1 SUPPLIER RELATIONSHIP MANAGEMENT Relationship Management Framework Slide One Perspective Slide

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1 Contents 1 SUPPLIER RELATIONSHIP MANAGEMENT Relationship Management Framework Slide One Perspective Slide Defining Supplier Relationship Management? Slide Coordination Slide Collaboration Slide A Common Assumption Slide Generating Value Slide Paradigm Shift Slide Determining amount of investment in SRM Slide Determining the form of investment in SRM Slide Illustrative supplier segmentation implications Slide Case example: Chrysler (Best Practices) Slide Case example: Chrysler (Value Realized) Slide A Framework for Implementation Slide Evaluation and selection Slide Negotiation Slide Post-contracting relationship mgmt. Slide Best practices overview: Performance monitoring Slide Termination Slide Portfolio Governance & Management Slide Copyright BManagement 2012 Page 1

2 1 Supplier Relationship Management Welcome to our Contract Management Learning Capabilities course on Supplier Relationship Management. 1.1 Relationship Management Framework Slide 2 As you review the objectives for this module, there are a couple of points worth making. First, in terms of a framework for thinking about supplier relationship management: supplier relationship management is a discipline that is fundamentally different from many of the strategies, techniques and approaches that companies have traditionally employed to manage supplier or vendor interactions. It s fundamentally different from contract management, fundamentally different from simply managing operational activities like purchasing, fulfillment and quality management it s a way of doing all of those things in an integrated fashion, and from a more strategic perspective. As such, there is a fundamental question about when, and to what degree, to implement supplier relationship management. It is not always necessary. It is not always the right solution or answer to every situation. That leads us to the second objective which is an exploration of the value of enhanced supplier relationship management. And, as we explore that value, we will provide some examples of organizations that have implemented supplier relationship management as a business process and the success they have realized as a result. The final objective of this module is to share a number of best practices, and provide lessons learned and advice regarding tools which have enabled effective supplier relationship management. 1.2 One Perspective Slide 3 There are many different perspectives on what supplier management is and what it means. There are companies out there for which supplier relationship management means primarily being smarter, more coordinated and more sophisticated in how they apply coercive approaches to extract more and more cost concessions. While certainly not our philosophy, that is the perspective that many suppliers have experienced, one which represents a hurdle which many customers must overcome. As companies go out to talk to their suppliers about supplier relationship management, and their desire to implement new supplier relationship management practices, they need to recognize that their suppliers have heard this story before. The exclusive partner training camp is rarely an experience aimed at creating value. Copyright BManagement 2012 Page 2

3 1.3 Defining Supplier Relationship Management? Slide 4 What is effective supplier relationship management? We often think about it as two fundamentally distinct, but intimately related buckets of activity. On the left is coordination a concept that is very different from traditional approaches to vendor or supply chain management, which typically deal with purchasing, delivery fulfillment, quality management, and supplier selection those activities typically managed by different groups independently, without access to common information, with no coordination strategy. From an SRM perspective, coordination begins with awareness that all activities that touch suppliers - from up-front sourcing and supplier selection, through negotiations, purchasing, performance management and demand forecasting have an effect on an overall relationship. And, because they are all part of the same relationship, they must be managed in a coordinated way. Similarly, there is recognition that all of the interactions and touch points with suppliers by different functional groups and business units are, again, not completely discrete, disconnected streams of activity, but rather have the potential to convey messages to suppliers, which could be mixed. Finally, there is an abundance of opportunity which can be found when individuals across the various functional and business groups share information and coordinate various purchasing and management processes and decisions so as to leverage volumes and find efficiencies in how the organization as a whole interacts with its suppliers. To get the most value out of suppliers, you need consistent access to information across all touch points, and visibility into historical information, especially if you are going to find the best ways to maximize the value of those relationships. But, coordination is not enough. Collaboration must complement all coordination activities if supplier relationship management is to be truly effective. Despite unfettered access to information, coordination will not provide solutions to how to make trade offs between short-term gain and long-term value. Coordination alone cannot lead to creative problem solving and the innovation that leads to maximum value realized through key supplier relationships over time. Copyright BManagement 2012 Page 3

