Strategic supplier relationship management. a true source of competitive differentiation

Transcription

1 Strategic supplier relationship management a true source of competitive differentiation

2 In September 2008, Jonathan Hughes, Vantage Partners, spoke at DILF s Strategic Supplier Relationship Management (SSRM) conference about how to transform trading relationships into partnerships and using SSRM to achieve collaborative advantage. In this interview, he shares with us some of his thoughts on the kind of value that can be gained through strategic buyer-supplier collaboration and the opportunities and diffi culties related to managing key supplier relationships strategically. By Camilla Højbjerg, DILF How would you define strategic supplier relationship management? SSRM entails broadening your view of key suppliers so that you see them as not simply vendors that you buy things from, but as actual or potential partners who can help you drive competitive advantage. This in turn means expanding the scope of interaction with them beyond purchasing and fulfillment transactions tapping into their expertise and capabilities to drive innovation, enter new markets, improve quality, exchange insights about marketplace trends, and more. It also means beginning to view relationships with suppliers as assets and to manage them accordingly. SSRM can thus be seen as analogous to strategic account management which is focused on creating close partnerships with an enterprise s most important customers. The focus with SSRM is on your most important suppliers and how you can build and maintain partnerships with them that provide a high degree of competitive differentiation for your company in the marketplace. Similar to strategic account management, this involves things like developing three to five year business plans with key suppliers and updating them annually; working more closely with suppliers on activities from product development to demand forecasting; and putting in place dedicated relationship managers who spot new opportunities for collaboration with suppliers and marshal the resources required to pursue them. What are the major problems organisations experience when implementing an SSRM strategy and programme? Let me give you three common ones: First, a failure to define and communicate the business drivers and goals for SSRM. Is it product or technology innovation with specific suppliers? Better understanding and joint management of quality and safety risks with supply chain partners? Further cost reduction through joint design or demand management efforts with suppliers? It may be all of those things and more though the opportunities are likely to vary greatly from one category and one supplier to the next. The key is to define objectives clearly and specifically, while acknowledging that many of the benefits of SSRM may be hard to track and measure with precision. You still need to define a rigorous business case and manage SSRM efforts to clear goals. Otherwise, and I have seen this happen many times, SSRM becomes an administrative, check-the-box set of activities. The second common pitfall is defining and implementing an SSRM programme without getting early supplier input. If you want to improve collaboration with key suppliers, don t go off for three months and define a programme without involving them. Too many organisations do exactly that. They wind up with SSRM programmes that suppliers don t fully understand and that they do not buy into, and thus the effort is compromised from the outset. Moreover, many organisations devote significant resources to their SSRM programmes without requiring suppliers to make reciprocal investments! SSRM needs to be a joint effort not managing suppliers so much as jointly managing relationships with them. Most suppliers have their own strategic account management programmes. What a lost opportunity, if customers and suppliers don t talk to each other about their respective programmes and align their efforts. Collaborate with the suppliers from the start, and you ll both benefit from each other s knowledge and experience and end up with a far more effective relationship management system. Third, when most companies implement SSRM programs, they focus on things like hosting supplier summits, defining new supplier relationship manager roles, and implementing software tools to enable more efficient exchange of information > 28 DILForientering / februar 2009 / årgang 46

3 JonATHAn HUGHEs ProFEssIonAL BIoGrAPHY Jonathan Hughes is a partner at Vantage Partners, a consulting firm spin-off of the Harvard Negotiation Project. As an expert in sourcing and supply chain management, he has worked with leading companies across a range of industries in the Americas, Europe, Asia Pacific, and Africa. Jonathan is a frequent speaker on supply chain management, negotiation, and collaboration and has written for a variety of publications including the Harvard Business Review, Global Business and Organizational Excellence, CPO Agenda, Inside Supply Management, CIO Magazine, The Journal of Trading Partner Practices, Supply Chain Strategy, and The Outsourcing Journal. He is also the lead author of the chapter on Negotiation Systems and Strategies in the 2008 International Contracts Manual. In addition, he serves as a Senior consultant on the Cutter Consortium Sourcing and Vendor Relationships team. with suppliers. They implement