Supplier Relationship Management: How to Maximize Vendor Value and Opportunity (2014)

Chapter 2. Supplier Relationship Management

A Myth?

SRM is a frequently used term that most businesspeople have heard of and recognize. It has its own Wikipedia entry. A recent search on Amazon revealed nearly 1,700 published books related to the topic. There are courses, seminars, and even Enterprise Resource Planning (ERP) system modules that are focused on it, too. Discussions with CPOs who have pursued strategic sourcing rigorously tend very quickly to move onto SRM as the “next big thing” for getting value. Procurement organizations typically have personnel and even whole departments devoted to implementing or driving SRM. People even make their careers as “SRM specialists.”

Seemingly, everyone agrees that we need to have SRM.

What Is Strategic Sourcing? Strategic sourcing is a structured, systematic process for reducing the total costs of externally purchased materials, goods, and services while maintaining/improving levels of quality, service, and technology. The objective is to meet the company’s business requirements from external supply markets. This is done most effectively by intervening in external supply markets in a way that takes account of the relative strength of demand power and supply power. Strategic sourcing most decidedly is not concerned explicitly with how a business manages its relationships with suppliers—that is the realm of SRM.

But, What Does It Mean?

For something that creates so much buzz, SRM is a remarkably slippery topic to put one’s fingers on. The very meaning of the term is unclear.

Most people can describe some of the things that are associated with SRM practices—the “trappings” as it were. Many companies implement these trappings. It is rare now to talk to a CPO who does not have:

· Some form of understanding in place that differentiates suppliers as strategic, critical, and tactical, or other similar adjectives. This is referred to as supplier segmentation.

· Some concept of partnership or collaboration with specific suppliers—usually focused, of course, on the strategic or critical ones.

· A regime of account review meetings and performance scorecards for selected suppliers—again, usually focused on the strategic or critical ones.

The problem: Many people get hung up on these trappings as a description of what SRM is and miss the bigger picture of what actually needs to be achieved. We see countless examples of SRM programs that are focused on combinations of process design, tools, and broad concepts of supplier collaboration. All of these things have a place and can be useful, but they often miss the fundamental point that, to be effective, the behaviors of both the customer and the supplier will need to change.

The Problems

The failure to recognize this leads to a number of serious issues for businesses:

· Big investment in processes and procedures, without sufficient focus on the necessary outcomes

· A view that SRM is a “procurement topic” that “belongs” only to the CPO, to the detriment of the organization

· A silo-based approach with an inability to join up the organization’s perspectives on suppliers, often leading to counterproductive messages

The net result of this is bad outcomes for both the customer and its suppliers.

Let’s ponder for a moment. Think of yourself as a supplier to an organization that has gone down this road of implementing a “traditional” SRM program.

On the one hand, you may feel that this is wonderful. The business uses the language of “partnership” and probably invites you to a range of “summits” and “review” meetings where you are able to meet senior executives. Occasionally, you also get asked to fill in a “voice of the supplier” survey, which you are told is anonymous. You even get invited to give face-to-face “feedback” on how things are going. You clearly realize that you are expected to feel valued and that, possibly, your ideas for how you can contribute more to the customer’s business are even valued too.

On the other hand, there is also a sense of artificiality in the air. Although you are asked to see yourself as a “partner,” the deep underlying behaviors do not change. You still have to win work constantly via tenders, and you are still managed predominantly through compliance to contract. There are also more forms to fill in with respect to performance reporting and scorecards. Deep-rooted customer behavior does not seem in fact to be so very different. You pause before giving honest face-to-face feedback; deep down, you even doubt that the voice of the supplier survey that takes so much effort is really anonymous. You hesitate from being truly honest when you complete it. You also notice that the organization is still completely unable to speak with one voice on its needs and requirements. This is despite all the paraphernalia that has been put in place. You revert to form. You continue to play “divide and rule” in your dealings with the customer. You rationalize this as the only way you can possibly succeed with the customer. You may even be right.

For the customer, this whole cycle has been utterly self-defeating. A considerable amount of effort has been invested. The result has been that behaviors are unchanged, or, worse, are even more dysfunctional than they were previously. The organization still fails to manage supplier relationships in the round. Suppliers end up confused about what is wanted and do not deliver to the best of their ability. Instead, they are encouraged to “game” the organization and play divide and rule whenever they can. Suppliers who could bring crucial innovation opportunities to their customer’s attention fail to do so. The customer has misapplied the “partnership” term to include nearly all big suppliers, even those who cannot really bring access to competitive advantage. The suppliers who have potential to be “true partners” have been ignored and everyone has been ground down by a need to follow “procedure.” Account-review meetings have become contract-performance discussions and the segmentation matrix has not moved far beyond being a pure theoretical concept.

There is a need to break this cycle. The organization has implemented procedural SRM. It has not put in place what we describe as TrueSRM. TrueSRM is what is needed. We will now consider what SRM should really be about.