4 1.4 Coordination Slide 5 What kind of coordination is required to maximize supply chain success? Drilling down into the kind of coordination required to maximize value, it is important to focus on how this relates to both interactions with internal stakeholders and external interactions with suppliers. So, as you can see in the bullets on the left, coordination requires sharing information across business units and functional groups. This includes: Sharing information about performance - where suppliers are doing well where they are not. Unless everyone has access to performance information, it is hard to make sure that the right suppliers are selected and reselected over time and that those interactions are managed effectively. It s important to coordinate negotiations among multiple business units to realize the savings that are possible through leveraging aggregate spend. It s also important to coordinate forecasting and purchasing among business units. If each business unit or buyer within a company negotiates their own agreements and makes purchases without coordinating and sharing information internally, there is tremendous risk that, among many other detrimental consequences, supplier capacity will be tapped out, and as a result deliveries will be late, quality will suffer, bottlenecks will occur, and value will be lost. Coordinating communication across all touch points and interactions reduces the risk that mixed messages will be sent to suppliers; and that as a result suppliers won t be clear on what is expected of them and, therefore, won t be able to deliver. Furthermore, inconsistent messages often lead to an erosion of trust, which has multiple implications for company s ability to collaborate with its suppliers. Other coordination with suppliers includes sharing information, integrating systems, and harmonizing procedures so that effective performance and quality management can take place. It is very difficult for suppliers and customers working together interdependently to solve quality or process problems unless they disclose openly with one another all of the information that might be necessary to diagnose problems effectively. Similarly, purchasing, ordering, and fulfillment activities need to be well coordinated between customers and suppliers if they are going to be managed to their greatest efficiency. Sharing information about capacity and demand, particularly as it relates to forecasting, is just as important externally as it is internally. Finally, customers and their suppliers sit in different points of the supply chain, and they have access to different information about the marketplace, competitors, and customer preferences. There is tremendous value if companies and their suppliers share this information with each other so that they can make decisions about how to increase the efficiency of the overall supply chain. Copyright BManagement 2012 Page 4

5 1.5 Collaboration Slide 6 What kind of collaboration is required to maximize supply chain success? As important as coordination is, it will not take place unless there is effective collaboration, strong working relationships, and a high degree of trust. Coordination does not solve all of the problems or capitalize on all of the opportunities related to problem-solving, making wise trade-offs, and balancing conflicting and competing priorities. To achieve a desired level of collaboration within an organization, you must first align multiple business units around some degree of commonality with respect to product specifications, service and delivery specs, and supplier facing policies and procedures. The more these are aligned, the more value there will be for the enterprise overall. Decision-making authority among business units and corporate sourcing needs to balance efficiency for the overall enterprise with sufficient flexibility and autonomy for the business units. Business units and corporate sourcing need to align on how to manage suppliers who have different kinds of relationships with the company which are more or less strategic to different business units. Who may also be a go to market partner, a customer or even a competitor to different parts of an overall enterprise? Companies and their suppliers have different expertise, different competencies, different knowledge, and they need to collaborate to figure out how to leverage those differences to create value. This depends on a fundamental level of trust and respect. Trust enables disclosure of information about future business plans, capabilities, needs and perceived risks. And, if that information is not disclosed, opportunities to create value will be missed. A strong indicator of such a high degree of trust is that each side is willing to forego short-term opportunities to extract long-term value. Finally, the critical element of collaboration is the ability to look at problems, be they quality problems, systems problems, and marketplace problems, and look at what each side may be doing or not doing that to contribute to an outcome that is sub-optimal. This type of joint problem-solving approach is more effective than a typical vendor-customer interaction where one party tries to assign blame. 1.6 A Common Assumption Slide 7 One of the key barriers to moving in the direction of greater collaboration is the tension between getting good business results and having a good working relationship. Most people and most companies recognize this intuitively. However, the challenge is figuring out how much a good relationship is worth, and how much one can afford to give up on the substance side to maintain a strong relationship with their counterpart. At any given point in time, it may be possible to use leverage to get a better deal at the expense of the relationship, or to try to buy or preserve a relationship by offering concessions. Looking at this from a longer-term perspective, we believe this is largely a false impression and a false trade off. Copyright BManagement 2012 Page 5

