Supplier Relationship Management: How to Maximize Vendor Value and Opportunity (2014)
Chapter 10. The “Difference” You Get from TrueSRM
Companies introducing, applying, and living TrueSRM will undergo fundamental changes. These changes will be necessary to stay competitive in the market. Similar to the introduction of category management over the past two decades, TrueSRM will separate the leaders from the laggards. Done right, it will help companies to leverage suppliers and harness the energy that is out there in the supplier market. The changes associated with the introduction will be felt:
· Within procurement
· Across functions
· Across hierarchy levels
· By suppliers
· By competitors
Let’s look at each in turn.
Changes Felt Within Procurement
Procurement teams will have to understand the clear separation between category management and supplier relationship management once the changes are implemented. Perhaps this can best be achieved by first making it crystal clear what exactly category management is. We have elaborated on this in Chapter 8 and recommend The Purchasing Chessboard as a read for those who would like to dive deeper into this topic. Once category management is clearly defined, the more challenging task of clarifying supplier relationship management can be approached. We are confident that this book encompasses the core elements and success factors of SRM, but, in most cases, companies will not have many of their own success stories to build upon when entering this territory.
Once the separation between category management and SRM is understood, new roles and responsibilities have to be accepted. That will be uncomfortable to many. While in the current state, most category managers might assume that they are also managing the supplier relationship, TrueSRM will bundle the relationship management. For many procurement team members, this will mean having to navigate in some kind of matrix with both category and relationship aspects being managed. Life will become more complicated than it is today.
The most probable, drastic change in Procurement will be the need to identify different priorities and employ different skill sets. By focusing attention on suppliers in the Critical Cluster, many tasks that appear to be “supplier management” today will be eliminated. Team members who currently perform these tasks will not necessarily be the ones with the right skills to work with suppliers in the Influence, Integrate, and Invest interaction models.
Changes Felt Across Functions
SRM is a cross-functional top-management task. One might have said the same thing about strategic sourcing and category management five years ago. The key difference is that while strategic sourcing and category management are cross-functional and procurement led, SRM is cross-functional as well but might be led by functions outside of procurement.
Let’s take a more detailed look at which function is leading SRM. For the Harvest, Improve, Sustain, Mitigate, and Develop supplier interaction models, the distribution of roles will not be too different from strategic sourcing and category management. Procurement’s role will be to facilitate quarterly reviews with suppliers and to coach suppliers in providing meaningful and consistent progress reports. Other functions will support this process, but Procurement will lead the way.
For the Bail Out interaction model, it is hard to make a generalization on the distribution of roles. Depending on the nature of the problem with the Bail Out supplier, a specific task force will be put in place. The leader of the task force will ideally be recruited from the function or discipline that has the critical competence to fix the problem. So, if the supplier has a manufacturing issue, the leader of the effort would come from internal manufacturing, or if the supplier has a financial issue, corporate finance would take the lead.
Remember that a key mission of TrueSRM is to focus attention on those few suppliers that really matter in the long run. Relationships to suppliers that fall into this category would be managed with the Influence, Invest, and Integrate interaction models. For these interaction models, specific governance models would be put in place and Procurement would typically be more a contributor than a leader in this context.
Changes Felt Across Hierarchy Levels
Earlier we stated that SRM is a cross-functional top management task. In line with the cross-functional discussion, top management is unlikely to get involved in decisions regarding suppliers in the Harvest, Improve, Sustain, Mitigate, and Develop supplier interaction models. If suppliers in these interaction models happen to be significant suppliers in terms of the amount of business transacted, then top management might occasionally join quarterly review meetings to emphasize messages that are prepared by the Procurement-led cross-functional teams. However, the intensity of the interaction will be significantly lower than for suppliers in the Critical Cluster, irrespective of the amount of business transacted.
Suppliers in the Bail Out interaction model will typically be highly relevant for top management, and, very often, top management might have put the supplier into that interaction model. Since the Bail Out task forces need to operate at high speed and far beyond the usual boundaries of doing business, top management will be key for opening doors.
The most regular top management involvement is likely to be seen in the Influence, Invest, and Integrate interaction models. In many companies, the key challenge will be to connect ongoing top management activities to the SRM efforts. A serious TrueSRM program will limit the freedom of top management to reach out to their counterparts at suppliers at will.
Note If you are serious about implementing TrueSRM, senior executives will no longer have the freedom to contact suppliers whenever they want without serious internal alignment being achieved first.