SSRM as an overlay to existing policies, processes and incentives, but fail to address underlying barriers to collaboration. Changing legacy assumptions about suppliers and how to work with them; re-designing incentives so they reward people for efforts to sustainably reduce real costs rather than logging short term price reductions; rewriting one-sided contract terms; changing research, design, and development processes so they benefit from supplier expertise and early involvement these are the things that enable companies to derive greater value from their suppliers. Of course, such changes are quite difficult to implement and they involve many functions across the enterprise, not just procurement. The good news is that companies that really invest in making this happen have a true source of competitive differentiation. Because embedding SSRM into the fabric of the way a company operates is not easy to do, it is therefore not easy to copy either. What are the typical mistakes that suppliers make when customers engage them in SSRM efforts? Like their customers, they often focus on short term benefits to the detriment of larger, long-term opportunities. They act like vendors, even as they complain that they are not treated like trusted partners. Recently, I was facilitating a series of joint sessions between an oil and gas company and their most strategic suppliers to try to uncover opportunities to realise more value for both sides. Many of these suppliers treated the sessions as an opportunity to pitch services instead of doing the harder work of understanding the customer s strategic priorities and challenges, sharing new insights about the marketplace and technology trends, and suggesting new and innovative solutions to meet customer needs. Others were disappointingly passive and said: You just tell us what you want, and we can do it! despite being coached to candidly share what they saw as their strengths, weaknesses, and unique capabilities. When confronted with such frustrating behaviour from important suppliers, a useful exercise not easy, and often uncomfortable is to take a look in the mirror. In what ways do our organisation, probably unintentionally, encourage such behaviour? How do we discourage the very ways of working with our company that we say we want from suppliers? Actions speak louder than words, and to a large extent, consciously or not, companies teach their suppliers how to work with them. SSRM requires both sides to change, and to help each other change what are often deeply engrained ways of operating. Organisations have traditionally focused on driving short term cost reductions with suppliers. What is the danger of that approach? As with many short-term oriented strategies, it doesn t really work. A focus on short-term savings generally leads to host of pathologies: a focus on pursuing price reductions that do not in fact translate into real savings; failure to pursue joint efforts with suppliers that would yield larger savings over time; adversarial and thus inefficient interactions with suppliers that undermine productivity Strategic sourcing efforts on average achieve only 55% of expected value. Similarly, customers report realising only about 54% of supplier contract value during implementation and innovation; an over-reliance on competitive bidding, the result of which is an environment of uncertainty for key suppliers that discourages them from investing in ways that would deliver future value. According to research we are cur- 29 DILForientering / februar 2009 / årgang 46 DILForientering / februar 2009 / årgang 46 29

4 rently conducting (involving over 500 companies globally), strategic sourcing efforts on average achieve only 55% of expected value. Similarly, customers report realising only about 54% of supplier contract value during implementation. A recent conversation I had with a sourcing executive at a global manufacturing company is instructive. Despite having a relatively mature and sophisticated procurement organisation, he acknowledged: We are often driven by short-term savings targets to do things we know do not make sense. For example, we regularly switch out key suppliers when we find a new supplier (often in a low cost region) offering a significantly lower bid price. We do this despite serious reservations about the new supplier s ability to deliver required volumes at required quality. And then, in fact, they fail to deliver. The costs of finding new suppliers, certifying them, and negotiating new contracts, far outweighs the original cost savings. And that is before we even try to estimate the lost sales that occur during the transition. Perhaps even more disturbing, we have periodically negotiated so aggressively with our key suppliers that we know we are depriving them of the margin they need to operate a healthy business. Sure enough, a year or two into the contract, they re out of business, and again, we incur losses that dwarf the negotiated price savings we achieved on paper. We can see it all coming, but we can t stop ourselves. Somehow, we haven t found a way to explain this to the executive suite. We do our best, but we feel caught between a rock and a hard place. We re rewarded for doing what we know is not the best thing for the business long term. How can buyers make sure that they get the best people from suppliers to work with them? Do a better job than your competitors sharing