Supplier Relationship Management: How to Maximize Vendor Value and Opportunity (2014)
Chapter 1. Procurement Success vs. SRM Failure
The Rise of Procurement
Let us be clear about one thing right from the start. This is not another book bashing procurement and calling out its allegedly many and obvious shortcomings. Over the past 20 years, procurement has made lots of great strides. A. T. Kearney’s periodic study Assessment of Excellence in Procurement (AEP) speaks a clear language. Across industries and at a global level, procurement functions are in a pretty good shape.
Today, most companies do have a chief procurement officer (CPO) who has earned a seat at the table with his or her peers from innovation, production, marketing, sales, and finance. Given the high degree of focus on core competencies that can be observed consistently across industries, outsourcing of significant elements of the value chain has become the norm rather than the exception. This trend, more than anything, has fuelled what could be labeled as “the rise of the CPO.” Strategic decisions about which product market segments to address and where and how to make products are driven rather than just supported by today’s CPOs. And this modern CPO is more likely to overstress the term customer value than the term cost savings.
At the same time, functional silos have crumbled to ruins. Walk the corridors of any leading company and you are likely to see cross-functional teams working on key initiatives. Today’s procurement executives are as eloquent in engineering and marketing language as their counterparts in the other functions are fluent in the language of sourcing strategies. The age-old tactic of suppliers playing functional managers against procurement people has largely lost its value and might even backfire on the suppliers.
Also, pounding the table has ceased to be the preferred sourcing strategy. Today’s procurement teams are working with a host of differentiated strategies that are selected based on the company’s demand power and the supplier’s supply power. The resulting strategies exceed the traditional remit of procurement by far and pull in substantial competencies from engineering, manufacturing, IT, and supply chain management. They even encourage procurement people to think and act as entrepreneurs. A significant subset of the authors of this book hopes to have contributed to this trend with the creation of the Purchasing Chessboard.1 This chessboard provides 64 techniques for buyers to reduce cost and increase value from category sourcing. These techniques are chosen depending on the balance between supply and demand power.
Managing operational processes has become a highly standardized topic. Today, no leading company worries about procure-to-pay processes. There is no more guessing and reinventing the wheel in these areas; there is just one right way to do it. The same is true for procurement information systems. After albeit huge investments, it has become the norm to press a key and get accurate information on who buys what from which supplier.
Procurement performance management is something of an exception, as it has seen more action recently. The advent of the financial ratio ROSMA (return on supply management assets) provides a way for procurement performance to be discussed in CFO-friendly terms. ROSMA provides the basis for gauging the financial performance of procurement with one single key performance indicator (KPI) and for managing the performance of procurement teams.
With procurement organizations increasingly hiring talent over experience, procurement has become the intellectual hotbed for many companies. Droves of former management consultants and investment bankers team up with engineering, manufacturing, and marketing experts to overwhelm suppliers with data, facts, and analyses. Procurement people spend an increasing amount of time in internal academies and the senior executives leverage the advice of external coaches to help them perform better.
Everything Is Rosy, Then?
If everything was rosy, this would be a very short book and we could pack up and go home now. The one open issue we would like to point out is the inability of procurement executives to manage suppliers rather than categories. Most of the good things previously highlighted are totally category focused:
· The decisions on which product market segments to serve and where to produce goods are driven at a product or category level.
· Cross-functional teams working on the next hot products focus on categories and not on suppliers.
· All sourcing strategy development by definition is category-centric and not supplier-centric.
· Procurement performance management focuses on savings by category and product but hardly ever on the savings or value contributed by suppliers.
· And last, the talent recruited into procurement focuses on better understanding products and categories but hardly ever on managing suppliers.
Again, we are not advocating for stepping back on any of these points. Instead, we’d like to focus on the one important element that’s missing. What we hear consistently from suppliers working with large customers are complaints about how hard it is to work with them. Suppliers are likely to get conflicting messages when working across business units (BUs). For example, one of us recalls the case of a machining supplier for a major aerospace business that constantly received mixed messages on how acceptable its quality and price performance were. Because the messages were not consistent, the supplier did not act. Then, one day the customer made the corporate decision to move business away lock, stock, and barrel. It gave the supplier no real opportunity to respond. This led directly to job losses and near closure of the affected plant.
