The common wisdom in a demanding economy is to give a lot to maintain your relations with customers, while leaning on your suppliers for more and more concessions to stay competitive. This tactic may be quite effective in the short run, but it raises a question if you depend on your supply chain to bring you innovations that add value to your organization. Would you give your best ideas to your worst customer? Of course not.

Although we are likely to be in a buyer’s market globally for 12 to 18 months, this is not the time to leverage that advantage in every case. Research and development dollars are scarce, and the cuts you demand now might come at the expense of access to innovations later.

Rather than specifically seeking the greatest short-term advantage in each transaction, this is the time to look for opportunities with key suppliers to work together for long-term mutual advantage. As a long recession thins the ranks of successful companies, it is inevitable that fewer competing supply chains will evolve. To achieve competitive advantage, it will be necessary to develop integration and collaboration with suppliers across the supply chain.

Of course, companies generally can’t change their procurement processes overnight, so it is useful to describe the stages they often follow as they move from transactional to strategic relationships with key suppliers.

1. Stop flying “silo” – The first step moving toward a strategic relationship is recognizing when to break through the silos within a company and between buyer and seller. People have to leap over their cubicle walls to build cross-functional teams. Engineers, designers, packagers, marketers and buyers need to work together. Barriers must be broken down to improve processes and eliminate waste. The same holds true outside the corporate walls – the kind of collaboration required inside a business can pay off when procurement teams build trusted relationships with strategic suppliers.

2. Use a category matrix – Smart purchasers at companies look at what they buy and identify the components or services that are difficult to source or have potential for adding innovation or other value to what they sell. They separate transactional from potential strategic relationships and treat them accordingly.

3. Collaborate to drive innovation – Suppliers should be seen as a potential extension of R&D and manufacturing. When cross-functional teams work with buyers, they can encourage innovations from suppliers that will create value for both companies. Teams also help drive down suppliers’ own costs by doing things such as reworking product specifications or bringing them into lower cost, volume purchases for their own supplies.

4. Hedge your bets – Every gambler arrives in Las Vegas thinking he could be the big winner. But the luxurious surroundings of the casinos weren’t built from customer winnings – they come from the millions of dollars that gamblers lose every day. In the same vein, every company that enters a trust relationship with a supplier expects to win big from it. However, as trusted relationships grow, so do risks. Procurement from strategic sources requires carefully executed steps over time to develop supplier relationships. The process also requires sophisticated risk management steps along the way. For instance, many companies set up a system to assess their relationships with key suppliers no less than once a year.

5. Build a model for supplier integration and collaboration – Your suppliers also have suppliers. Your customers may have their own customers. As strategic relationships blossom, they can start moving up and down stream. Value-adding collaborations and cost transparency work better when they work up and down the supply chain from raw materials to end users.

6. Get and keep everyone on board – Relationships between organizations require relationships among people. It takes specific steps to bring constituencies together across divisions and companies. For instance, it may seem efficient to manage supplier relations through a single point of contact, but stronger ties between organizations will develop when more people from each are interacting regularly. Multiple connections also reduce the risk of disruption if one person leaves the organization.

7. Build metrics and increase performance – The only way to know if a relationship is moving forward is by measuring progress. The value of building a long-term relationship is not as simple as pricing a part. Companies must establish reliable metrics for evaluating the value of deeper levels of trust and collaboration along the supply chain.

8. Optimize relationships and value – Markets change, and innovations make products or processes obsolete. When the landscape changes, companies must have strategies in place to evaluate changing conditions and make critical decisions about moving relationships forward or easing back.

9. Achieve competitive advantage – It was Henry Ford’s vision to integrate a complete supply chain, from iron ore to automobile within a single company. Most companies don’t have that kind of aspiration, but they do work to integrate an entire supply chain of trusted companies to work essentially as one family. Although that level of collaboration is rarely achieved, the business world is moving in that direction because sharing and communicating data and achieving efficiencies give companies sustained competitive advantages.

In one way, all this comes down to a simple fact: Over the long haul, you can’t make money in any industry unless your suppliers make money, too. We only have to look at the domestic auto industry for proof of that. For too many years, they used their volume leverage and power to focus on driving the Tier I supplier price down. Suppliers that conceded to the pressure lost margin, cut back research and development and investments in facilities and now face bankruptcy.

In contrast, automakers from Japan take a different approach. They focus on cost and cost transparency rather than price. These automakers make supplier development and joint problem solving a key priority. While still demanding cost and value improvement, their focus is on the elimination of cost using approaches such as specification change and waste elimination, not just price reductions.

These times call for lean business practices, and in well-managed supplier relationships – both buyers and suppliers become lean together.

Bill Michels is CEO for ADR North America, based in Ann Arbor, Mich. To contact the author or sources mentioned in this article, e-mail This e-mail address is being protected from spam bots, you need JavaScript enabled to view it .