your business strategies, plans, and objectives (versus rigid requirements) with your suppliers provide them with the context and information to deliver more value to your organisation; understand their strategies and needs and identify ways you can help them; treat their staff, in every interaction, with professionalism and respect. From a cultural and attitudinal perspective, SSRM is about recognising the full range of supplier motivations from the organisational, to the interpersonal. Of course, suppliers are motivated by revenue and profitability goals. However, our work with clients and our research clearly show that customer assistance in helping suppliers improve their capabilities, providing positive references to suppliers, on a day-to-day, person-to-person basis, treating supplier personnel with respect, and acknowledging and expressing appreciation when suppliers go above and beyond their obligations these are the things which lead a supplier to assign their best people and work to deliver considerably better performance and more innovation to one customer versus another. More often than not, the organisations that get the most out of their suppliers are not those suppliers biggest customers. Financial considerations cannot be ignored, but, as long as business is conducted by people, assuming that absolutely everything simply comes down to money is deeply misguided. Even in the current economic downturn, many industries face a critical shortage of skilled, experienced personnel. As organisations have outsourced a tremendous amount of activity from administrative functions, to manufacturing, to product design and even R&D they are consequently competing for access to limited supplier expertise and capabilities. I think, sometimes people as- > 30 DILForientering / februar 2009 / årgang 46 DILForientering / februar 2009 / årgang 46 30

5 sume that SSRM is mostly relevant in the context of direct materials, but in so many supply scenarios value is a function of the quality of supplier staff who work with your organisation. Whether you are a pharmaceutical company outsourcing clinical development, or an energy company contracting for engineering services, or any organisation relying on IT suppliers for application development and other complex services, you need to be asking yourself how you get the most experienced, and best qualified people from top suppliers working for you rather than your competitors. Of course, you also need to make sure the people in your own company have the requisite collaborative skills to take advantage of supplier knowledge and expertise. There are clearly significant benefits from engaging in SSRM, so why are some companies reluctant to do so? Buyers often fear becoming dependent on suppliers by virtue of forming closer relationships. They fear that dependency will lead suppliers to become complacent, or even to behave opportunistically. Such risks are real; they should not simply be discounted. But you can t eliminate risk in your supply chain, or in any other aspect of your business. Entering a new market is risky, but staying in a market that is being commoditised and failing to evolve your business is also risky. You need to weigh the downside risks of any decision or strategy against the potential upside. I would argue that, in general, the benefits of closer collaboration with key suppliers greatly outweigh the risks. Since relying heavily on a supplier for whom your business is unimportant is indeed an invitation to trouble, the key is not to minimise dependence on suppliers, it is to ensure that you maintain a balance of dependency. All that said, SSRM is also the best mitigation strategy for the risks of supplier dependency, and every organisation has suppliers on which it is necessarily dependent, and not as a matter of choice suppliers with unique capabilities or patented technology for example. SSRM is about implementing effective governance structures that ensure regular communication at the executive level between customer and supplier ensuring that the decisions each side makes about the relationship are based on a strategic, long-term view. It is about understanding your supplier s strategy and business, and actively searching out ways that you can assist them and work together in mutually beneficial ways. You need to make your supplier s relationship with you valuable enough that they are not tempted to put it at risk through short-sighted behaviour or decisions. One other concern is that, by working more closely with suppliers and perhaps engaging in joint technology development, you might somehow enable them to become competitors, or share trade secrets that could be leaked to competitors, intentionally or inadvertently. These are real risks that should be considered, but they are also risks that can be largely mitigated through good governance, carefully structured contracts, and policies and procedures that cordon sensitive information, and limit access to select supplier staff. Unfortunately, many companies have launched SSRM initiatives without being truly committed to changing the way they work with suppliers, and this has left many suppliers rather skeptical How can customers motivate their suppliers to engage in SSRM? Unfortunately, many companies have launched SSRM initiatives without being truly committed to changing the way they work with suppliers, and this has left many suppliers