Supplier Relationship Management: How to Maximize Vendor Value and Opportunity (2014)
Chapter 3. To SRM and Beyond!
Initiating SRM in the Real World
Before we get to the core of the SRM framework we propose, let us take a look at a case study for inspiration. During the rest of this book, we will use the fictional example of Heartland Consolidated Industries to illustrate the points made in the main text. Let’s say that Heartland is a global food products business headquartered in Fort Wayne, Indiana. The recently appointed CEO is a German-American named Thomas Sutter. Unusually, his prior role was as the chief procurement officer and he has owed his elevation to the success he achieved in that position. Prior to Heartland, Thomas worked for several years at Autowerke, the leading German carmaker.
Under Thomas as the CPO, the business had gone a long way toward implementing best practice procurement. He successfully imported many of the good practices that his previous company already had in place. Procurement in Heartland has become incredibly successful at meeting the perceived needs of the business, owing to its laser-like focus on reducing external costs. The external effectiveness of the function of dealing with external suppliers as well as its internal effectiveness in dealing with the wider Heartland organization has been significantly enhanced in an approach known as Holistic Procurement Transformation. As part of this approach, strategic sourcing has also been put in place systematically, and ROSMA, the overall return on supply management assets, is tracked and managed.
Laura Braida, an Italian businessperson from Milan, is the CPO now. She achieved the first key breakthrough results in the strategic sourcing program that Thomas launched when he joined Heartland. Unusual for a procurement professional, Laura has a PhD in mathematics, which she had put to good effect in the analysis that drove her strategic sourcing savings. Other key executives in our story include Garner, the CFO; Rick, the COO; and Scarlet, the CMO.
Note Astute readers may have noticed that some of the same characters appear in The CPO (Apress, 2012), cowritten by a number of the authors here. This book offers the backstory on these characters and the turnaround they engineered at Heartland. You can find out more information about the book at http://www.apress.com/9781430249627.
When Thomas had been in his new role as CEO at Heartland for six months, he felt that he had fully settled into his role now. The inheritance from his predecessor, Ross, was a good one; the executive team was effective and the business largely in sound shape. Thomas now had his mind predominantly on how to grow. He felt he had largely left the cares of procurement behind, in the hands of Laura. Then, one day, Emma Jenkins, the head of investor relations, appeared in his office’s anteroom and told Natalie, his executive assistant, that she had to see him as soon as possible.
Emma was immediately let into the office. Thomas was aware that Emma’s role meant she often had external conversations with investors and stakeholders. Frequently, she needed to update him quickly so that he could return a call or have a conversation. However, this was different.
“Thomas, we had a call this morning from a researcher with the Corporate Responsibility Awareness Group. He says they have strong evidence that one of our packaging suppliers in Sri Lanka is using child labor. They are forcing children as young as eight to work 10 hours a day.”
“Seriously?” asked Thomas.
“Yes. They wanted to give us a chance to comment. But the story is about to break. I am sure it will quickly go viral. I could not really offer a comment.”
“OK. Not much you can do. I would talk to Laura so she knows. We need to find out what is happening at that supplier. I had been meaning to introduce more rigorous supplier audits when I was CPO, but it was not the number-one priority.”
What became known as the Heartland Child Labor Scandal did go viral. No local laws had in fact been broken, but the adverse publicity hurt the company’s stock price and considerable management attention was diverted to dealing with the issue. More importantly, Thomas saw himself as an ethical individual and genuinely wanted Heartland to operate under the same principles. He was personally upset with what had happened.
But the litany of supplier problems in what he would later call the month of mayhem was not over. Two weeks later, after the storm from the child labor scandal seemed to be passing, Thomas received an urgent e-mail from Rick Fiore, the chief operating officer, copied to Laura. A small subsupplier of a key ingredient made in Poland had suddenly stopped deliveries. The ingredient concerned was a unique flavor, which had been a major innovation for Heartland’s yogurt range. It seemed that the subsupplier was having financial difficulties and one of its own suppliers, much bigger than it was, had stopped supplying essential inputs as a response to not being paid.
