There are four main reasons.

Firstly, sustaining a consistent standard of performance is extraordinarily difficult. Feedback from customers in terms of "what" went wrong and diagnosis as to "why" is the basis for systematically eradicating problems that cause errors and poor performance.

Secondly, in many markets, buyers simply do not have the option of switching the business to other sources. It is no use thinking that you can just move the business to a better supplier. There may not be a better supplier! So the only option if the supplier is causing problems is to work with the supplier to address the problems and hopefully improve their capability.

Thirdly, many suppliers are closely integrated into the operations of their customers. It is unlikely that the stationery supplier will make a big difference to the performance of your business, but if you have outsourced the call centre, or the interpretation of seismic data, or the delivery of product to your customer, it may well be that the supplier is an extension of your own resources in fulfilling your customers' expectations.

Finally, when you have leveraged, consolidated, bid, negotiated and auctioned until you can do no more of these things, what else can you do to secure cost downs? The answer may to be work with your supplier to attack cost, rather than price. Some commentators distinguish between cost down and cost out. If you can jointly take cost out of the supply chain, then the benefits can be shared between you.

What is Supplier Development?

Here are some broad activities which we can classify as supplier development.

~ Sharing capital with the supplier
~ Sharing people with the supplier
~ Sharing plant with the supplier
~ Sharing ideas with the supplier
~ Joint process enhancement

Sharing capital with the supplier
This could be pre-payment of the contract value which may help the supplier's cash flow and allow them to acquire materials if they are short of working capital. Being thoughtful about the payment profile may help incentivise the contractor.
Of course, paying for services or goods that you haven't received is fraught with risk; this doesn't mean we shouldn't do it, but rather that we carefully consider the risks and opportunities.

Sharing people
You may have a subject matter expert who you can second to the supplier to assist with a specific problem. Car companies do this as a matter of routine, but we have seen Human Resources people and safety experts assist suppliers on specific projects such as writing a Policy manual or aligning safety training with the policies of the buyer.

Sharing plant
Some outsourcing deals involve the supplier taking over selected resources of the client, like a catering facility, or a logistics operation. It could be as simple as inviting the contractor to buy back or just operate your fleet. Or it could be as simple as sharing a tool with a manufacturer.
Some companies offer a form of counter trade whereby they donate capital equipment to a supplier on the basis that the supplier "pays" for the plant by selling the output of that plant back to the donor at a reduced price or even for no charge. The supplier offsets this loss of revenue by selling some of the output on a commercial basis to other customers.

Sharing ideas
Often buyers will take an offer from a supplier and turn the proposal into a specification which they then bid between three suppliers. The ideas in the specification can help develop the other suppliers unwittingly! But often the buyer deliberately seeks to stimulate the supplier with initiatives to do things differently. A buyer may visit a supplier in an industry and see something on a visit and then share the insight with their current supplier in terms of "have you considered?"

Joint process enhancement
Joint working parties established to drive out waste or target inefficiency are an obvious commitment of resources by both parties and may lead to improvement. This would benefit not only the buyer but the supplier's other customers as well. The challenge here is two-fold; the creative challenge of getting two organizations to work co-operatively together, and the challenge of defining what is "fair" and equitable. It can be tough enough getting different parts of the same organization to work together, let alone two cultures, two value sets, two sets of goals etc. One area that the parties may not agree upon is what is "fair"? Supposing that together we create a process improvement which results in the supplier reducing their costs by 5%. What proportion of that saving is shared with the buyer? And what about the margin improvement the supplier experiences in respect of all their other customers? Who benefits from that?

Whether we call it partnering or co-operation or supplier development, these initiatives are resource hungry. We cannot realistically partner with more than a handful of suppliers at once. The depth of the relationship and the scale of the commitment imply that we have many "touch points" between us and so the number of people involved in interactions is substantially greater than a simpler transactional relationship.

There needs to be a clear goal as to why we are doing this and some measures as to the likely return on the investment of time and effort. In particular, we can conceive as initiatives like this having a 90 day attention span. No results, - or no prospect of results- within 90 days, and management will lose interest.

Another issue to bear in mind is the half-life of the project. How long does it take to realize 50% of the planned benefits. Supplier development needs at least 180 days to yield real results