rather skeptical. In my experience, successful SSRM programmes usually begin with some kind of voice of the supplier assessment focused on uncovering how suppliers view the organisation, where they see opportunities to create more value for both sides, and what they think needs to be put in place to enable more effective collaboration. If you want to enhance collaboration with your suppliers, get them involved early and talk with them about what you re doing and why. Ask for their input, ask for their advice, ask them what they are doing with their other customers and then build an approach to SSRM together. And, unless your organisation is truly committed to ensuring that your efforts benefit your suppliers as well, don t waste the effort. What can procurement people do to get the internal stakeholders on board to support the SSRM? In my experience, when it comes to SSRM more than half the battle is changing the way procurement and sourcing professionals work with, and manage relationships with, internal business partners and stakeholders. We need to change the way procurement is seen within the enterprise, and the way it sees itself. I believe the future of procurement is to be seen as the experts on how to advance the needs of the business, in the broadest sense, by tapping into and leveraging the capabilities and assets of suppliers. Most organisations need to become much less prescriptive when dealing with suppliers. Instead of saying to the supplier: This is what we need to do, and this is how we want you to do it, you need to be able to explain to them the outcome you are trying to achieve or the business problem you are trying to solve and then work to take advantage of their ideas and expertise to find the best solution. This requires a more sophisticated understanding of business drivers than is commonly found among the procurement staff who handle a lot of an enterprise s interactions with suppliers. It requires stronger communication skills, more creative problem-solving skills, and, of course, it requires other groups like R&D to be open to supplier ideas, to get beyond the not invented here and we know our business best thinking that is common in many companies. Procurement professionals need to be confident and assertive in challenging the thinking of their internal business partners, while also recognising that they are a support function operating with a service mindset. Fundamentally, procurement needs to transcend a false choice between simply being an order-taker for business units, or seeing its primary role as enforcer of compliance with sourcing strategies and purchasing policies. SSRM requires collaboration both internally and externally. You can t change one side of the equation without changing the other. Both internally and externally, it is important to make the value that we gain through SSRM visible. How do we measure the value and how do we present it? There are no easy answers for how to do > 31 DILForientering / februar 2009 / årgang 46 DILForientering / februar 2009 / årgang 46 31

6 this, and acknowledging this reality is critical. Let me try to explain. First, SSRM is an investment strategy. We are talking about the difference between pursuing cost reduction, performance improvements, and innovation by working collaboratively with suppliers as opposed to chasing the lowest price (which more often than not fails to deliver the lowest cost) through constant competitive bidding, and seeking to effect a high level of supplier performance primarily through the threat of shifting business. I do believe strongly in targeting quick wins when implementing an SSRM programme, but the real value comes over time, and requires significant time and effort. You cannot do it on the cheap, and you should not expect instant results. Secondly, I would note that the most procurement organisations place a I don t think there is any other word for it pathological focus on prices and price reduction. Price is often a spectacularly poor proxy for actual costs, but it is attractive because it can be measured so easily, and with great quantitative precision. But so what? For every 100 organisations that can show me their annual cost savings, 99 of them will be unable to show where or how those savings either hit the bottom line or contributed to increased investment in R&D, new production capacity, whatever. Moreover, there are myriad ways that key suppliers contribute to the success of their customers flexibility in response to changes in demand, delivering high quality products and services, contributing to innovation in product design and businesses processes, etc. I don t think anyone would argue that these dimensions of supplier performance are not just as important as cost, but none can be measured with the same objectivity and precision as price. Nor, for that matter, can total cost of ownership a powerful and underutilised concept which requires developing models that comprise multiple assumptions and require the application of judgement. Procurement and supply professionals need to do a better job of measuring what matters, not what s easy to measure, and this means accepting a degree of subjectivity and approximation. That said, subjectivity does not mean unreliably biased, and approximation does not preclude rigor. For example, if you are engaging in joint research and development with a supplier, you can measure how many