Business Horizons (2006) 49,41—50

www.elsevier.com/locate/bushor

Holding up the mirror: The impact of strategic practices on account

Lynette J. Ryals a,*, Beth Rogers b aCranfield School of Management, Cranfield, Beds MK43 0AL, UK bPortsmouth School, Richmond Building, Portland Street, Portsmouth P01 3DE, UK

KEYWORDS Abstract Procurement has grown up. It is now a strategic business function that Procurement; increasingly recognizes the importance of strategic supplier relationships, a Key account reflection of key account management. It is time to assess the impact of this shift management; on the profession and practice of account management. This paper examines Supply chain customer adoption of strategic procurement and then discusses the implications this relationships has for account managers at the suppliers serving these customers. New techniques are emerging in these special relationships, including the use of psychological contracts and co-measurement and monitoring. Perceived fairness will also have a major impact on the customer’s view of their suppliers. Account managers must recognize these changes or fall victim to supplier delusion: the belief that they are performing better than they really are. D 2005 Kelley School of Business, Indiana University. All rights reserved.

1. Strategic procurement: Everyone’s a nies, strategic procurement is now seen as vital to winner! competitiveness, and Carr and Pearson (2002) find that it has a positive effect on the firm’s financial Procurement is big business. A company’s pur- performance. chases of and services can account for 50— Traditional purchasing is driven by the desire to 70% of total costs (McGinnis & McCarty, 1998) and cut costs of purchase and improve short-term form 70—80% of the cost of new products in some . It historically results in supplier prolifera- industries (Minahan & Vigoroso, 2002). Coupling tion, transactional rather than relationship behav- the scale of procurement costs with a recent ior,andanemphasisonpricereduction.In increasing trend for outsourcing entire processes, contrast, strategic procurement focuses on how it is hardly surprising that the purchasing profes- the purchasing of goods and services, including sion is becoming more strategic. In many compa- outsourcing of entire processes, can deliver better long-term shareholder value. Strategic procure- * Corresponding author. ment is a very different approach which involves E-mail addresses: [email protected] (L.J. Ryals)8 reducing the supplier base, negotiation [email protected] (B. Rogers). with suppliers, quality interaction with suppliers,

0007-6813/$ - see front matter D 2005 Kelley School of Business, Indiana University. All rights reserved. doi:10.1016/j.bushor.2005.05.007 42 L.J. Ryals, B. Rogers and developing long-term relationships with the ment. Account managers also need a better under- best suppliers. These behaviors are linked to better standing of key customer profitability and the company performance (Swinder & Seshadri, 2001). payback on the relationship, as suppliers, too, Developing strong supplier relationships is a encounter risks in dealing with fewer, larger reflection of key account management. It is now customers. Customer profitability risks have been well understood that long-term relationships can extensively discussed elsewhere and will not be pay off for customers and suppliers, both. This, examined here. Our theme is the additional issues however, requires abandoning traditional adversar- that are generated when a major customer moves ial roles and recognizing that more can be achieved toward strategic procurement: the problems of co- from world-class suppliers if companies behave like measuring a complex business relationship to world-class customers (Morgan, 1998). As well, it minimize the risk inherent to the customer in entails offering commitment and adopting a bcan- supplier dependence. doQ approach, such as helping suppliers secure by agreeing to long-term contracts and work-in-process payments. Just as the key account 2. Mirror, mirror: Measurement and risk manager is a boundary spanner for the supplier affect both suppliers and customers (McDonald, Rogers & Woodburn, 2000), so too is the The risk of dependence impacts both parties in a purchasing and supply manager for the customer relationship. While purchasing decision-makers . Strategic procurement managers are have concerns about dependence upon a single now just as committed as key account managers to source for key products or services, managers identifying mutual gain from key supplier/key are equally concerned regarding the risk of over- customer relationships. dependence on a handful of strategic customers. Assumptions regarding the nature of supplier/ customer relationships have changed over the past Working together in strategic supplier/customer relationships requires a grasp by both parties of decade. Suspicious win/lose scenarios are out. The new tools and ways of operating in concert. In current rationale is that buyers and suppliers can particular, the co-measurement and discussion of have common goals, there is no need for customers performance, including the development of trust to have total , and transactions are not and both parties’ perceptions of fairness, is essen- random and episodic. An example of strategic tial to the sustainability of mutual benefit from the procurement thinking is that of Kodak, which relationship. developed a successful supplier pro- gram based on careful supplier selection and 2.1. Who’s the fairest supplier of them all? relationship measurement and management (Ell- ram & Edis, 1996). Kodak obtained benefits through Supplier selection is as strategic to purchasing as lower costs and reduced cycle times, and gained customer portfolio analysis is to sales management. improved solutions through earlier supplier involve- Just as key account managers focus on understand- ment. Suppliers benefited from a greater share of ing customers’ business needs, purchasers strive to Kodak’s business and secure long-term demand understand supplier capabilities such that they can from the customer; they also gained competitive choose the best candidates with which to work. strength. Purchasers bear a considerable Strategically minded procurement managers rec- responsibility on behalf of the firm, balancing the ognize supplier are patterns of pur- -off between control (usually associated with poseful behavior that can deliver value to both playing a number of suppliers off each other) and parties. This new mindset from a traditionally dependence (single sourcing). They need to protect price-driven adversary represents an opportunity the firm from quality mishaps, deficiencies, for suppliers that possess key account management and cost overruns. Purchasers also have to judge capabilities and the ability to respond. However, the risk of supplier failure and keep up with there are still underlying supplier/customer mis- suppliers’ financial health. matches to be addressed. Procurement managers Supplier reduction has been a popular purchas- face two issues in moving toward strategic procure- ing strategy since the 1980s. Although poor perfor- ment: how they measure supplier performance, and mers are dropped, purchasers see a vested interest the risk of increasing their dependence upon a in helping their best suppliers survive and thrive. smaller number of suppliers. For account managers, There are many reasons why customers may move an important implication of closer relationships toward single sourcing or supplier concentration, with fewer, larger customers is the need for greater including the need to increase coordination in a proactivity and openness in performance measure- complex task or process, buffering the firm against