CASE: AUTOMAKERS IN THE MID-1990S

A case example illustrates the downside of too much, or the wrong kind of, partnership. In the mid-1990s, one of the world’s most prestigious carmakers had discovered the importance of SRM for itself. The implicit understanding was that something needed to be done beyond having annual negotiations with suppliers. After analyzing what went well and what did not, the relationships with several high-end suppliers were identified as best practice.

Some of these high-end suppliers had been working with the carmaker for more than 90 years and over that period had provided many crucial innovations. The idea then was to bring all other suppliers up to the level of those key suppliers. A comprehensive SRM program was introduced and given a name that resonated well. Since many of those who were involved in the program are still around, we cannot disclose its real name in this book, but let’s call it “Program Handshake” going forward.

Program Handshake was kicked off during a large supplier day with the CPO and several board members giving inspiring speeches. The new way of working was outlined to suppliers in booklets describing the new partnership type of approach. Suppliers who agreed to these principles were then called Handshake suppliers. After a very short ramp-up period, 1,500 direct material suppliers had signed up as Handshake suppliers. They represented nearly all of the carmaker’s direct material spending.

The CPO lived and breathed Handshake. He was talking about Handshake wherever he went, both in internal and in external meetings. There even was an elaborate sculpture of two shaking hands on his conference table.

But the deeper he got into Handshake, the more difficult things got. The achievement of the required cost-reduction targets stalled. Whenever a supplier was challenged on cost, his response would be “This demand to cut price is against the principles of Handshake.” To make matters worse, even the innovation performance dropped. The long-term, high-end suppliers continued doing what they had been doing all along, but the hundreds of other suppliers actually showed fewer innovations than prior to the introduction of Handshake.

What had happened was that suppliers in Handshake became complacent. Handshake effectively pulled the teeth out of strategic sourcing, and suppliers did not feel competitive threats anymore. Privately, supplier executives admitted overcharging the carmaker by up to 50 percent compared to other carmakers.

So, What Is TrueSRM Really About?

We take a holistic view that SRM encompasses all interactions between the customer and the supplier. At its heart, SRM:

· Drives supplier behavior

· Encompasses the relationship between two enterprises

· Enables a company to leverage its size by coordinating across divisions, functions, and hierarchies

This seemingly innocuous but broad-reaching definition means that SRM is about both top-line and bottom-line goals that encompass innovation, risk, and cost, as well as quality and responsiveness. The trappings of SRM can only be implemented and considered in terms of how they contribute to this overall goal.

A company that is applying SRM in this highly holistic way is following TrueSRM. Even today, very few organizations take this approach systematically across their full external supply base.

TrueSRM Does Not Vary by Industry/Business

Given the holistic nature of TrueSRM, one might argue that an attempt to describe how to execute it can only be meaningful on a pure industry-by-industry basis. There is some rationale in this. Clearly, the precise needs from the overall supply base will vary by industry and for each firm within the industry. Industries vary in the precise opportunity for suppliers to bring innovation, for example, or in the precise definition of risk. A chemicals company will have different objectives in these fields from a bank with quite different weightings. Different firms in the same industry will vary in things like the degree to which they outsource/insource activities. This will also have impacts on the precise needs they have from suppliers.

However, the fundamental nature of TrueSRM does not vary across industry or firms. The end requirement is the same. The precise trappings will vary but the thought process and key needs will not change. Indeed, there are major lessons to be learned by exchanging “best of breed” practices across different industries.

The Challenge

In effect, we feel that SRM today resembles strategic sourcing in the late 1980s. This was before the concept was invented and properly codified. Organizations designed specifications, issued tenders, negotiated with suppliers, and signed contracts. On occasion, they did these things very well and even achieved strong benefits from doing so. But, rather like an animal that acts from pure instinct, there was limited ability to repeat successful approaches systematically across an organization. Selecting different levers for benefit was based more on “gut feel” than on analysis or science.

The codification of strategic sourcing that started with A. T. Kearney’s work in the automotive industry changed all this. Initially, a bit like with SRM today, people argued that strategic sourcing could not be applied to all industries or categories. We now know that to be false and the growth of the influence of procurement functions in the past 20 years has been strongly associated with the rollout of strategic sourcing beyond its automotive origins.

Where TrueSRM has been put in place, often in parts of businesses, the results have been very good. We are sure that, like us, most readers are familiar with excellent examples of suppliers and customers working together to drive operational improvement and create joint innovation. This is often driven by a particular working relationship that has been created, sometimes by chance. When this happens, the results are great. But it tends to happen in isolated circumstances, and is rarely systematic. Organizations that achieve these great results in one part of their supply base often still experience major issues elsewhere. The “secret sauce” is not codified.

Today’s challenge for procurement is to orchestrate precisely this process by building on the great success that has already been achieved from strategic sourcing. The challenge is to manage supplier interactions on the same systematic basis that already applies to strategic sourcing. Doing so has the potential to release immeasurable value that will go far beyond mere cost saving.

This book is intended to be the guide for putting TrueSRM in place. In the next chapter, we will introduce a case study for doing this in practice.