the buying organization. Trust between trading partners comes in three flavors:

• Contractual trust that a trading partner will carry out its contractual obligations;
• Competence trust that a trading partner can meet its promises and,
• Goodwill trust that a trading partner will make open-ended promises that focus on the benefit to both parties.

That’s generally lacking on both sides, but it should come as no surprise. Throughout history, buyers and sellers have acted in their own interests. And it has cost both dearly.

Take the example of the automotive industry. In the early 2000s, Chrysler shifted its contracting model, becoming more confrontational in its negotiations, and supplier trust levels sank to record lows. Many suppliers went under, and Chrysler lost an estimated $24 billion in profits between 2002 and 2014. 

This this isn’t an isolated example, and such behavior persists today. If it isn’t corrected, similar damage will be done. The question is, can the dynamic be changed?

According to the report “Unpacking Trading Partner Trust,” they can — if armed with the right tools.

Building trust starts with knowing where you stand with partners and monitoring changes to take actions where improvements may be needed. To help buyers and suppliers do this, UT researchers teamed with their peers at Georgia College & State University and the University of Texas Health Science Center to develop a simple assessment known as the Compatibility and Trust assessment (CaT). Recognizing that trust is a two-way street, CaT provides a multi-faceted view that organizations can use to not only assess the trust of a partner but their own ability to be trusted, along with tools to monitor insights on an ongoing basis to ensure that relationships are healthy and act to strengthen them. And many are already using the tool to do just this. 

For instance, a global pharmaceutical company used CaT to repair its relationship with a key partner that manages its operations in 10 countries. Once viewed as “perfect” and highly trusted, the suppler failed to meet pre-defined service level agreements, causing the company to miss in delivering on its transformation agenda. And trust plummeted. 

Using CaT, the pharma company gathered hard data on where exactly confidence was lacking. It found that its traditional performance-based sourcing business model was creating an “us-versus-them” mentality and friction on both sides. Equipped with these insights, the partners teamed to develop a vested model for working together that ensures continuous alignment of interests and delivery of results. They continue to use the tool to monitor their relationship and make adjustments as necessary to ensure its health.

CaT isn’t the only tool that can be used to change the game when it comes to buyer-supplier relations. Technology can play a role as well. Business networks and digital procurement tools can provide a clear and transparent way to collaborate that removes friction, by aligning trading partners with consistent and accurate information across orders, inventory, capacity, logistics and asset management, to make sure the right product gets to the right customer at the right time. And they fuel seamless collaboration for greater supply chain visibility to ensure their mutual needs are met.

All of this builds trust. And trust pays dividends. Research across the board shows that trust has the power to reduce the costs of procurement while increasing collaboration and innovation to create new markets and business growth for buyers and suppliers alike:

• A London School of Economics study found that the costs of trust-based outsourcing agreements are 40% lower than power-based agreements.
• A survey of 207 Australian businesses concluded that closer relationships with trading partners are associated with higher levels of performance.

The case for improving trust across strategic relationships is compelling and clear. And in today’s unpredictable economy, it’s vital. Organizations that recognize and embrace it can become partners of choice, and succeed even in the most uncertain of times. 

Baber Farooq is senior vice president of market strategy, procurement solutions, and Gordon Donovan is market research director, procurement and supply, at SAP.