6 1.7 Generating Value Slide 8 Strong supplier relationships generate more value. One of the challenges that many companies confront is how to get more rigorous and more sophisticated at measuring and quantifying the value-added due to SRM. There is a pervasive sense that there is tremendous value delivered by strong supplier relationships and strong supplier relationship management. Based on a study of over 100 companies, Vantage Partners found that 80% of sourcing supply chain executives felt that strong supplier relationships deliver at least 25% more value than poorer relationships. That raises the questions: How do you monetize that value? How do you get more specific in terms of quality improvement, better time to market, top line value through better product design and better access to market information? According to an Institute of Supply Chain Management study, partnering with suppliers is one of only two out of a total of 88 tools or solutions considered in the study that was deemed important and truly impactful when it came to purchasing and supply chain management. The other tool is the use of e- commerce and e-procurement tools. 1.8 Paradigm Shift Slide 9 Successful management of key supplier relationships requires a paradigm shift. Looking from a behavioral and mindset perspective, what kind of thinking accompanies a traditional customer-vendor relationship versus a strategic supplier partnership? On the left is a tactical orientation, a very unilateral approach to interacting with suppliers - a sense that we as the customer call the shots; we make decisions on which the supplier has to deliver. If there are problems, we assign blame, and exercise penalties. This is the way customers and vendors have traditionally interacted, and the reason why opportunities for customers and their suppliers to create value have historically been lost. On the right is a fundamentally different relationship: much more joint or bi-lateral from a negotiation, problem solving, and planning perspective. Both sides are working together. In a strategic supplier partnership each side considers the other as a partner, and looks at the overall supply chain, figuring out how to work together to provide maximum value to the end customer, and managing their interactions to maximize their competitive advantage in the marketplace. Problem solving is not punitive. It is aimed at root cause diagnosis and figuring out how both sides can do things differently to achieve better outcomes. Planning is integrated. There is joint sharing of information, greater predictability and value. Copyright BManagement 2012 Page 6

7 1.9 Determining amount of investment in SRM Slide 10 Why would one make that kind of investment in SRM instead of doing reverse auctions or spot buys in the market? The answer to that is that Supplier relationship management is not a one size fits all solution. It is a strategy that is more or less relevant to different situations. Let s look at a simple two-by-two matrix. Companies need to look at their different suppliers, their different sourcing situations, their different commodity groups. They need to look at things like what is the value at stake in a given marketplace, in a given commodity area. What is the strategic importance of a given supplier to our success? If you find yourself in the lower right quadrant where it s very easy to find other suppliers; it s a commodity good; it is not a source of competitive advantage; this is where supplier relationship management has relatively little relevance. If you fall in this quadrant, you may not even be managing true supplier relationships but more supplier contracts, or doing spot buys and marketplace purchasing. As you start to move out to where there are fewer suppliers or to greater strategic importance, you start to move into a realm where SRM becomes more critical Determining the form of investment in SRM Slide 11 As we assess how much we should invest in supplier relationship management for our various tiers of suppliers, we must also think about what form that investment should take. One critical dimension to consider is the degree of interdependence: Do we really need to work closely with our suppliers to integrate product specifications because they are delivering components that we need to use in some larger product? Are we in marketplace where technology is changing very rapidly? How closely do supplier and customer engineers interact on product spec and design? On the organizational complexity spectrum, we have the notion of how many different business units and geographies a supplier services, and how many different kinds of relationships the supplier has within a company - supplying a range of commodities or acting as a go-to-market partner. With each of these dimensions come implications such as: Integration of business unit planning Metrics that need to be put in place to manage performance and assess value Internal and external roles and responsibilities with respect to SRM, and Appropriate negotiation strategies. Copyright BManagement 2012 Page 7

8 1.11 Illustrative supplier segmentation implications Slide 12 Let s look at some possible implications for each segment of supplier relationship. Down the left side is Our negotiation strategy The expectations we set within our organization and with our supplier around the duration of the relationship o Is it evergreen? Is it long-term, but renegotiable every five to seven years? Is it highly dependent on market conditions? Appropriate forms of governance, depending on how many internal groups are involved on the customer side how many different groups or functional areas are interacting with the supplier? Communication activities that need to take place o o o How frequently do we share information of a strategic versus operational nature? How much are we disclosing about our product development roadmaps? And, at what level do these communications occur? To what extent do we need to monitor our suppliers viability- o Do we need to invest in their viability and ensure they are keeping up with the latest technology? Copyright BManagement 2012 Page 8