All of us have also seen the curious case of one BU phasing out a supplier because it is unhappy with the overall performance of that supplier while another BU is increasing business with the very same supplier. Individually, there may be good reasons for that dichotomy, but in the grand scheme of things, this sends a very confusing message to the supplier.
The same lack of alignment can be observed across functions. Engineering may believe that a certain supplier is the greatest of all because it comes up with breakthrough technologies that will make a difference in the market. At the same time, manufacturing and supply chain managers may loath this specific supplier because it consistently fails in ramping up production and causes horrific quality problems. Again, all of us have seen suppliers that, despite disappointing day-to-day performance, get awarded with substantial new business.
Even worse is the frequent misalignment across hierarchy levels. Too many CEOs lack the time and discipline to ask for a thorough briefing before meeting a supplier. This sometimes leads to high-level conversations that only take place at the level of pure “relationship building” between individuals, without substantive content. Such a result at least does not cause harm. Far worse, lack of briefing can lead to agreements being made, or perceived to having been made, with a supplier that are completely counter to the real needs of the customer. We have all heard of examples where suppliers try to get CEOs to agree to things that look fine at a high level but that at a more detailed level would be soundly rejected. At the very least, what could be a fantastic opportunity to emphasize a message to a supplier becomes another cause of confusion that neither benefits the company nor the supplier.
Key Account Management vs. SRM
Let us repeat the observation that suppliers regard the internal misalignment of their customers as a problem rather than an opportunity. The conflicting messages they receive result in wasted effort for the supplier. Granted, some suppliers do cynically try to play “divide and rule.” But, this is usually acquired or socialized behavior in response to the misalignment of the customer. A supplier is usually far happier if it can understand what the customer really expects with the minimum of effort.
Even the sophisticated key account-management routines that many suppliers have deployed fail to be a reliable remedy. After all, what good does it do to be very close to the key decision makers of your customer if they can’t agree among themselves? A professional supplier will point out these inconsistencies to his customer to the degree that politeness permits. But there are limits to the extent of feedback a customer can digest, and too often, the supplier will have to cope with the fallout.
Therefore, we hear the suppliers’ cry for supplier relationship management, or SRM. Professional suppliers prefer to work with customers who are aligned internally.
The Prize
What is SRM? While category management is all about the price of a product or service, SRM is about working more effectively with suppliers to deliver benefits. It recognizes that both parties need to achieve their goals. Today, SRM is instead often little more than the sum of all category management activities and infrequent executive-level meetings and hoping for the best.
Imagine the benefit companies could reap from opening up an additional dimension of management that deals with the following questions:
· At a company level, what do we want from this supplier?
· What type of behavior do we want to drive with this supplier?
· How do we want to structure the relationship with this supplier?
· How do we ensure we are aligned internally when dealing with this supplier?
· What are the appropriate tools and models for managing the interaction with this supplier?
These are crucial questions that all organizations can benefit from answering. We strongly believe that accessing the power of supplier relationships is a big untapped opportunity in so many businesses.
This Book Is Not About Procurement (At Least Not Only)
By now, it should have become clear that this book is not about procurement. Procurement, on its own, cannot answer any of the previous questions sufficiently. SRM is a cross-functional, top-management responsibility. As we’ll see, the role of procurement is to orchestrate SRM and to lead the introduction of SRM in a company.
Introducing SRM in this way to a company is the key to unlocking major opportunities. In this book, we seek to shed light on how to do this. In the next chapter, we introduce the approach of TrueSRM—a fully holistic way for driving supplier behavior. In subsequent chapters, we talk about different types of supplier relationships, how to apply TrueSRM to these differentiated suppliers, and the key factors for success. We then circle back to discuss the future outlook for supplier management and how it applies to different industries. Along the way, we use a number of case studies from our own experiences as well as some from our colleagues and clients.
To illuminate and support the messages, we also reintroduce the story of the fictional characters from the novel The CPO, which three of us cowrote.2
1 Schuh, Christian, Robert Kromoser, Michael F. Strohmer, Joseph L. Raudabaugh, and Alenka Triplat. The Purchasing Chessboard: 64 Methods to Reduce Costs and Increase Value with Suppliers, 2nd ed. (Berlin: Springer, 2012).
2 Schuh, Christian, Stephen Easton, Peter Scharbert, Armin Scharlach, and Michael F. Strohmer. The CPO: Transforming Procurement in the Real World (New York: Apress Media, 2012).