Changes Felt By Suppliers
Suppliers should generally appreciate their customers embracing TrueSRM, as it brings clarity into the overall relationship. For suppliers in the Harvest, Improve, Sustain, Mitigate, and Develop interaction models, the relationship will be transactional. There will be clear expectations regarding what needs to be done by the next quarterly milestone review, and good performance will be rewarded. At the same time, the supplier will not need to dedicate resources to bringing the relationship to a place it will never go—because there is mutual clarity on what the relationship really is.
Suppliers in the Bail Out interaction model will receive the attention they deserve. What might have resulted in finger pointing in the past is replaced by a swift corrective intervention by the customer’s task force. A smart supplier will fully cooperate with the task force, as ultimately it can only win and learn from it.
Suppliers in Influence, Invest, and Integrate will first need to understand the unique position they have been assigned. They will have the opportunity to grow, make game-changing moves, and build winning ecosystems. In the end, the customer is competing for mind share, and, since this is a limited resource, it will always be an investment and account management decision by the supplier whether or not to fully engage. What should be clear to everybody involved is that the Integrate supplier interaction model, especially, can only work if both parties are fully engaged. A supplier that is not ready should communicate this proactively to avoid wasting its customer’s time and resources.
Changes Felt by Competitors
Competitors of a company like Heartland Consolidated Industries that fully embrace TrueSRM will struggle to understand what hit them. They will wonder what Heartland did to become so much more competitive:
· Did they hire a new breed of managers?
· Did they put some new type of innovation process in place?
· Is it a different kind of incentive system for internal people?
· Are they getting some form of external help, maybe from a consulting firm?
· Is it the new CEO who brought some magic tricks from his former employer?
· Is there something we did wrong to fall out of favor with our key suppliers?
As readers of this book, you know the answer. By introducing TrueSRM, Heartland has taken the game to an entirely new level. Managing the relationship with thousands of suppliers has always been a losing proposition. What Heartland did right was putting suppliers into the right buckets and defining clearly differentiated approaches for each bucket. This allowed Heartland to deprioritize suppliers that are useful but don’t make a difference in the grand scheme of things. With this, Heartland freed up management capacity to focus on those few suppliers that really matter to them. Once those select-few suppliers recognized this, Heartland got a lot more out of them than any of Heartland’s competitors. This, in turn, sparked a virtuous cycle that made Heartland the number-one place for any ambitious supplier to go to because working with the company got it the best chance at growing fast and profitably.
With this, let us conclude by looking at an article written by Elisabeth Huttich two years after her first interview with Thomas Sutter and Laura Braida. It was published in the Global Economy as a “briefing” piece.
Heartland’s Secret Sauce
How a Dull Consumer Goods Company Reinvented Itself to Become the Darling of the Stock Market . . . and Others.
By Elisabeth Huttich
The Star of Fort Wayne
Taxi drivers are often a reliable indicator for the mood in a community. So when your correspondent arrived at Fort Wayne’s cozy little airport, she did not head for the rental-car booths but got into one of the very few cabs available. After looking quickly at me through the rearview mirror, the driver asked, “Are you coming here to work for Heartland?” Over the next 20 minutes, he talked about how much Fort Wayne had changed over the past years thanks to the company.
First, there were all these smart kids moving to Fort Wayne to work for Heartland. He called them the Silicon Valley crowd. Obviously, Heartland must pay them very well, for what other reason would they move from California to Indiana? Second, lots of companies were opening up offices in Fort Wayne and they surely must have something to do with Heartland. He had overheard their executives discussing contracts with Heartland in his cab on their way to and from the airport. Then there was a lot of construction work going on, most notably on Heartland’s new campus. That was very good for some of his buddies who were in the industry. And finally, there were the prices of houses. His own house, which he had inherited from his grandparents, had more than tripled in value over the past five years. He could sell it for a handsome amount, but then all the other houses seem to have gotten more expensive too, so he wondered whether that would be a good idea.
How did Heartland transform not only Fort Wayne, Indiana, but also itself? How is it that Fort Wayne is mentioned in business dailies more often than Cupertino, Mountain View, or Menlo Park? How did a formerly dull food-products company that was better known for causing obesity than excitement become the most desired employer for business school graduates?
