Procurement 29 September 2016

Why supplier relationship management matters more than ever

Supplier relationship management
Supplier relationship management should be regarded as the introduction of a company-wide philosophy aimed at securing greater competitive advantage from the supply base

Jonathan O’Brien considers what is driving interest in supplier relationship management (SRM), the hot topic of the moment in procurement circles, why companies need it like never before and how small businesses can help make it happen.

In today’s business environment, and with procurement no longer solely a sourcing function, companies need to build close working relationships with their most important suppliers and supply chains to assure future survival and prosperity. A fresh approach is needed where the supply base is regarded as a vital extension of the business, capable of adding the next generation of value, brand protection, preservation and competitive advantage.

Evolution of the world, of companies and of procurement mean that only the fittest will adapt to the rapid changes around us. Branding and differentiation remain the last bastions supporting the dominant position of global market players seeing the erosion of traditional footholds. But, with sea changes in technology, the migration and education of people, and once under-developed nations becoming ready to challenge world players, there are hungry and capable rivals that can do what we do – or do it even better. The imperative for corporates to adapt and survive in this changing landscape is more acute than ever.

So how do we respond? The answer lies in our supply base, which is being driven by the same factors we face. This brings a wealth of new possibilities that we must work out how to unlock.

The suppliers of tomorrow will not exist in one building in a familiar territory. Hitherto unseen ideas, innovations and ways of connecting things together will be developed to solve needs and problems. Changes will occur like never before in a new global market place already open for business. Expectations around sustainability factors coupled with global concerns such as environmental events, heightened volatility of supply, commodity scarcity and security of supply, may give rise to problems not yet visible on the horizon. Worse, if there is an issue that restricts supply, how can we know the supplier will give us priority?

One of the most critical things an organisation needs to be able to do well moving forward is to understand and engage with its supply base. Survival of the fittest means we must continue to find ways to be better, faster, cheaper and perhaps even unique and tailored to each customer in some way. This pursuit once belonged to sales and marketing teams, but future survival must now equally be the concern of procurement. In effect, survival means we need to connect supply base possibilities with the needs and aspirations of our customers. Today, few companies have truly worked out how to do this.

The key to changing the game is SRM which, if well implemented, can enable a business to evolve to survive – but only if it is transformational across the entire organisation. A few people in procurement “doing SRM” will not change the game. It must be much more than that.

But what do we mean by supplier relationship management? Holding us back in the starting blocks as procurement people is the myriad of views on what exactly the term means. Variably, it has been described as a way of managing suppliers to deliver against contract, measuring and managing supplier performance as part of an improvement or development initiative, looking beyond the immediate supplier to the entire supply chain, or an approach for the handful of really important or strategic suppliers with whom we want to collaborate in some way. In fact, it is all of these things, with only the relevant elements coming into play at the same time.

I describe this as an orchestra where different sections play at different times according to the music. Just as every piece of music is different, so every important supplier is different and requires different types of intervention at different times. The reality is that SRM is an umbrella approach for many different initiatives resulting from an organisation-wide approach that seeks to identify which suppliers are important in some way, what makes them important and implement the interventions required in response to this. Thus, the “one size fits all” type of SRM programs that regularly seem to be driven in as procurement initiatives within organisations can be largely ineffective.

Instead, SRM should be regarded as the introduction of a company-wide philosophy aimed at securing greater competitive advantage from the supply base. SRM can only be successful if it is responding directly to corporate goals and ambition, and then determining what this means in terms of supply base intervention to (i) unlock value, drive performance and supply side improvements, (ii) increase effectiveness of day-to-day operations in joint or outsourced relationships, (iii) reduce, eliminate or manage supply side risk and (iv) really find and capitalise on supply side innovation.

There are five key success factors that will drive SRM evolution to realise significant value from the supply base:

(1) Supplier relationship management: Change the mindset, change the game

Effective supplier relationship management starts in the boardroom where the executive team needs to come to appreciate the opportunity and imperative SRM presents. Viewing the supply base as an important extension of the business can start to change the game, enabling the flow of value from key suppliers to deliver added value in meeting the needs of our end customers.

Regular, top down communications reinforcing our relationship with the supply base as a joined up, organisation-wide concern are key.

(2) Train the entire organisation

It is rare for those in functions outside of procurement to receive training in how to work with and manage suppliers. Yet, there are frequently multiple organisational interfaces with suppliers, e.g: in marketing, where “interference” from procurement may be viewed unfavourably. Rather than restriction and control, the solution is education, empowerment and coordination to maximise competitive advantage.

Agreed boundaries and an aligned approach will hinder the supplier’s ability to divide and conquer whilst allowing the presentation of a united front from which to maximise our potential.

(3) Chase the ace

Creating complex relationship rules or performance measurement systems that must be applied to all suppliers that meet the importance criteria are resource draining and self-defeating. Instead, determine what makes each supplier important (e.g: high spend, significant risk, potential to add value, degree of dependency, future opportunity, etc), then design and prioritise tailored interventions according to where the time spent will have the greatest impact.

Rather than hold regular quarterly reviews as standard, spending 80 per cent of our time and resources with the 20 per cent of suppliers who hold the potential to make a real and significant contribution to our business will yield the greater value for all stakeholders.

(4) Manage it

This is where the role of procurement fits. By knowing the impact and value the organisation wants from its SRM program, alongside the contribution it will secure from each important supplier relationship, procurement can track, measure and report on the highest priority projects before selling the benefits.

Developing capability and equipping those involved with the skills, process, toolkits and common ways of working they need is also addressed here.

(5) Sell it, make it real, make it worthwhile

Significant resources are required on both sides to make a supplier relationship management program work. Maintaining business interest against competing initiatives demands an ongoing marketing communications campaign aimed at internal stakeholders and the suppliers to help them understand why it is a priority for their support. This can take many forms ranging from a supplier engagement program, an awards scheme, a project microsite with regular updates to sharing success stories of the benefits delivered, etc.

Most critical is ensuring all involved understand that we have a program, that their role is to support it and work to actively deliver that support and the competitive advantage that will ensure future survival.

Jonathan O’Brien is the CEO of Positive Purchasing.

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