Chapter 4: Customer and Supplier Relationship – A Trust

 Customer and Supplier Relationship – A Trust

The article is written in the area of customer and supplier interaction, a trust that you should know. Applicable to high volume, repeated transaction environment – manufacturing based.  (It can also be applied to service industry.)

A Trust

Do you trust your suppliers? If you trust your suppliers, then you are a good customer. Your suppliers must be delighted with you.

Anyway, the reason why this topic is written is to measure trust between you, as customer, and your suppliers. It is to increase the trust level from a low trust level supplier to a high trust level supplier. This seems to be a weird topic, right. Why measure trust if you have entrusted your suppliers?

Trust is trust and it is something personal between you and your suppliers. If you trust your supplier, your supplier will work diligently because you do not look down on their abilities. Your suppliers will do their best to meet what you have entrusted in them. In some cases, the suppliers are more able than the customer, in which case, the relationship turns into a partnership approach instead of just a transaction.

Measuring trust is about calculating the details between you and your suppliers. Why? Because by calculating this level, you are able to know that there are rooms to be filled. Why? Because you do not want a relationship to erode after you have placed so many effort in the relationship. On the other hand, the relationship should be moving in the opposite direction.

Relationship is a word that cannot be quantified. Relationship being emotion, and cannot be calculated. Trust is the same. For example how do you know whether you can trust this short book or not?

This short book talks about the different phases in a relationship, from a transaction to partnership and to trust. In the next section, what a relationship is about - a transaction, a partnership and a trust, is described.

A Transaction

In a buying and selling environment, the customer has contact with more than one supplier. The customer will be in contact with more than one supplier to source for the products that will meet their requirements. If it does not meet their requirements, the supplier will not be contacted further for more information. There will be no further interaction between the customer and the supplier. However, if the products meet the requirements it will resort to a transaction. This means that the customer is satisfied with the products that are offered. The supplier will sell the product because there is an offer from the customer. This is a transaction.

Interaction between customer and supplier is interesting. In the process before the transaction is made, many activities are involved. The customer has to source for the right supplier. Sometimes, the supplier will approach their customer to introduce their products. The customer needs to do a search about the supplier before a transaction is made. The customer must clear the doubts. Once the customer is satisfied with the product, the offer is made and the product is purchased.

The transaction between the customer and the supplier can be represented in the diagram below. The customer buys in exchange for goods. The supplier sells the finish products in exchange for money. In the diagram below, only one supplier is shown. There can be more than one supplier in each instance.

In manufacturing of goods, there will be more than one supplier supplying components or raw materials to the manufacturer. The manufacturer, which owns the product, will get quotations from suppliers to supply the components or raw materials. The manufacturer will then put the components or raw materials supplied by the suppliers together to produce the end products. The suppliers are required to supply the components or raw materials meeting the requirements. The components or raw materials that do not meet the requirements will be rejected. It will be sent back to the supplier.

In a retail business, the retailer is like an organizer, contacting suppliers to buy their finished products and to put it on the shelves. The retailer earns a marginal profit from selling the goods. Sales is based the nature of the goods. Sometimes the demand is seasonal and the retailer depends on the sales during festive seasons.

In an automobile service centre, parts have to be available when it is required. The customer will drive his or her car for periodic maintenance to the service centre. If the parts need to be replaced, the parts need to be available. The service centre will then source it from the part suppliers. Sometimes, the service centre stock up the parts, which will offer instant response to the end customer.

A transaction is the basic in buying products from suppliers. In the next section, buying and selling is considered as a partnership.

A Partnership

In a relationship, emotions are involved. You and your suppliers get together and hope that the relationship will be a good one during the phases of transactions and also after a transaction. Sometimes, things do not turn out well and the relationship between you and your supplier will not turn out to be good.

A good relationship will turn out to be a good one if both customer and supplier work together to accomplish a common goal. If the relationship benefit towards the customer, there will be an imbalance in the relationship. The supplier will be dependent on the customer.

A partnership between a customer and a supplier is based on a common goal. Both the customer and the supplier see the opportunities to work together. There is interdependency. The customer is good in generating ideas and the suppliers are able to develop the product. Partnership is formed and both benefit from it.

Partnership is long term. The time spent to develop the product and the knowledge created will be amazing. When fresh ideas are available, it will increase the value of the company and will be beneficial to the organization.  In the long term, the source of income from the first product will have to be made available to fund for the next product.

Partnership is two way and it requires both sides to compromise with each other to accomplish the common goal. The ultimate aim is to develop the new product and to commercialize it.

Partnership approach is to share new ideas from both ends. You could be viewed in the sense that supplier is also another shareholder to the company. However, in my opinion, it has to be viewed that a customer is still a customer, and a supplier is still a supplier. The customer and the supplier have got different roles and functions to enable the partnership to work out to be fine. A diagram below shows how a partnership looks like.

There will be communication between the customer and the supplier to find out how each other are doing. Both sides are keen to find out from each other regarding the partnership. For instance, if it regarding yesterday’s shipment, it will affect both sides if one side is could not detect the defects.

