I’ve argued over the past few years that we have a trust problem in supply chain management. For example, in a survey we conducted with our Indago supply chain research community in September 2021, more than half of the respondents (56%) either agreed or strongly agreed that “you can’t be too careful when dealing with people across your supply chain.” Why is this lack of trust a problem? What are the costs of distrust? Is there a way to measure trust in business relationships? And how can companies turn low-trust business relationships into high-performing partnerships?
Those are the main questions I discussed with Kate Vitasek, a member of the graduate and executive education faculty at the University of Tennessee, Knoxville’s Haslam College of Business, and Karl Manrodt, a professor of logistics at Georgia College’s J. Whitney Bunting College of Business and Technology, on a recent episode of Talking Logistics.
Kate and Karl have conducted a lot of research related to trust in business relationships, which they have detailed in a recent Harvard Business Review article and in a white paper published by the University of Tennessee.
Why Does Trust Matter?
I began our conversation with a basic question: why does trust matter? Kate points out that significant research has shown that high-trust relationships have both quantitative and qualitative benefits. For example, Kate notes a London School of Economics study found that trust-based contracts produced 40% lower costs than transaction-based contracts. And a study published in the Harvard Business Review found that employees working in companies with trusting business relationships had 74% less stress, 106% more energy and 13% fewer sick days. So, the benefits are real.
Karl adds that the increase in supply chain complexity and disruptions in recent years, resulting in a greater need for collaboration and innovation between partners, is a further reason that trust matters.
Can trust actually be measured? The short answer is yes! The team developed a compatibility and trust (C&T) survey that measures five key relational components that contribute to a healthy and trusting relationship. These include performance trust, which deals with the consistency of performance over time; a focus on shared goals between individual roles and corporate objectives; and a level of communication that is open, planned and consistent. This leads to a team approach to problem-solving and innovation. The key is that there is both shared risk and incentives for both partners to collaborate and innovate.
Kate goes on to explain that the compatibility and trust survey can score these five dimensions to produce a compatibility health index. “We can actually give a score to a buyer-supplier partnership,” she says.
As part of their research, 129 assessments were performed across 98 unique trading partner relationships in more than two dozen industries. What were some of the lessons learned?
Kate explains that the first finding is that cultural fit matters. For example, are you hierarchical in business decision-making or more autonomous? Is your communication style transparent or not? “In the assessments, we scored the buyers and the suppliers across the five dimensions and compared the buyer and supplier side by side. If there was a fair degree of similarity, we say there is a high enough cultural fit.”
The second finding was that business model matters. Companies in transactional business models could not unlock the potential available in vested relationships that align interests toward business outcomes. “Making that shift is really impactful on trust,” she says. “As you track this over time you see that performance goes up and costs go down.”
The third finding was that improving trust is a strategic choice. It doesn’t happen automatically. “You can’t learn to trust until you choose to trust,” Kate notes. “Once you make that choice, there are tools and processes that can create a roadmap to building trust.”
Overcoming Barriers to Trust
Developing trust isn’t easy. There will be challenges and barriers. I asked Karl how companies can overcome these.
Karl mentions that choosing to trust is hard and it’s not a one-time thing. It has to be an ongoing practice or you’ll lose any progress you’ve made. “The good news is that people can change, but they need a process to enable that,” he says.
Karl also states that a lack of alignment on the five dimensions is a key challenge. Companies must acknowledge areas of mis-alignment and work to change or the relationship will flounder. Kate adds that without alignment, it will be impossible to create a win-win environment.
For additional insights on how to turn low-trust business relationships into high-performing partnerships, including case study examples, I encourage you to watch the full episode and download the white paper.