The Wisdom of Becoming a Preferred Customer

This is an excerpt of the original article. It was written for the November 2012 edition of Supply Chain Management Review. The full article is available to current subscribers.

November 2012

We’ve all heard about the advantage of being a preferred customer to your buyers. Now we learn that it’s just as important to become a good customer to your key suppliers. This article explains the benefits of becoming a preferred customer and lays out the actions needed to become one.

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The one constant that executive leaders will always face is a relentless pressure to improve corporate performance. Enlightened leaders understand that the link between positive relationships with suppliers and improved corporate performance is a strengthening rather than weakening one. And, these leaders understand that by satisfying the diverse needs of their suppliers, their firm stands a better chance of receiving preferential treatment from suppliers compared with firms with less satisfied suppliers. Consider the following high-profile examples.

Ford and Toyota are competing to become market leaders in the production of hybrid vehicles. As part of their development efforts both companies outsourced the production of a complex hybrid transmission system to the same supplier. As market demand for hybrid vehicles increased, Ford executives complained publicly that the transmission supplier favored Toyota when supplying transmission systems.1 Unfortunately, a demand for transmissions that exceeds the supply of transmissions prohibits the supplier from supporting the demands of both companies. What should be obvious here is that one company became the preferred customer while the other did not.

In another example that gained widespread attention, Airbus publicly accused General Electric of favoring Boeing during the development of engine technology for the next generation of commercial airplanes, a market estimated to be worth several hundred billion dollars.2 As an Airbus executive complained: “The problem we have with GE is they go to Boeing and say ‘what kind of engine should we design for your airframe?’ Then they come to Airbus and say ‘here is the kind of airframe you need to build to fit our engine.’” Complicating matters is the fact that the largest version of Airbus’ next generation of planes will compete with the largest version of a Boeing model (the 777) where GE is the exclusive engine supplier. GE officials say they will not build a new engine for an Airbus plane that will compete against a Boeing plane where GE is the sole supplier.

These two examples highlight the high-stakes competition that is taking place over who will reap the benefits of preferential treatment from suppliers—a competition that can affect success or failure at the business level. Although the examples just presented involve large, wellknown companies, the need to understand what it takes to become a preferred customer is just as critical for smaller and less well-known companies. Smaller companies must not be caught off-guard regarding what they must do to receive preferential treatment from suppliers. Failure to understand this can lead to some serious negative consequences as suppliers explicitly and tacitly decide who their preferred customers are. Because supplier satisfaction with a buying customer is primarily a function of a customer’s behavior and not size (something that will be explained shortly), smaller companies do not have to be at a disadvantage here.

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