Many attempts have been made at answering these questions and the latest count yields eight books on the topic. Emma Jenkins, Heartland’s notoriously tight-lipped spokesperson, has dismissed all of those books as inaccurate. As a correspondent, I have been on the Heartland story for more than two years after conducting an interview with Thomas Sutter, Heartland’s CEO, and Laura Braida, then the company’s CPO, or chief procurement officer, and now its COO, or chief operations officer, after the recent departure of Rick Fiore. To date, this interview is still regarded by many as giving the most relevant clues on what makes Heartland tick.
Heartland’s executives are not eager to share their secret sauce with the rest of the world. Both Sutter and Braida regularly give interviews, but they are very skillful at avoiding giving insights into how they are running the company. Heartland’s wider executive team does not talk to media, not even off the record. This left me to conduct my research for this article largely based on interviews with former executives and suppliers.
Even Suppliers Rave About Heartland
Usually, suppliers are very reluctant to talk about their customers publicly. When they talk off the record, the tone is usually critical. Heartland is different. One of the suppliers known to work very closely with the company is Caledonian Packaging, the global-packaging giant headquartered in Edinburgh. Calum Drummond, Caledonian’s CEO, is a towering and imposing man who has hardly given any interviews in his 15 years of leading the company, yet he was willing to talk about the relationship with Heartland in general and Thomas Sutter specifically.
Caledonian Packaging is a family-owned business that was founded by Drummond’s great-grand-uncle in the early 20th century. The executive explained that in his view, unlike many publicly listed companies, Caledonian has always taken an extremely long-term perspective about every business relationship it entertains. For an average food product, the packaging makes up less than 5 percent of the overall product cost. And it is very difficult to replace the packaging because of the regulatory approvals required, such as with the FDA in America.
So, Caledonian’s approach typically is, in his words, “Simply to do a good job, provide flawless quality, and help our customers to achieve what they want. Over the past 20 years, this has mostly been about dealing with smaller lot sizes. Think yogurt. When I was a child, there were maybe 20 different brand and flavor combinations of yogurt in a grocery store. Today, it can easily be over a hundred in an average supermarket. We have had to become very efficient at making short production runs of yogurt lids in all kinds of colors and layouts.”
Drummond further explained that many of his big customers have hired armies of consultants and MBAs in procurement principally to negotiate much more advantageous commercial terms and squeeze his profit margins.
I asked him for his views on this. He felt it is OK and that it keeps Caledonian at the top of its game commercially. “But then you have to ask yourself, What does a consumer goods company get out of its packaging supplier? Is it just about nickeling and diming us, or is there more? A smart man might reckon that the packaging is what talks to the consumer at the point of sale. And this is what my friend Thomas Sutter instinctively understood. He could have done what all his competitors are doing and set his blood hounds on us. Laura Braida, who was leading their procurement, is pretty sharp. She, for sure, could have squeezed 2 percent savings out of us, no doubt about that. But they went for the smart packaging innovation with us. And everybody now understands how to work with their packaging supplier.”
Drummond’s comments about Heartland were borne out by other off-the-record conversations with suppliers in the industry. They were reluctant to talk openly for fear of offending other customers who behave differently from Heartland.
Heartland Is a Business Transformed
With Sutter at its helm, Heartland has become nothing less than America’s career hotbed. Not only is the company the employer of choice for business school graduates, it has also become the prime target of headhunters. Companies from just about every industry want to replicate the Heartland success story by bringing the company’s people on board. The most famous Heartland alumnus is, of course, Rick Fiore, formerly Heartland’s COO, now CEO of Detroit Motors, America’s second-biggest maker of passenger cars and light trucks. Fiore’s family still lives in Fort Wayne, and he and Sutter are frequently seen together doing long runs on early Saturday and Sunday mornings.
Asked what they chat about during these runs, Fiore claims that Sutter is paying him back. “When Thomas joined Heartland from Autowerke, he knew nothing about consumer goods and I was his tutor. I believe Thomas is still grateful for that. So, when I was approached by Detroit Motors, Thomas spent a lot of time explaining the key success factors of a carmaker to me. He still knows a lot about the industry and I go to him to test ideas that I am pondering.”
Fiore is clearly proud of his close connection to Sutter. “What Thomas brought to Heartland was focus. Focus on what really matters.” Fiore explained that Sutter is very good at identifying winners and ignoring everything else. He says that, in essence, Heartland, under Sutter’s leadership, is all about a differentiated customer experience. This means that each of Heartland’s products or services needs to leave a lasting positive experience in the customer’s mind. And, in Fiore’s words: “That experience needs to be way beyond anything that Heartland’s competitors can offer.”
