Part 2: The. Streamlining SRM Processes from Initial Negotiation through Managing Ongoing Performance. Copyright ChainLink Research

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1 The SRM Series: Next Generation Best Practices in Managing Suppliers EXECUTIVE SUMMARY Copyright ChainLink Research Part 2: The Lean Machine Title Streamlining SRM Processes from Initial Negotiation through Managing Ongoing Performance Authored By: Bill McBeath January, 2006

2 About ChainLink Research ChainLink Research, Inc. is a Supply Chain research organization dedicated to helping executives improve business performance and competitiveness through an understanding of real-world implications, obstacles and results for supply-chain practices, processes, and technologies. The ChainLink Inter-Enterprise Model is the basis for our research; a unique, real-world framework that describes the multidimensional aspects of the links between supply chain partners. For more information, contact ChainLink Research at Harvard Square Center 124 Mount Auburn Street, Suite 200 N., Cambridge, MA Tel: (617) info@clresearch.com. Website:

3 The SRM Series: EXECUTIVE SUMMARY Next Generation Best Practices / Part 2: The Lean Machine 1. The Outcome Economy Tapping the Innovation Engine of Your Supply Base 2. Lean Machine Streamlining SRM Processes, from Initial Negotiation through Managing Ongoing Performance 3. Inside Job Changing the Way Your Enterprise Thinks, Grows, and Relates to Suppliers and Partners 4. Ascending the Peak Advanced Practices for Supply Chain Leaders EXECUTIVE SUMMARY This is Part Two of a four-part series of reports on the findings from ChainLink research into the next generation of best practices for managing supplier relationships. The research examined hundreds of companies. Among those, ChainLink interviewed the 30 companies achieving the best sourcing results. This series synthesizes the collective next generation of best practices from those top 30 firms. Who Should Read This Paper The audience for this paper includes: Sourcing and procurement senior executives and practitioners (for example, commodity managers, buyers) CEO and C-level executives at firms where supplier relationships are critical to success IT executives responsible for supporting supplier-facing organizations Solution providers of SRM (Supplier Relationship Management) and related solutions and services Customer-facing executives at the suppliers, especially customer relationship and customer-facing supply chain services managers. By giving these executives a better understanding of the customer s perspective, this paper can help them serve their customers better, and provide process improvements and management techniques that could bring themselves as well as their customers up to the next level of performance.

4 Table of Contents for Full Report Introduction...1 The Series...1 Streamlined SRM Processes...1 Contract Negotiation and Management...2 Negotiation...2 Total Cost Based on Actual Performance...2 Reverse Auctions and Game Theory...3 Negotiation Training...3 Contract Authoring...4 The Problem with a Manual Approach...4 Meeting the Challenge of Automating Contract Authoring...4 Accelerating the Velocity of Business...4 Ensuring Contract Compliance...5 E-Sourcing Innovations...5 Comprehensive Auctioning: Broadening the Scope of Reverse Auctions...5 Sample Comprehensive Auctions...6 Managing Risk for Auctions of Critical Items...7 Product Classification in Massive Catalogs...7 The GSA Catalog Story...8 Supplier Performance Management...9 Managing Suppliers in a Diversified Multi-Division Company...9 Automatic Initiation of Corrective Action Workflows...9 Regularly Rating Suppliers...10 Reverse Rating...10 Dell s Scorecard and Rating Approach...11 Integrated Supplier Management System Beyond Scorecards...11 Pinpointing Improvement Opportunities...12 Easy Accessibility to Supplier Performance Data...12 Data Hygiene and Data Quality are Critical...13 Data Cleansing and Change Management...13 Suppliers Quickly Identify Bad Data...13 Cleaner Data A Major Side Benefit...13 Innovative Uses of Integrated Supplier Management...14 Helping Out the CEO...14 Leveraging Spend Across Contract Manufacturers...14 Conclusion...15

5 Introduction THE SERIES This is Part Two of a four-part series of reports on the findings from ChainLink s research into the next generation of best practices for managing supplier relationships. The research examined hundreds of companies. Among those, ChainLink interviewed the 30 companies achieving the best sourcing results. This series synthesizes the collective next generation of best practices from those top 30 firms. STREAMLINED SRM PROCESSES ChainLink Research originally coined the term SmallSmartFast to describe the next generation of tiny but powerful hardware and software devices and agents (RFID, GPS, hand-held computers, monitoring devices, software agents, etc.). We soon realized that this same thinking can be applied to organizations and processes. 1 In this report, we examine how some companies have implemented SmallSmartFast sourcing processes streamlining, and making smarter, faster decisions throughout the sourcing cycle. Supplier Performance Management Contract Compliance Monitoring Corrective Action Reconciliation, Settlement Supplier Vetting Strategy Human Skills Decision Support Automation Buy Cycle Order Monitoring, Corrective Actions Negotiations Design Collaboration Procurement RFX, Reverse Auctions Contract Authoring Figure 1 - Sourcing Cycle In particular, this report identifies those stages of the sourcing cycle in which companies have recently achieved significant performance improvements: Contract Management Negotiation, authoring, and compliance management E-Sourcing Innovations Comprehensive reverse auctions, e-procurement catalogs Supplier Performance Management Supplier scorecards, rating and auditing, corrective action After reading this report, every firm should be able to identify the stages of their own sourcing cycle where there are opportunities for significant improvements in performance. 1. See SmallSmartFast Organizations from Parallax View Vol. 2, No Page 1

