Value of Trust in Supply Chain Management

Value of Trust in Supply Chain Management

AUTHOR

Vivek Sood

TIME TO READ

minutes 

UPDATED ON

January 8, 2019

Why Trust in Supply Chain Is Important?

Recently, the value of trust in supply chain was brought home to me in a graphic manner. An owner of a medium sized business (who was trying to be one of our well-wishers) showed me (and one of our new recruits in sales management department) the way they were using dummy websites to generate leads for their business. He also mentioned that nowadays this is a very common practice to create dummy websites, even dummy companies and fake addresses for the sheer ease of doing so and anticipated potential benefits.

He wanted to encourage us to do the same thing. We listened to him politely, thanked him for his opinion, and refused to go down that path.

He was firmly in the camp of people believing that you have to fake it till you make it.

Obviously there is a huge contingent of people who follow this philosophy. To justify themselves they often quote Richard Branson saying this:

I don’t know if this phrase was truly said by the man himself. However I would feel a little bit uneasy if pilots in their airlines adopted this mantra. It basically means that they accept the job as a pilot hoping to figure out how it works later, meanwhile they are going to fake it till they make it.

I know I have carried the example to an extreme, and pilots do need certification before anyone offers them a job as such.

However, I am also aware that there are more subtle considerations such as aircraft types, routes and even airport characteristics where most pilots will not accept command of an aircraft till they know for sure they can do the job.

Like them, I am firmly in the camp which says ‘make it real and keep it real.’ The risks are far too high; and the numerous opportunities to train and learn without exposing your passengers (or business network partners) to the unnecessary risks make it almost callous to do otherwise.

Yet, many people persist.

Deficit of Trust in Supply Chain, and Its Side Effects

This belief – fake it, till you make it – is usually based on the assumption that nobody will offer you a job if you’re perceived as not qualified for it.

On the contrary, you are the best person to judge whether you are truly competent enough to take on a job. At the same time, with the job offers comes the responsibility of choosing, whether to accept it, or not; the responsibility of evaluating your own skills, experience and competence for this particular job.

Unfortunately, there are far too many people forsaking this  responsibility that can only apply at a personal level.

That is also the reason why there is a lot of trust deficit in the business world.

If you are faking it, your reader, your audience, your client, your customer will most likely know that you’re faking it. It is just a matter of time.

Whether you are a motor mechanic who’s faking the knowledge of the type of motor that you’re repairing or you’re a heart surgeon or any job in between. Faking it is definitely not going to make you happier or more successful for the simple reason that your customer will always be uneasy with you. Furthermore, in your heart you will always know that you are faking it, which is not the best thing for your self-confidence and self-respect.

Supply chain management is not a unique field which requires a large amount of trust between people to collaborate. In fact, trust is a fundamental requirement for all collaboration, cooperation and joint activities between human beings.

It becomes even more significant in supply chain management where it is both individual trust and institutional trust.

Why is trust so important anyway?

There is an important reason why I mention it.

As supply chains become more and more sophisticated, as they become more entangled and evolve into business networks, the need for trust within the supply chains becomes more and more intense.

Let’s take a specific example to make this generic statement more real.

Suppose you are a soft drink manufacturer, and the suppliers of empty cans has a captive plant right next to your bottling plant, you have a good chance of hearing about their business ups and downs and know well in time about events that might affect your supply. Now just substitute this captive supplier of packaging by a bunch of suppliers half way around the earth who might have significant cost advantage (because of manufacturing cost, for instance), and see how important it will be for you to keep open clear lines of communication in order to run your business smoothly and efficiently. people in round

Companies typically want to engage with supply chain partners who will be able to deliver on what they promise, barring a totally unanticipated event. If your business network partners are not fakes themselves, most likely they will not engage with you further when they find out that you’re faking it.

Components of Trust in Supply Chain

Although trust in supply chain management is a very popular topic, it is evident that establishing trust within the business network can be very challenging. It takes time, patience and effort of each and every supply chain partner. It can be even more difficult to maintain trust over time. As the concept of trust is rather abstract, it is also hard to measure. At the same time, despite all the difficulties and efforts you can be sure that developing trust with your suppliers and customers is worth the efforts.

So what is trust and what are the components of it?

How to make sure that there is enough trust between you and your supply chain partners?

Is it always worth the investment of your time and effort?

Is there such thing as too much trust within the business network?

First of all, trust in supply chain management, as in any other cooperation between people, includes numerous factors.

You should maintain good communication at all times between you and your partners. Communication also means honesty and openness. Fairness and loyalty can also be very helpful in establishing trust. Another integral part is the competence and your openness about whether you are qualified for this particular job or not. This kind of relationship requires goodwill and willingness not to exploit your partner’s vulnerabilities. This is even more important because of the confidential information which is shared between supply chain partners and with management consultants.