Suppliers Have Been the Crucial Ingredient
Most businesses claim to be able to offer a differentiated customer experience. What is interesting about Heartland is how it says it has done that. The point that Fiore stresses is that effective supplier management, or what he describes as “TrueSRM,” or more fully “True Supplier Relationship Management,” has been critical for achieving that differentiated customer experience.
This perspective is not just hype. The company’s success has come from a combination of the chief executive’s vision and effective supplier relationships. Fiore cites the second-generation frozen-food packaging as an example where innovation involved leveraging multiple networked supplier relationships. This now includes the use of semiconductors and LCDs as an integral part of the packaging to improve the safety of food handling by monitoring temperature. Heartland had already introduced packaging that changes color once it has been out of the freezer too long. This had been developed in cooperation with Caledonian. You might have thought that this would do the job. Not so for Heartland under Sutter. Fiore explained that Sutter “has this laser focus and thinks many steps ahead. He always warned us that competitors would soon come up with something comparable.” So, the CEO drove the creation of a tripartite relationship between Heartland, Caledonian, and a small Silicon Valley start-up to work time and again on more advanced solutions. This led to the development of yet another level of ice cream packaging that has a printed display telling you how many more minutes you can keep the ice cream outside of the freezer. This has been a great success for Heartland. Up to then, no one had thought that you could make semiconductors and LCD displays into a part of packaging by printing them cheaply. As we have reported before, Heartland’s competitors are suffering intensely. Their ice cream and frozen food are considered by many to be unsafe in light of this new packaging.
Will the Changes Last?
The question is whether these changes at Heartland are more than skin-deep. Will they outlast Sutter? Fiore thinks they will. He explained: “Of course Thomas cannot be everywhere at once, which is why he is building operating models that force people to focus.” He talked about the interface with suppliers. A company as big as Heartland will always have tens of thousands of suppliers or, if you take a single business unit, it will be a couple of thousand. But among this huge number of suppliers, only a handful of them really matter. In Fiore’s view, what Sutter and Braida did was to select a few suppliers to really focus on for relationship building and deprioritized all the others. The hard part of this exercise was the deprioritizing. According to Fiore, people were very skeptical initially, but with the first successes coming in, the mood changed very quickly. “Now, everybody at Heartland gets it.”
Consumers around the globe seem to agree with Fiore. The entire consumer-goods and retail industry is undergoing changes that are unprecedented since the introduction of the refrigerator and the supermarket. It is useful to think of the innovations Heartland is introducing as some kind of chain reaction. Its first-generation smart ice cream packaging increased consumers’ awareness of the importance of uninterrupted freezing by showing them when this had been compromised. The second-generation packaging would go on to become so effective that consumers could tell if they had left the product out of the freezer for too long, and it gave a warning before that point was reached that the temperature was in danger of becoming compromised.
Developing World Teaches the Developed World
Then came the third wave of supplier-based innovation, based on the dabbawalas working in India. Now a familiar sight in megacities, this new group of delivery people use carts or bicycles to transport goods. Heartland introduced this role to deliver products directly from the supplier to the consumer. In a recent report, A. T. Kearney, a global management consulting firm, argued that the dabbawalas working for Heartland have been highlighted as a key competitive advantage for Heartland and a real game changer in the supply chain for food. Trips to supermarkets have become the exception for city dwellers, as Heartland’s dabbawalas get you everything you need on short notice. On top of its environmental impact, the introduction of dabbawalas has been the tipping point for Heartland, with their market shares and revenues skyrocketing while those of their competitors have gone into a collective nosedive.
Rumor has it that Sutter and Braida came up with the idea to introduce dabbawalas for distribution to consumers during consecutive business meetings in Mumbai and New York City. In Mumbai, they saw the original dabbawalas delivering lunch boxes to office workers from their family homes to their offices. In Manhattan, they saw bicycle messengers and compared them to the dabbawala rickshaws that are a familiar sight in Mumbai. They then half-jokingly speculated what dabbawalas could do in New York. Days after having this idea, they were discussing implementation plans in earnest with potential suppliers.
Sutter and Braida took a big gamble. By going direct to consumers and bypassing retailers, they were jeopardizing the very foundation of Heartland’s business. But then, a glance at what had happened to the music and book businesses made the case very clear to Heartland’s executive board. Sutter is rumored to have said, “If we don’t do it, somebody else is going to do it. And I would rather be in control of our destiny than be at the mercy of some external forces.” In hindsight, one can conclude that Sutter was right. Heartland’s direct distribution business through the dabbawala supplier relationships grew much faster than its revenues with retailers. And with retailers closing down outlets everywhere, they are becoming increasingly obsolete to Heartland.