Clearly, Heartland had not been close enough to events in its supply chain. On further inquiry, it transpired that the company that had stopped deliveries to the Polish supplier was also a very significant direct supplier to Heartland elsewhere in its supply chain. This made the situation far more galling. The situation was rectified by the procurement, finance, and production teams working together to get the deliveries resumed in crisis management mode. Ultimately, only two days of production were lost, and the European supermarket customers saw only a blip in stock availability—but enough that several customers demanded, and received, large rebates.
Thomas now felt that perhaps there was a more systematic issue that needed resolution. He wondered if Heartland was really close enough to its suppliers. His feelings were prompted to action by receiving a third piece of news. At the end of the month, he was in his office just after 7 a.m. An early morning meeting had been scheduled with Laura to debrief on how the recent supplier problems would be avoided in future. Thomas quickly opened his iPad to check on the morning’s news. To his amazement, the following headline flew across the financial section: “Calbury Consumer Industries announces launch of major new packaging innovation in conjunction with Marshfield Packaging.”
The detailed article explained that the new packaging for the products kept the food fresher and tasting good for longer. The company’s launch was imminent. Calbury had cofunded development and contributed expertise. Accordingly, it had exclusivity to the product for what looked like a two-year period. It looked like this would be the initiation of a more wide-ranging strategic partnership, and Thomas realized that this was a major competitive disadvantage for Heartland. To his chagrin, Marshfield was also a supplier to Heartland.
Laura walked into the office for the meeting. “What’s happening?” Thomas said. “Have you seen the Calbury and Marshfield tie-up?”
“Yes,” she answered. “I think this proves what we have been discussing. We need to get much more systematic in how we manage our supplier relationships, both to avoid risk and to add more value.”
Laura sat down and put her laptop on the edge of Thomas’s desk. “I think we need to drive SRM, Thomas. It’s something I can orchestrate but it really needs to be owned more broadly.” She opened up her laptop and said, “I have a short slide deck. Do you have a minute to . . . ?”
Thomas stopped her. “Please, Laura, not an SRM program.” He said “program” very slowly and dwelled over the syllables. “SRM programs rarely achieve much,” he said. “I saw all this at Autowerke. They were just a way to get more discounts, really.”
She agreed. “Most CPOs have done ‘something’ they label as SRM but without a consistent, compelling view on the business objective of SRM and what should be included in a SRM capability. As a result, many of these companies fail to fully channel the energy of their supply base for competitive advantage. What we need is what I would call TrueSRM as opposed to only a set of processes and procedures.”
Despite the dramas of the past couple of weeks, Laura clearly saw an opportunity. She envisioned that procurement would become far more of a strategic function for the business than it currently was. She explained that this would need to be achieved by working closely with the executives to collectively make progress in the company’s three to five year strategic plan with a comprehensive SRM capability aimed at building a sustainable competitive advantage. Done that way, she said, SRM would work.
Rather than spell out all the details of the program, Laura had a simple “ask” for Thomas. She wanted to run workshops with the executive team to chart the journey toward SRM.
“Thomas, I can orchestrate SRM. But if I try to determine everything within procurement, it won’t work.”
“What will the workshops look like?” asked Thomas.
“The objective would be to come up with answers to five beautifully simple questions.”
She pointed to a slide on her screen that read: “What is SRM? Why do SRM? Why do SRM now? What does it take to build a leading SRM capability? What is the best way to get started?”
Thomas relented. “OK, Laura, let’s give it a go.”
But she had one further request: “Thomas, you need to be the executive sponsor. This must be owned from the top. It is simply too important not to be.”
Thomas was a little concerned that this would potentially pull him back into procurement and overshadow Laura’s role. However, he saw the logic. The three issues of the month of mayhem really were a mission critical for the business. If Heartland could head off such debacles . . . .
He agreed. Over the following couple of weeks, a series of workshops addressed Laura’s five questions one by one. Thomas attended each session and Laura chaired them. Rick, the COO; Garner, the CFO; and Scarlet, the CMO, were also present. Each workshop addressed one question and was scheduled to last one-and-a-half hours at the end of the day—a good moment for reflective discussion in the Heartland culture. Thought was given to just holding a single all-day session to attack all five questions. However, it was felt that shorter sessions over a period with the opportunity for participants to reflect would achieve a much better outcome. It would also make scheduling easier.
The First Workshop
On a Tuesday afternoon at 5:00 p.m., all of the executives filed into a meeting room to tackle the first question, What is SRM?