Levels of Trust in Supply Chain

My colleague, who was at the meeting mentioned at the start of this article, wondered aloud about the advisability of trying to create some websites to generate additional leads for our training business.

And my answer was an unequivocal “no”.

The reason was very simple.

I like to make it real – and keep it real. exercise-in-ground

I gave my colleague an example of the difference between level of trust required for a pharmacist, a general practitioner and an open-heart surgeon.

When you go and buy a medicine from a pharmacy, you do need a certain amount of trust. You need to be confident that the pharmacist will indeed give you the formulation that the doctor has prescribed. You need to be sure that it is pure, unadulterated and sold at the market price.

However the level of trust required from a general practitioner is much higher. Because you will have to literally remove your clothes in front of him. In this case you need the confidence that your general practitioner is able to examine you, to find out what was wrong.

This trust requirement further multiplies when we are talking about a heart surgeon. You need to be completely sure of your heart surgeon as you need to entrust him your own body, because he will be actually cutting you open and looking literally at your heart. Imagine a heart surgeon who lives with the philosophy mentioned earlier.

In the situation where people need to share confidential information, where the profitability of your business depends largely on the competence and honesty of someone else, it is critical to make efforts in order to develop trust. A low level of trust in this case may give a bit more independence and space at first but later on it will definitely result in lower productivity and profitability in supply chain.

people-workingTrust in Management Consulting

Management consultants by their nature need to establish a very firm bond of trust with their customers. The clients need to be able to entrust them with a lot of confidential data and information as well as their innermost strategies so that management consultants could work successfully and effectively.

To be able to establish this kind of firm bond of trust you have to make sure that there is no possibility that your customer misunderstands any of your marketing messages. You should be unambiguous about your market position. It takes us to the next point.

It is always better to say clearly and honestly if the required skills or competences for a particular project are not within your company’s skillsets.

Let me make it real with another example. Very often when we formulate segmented supply chain strategies for our clients’ business, we need to understand the customer segmentation criteria. As part of that activity we need market research data, which is obviously outside the competency set of our business. I am very clear with my clients when such situations arise. I also say that I am in a position to recommend a few good market research firms, if necessary, but customers are welcome to choose any others that they want to use so long as the required segmentation data is available at the end of the exercise.

Sophisticated clients always appreciate a consulting company which is honest about where their competency starts and where it ends. On the other hand there are consulting firms who pretend that they are able to magically do everything.

In most cases they end up doing nothing well enough, and in the long term they usually lose not only the trust of their clients, but also their own self-respect.

Trust in The 5-STAR Business Network

Looking beyond management consulting, as mentioned before, trust is important for collaboration between supply chain partners. When you are working with your supply chain partners – suppliers and customers – in innovation, in order to create new products faster, in enhancing the profitability and reducing the cash-to-cash cycle, you know that relying on fakes will only come back and bite you at the worst possible time.

Typically deep understanding of customer segments is required to be able to configure a segmented supply chain so that the end-to-end business strategy is in coherence. This activity obviously requires an immense amount of trust running all the way through the entire business network.

However, similar to the example comparing a pharmacist, a general practitioner and a heart surgeon, the required trust will always depend on the situation and on the level of collaboration that we need from each participant within the 5-STAR Business Network.


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Notes:

  1. These ideas and concepts will be usually expressed by our thought leaders in multiple forums - conferences, speeches, books, reports, workshops, webinars, videos and training. You may have heard us say the same thing before.
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Vivek Sood

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  • What an amazing blog Mr. Sood I liked each and every statement in this blog and it is also very useful for all the learners and teachers who are out there to perform their best in their field
    But sincerely I read your blog and it is very inspiring for me to get succeed in my future

    Especially I liked that lines which are written in that image of “Richard Branson”
    Thanks for sharing such an beneficial information with us keep up doing great work.

  • Observation is corroborated by the evolution of trust in the fields of industrial economics, organizational behavior, marketing, and organizational theory. Of all the elements critical to managing supply chains, trust is one of the most commonly cited elements, yet one of the most difficult to measure.

    Trust is a range of observable behaviors and a cognitive state that encompasses predictability (Said by Rossiter and Pearch 1975).

    What this means in simple terms is that- trust is not something that occurs overnight, but is built up over time through repeated interactions and acts of good faith. For example, a long-term customer relationship may be based on a continuous discussion of problems that occur and are resolved over time.

  • Importance of Trust in Supply Chain Management

    One of the most critical factors in a committed and collaborative relationship between supply chain partners is trust. If trust is present, it can improve the chances of a successful supply chain relationship; if not, transaction costs can rise through poor performance.

    Organizations need trust in order to be flexible and agile. However, establishing trust can be elusive and even harder to maintain. It is also true that trust is both individual and institutional. Trust in a supply chain evolves based upon commonalities among the partners and can take patience and time to develop.

