Building customer partnerships - strengthening the foundation for customer relations in business-to-business relationships - includes bibliography

Business Horizons, Jan-Feb, 1994 by Allan J. Magrath, Kenneth G. Hardy

There are five key tactical building blocks in the customer partnering strategies of partnerships formed between pairs of companies in vertical and horizontal alliances. Customer partnering tends to be synonymous with "relationship marketing," whereby customer retention is emphasized using a variety of customer bonding tactics--including a far deeper involvement of the buyer in the design and development of the seller's product or service offerings. The main reasons for developing the closer bonding are improved quality, reduced costs, and product satisfaction--all means of retaining customers.

Customer partnerships engage most parts of the company in the crucial role of satisfying and interacting with customers. For example, partnering often requires customer service, transportation, and materials management personnel to have a more direct influence on deliveries, product availabilities, and order service. Engineering and production personnel deal with customer-initiated design suggestions or complaints about product performance and features. R&D personnel may deal with the customer's future needs in new products or next-generation value-added service enhancements. In customer partnerships even a firm's credit, accounting, and systems people may be involved with the customer's finance personnel regarding such customized billing needs as monthly master invoicing and product usage reporting. Customer partnering dramatically alters the roles of most departments. For example, it changes the role of the sales department because the customer retention emphasis focuses on longer-term volume achievement and return on investment rather than solely on immediate sales transactions.

The five building blocks have a logical sequence to them, although there is no evidence that firms follow a "creeping commitment" type of evolution. The IMP group in Sweden found that close cross-company relations tend to seep upward from the transaction level to middle- and senior-management levels. Customer partnerships typically involve several hierarchical levels; coordination across these levels is important. In one reasonably effective partnership between a manufacturer of technical equipment and a very large distributor, the senior and front-line managers interchanged very well, but the middle managers in the two organizations were not amicable toward their counterparts. Nevertheless, the partnership survived.

The Figure shows the five key elements of partnering. These include new objectives and measurements, exchanges, new attitudes and behaviors, commitment, and investment.

Develop Objectives and Measurements

The first building block in partnerships is to negotiate joint objectives and then measure their achievement. Traditionally, when buyers and sellers have evaluated their agreements they have focused on the effects on their own operating revenues, expenses, profits, and growth. Partnerships usually lead to a broader spectrum of performance indices. Because partnering ties the collaborating companies' forecasting and materials management activities closer together, total system inventories can often be rationalized, improving return on investment for both partners. With just-in-time management, current assets per sales dollar can be improved. The productivity of people involved in the partnership can be measured, and productivity often improves as organizational linkages are tightened. Sales or gross margins generated per person assigned to the selling, buying, or servicing partnership can be fully leveraged.

Partnership collaborations usually speed communications, problem solving, and decision making between partners. In this way, the cycle time for activities can be measured and reduced when launching new products, handling complaints, jointly tackling new projects, or jointly targeting new markets. For example, Stanley-Proto Tools was able to launch its new Torque Plus line of sockets and wrenches rapidly into the refinery and petrochemical industry because of its tight customer partnerships with its distributors. Right-the-first-time quality, which can be measured, can also be enhanced by partnering.

One of Stanley-Proto's distributors analyzed its error rate on invoices under the former system of ordering mostly in large volumes. It found the error rate on one $100,000 order was twice as great as for processing four $25,000 orders. Very infrequent ordering created mistakes by order processing personnel because of reduced familiarity with part numbers, pricing, and assortments. These mistakes created waste and poor quality because order errors resulted in wrong invoicing and shipping and more returned goods. So Stanley-Proto raised the frequency of the ordering and drove down the error rate.

Exchanges

In any customer partnership, buyers and sellers may try to improve the exchange of transactions, perhaps through computer-to-computer ordering systems or electronic data interchange (EDI). However, exchanges of people and ideas can be just as crucial. Baxter Health Care Corp., the hospital supply giant, has extensive people exchanges between its key hospital buying partners and its managers at various levels. For instance, its senior managers meet with a hospital's senior managers to understand the hospital's mission, strategies, and priorities. This helps Baxter mobilize its resources for these customers in a targeted way; its warehouse pickers are specialized by customer partner, and two or three times in a working month the pickers accompany shipments to their designated hospitals to study the customer's warehousing and receiving operations, where they learn how they should pack shipments to minimize customer handling. In addition, Baxter's accounts receivable staff interact with the hospital partner's accounting credit and finance managers. Every part of Baxter's regional office staff visits the customer partner's counterpart function.