In the next section, buying and selling is considered as a trust! Find out more in the next section.

Trust, As One of The Determinants

The topic of interest is trust between customer and supplier. Trust is one of the determinants in relationship between you and your supplier. You need to increase the trust level of your suppliers in the relationship from low trust level to high trust level because it is important to keep it that way. You need to measure trust over a period of time to see that it is at a comfortable level.

In the trust model developed, there are four factors effecting trust level. These are control, feedback, disturbance and delay. If there is control over the relationship, the trust level will improve. If the feedback (communication) between you and your supplier are fast, it has a positive effect. If there are uncertainties which cause disturbance in a relationship, it will reduce the trust level. Delay, for example information delay, is the last factor, will reduce the trust level. The trust model takes into account these components of trust.

These factors mentioned above, are used to calculate the level of trust between you and your supplier. Plotting the trend will see whether there is a constant increase in the trust level among your suppliers.

Below is the trust model, which measures this level between you and your suppliers.

Trust relationship need to be tracked, look, and improve the low components of trust to improve the overall trust level. Sometimes, further improvements will not only increase the overall trust level, it will not cause a further increase. This is due to natural behaviour of the suppliers. For instance, suppliers can only do this. It cannot do more than what is expected. In which case, that will their capabilities.

The Equation

So, the components of trust, is just an arithmetic summation of the components, if it improves the relationship or subtraction, if it reduces your trust towards your supplier. The components of trust are weighted depending on the performance of your suppliers. The equations are shown below.

Performance, P = f(C, F, D1, D2)       – (1)

            where C = Control

                        F = Feedback Rate

                        D1 = Delay

                        D2 = Disturbance

Performance is a function of control, feedback rate, delay and disturbance.

Performance, P =  f1 * C + f2 * F + f3 * D1 + f4 * D2                                     - (2)

where f1, f2, f3 and f4 are weighted factors, sum to 1.

The components are multiplied by a factor and equated it to performance. Performance consists of the weighted factor of the components scored.

As trust consists of past experiences, it can also be represented as follows.

Trust, T_t=1= ( P_t-1 + P_t-2 + … P_t-n) / n    - (3)

where n is how many past experience that sum up to a valued trust (Moving Average Method).

Based on the above equation (3), the average of actual past experience determines the current trust level. Again, it is only able to relate to trust, a representation, and trust cannot be calculated.

Trust, T_t=1= a * P_t=1 + (1-a) *T_t=0         - (4)

where a is a constant to weight more emphasis on the actual performance or initial or actual trust level (Exponential Smoothing Method).

The actual performance relates to trust, it is part of the equation. The first trust level Tt, is a score, and it is the trust the customer has towards its suppliers in the beginning of each relationship. The actual performance P_t is calculated based on equation 2. With this equation, subsequent trust level will be automatically calculated based on the above equation (4).

The Discussion

It depends on “the degree” of partnership, by researchers in the UK. It really depends on how much you as a customer need a supplier. In the UK, the degree of partnership is formed because there are mutual benefits, and the return of investment is reduced because the cost is now the suppliers. If it is produced in-house, it might not worth the time. In addition, share of resources is also reckoned. Sometimes the suppliers know better. It is really up to you, as the customer to allocate the funds.

In situation where the suppliers are not performing, you need to find out whether it is worth to continue. The above equation will help you to determine your further action. At least, try to save the effort, to improve the components of trust by defining it. But if it is not feasible, then to terminate the contract and to seek for “alterative” source is advisable.

The Conclusion

The above contain views on the subject and might not be applicable. Not all can be applied to your situation. The main concept is trust. Transaction, partnership and trust transition in a relationship is something to be discovered by you.

Trust based, an approach to increase the trust level from a low trust supplier to a higher trust supplier is to increase your trust toward your suppliers. The components of trusts break down trust into factors that you are able to look into which means trust to you.

I hope that trust-based approach is applicable to you. Hope you like it.

REFERENCES: -

Open Loop verses Closed Loop System

The difference between an open loop system and a closed loop system is its feedback function, where it is ability to measure output data (continuous) back to a node. At the node (summing point), feedback output data will be subtracted from its original input (or setpoint), forming a steady state error (in an imaginary/real complex state – Laplace Domain), which the data is then entered back-in to the controller and/or the plant (example for storage). Diagram 1 shows an example of a closed loop system.

Diagram A: Closed Loop System

System Dynamics

A dynamic system (or system dynamics) is a real time function of a system that functions under a controllable condition. In the case of liquid-tank filling, it will never overflow – i.e. the flowrate that enters in, to the storage tank requires time to fill with unique input(s) parameter, and each the output has a control valve to regulate the flow.

The Trust Model (Interaction(s) – Influence Diagram)

This Trust Model suggests in this paper has three (3) inputs, with a feedback (delay function) loop, and two (2) outputs. In real scenarios, it has an equivalent system to measure/detect. At the node/or interaction point, air mix well with each other, whereas for liquid (spray) and air (flow) the system response to the demand, depending on the device/tool (spray controller) which allows CO2 to dissolve in rainwater efficiency, forming carbonate acid internally within a controllable closed loop system.