    There is both risk and interdependence in a supply chain relationship and there must be an implicit agreement not to exploit the partner’s vulnerabilities. This takes development, honesty, and openness to be successful.

    In fact, the main components in trust in supply chains are honesty, loyalty, fairness, openness, and competence.

    Companies must be careful to “optimize” this trust as it can take resources from other aspects of the supply chain (and risks) to develop this. So they must be careful not to over or under-invest in developing trust. The value of the specific relationship must first be made clear so that it can be determined what effort will be put forth in developing this trust.

    It is apparent that trust only exists when both parties think it exists, that it is critical to treat supply chain partners like they are important, information needs to be shared freely, and that partners need to follow through with promises made.

    • Yes Dannic, I am agree with your statement companies must be careful to “optimize” this trust as it can take resources from other aspects of the supply chain (and risks) to develop this.
      But Mutual trust does not appear on the ledger sheets of buyers and suppliers, but researchers suggest that levels of trust between companies may be an important influence on how they operate and perform.

  • Does your supply chain minimize the amount of touches and the touch time in supply chain transactions, so as to reduce the number of potential failure points?

  • The evolution of trust in the fields of industrial economics, organizational behavior, marketing, and organizational theory has brought tremendous changes. Of all the elements critical to managing supply chains, trust is one of the most commonly cited elements, yet one of the most difficult to measure. What this means in simple terms is that trust is not something that occurs overnight but is built up over time through repeated interactions and acts of good faith. For example, a long-term customer relationship may be based on a continuous discussion of problems that occur and are resolved over time. I recall at a meeting between a senior VP of purchasing and a senior VP of marketing from two companies with a ten-year history of a solid business relationship. The VP of marketing noted that the reason the relationship worked, is that “Whenever there was a problem or conflict, I was able to march over to his office, shut the door, lay it out on the table, and work it out! Sometimes it took a few hours, but when I came out, we both felt better about the situation.” Similarly, trust is important in the supply chain as well.

  • There is both risk and interdependence in a supply chain relationship and there must be an implicit agreement not to exploit the partner’s vulnerabilities. This takes development, honesty, and openness to be successful. In fact, the main components in trust in supply chains are honesty, loyalty, fairness, openness, and competence. Companies must be careful to optimize this trust as it can take resources from other aspects of the supply chain and risks to develop this. So they must be careful not to over or under-invest in developing trust. The value of the specific relationship must first be made clear so that it can be determined what effort will be put forth in developing this trust. It is apparent that trust only exists when both parties think it exists, that it is critical to treat supply chain partners like they are important, information needs to be shared freely, and that partners need to follow through with promises made.

  • Good article Sood. One thing that may cause supply chain partners to hold back is that, unfortunately, channel masters do not always treat their partners fairly. It’s not uncommon for the company in control to achieve financial gain at its partners’ expense. Trust can only come about when all companies in a supply chain share in not just the rewards but the risks, too. Without trust, there can be no sharing of critical information. And without sharing critical information, it’s impossible for a supply chain to become borderless and win in the global economy, today, tomorrow and in the future.

  • Technology is coming to our aid and playing a growing role in helping smooth the relationship between businesses and their suppliers. There are many more solutions available that allow buyers and suppliers to take the extra step and provide clear visibility and rich data – we know this can be achieved by digitizing and automating the invoicing process, for example. This clearer visibility of the supply chain and transactions means buyers and suppliers can interact more confidently, which in turn can have a broader impact on an industry such when it comes to future-proofing prosperity. Many suppliers act as industry leaders in terms of research and development. But there is a risk that this innovation isn’t being fully utilized.

  • A business is only as strong as the weakest link in its supply chain. In today’s interconnected world, supply chain networks can include many different businesses or organizations, each relying on one another. This means weak links have a bigger impact than ever before.
    These interconnections in themselves represent complexity, a web of deals, trades and commitments that keep not only businesses running smoothly, but even entire industries.
    It comes as no surprise then that trust is a vital ingredient when it comes to running a business or safeguarding an industry. In fact, in supply chain trust is of growing importance.

  • Trust goes both ways in ensuring the integrity of any supply chain. Suppliers need their customers to trust that they will deliver their goods on time, to an agreed price. Equally, buyers need to treat their suppliers with respect by doing all they can to complete payments in line with agreed terms. So why is it that trust can be so difficult to maintain? It’s not only that cybercriminals and fraudsters are becoming ever more adept at targeting business’s vulnerabilities, making us more suspicious; it is also that the growing complexity of the supply chain makes it harder to track transactions and interactions.