9 1.12 Case example: Chrysler (Best Practices) Slide 13 To make these terms of supplier relationship management come together, both in terms of what it is like and the kind of value it can deliver, let s take the example of Chrysler. In late eighties, Chrysler was in crisis. Their profitability was low, and they were losing market share. Finally, the president of Chrysler, Thomas Lutz, and head of purchasing, Thomas Stallkamp, decided that to survive, the company needed to fundamentally redefine its supply chain and alter the ways in which it worked with its suppliers. To achieve this, they decided to change the paradigm. Instead of continuing to treat suppliers as armslength vendors and find adversarial ways to extract year-on-year cost concession, they began to look at their suppliers as business partners in the supply chain: partners in not only reducing cost, but also in improving quality and increasing innovation. Some of the best practices that came out of Chrysler s work included: Working collaboratively with suppliers to reduce cost, not by taking cost out of their supplier s margins, but by going to suppliers and asking for supplier recommendations about how to improve efficiency. They asked their suppliers to suggest ways to reduce cost by looking inward at Chrysler s policies, procedures, and specifications, and making recommendations about what Chrysler could change that would enable the supplier to deliver greater quality at lower cost. Chrysler made credible commitments to share risks and rewards. Both within Chrysler and across the interface with their suppliers, they aligned the individual incentives of engineers and executives with corporate goals and strategy. And they implemented a program called SCORE (Supplier Cost Reduction Effort) in which Chrysler offered to split savings realized by supplier suggestions In some cases, Chrysler got more of the savings in exchange for shifting a greater volume of spend to those suppliers who were most productive in coming up with cost reduction innovations Case example: Chrysler (Value Realized) Slide 14 The value Chrysler realized overtime was enormous. In 1995 alone, there were over 5,300 proposals which yielded an annual savings of over $1.7 billion for Chrysler. These cost reductions were equal to 5% of each supplier s sales to Chrysler. However, each supplier s profit increased. Profit per vehicle increased to over ten times what it was before the implementation. And, cars were manufactured in half the time as a result of many of these innovations, which led to significant top line value, which was inevitably harder to quantify than the actual cost savings. Copyright BManagement 2012 Page 9

10 1.14 A Framework for Implementation Slide 15 The framework for thinking about supplier relationship management across the lifetime of relationships with suppliers challenges the traditional treatment of sourcing as a separate bucket, which is disconnected from the ongoing management activities of each supplier and suppliers overall. They would look across their different categories of suppliers and spend, recognize their best suppliers and negotiate agreements with them. Results have fallen short of expectations. In so many cases, the cost reductions that sourcing groups negotiate are never realized over the years. We have found the inability to extract the value created through sourcing negotiations comes down to the way that subsequent, ongoing supplier interactions are managed. Much of this has to do with poor or non-existent joint business planning performance management, issue escalation and resolution. Companies need to coordinate internally and externally, and to support such interactions with the appropriate tools, to realize the value from newly sourced contracts with key suppliers. It is important to note that negotiation doesn t stop when sourcing with the supplier has been completed. Negotiations occur in each of the post-deal relationship management buckets, as companies and suppliers deal with scope change and scope management. Much of the value that companies negotiate during their sourcing activities is ultimately lost through ineffective scope management and supplier relationship management. In the bottom bar of this chart are some key activities that need to happen with individual suppliers, but it is worth noting that these activities can t be looked at only on an individual supplier basis. From a sourcing perspective, no company would go off without first looking at its portfolio of suppliers. Similarly, metrics and data about performance and value delivered need to be looked at in the context of the overall supplier portfolio. Appropriate benchmarks for quality need to be established by looking across the suppliers. Companies are realizing tremendous value by showing their key suppliers how they stack up against key performance metrics and indicators in their peer group: Are they at the top of the stack, middle, or bottom across different dimensions of performance and value? Finally, at the highest portfolio level, if companies are going to get the most value from their relationships, they need to make decisions about: Sending more business to those suppliers that are working most effectively Limiting relations with those suppliers who are not working with as true partners Identifying and interacting with those suppliers which are working with them also as go-to-market partners, customers, or competitors Balancing all of these priorities from a portfolio perspective. Copyright BManagement 2012 Page 10

11 1.15 Evaluation and selection Slide 16 A fundamental challenge is: How do companies identify those suppliers that can be treated as business partners? How do companies measure not only technical capabilities, but whether the supplier can institutionalize practices so that they can act as good collaborative business partners? One of the best practices that has emerged is to make supplier selection a two-way activity, not us just going out with RFIs and RFPs and due diligence. It s important to ask our suppliers to look at the company as a potential customer and have the conversation about how supplier and customer might best work together. What the barriers, and how can they be overcome? Which suppliers are comfortable entering into these conversations, and which suppliers add the most value and insight. Develop RFIs and RFPs that lay out some of the common challenges, aspects of systems and culture, ways in which the company is incredibly demanding or doing things differently from the industry. Invite suppliers to explain what the impact of those factors may be, and how to work around them effectively. The answers to these questions are fundamentally different than those from traditional RFIs and RFPs. They help companies assess suppliers mindset have and the kind of thinking suppliers can bring to the relationship as real partners. Copyright BManagement 2012 Page 11