Laura started the session: “Maybe the best way to start this,” she said, “is if we all give an initial view of what we think SRM is.” This seemingly innocuous question actually turned out to be very hard to answer. There were quite different views in the room.
Garner started: “For me, it is about making sure that suppliers perform and do not let us down.” Scarlet nodded in agreement and added, “It’s also about making sure that we mitigate any risks we have from external suppliers.” The child labor issue in Sri Lanka was still very much on her mind, but she did not want to refer to it directly; the experience had been too painful for all concerned.
“OK,” said Laura. “So, SRM needs to include performance and risk management.” She captured those points on the whiteboard.
“What you do with suppliers somehow needs to be differentiated too,” said Rick. “We would not want to manage performance and risk as rigorously for a stationery supplier as we would for a supplier from which we get core ingredients.”
Laura interjected: “This is what in procurement we talk about as segmentation of the supply base. We use that as a basis to treat different types of suppliers differently.” She wrote “Supplier segmentation” on the whiteboard.
Thomas now spoke up: “It’s also about making sure that we are coordinated. We need to be able to speak as a single voice to suppliers. That way, they know where they stand and no supplier will be tempted to play “divide and rule” with us. It’s hard to do given that we are big and global, but that understanding must be part of this.”
They all nodded. Laura noted the point. They now had three definitions on the whiteboard:
—Performance and risk management
—Coordinated supplier communication across all business units, functions, and hierarchy levels.
“Is that all?” asked Laura.
“No,” said Scarlet. “Those are good foundations. But I think it is really about more than that. I want to work with suppliers to get more out of the relationships. That goes beyond pure performance management or making sure the contract is delivered. For example, from the creative agency I want the absolute A Team to give us the best marketing ideas that we can develop. I want more value. I want innovation.”
“Do you want innovation from every supplier?” inquired Laura.
“Well, I suppose the politically correct answer is to say yes,” said Scarlet. “But, in reality, as a business, it is not always so critical to get that from every supplier, nor is it a realistic desire. From our suppliers of printed materials, I really just need on-time delivery and a hardworking response to our specifications each time.”
“So, there are strategic elements to SRM that do not apply to every supplier,” said Laura.
“When we talk about suppliers who are really valuable,” said Thomas, “we will also be thinking about how we can work with them to create ecosystems that give us a competitive advantage. But that will be with a handful of suppliers at most, I would say.”
“So, the strategic elements only apply to select suppliers based on the segmentation we just discussed,” said Laura. Then, she wrote on the whiteboard:
—Improvement initiatives that go beyond current contractual commitments
—Value maximization across the ecosystem
“We have five key points,” she said. “Three foundational aspects apply to all suppliers and then these more strategic needs apply to a smaller number of select suppliers only.” She paused and then said: “We still do not have an overarching definition of SRM though, do we? Do we need one?”
“I think it would help,” said Rick.
Thomas intervened again: “I think we are saying that SRM should encompass all interactions with suppliers. This includes foundational elements that are applicable to all suppliers and the strategic elements that are applicable to select suppliers.”
That seemed to work for them. There was general nodding. Laura said, “Well, now we know what SRM is. On Thursday, we will agree why we need to do it!”
The Second Workshop
The group reconvened at the same time two days later to answer the question, Why should we pursue SRM?
“You know,” remarked Thomas, “this is not such a simple question to answer actually.”
“I know,” said Laura. “The entire culture of procurement is focused on savings. Everybody understands that the reason to do strategic sourcing is to receive better value for your money. When they say that, they really mean cut costs and get savings.”
“As the CFO, I have to say that there is nothing wrong with savings, as long as they are real,” Garner pointed out.
“I like savings too,” said Laura with a smile. “But, SRM is a much broader topic. I am not so sure we all have the same objectives in mind.”
Scarlet then jumped in. “Supplier management is not really something that procurement does, Laura. To the extent that it happens, it is we in the business who do it.”
“SRM is delegated to users,” said Laura. “I agree with you.”
“I am not sure I would use the word delegated,” commented Scarlet. “It implies that there is some conscious choice or mandate that is possessed by procurement in the first place.”
