One of the finer arts in the procurement profession is that of extracting greater value from suppliers. Today, competitive advantages are sought across the entire business, and increasingly these are found through supply chain efficiency and effectiveness.
It’s therefore a slightly curious phenomenon that relatively few companies place little stock in Supplier Relationship (SRM). It is an under-used weapon in the procurement department’s arsenal, deployed to obtain value and improved performance from suppliers after contracts have been agreed, a process that always seeks to extract optimum value for money.
According to consultant David Atkinson, the lackadaisical approach to SRM is symptomatic of a flawed category management process that places too much emphasis on the category and not on the service inherent in the contract. Unfortunately it happens all to often in procurement departments.
“Most category management processes have an element around step 7 or 8 called contract and supplier management,” says David, who is Managing Director at the consultancy Four Pillars. “Most organisations in deploying this process tend to run their category strategy work on a category-by-category project basis. By the time they get round to implementing their strategies the organisation and the procurement category manager tends to take their eye off the ball and don’t follow through on the supplier management.”
The situation has dire consequences for value in the supply chain. “The potential to leak value from the moment the contract is signed can be significant,” adds David. “How much value is a moot point; it can be, depending on the circumstances, a drip, drip, drip loss of value or catastrophic failure that sees value plummet.”
Value in this case is lost through a number of different ways. This ranges from late delivery to not meeting specification, to not having the right people available when required or innovation that was promised not being delivered. Often it will be in the face of price escalations or not receiving savings that were negotiated; almost always in such cases it betrays a supplier that is not significantly engaged in driving improvement.
“That’s why you need really good supplier relationship management. It’s to make sure you protect the value that you contracted for. Secondly, it’s to drive additional value for money benefits on behalf of your organisation in the post-contract period of the relationship.”
Three things drive most procurement departments: cost reduction, risk reduction, and contributing to growing company revenue. Cost can be reduced in a number of ways, for example by taking an aggressive approach with suppliers by putting in place extended payment terms or pay-to-play deals. Cost can also be improvement through negotiated savings or often more collaborative process improvement.
Reducing risk is a little trickier, though David believes that SRM can help here too by helping to manage quality, supply chain integrity and making sure the supplier has the capacity in place to meet their contractual commitments. Growing revenue through SRM is often where people will initially tend to focus.
“Businesses increasingly talk about capturing supplier innovation, they talk about collaborative design and collaborative marketing campaigns,” says David.
“All of those things fall under the remit of a comprehensive supplier relationship management programme. Each of them, if the practitioner is diligent enough, could have a quantified value put against them. That way you can calculate how much value you are protecting or achieving through the deployment of SRM.”
Although David admits that it is an involved process, it is worth it, not least because it bucks the ‘fire and forget’ mentality of a lot of organisations, who are very busy and diligent in sourcing and letting contracts, but who then lose interest and leave a mess that needs to be cleared up.
“This is focusing on making sure the contracts that you get are perfectly managed to secure that value.”
Putting it into practise
When done right, SRM has huge potential to make a positive difference to the procurement department’s success. Getting it right though is more than just a case of more supplier engagement and is instead the result of a measured and strategic approach and one other key ingredient.
“The most important thing is intention,” David says. “That may sound glib, but let me explain.
“There are a lot of people who talk about SRM and too often it is a box ticking exercise. If you want to be successful as an organisation then you have to truly intend to seek additional value and be prepared to stand up and be counted for the delivery of that additional value.
“I have a client in the public sector that is launching SRM and the biggest challenge is a cultural change within the organisation. Procurement ‘gets it’, but the wider organisation doesn’t yet understand that additional value is achievable working diligently through SRM after the organisation’s negotiators have agreed the contract (with the supplier). It’s a big hurdle to overcome and it reiterates the need to operate with intention. You have to work cross-functionally and generate the aspiration to drive additional value.”
Once that initial hurdle is overcome organisations can move onto the framework (fig1), which is the ‘how to’ of SRM. It is a process that ensures focus on a small number of critical relationships both within your organisation and between you and your supplier. From there you are able to develop a relationship strategy, the part that details where value will be obtained, improvements can be made and risks can be analysed. The end point of the process is supplier engagement. It is the steps, rather than the end point, that are critical.
“Whenever organisations discuss SRM they start with a description of the type of engagement they wish to have with their suppliers, usually in terms of collaboration and partnership,” says David.
“Few describe the steps leading up to supplier engagement or the necessary activities required if the engagement is to be consistent, sustained and yield tangible results. Many leap into supplier engagement following a set of principles based on a simplified view collaboration. Without a robust framework this is a hope for the best strategy.
“About 80% of the work that goes on in SRM is the necessary but ordinary unheralded supplier performance management – most organisations do it in a poor way, but that’s where the real value is won and lost.”
Doing more with less
The notion of doing more with less is the way of the world and a common theme among purchasing departments. SRM is well suited and beneficial in this instance because, beyond the initial phase, it doesn’t have to be resource intensive – if anything it is the opposite of that.
To launch SRM you need a burst of activity and to combine cross-functional teams to develop relationship strategies for your key suppliers. That takes an investment of time, and if you want external support it takes a financial investment.
“If you as an organisation are able to get good SRM practise consistently applied across the organisation I absolutely am convinced that you need fewer resources than you are currently deploying,” David says.
“Organisations are full of people who are problem solvers, expediters who are chasing materials, there are people trying to fix quality issues concerning products and services; there’s all sorts of activity going on between buyer and supplier that is ad hoc and haphazard and it’s not coordinated. In that respect SRM is the vehicle for getting that coordination.
“In steady state, after that initial investment, you can actually do more with less.”