12 1.16 Negotiation Slide 17 The traditional view of sourcing says negotiation is a discrete bucket of activity, and we are going to employ negotiation strategies that get us the best contract. This may be a shortsighted and somewhat limiting approach to negotiation. Negotiation strategies should reflect not only what will get us the best contract, but what will ensure that the contract will be effectively implemented. The contract itself does not deliver value. One of the fundamental challenges is how to develop a favorable set of contractual terms, and create the kind of relationship that will enable both sides to work together to extract that contract s value and develop new sources of value over time. One best practice is to put in place incentives that not only reward negotiators for the amount of cost savings they achieve, but also on the number of creative, mutually favorable terms and the quality of the relationship with the supplier. When negotiators are consistently measured on broader set of outcomes than simply price, they begin to not only place greater emphasis on the total value created through the agreement, but also on the way in which negotiations take place and the dynamics between the parties. There are two tools in particular, which are designed to help negotiators craft a favorable deal while building or maintaining a strong relationship: a preparation template and strategy playbook. These tools direct negotiators to prepare for negotiations in a way that places heavy emphasis on the interests of both sides, the importance of objective standards of legitimacy to ensure fair results, and the process necessary to move negotiators away from positional haggling and adversarial dynamics and toward a joint gain orientation. For more insight into value-creating negotiations, please refer to the negotiations modules. Copyright BManagement 2012 Page 12

13 1.17 Post-contracting relationship mgmt. Slide 18 As companies move from negotiation into the management phase, they inevitably face challenges associated with change change of spec, change of scope, change of marketplace dynamics, change of personnel. Many companies and their suppliers are ill equipped to deal with such change and as a result allow change to burden the productivity and quality of their relationship. There is often minimal joint planning and joint problem-solving, and even the slightest difficulties lead to incontrovertible tension. One best practice is to assign a dedicated alliance manager whose sole job is to pro-actively spot problems and manage them jointly with the supplier, and to turn problems into opportunities to better understand and innovate. A tool that will enable effective coordination among internal and external stakeholders is a decisionmaking matrix. The matrix ensures clarity and alignment around who has authority to make what decisions, and gives the supplier manager a higher degree of control over various elements of the relationship by giving stakeholders confidence that they will be appropriately included in the decisions most important to them Best practices overview: Performance monitoring Slide 19 Companies often fall short when it comes to assessing supplier performance against a shared set of expectations. In many cases, supplier performance is either not measured at all or is monitored in response to some dip in performance or consistent underperformance. When performance is not routinely assessed against a core set of jointly determined metrics, there is very little opportunity to spot and manage problems before they ve had a chance to fester. As a result, value is lost and relationships often break down entirely or become largely ineffective. A best practice for dealing with this challenge is to conduct regular performance and relationship assessments against a shared set of metrics. This way, suppliers know exactly what is expected of them. As opposed to waiting for suppliers to significantly fall off track, companies can work together to address minor performance issues without needing to invest significant time in dealing with major problems. One useful tool which enables this type of routine performance assessment is an online scorecard. The scorecard allows companies to survey both their internal teams and the supplier team to identify performance gaps, relationship deficiencies, or opportunities to create greater productivity and efficiency in the partnership. This type of survey easy to administer and it allows for comprehensive analysis of results as they compare to the supplier s past performance and to the company s other suppliers performance. Copyright BManagement 2012 Page 13

14 1.19 Termination Slide 20 When companies determine that it is time to end relations with an existing supplier, it is often very complicated and messy. In the end, the relationship is often incredibly strained, and typically cannot be recovered. One best practice for dealing with adversarial termination proceedings is to execute termination decisions in consultation with suppliers. This allows both parties to determine the most efficient and least costly way to end relations, and ensures that all involved are adequately prepared for the consequences of termination. One way to jointly prepare for potential termination is to use a joint unwinding plan template. This encourages both sides to identify up-front the risks associated with termination. Should termination eventually be necessary, both sides are equally sensitive to the mitigation strategies the other needs to execute in conjunction with the termination proceedings Portfolio Governance & Management Slide 21 Relationships with individual suppliers cannot be looked at in a vacuum. Each supplier relationship has a bearing on the rest of the relationships in a company s supplier portfolio and must be managed accordingly. Many companies attempt to place equal resource toward managing the array of their supplier relationships, despite tremendous diversity of importance and complexity. As a result, value is lost on the relationships that don t require the same degree of management and those that do suffer from inadequate attention. One best practice for managing a portfolio of suppliers is to tier suppliers into categories of relative significance and to communicate implications of such tiers to the organization and to the suppliers. This ensures that those supplier relationship which are worthy of higher levels of management attention and investment receive it, and those which are not, don t. One approach to segmenting suppliers and delineating the implications of each level of relationship is to use the quadrants we outlined earlier in this module. It is important to identify the management implications relevant to your business strategy and to parse management tactics in a way that appropriately reflects the tier of relationship. Copyright BManagement 2012 Page 14