“Point taken,” said Laura. “I think we can agree on the following: While procurement leads sourcing efforts and negotiates the contracts that reduce unit price, it is the users that actually manage the day-to-day and strategic aspects of the supplier relationship and many times they do not even include procurement in decisions. As a result, suppliers maintain and coordinate an extensive network of interactions and personal contacts with us while the company lacks transparency on the overall relationship. The situation is not optimal, is it?”
“That’s right,” Thomas affirmed.
Some debate ensued over what exactly made sense to do. Rick felt that the individual functions should provide better transparency on day-to-day supplier compliance with supplier scorecards.
Scarlet wanted to drive value beyond compliance and experiment with supplier innovation conferences and executive sponsors. “I think we should hold a big supplier summit and even give awards as a way to build enthusiasm,” she said. Thomas and Laura exchanged glances.
“That’s a classic marketing approach, Scarlet,” Thomas said with a smile to show that he understood her perspective. “I’m sure there is a place for that, but we need to address the key question of why we should do this!”
“You prompt an idea though, Scarlet,” added Laura. “We do want excitement from our key suppliers. This needs to be bold. SRM is the opportunity for us to channel the energy of our supply base for competitive advantage.”
Scarlet interjected: “Yes. SRM should be driven by creating a sustainable competitive advantage through the pursuit of value beyond cost reduction—growth and innovation, risk management, capital optimization, and so on.”
“And cost, don’t forget cost,” said Garner.
“We won’t forget that, my friend,” responded Thomas. “But, the ultimate prize from SRM is really to team with select suppliers and build a competitively advantaged ecosystem, isn’t it? That’s what we want to do as a business, surely. Cost reduction only gets us so far. Right?”
There was nodding, even from Garner, who said, “Actually, we are about to enter our five-year strategic planning cycle again. SRM needs to be part of that.”
“You are right,” said Thomas. “SRM really requires a focus on enabling our five-year plan. SRM can contribute to this year’s business plan, but the primary payoff is longer term. I think we all agree?”
There was general nodding around the table.
“Tomorrow, we will talk about why we need to do this now,” concluded Laura, “instead of waiting.”
The Third Workshop
The third question—of why Heartland needs to institute SRM now—was relatively easy for the group to answer.
Laura opened the discussion: “We have sourced our supply base lots of times now. We know which suppliers are best suited for the key areas of spending. Constant threats to switch suppliers are losing their credibility.”
“I agree,” said Rick. “In fact, a significant portion of the supply base is so entrenched in our business models that there are few viable alternatives anyway.”
“I think we all know that a sole focus on cost reduction is not sufficient to meet the dynamics of today’s global economy,” offered Thomas. “I’ve been thinking about this,” he said as he consulted some notes. He then quickly wrote the following summaries of key macro-economic points on the whiteboard:
—Changing growth imperatives: evolving demographics and consumption, increased commoditization
—An increased demand for sustainability: avoiding depletion of natural resources, focus on sustainable designs
—Higher levels of risk: elevated financial volatility, rising commodity costs
—Tighter regulation: changing role of government, more regulations
At this point, Thomas paused and looked down again at his notes. He said, “Oh yes, and let’s not forget that cost does not go away as an objective either.” He then wrote:
—Continued pressure on cost: new paradigms, realignment of global supply chain
He continued speaking. “But, let’s not forget the month of mayhem we just had. The issues we had were all about innovation and risk management. They were supplier issues. I do not want to have a repeat of that. I think that is why we need to do this now, and not wait!”
“Yes, we need to get on with it,” agreed Garner.
“Right,” said Scarlet. “We need a supplier-centric approach to value beyond cost reduction. We need to start it now.”
Laura ended with, “OK, next week, we tackle the remaining questions. I hope that is soon enough for us all.”
The Fourth Workshop
The group reconvened at 5:00 p.m. on Monday. Laura introduced the session: “We have defined what SRM is, why we need it, and why we need to implement it as fast as we can. Today we need to discuss this question, What does it take to build a leading SRM capability?”
“I think that is tricky,” said Thomas.
“Yes,” agreed Laura. “Today, in all the companies that I have reached out to for best practice comparisons, SRM is severely underdeveloped versus strategic sourcing. Specifically, in none of them is SRM established as a robust and repeatable process consistently deployed across the enterprise. They are even prepared to admit that, and as you know we are all quite proud and hate to admit failings externally!”