Living the Dream
Konstantin Bauer, my personal dabbawala in my hometown of Munich, explained how he feels about his Heartland-enabled side job. He studied physics at the Technical University and has always worked to finance his studies. Bauer describes his office jobs: “On top of being boring, they left me out of shape. You know, I sit in the lab, I sit at my desk in the dorm studying, and I sat in an office. Days got too short to do exercise. When I was still in high school, I would work out two or three hours a day; here in Munich I sometimes did not do any exercise for two or three days in a row.”
Now, Bauer works as an independent dabbawala supplier for three to four hours a day. He has an app on his smartphone that tells him when and where to pick up the deliveries for his tour. His area is a bit suburban, so he uses a hand cart. Bauer told me, “At the start of the tour, the cart I push is so heavy that I can hardly lift the handles. But since I am usually running while I deliver the items, it is a great workout that makes my muscles ache and it feels fantastic. Most of my friends are dabbawalas as well. Each of us has a different style. Some of them have even started to balance those large trays on their heads that the original dabbawalas in India are using.”
Bauer always works in the same neighborhood, which means that most people know him and he knows them. Some even put their keys in a secret place for him so that he can put their groceries into the fridge for them. Of course, as he recounts, those are the ones that give the biggest tips. This system is very much based on trust.
Bauer explains that “the pay as a Heartland dabbawala is very good, but then there is also this coolness factor. We get these fancy outfits and all of us are really fit and trim. In Munich, there are now even pretend dabbawalas who wear the outfit in the clubs. That is something we don’t do.”
Asked about his aspirations after graduation, Konstantin Bauer has a very clear idea: “I want to join the research division of Heartland in Fort Wayne. This is the one place to be for a scientist. I spent a day on the premises last summer when I travelled the Midwest. Even their old site was pretty cool, but the new one they are building right now blows your mind. It will be ready just when I graduate.”
Building New Ecosystems with Suppliers
Bauer is very conscious that he is doing something special. What he is dreaming about is opening new doors for Heartland. He firmly believes that in the future the food industry and the pharmaceutical industry will converge. “Let’s face it, what the pharmaceutical industry has been doing over the past 150 years is pumping the human body full of chemicals and finding out in a trial-and-error process how it will respond to them. And then it sold the resulting approved drugs in a one-size-fits-all model through pharmacies. Yet we know that depending on gender, age, weight, and many other personal factors, everybody reacts to drugs in a different way.”
In Bauer’s vision, each of us will wear a smart device, for example a watch, that will monitor our bodily functions on an ongoing basis. This device will be linked to an intelligent health care system, a virtual doctor with unlimited knowledge so to speak. If some of your parameters go out of predefined boundaries, a device in your home will custom make drugs for your very personal conditions at this specific point in time. Bauer asked me to imagine this like a very sophisticated 3D printer that prints a power bar for you.
If Bauer and Heartland are right, then the ability to engineer new relationships with suppliers and create innovative ecosystems will be crucial for success in the future. This does not only apply in the food industry but also in a far more broad scope. Companies cannot hope to create all the innovations that they need purely internally. They need to partner, focus on the handful of key relationships that have the right strategic potential, and work relentlessly to build the right ecosystems.
Heartland may well be the one company that can pull this off. They have proven to be willing to overcome established beliefs and they are able to create ecosystems that are changing entire industries. Bauer knows that in order to get into Heartland he will have to compete against the best graduates of the world’s most prestigious academic institutions. He is studying night and day to get there. The vision that Heartland has created is why many of the best and the brightest are doing likewise. It is only a matter of time before the rest of the world copies Heartland.
A Final Word
In this book, we have introduced and explained TrueSRM—a way of working with suppliers that is strongly differentiated based on performance and strategic potential. Companies need to focus most of their attention on the handful of relationships that have the high strategic potential to really make a difference in their competitiveness. As we see more and more dysfunctional change across industries, the ability to harness these Critical Cluster relationships will be of more and more importance. As the boundaries between industries increasingly converge, no single company will internally possess all of the capabilities that are needed for future success.
Done well, TrueSRM is the key to staying relevant in a changing world. It goes far beyond the concerns of “traditional” procurement. We implore you to embrace it.