  • An enjoyable piece of writing Vivek. Let’s start with the discussing relationships between suppliers and customers, which some like to call partnerships. Calling business relationships partnerships don’t make them so. Furthermore, there are limits to how many partnerships any company can effectively maintain. Certainly, you can’t have partnerships with everyone in your supply chain, unless the chain consists only of you and two others. Still, it is important to maintain high-trust, high communication, mutually beneficial relationships with key suppliers and customers, whether they’re called partnerships or not. Granted, there are some very successful mega-merchants that are able to dictate prices, terms, and processes to their suppliers by threatening to pull their business. But the fact is that very few of us are in the position of being able to tell our suppliers, My way or the highway. For the rest of us, creating and developing strong, positive relationships is a key to supply chain success.

  • In business settings, I tend to believe that the more than a business trusts the other, that business will be perceived as less opportunistic, in other words, the higher the level of trust, the lower the opportunistic behavior. Sometimes it’s not about the level of trust, though.
    It’s about the asymmetry or the difference between the levels of trust that is important. Trust reduces opportunistic behavior only when both sides have similar levels of trust.
    However, a buyer or supplier with a higher level of trust than its counterpart is more likely to be perceived as being more opportunistic, not less opportunistic.

  • While supply chain management is often viewed as solely a statistical endeavor, soft skills are often required in maintaining buyer and supplier relationships. In the supply chain, we particularly talk about the hard skills, the size and power of a firm and we tend to overlook the soft side, which is trust, reciprocity, interpersonal relationships. In the supply chain, we consider both are important, but the one with the higher impact is these softer skills. Mutual trust does not appear on the ledger sheets of buyers and suppliers, but levels of trust between companies may be an important influence on how they operate and perform.

  • I think before a company attempts to build good external relationships, it must first put its own house in order. You can’t really develop open communications with others if your organization is partitioned itself. Within the friendly confines of your own four walls, manufacturing and distribution need to do more than communicate, they need to march in lockstep. Both functions need to be plugged into what’s going on with sales and marketing. Sourcing and procurement can’t operate independently of other supply chain functions. Senior management must include the supply chain organization in the strategic information loop, while the supply chain organization must let the generals know what it can do to support strategies. This means joint planning and joint problem-solving. It means cross-functional teams with a purpose other than political correctness. It means that everyone has, if not a voice, at least a hearing in product development and discussions about stock-keeping. If all that seems alarming, you’re not ready to manage external relationships. They can’t possibly succeed until your company is master of its own domain.

  • In my opinion, in an ideal supply chain relationship, both customers and suppliers get connected in ways that allow them to easily exchange information, demand data, and the visibility of status. What does this mean? For openers, it means communicating demand events and the director of strategic plans. It also means linking information systems and jointly leveraging the potential for the Internet and other electronic communications. It means working together to reduce costs and improve quality, and understanding capacities and capabilities. And don’t overlook your responsibility to teach your partners the tools and techniques needed to be successful in the 21st century.

  • Everyone is talking about the importance of trust between partners; let’s don’t forget relationships with service providers. This need is particularly acute when logistics service providers (LSP) are involved. Building a successful LSP relationship is absolutely essential to its successful use. Open and full communications are vital from the outset, beginning with the evaluation and selection processes. Multilevel working relationships throughout both organizations provide the key to making processes work and to effectively solve the problems that inevitably crop up. And the work doesn’t end there. LSP relationships, like marriages, require constant effort and continued attention. The LSP also needs to know about upcoming events, changes in strategy, and new products and customers, things that many companies used to keep secret. The arm’s-length, transaction-based, traditional relationship may get the job done at a low price in the short haul, but it does nothing to build a foundation for the future. You and your LSPs need to engage in regular dialogue about where and how they can add value to what you are doing.

  • It’s more difficult to have a trustworthy relationship with consultants that span functions and managerial generations. But the quality of relationships with consultants can have a profound effect on the quality and extent of outcomes. For best results, mutual trust and open communication are required. The more your consultants know about what’s really going on and the more you can tell them, the better their chances of getting to the heart of the issues and devising on-target solutions. As for software providers, they are often portrayed as salespeople without scruple or inhibition. That’s unfair. When it comes to evaluating vendors, your job is to look for and assess the qualities that can make for a positive mutual relationship all the way through a successful implementation. Like all other aspects of the supply chain, this is about more than simply making a purchase. It is about having a sustainable relationship with someone who can play a key role in your long-term supply chain success.

  • Fake it till you make it. If you want to become successful, just pretend you already are successful, so people around you assume you are successful and levitate towards you because of this success. No one cares about entrepreneurs who haven’t made it. And why would they? People just want to look at pictures of really expensive stuff like cars and cocktails, and read stories about how many millions of dollars a person has made working 1 hour a week. So when you are starting out, you can do things the hard way, or you can take the shortcut. I mean, if you can act the part, it is only a matter of time before you magically become the part.