There was then quite a bit of discussion about how difficult it would be to implement SRM. A little way into the conversation, Rick spoke up: “I have been thinking about this. Successful SRM really requires the development of an integrated, comprehensive operating model that is focused on driving value. This ‘form follows function’ operating model needs to include repeatable management processes, enabling tools, key metrics, inclusive governance, new people skills, and supporting organizational structures that are guided by a set of commonly understood principles.”
“I think that is right,” said Laura. The others nodded.
Rick continued: “At a high level, this operating model includes a number of elements.” He then jotted the following elements on the whiteboard:
—Processes: compliance management, segmentation, collaboration
—Tools: scorecards, comprehensive intercompany trade-flow maps
—Metrics and incentives: value measurement and gain sharing
—Governance: interlocking cross-enterprise executive sponsors, committees
—Talent: people skilled in collaborative problem solving and communications
—Organizational structure: focused departments positioned to work in a complex environment
There was general agreement on the points.
“I do not want to push back on our urgency to get this done and in place,” Rick said. “But, my sense is that there will be quite a lot of work involved. We do not have all the capability we need. We need to build it and/or acquire it.”
“You are right,” agreed Laura.
Thomas chimed in: “I could certainly see you needing to do a lot more to put the right capability in place within procurement to orchestrate this.”
Laura responded, “Yes. I guess that takes us on to our final question, too: What is the best way to get started? We talk about that on Wednesday.”
The Fifth Workshop
“How do we get started?” was Garner’s opening statement the next time the group met. “That is a really tough question. It seems to me that we are trailblazing. There are so few best practice examples to learn from. It is never easy.”
“I think we need to learn from other initiatives we have already deployed across Heartland,” Thomas offered. “Goes without saying really, but we also need to be pragmatic.”
“When we put in place the global marketing operating model across all our businesses, we had a similar challenge,” commented Scarlet. “We needed to change the way we were doing things, be more consistent but still allow for quick and decisive decision making on the frontline.”
“It worked well,” said Rick.
Scarlet continued. “That would mean we need to set up a joint task force to establish a common-core SRM capability that will serve as a guideline for the whole of Heartland. Individual businesses and functions will then be allowed to tailor this core SRM capability to their situation while maintaining the ability to speak to suppliers with a common voice.”
“Yes,” said Laura. “We then need to do this in a ‘test and learn’ mindset that measures and communicates value realized. As we proceed, we need to learn the lessons and get better.”
“I agree,” said Thomas.
“I will start to work up a plan,” said Laura. “This has been a very helpful series of meetings. I suggest we review it at our executive meeting this coming Monday.”
Getting to TrueSRM
The team left the room. Laura then approached Thomas, who asked her, “Did that achieve your objectives?”
“I think so,” she said. “But there is one issue. Even after all this, I think that there is still a missing ingredient.”
“I think so too,” said Thomas. “It’s great that we have alignment on all these questions, but I’m not sure we are really there yet either. Our whole problem with this started because we have not been managing suppliers properly. For that, one size really does not fit all. I have seen traditional segmentation approaches and, for me, these really never work. They are never applied properly either. What do you think?”
Laura responded, “I think we need to take a much more effective approach. We need to have a genuinely differentiated strategy for managing our interactions holistically with suppliers. That is what I really see as living and breathing TrueSRM. I have some ideas . . . .”
Key to a Profitable Future
Right now, Heartland is at the stage where it realizes it needs to manage supplier interactions more effectively and more comprehensively across its business. It also needs to do this sooner rather than later; there is a genuine imperative. At the very least, the CEO does not want to endure another month of mayhem.
Although the Heartland case is fictional, it mirrors real-life experiences that we have had with SRM. We have worked extensively with clients who have implemented strategic sourcing across their businesses, and who are adept at negotiating to achieve “savings.” However, these clients were missing the “secret sauce” of how to manage supplier relationships effectively to achieve wider objectives associated with innovation, sustainability, and risk management. We developed and implemented TrueSRM with clients precisely to address these needs that are highlighted in the Heartland experience.
In the next chapter, we will address the question that Laura and Thomas have left us with—how to effectively put TrueSRM in place. We will describe the key that is needed to unlock “the genuinely differentiated approach to managing our interactions holistically with suppliers,” which is the idea Thomas is searching for. This is where interaction models enter our story.