joint projects you engage in, and how many lead to new or improved products, or new patents. You can measure the value of investments that your suppliers are making in such efforts, based, for example, on the labour cost of the people they assign to such efforts. You can also measure the number of products you bring to market that are the result of joint design efforts with suppliers, or the number of supplier patents a new product includes. In an ideal world, the revenue and profit from such efforts should be tracked, and the value of the supplier s contribution quantified (not just the time they put in, but the value of their technology or intellectual property). You need some kind of model to do this. It is not a single number like price, but it doesn t have to be terribly complicated either. Let s briefly consider a different example. Much of the value of collaborative relationships with suppliers result from problems that don t happen averting quality problems that might lead to product recalls or the failure of a mission critical IT system, avoiding situations where your supplier puts you on allocation, or simply can t meet demand, which would otherwise result in lost revenue. By definition, measuring something that doesn t occur is impossible. So what organisations need to do is invest in measurement systems that track the occurrence of such adverse events over time. Then you can measure, and jointly manage with suppliers, a reduction in the frequency and severity of such events, and you can report on the associated financial benefits. How do you gain trust from your suppliers? First, be consistent and predictable in your dealings with them. In other words, be trustworthy! This is a non-trivial matter when you consider that your most important suppliers probably work with multiple business units in your organisation, and have interactions with dozens or even hundreds of people across multiple functions ranging from procurement, to R&D, to quality assurance. It also means recognising that you cannot take a tactical or adversarial approach to negotiating with your suppliers, and then expect to reap the benefits of trusting, cooperative relationships after contracts are signed. SSRM cannot be seen as separate from strategic sourcing, but rather picture these two disciplines as complimentary strands of an intertwined double helix. Second, commit to working actively to safeguard the interests and welfare of suppliers. This does not mean abandoning aggressive efforts to reduce costs, nor does it mean failing to hold suppliers accountable to a high level of performance. Instead, it means doing the harder work of reducing costs through joint efforts to reduce waste, redesign specifications, and uncover more efficient ways of working together, rather than simply relying on competitive bidding to squeeze supplier margins. It also means avoiding the temptation to simply blame suppliers for quality or delivery problems, and instead working closely with suppliers to diagnose root causes that, as often as not, exist within the customer organisation for example, unclear requirements and inaccurate forecasts. How do you think the financial crisis will influence people s will to engage in SSRM? Increased pressure to reduce costs in the current environment is inevitable and appropriate. Unfortunately, many organisations will simply attempt to squeeze their suppliers whenever and wherever they can, without regard to long term consequences. Ironically, they will succumb to the very sort of short-term focus on financial results, without regard for longerterm consequences that was at the root of the crisis we currently face. Other organisations will, however, take a longer-term view, and a more strategic approach. For them, SSRM will be a critical means by which to work with suppliers to find innovative and collaborative ways to reduce costs in a sustainable fashion and to identify and mitigate supply chain risks that arise as a result of the financial pressures faced by their suppliers. Of course, wherever an organisation has single and sole source suppliers, there will be an especially strong incentive to find ways to reduce costs collaboratively simply squeezing such suppliers by demanding price cuts is not an option. /

7 DILF UPDATE DILF UPDATE DILF UPDATE DILF UPDATE Velkommen til 2009 Så er 2009 allerede i fuld gang. Et nyt år venter os alle med nye oplevelser og udfordringer. I DILF-regi byder vi atter i år velkommen til et spændende år med arrangementer, faglige opdateringer via vores forskellige medier og masser af gode netværksmuligheder. Desuden bliver 2009 året, hvor vi for alvor kører på med vores seneste initiativer såsom råvareportalen Kairos Commodities, der allerede gennem 2008 har fået enorm opbakning fra en række af Danmarks store virksomheder, der alle, ligesom os, venter sig meget af Kairos. Ligeledes lancerer vi i år vores nye kompetenceudviklingsværktøj COMPASS, som du kan læse mere om i dette blad. Alt i alt ser det ud til, at vi har taget godt hul på et rigtigt spændende år i DILF. Vi håber, at det samme gælder vores medlemmer. Månedens vinvindere DILF trækker hver måned lod om tre flasker vin blandt de deltagere, der udfylder evalueringsskemaet ved DILFs arrangementer. Vinder i november Director of Central Logistics, Lasse Granholm, Thrane & Thrane A/S Vinder i december Manager, Mia Kjersner, Nilfisk Advance A/S DILF ønsker tillykke!