6 Contract Negotiation and Management The essence of good contract management is reasonably straightforward: Can you negotiate a good deal? Can you capture and document the agreement quickly, flexibly, and accurately, with a minimum of effort, error, and exposure? Can you monitor compliance to make sure that you are taking advantage of those hard won gains? For too many organizations, the answer is no to all of these questions. Many firms have untrained buyers and an undisciplined approach, paper contracts, manual processes, and fragmented systems. These problems make authoring contracts very timeconsuming and error-prone, and compliance monitoring almost non-existent (see sidebar Managing contracts poses many challenges ). Firms that have made investments in buyer education and improving the full lifecycle of contract processes have realized benefits. We look at some of those practices here. Managing contracts poses many challenges Imbalance of Power Starting with negotiations, there is frequently a large imbalance of power, with a high-powered VP of sales executive negotiating with a low-level buyer. Lack of Spend Visibility On top of that, the buyer may not have access to information about their company s total spend, with this particular supplier, across all of the buyer s divisions. Sheer Numbers of Contracts Fortune 1000 corporations typically have 20,000 to 40,000 active contracts governing the majority of their business-tobusiness transactions. Cpmpliance Regulations such as Sarbanes-Oxley (SOX) and (for the Healthcare industry) HIPAA requirements mandate accuracy and compliance in these agreements, requiring disciplined processes and systems. SAMPLE PAGE Leakage / Non-conformance After doing all the hard work of negotiating the best possible deal, crafting and recording the contract, many corporations fail to take advantage of those hard-won dis- NEGOTIATION counts for various reasons. A large high-tech manufacturer and systems integrator, which we will refer to in this report as HighTech, Inc. has implemented an Advanced Negotiation Concept program, incorporating components such as total cost analysis, game theory, market dynamics, and risk management. Total Cost Based on Actual Performance Total cost analysis is a key part of negotiations. Although buyers may be fully aware of the differences in material costs between suppliers, without total cost analysis they may not be aware of the value of other differences, such as lead times, on-time delivery, quality levels, perfect order rates, transportation costs, etc. Ideally, many of these total cost inputs will be based on the actual past performance of the supplier. Page 2

7 they created their integrated supplier management system, which we will refer to as SingleSource. It started in 2001 when MultiManufacturing, Inc. launched a major project to build a centralized tool to select and manage suppliers, as well as provide performance feedback to suppliers. SingleSource is now used at 130 manufacturing and procurement sites globally. On a weekly basis, SingleSource pulls a wide variety of comprehensive data (see sidebar Example Data Feeds into Multimanufacturing, Inc. s SingleSource ) for both direct and indirect goods from eight different data feeds (ERP, MRP, factory management systems, etc.) and organizes that data into a common data structure. Pinpointing Improvement Opportunities MultiManufacturing, Inc. s scorecards show supplier quality and delivery performance by site. They recently added the Example Data Feeds into MultiManufacturing, Inc. s SingleSource Receipt transactions from all 130 sites Quality data such as reject rates for parts and components received Open POs all the part numbers for POs that have not yet been received Forecasts all parts on forecast, by month for 24 months. Forecasts by supplier, by part, by part family Accounts Payable invoices paid for current plus previous 2 years then archives to allow offline queries for ancient records Part master data Supplier master detailed list of all suppliers, organized in 52 different categories (e.g. sheet metal, molded plastic): - Name of buyer - DUNS number - Contact information - Cross reference information, such as different internal vendor numbers for different sites - Total spend for specific suppliers including expediting transportation, non-recurring engineering charges, etc. - Supplier performance in quality, delivery, savings SAMPLE PAGE capability to score suppliers differently by business unit. This helps suppliers to see exactly where they need to put their resources in order to improve. To eliminate redundancy and fragmentation in the rating process, MultiManufacturing, Inc. audits its suppliers only once a year, across all divisions. (If audits were done by individual business units, each supplier would receive several audits per year.) The results of these supplier assessments and audits are shared across the corporation. The suppliers are assessed on items such as their internal quality systems and their special process capabilities. Easy Accessibility to Supplier Performance Data MultiManufacturing, Inc. realized that they needed to make their supplier performance information easily accessible to those who needed it. As part of their solution, they developed an online, web-based, training-on-demand package that reduced the lengthly training sessions employees faced in learning how to access the performance information. On an as-needed basis, employees can learn how to use the system in short 2-3 minute chunks of training. Page 11

8 EXECUTIVE SUMMARY Harvard Square Center 124 Mount Auburn Street, Suite 200 N. Cambridge, MA Tel: (617) Website: