orientering NR 3 SEPTEMBER 2014 ÅRGANG 51 UNLOCKING THE POTENTIAL VALUE OF SRM THROUGH EFFECTIVE GOVERNANCE insights from recent research PHOTO: ISTOCKPHOTO
The December 2013 issue of DILF included an article highlighting interim findings from Vantage Partners 2014 Supplier Relationship Management (SRM) Study, comprising 867 survey responses from more than 500 companies globally. In this article, we build on that piece by focusing on a critical driver of SRM success governance. ResuLTs On question: please characterize The ResuLT AchieVeD ThROugh your company s srm program BY JONATHAN HUGHES, PARTNER, ASHLEY HATCHER, SENIOR CONSULTANT, AND JESSICA WADD, PRINCIPAL, VANTAGE PARTNERS While supplier relationship management is increasingly recognized as a strategic imperative, many executives continue to struggle with how much to invest, and where and how to make such investments, in order to maximize returns. the problem of measuring the benefits of srm remains a thorny one, as evidenced in Figure 1. in fact, in our study, the bottom 10% of srm performers (in terms of value achieved through srm) reported no measurable financial benefits from their srm programs in the prior year. While many of these companies were in the very early stages of implementing an srm program, this data also bespeaks the challenges of implementing srm in an effective manner. the good news is that the top 10% of performers reported an average of us $298mm in financial benefits from srm in the prior year. moreover, given the inherent difficulty of successful srm implementation, those companies that are able to crack the code are likely to enjoy a sustainable form of competitive advantage, inasmuch as srm best practices have proven difficult to simply copy or transplant from one organizational context to another. A major focus of our research study was to gain new insights into which specific srm practices, independently and in combina- 22% 13% 20% Little or no value Considerable measurable value Little or no value Figure 1. Source: 2014 Vantage Partners SRM Study 19% Modest, but difficult to measure, value Modest measurable value 26% Considerable, but difficult to measure, value 2 DILForientering SEPTEMBER 2014 ÅRGANG 51
about ABOUT THE THe STUDY study The 2014 Vantage partners supplier Relationship Management study is a global benchmarking study of srm best practices and provides new insights into which specific srm practices deliver the greatest value. The authors would like to offer DiLForientering readers a complimentary copy of the full report of findings. please visit www. vantagepartners.com/srmstudyrequest.aspx tion, yield the greatest benefit and return on investment. one of our primary findings was that governance (the discipline of formulating, making, and implementing strategic decisions) was a major differentiator of top srm performers. in this article we discuss some of the specific srm practices that collectively comprise effective srm governance. A major aspect of our research also involved deeper investigation, through interviews and case-study analysis, of companies where investments in srm have failed to produce significant benefits. one of the notable patterns we uncovered was significant and persistent tension between corporate procurement and supply management groups (seeking to implement a consistent set of srm policies and procedures), and different regions and/or lines of business (each seeking to preserve a high degree of flexibility and autonomy in their dealings with suppliers). by contrast, top performers described achieving an effective balance between consistency of srm approaches (thus enabling them to speak with a single voice to key suppliers; to maximize efficiency in interactions with suppliers; and to ensure effective supply chain risk management), while also preserving appropriate flexibility for different regional, business unit, and/or category teams to address the unique challenges and opportunities they face with their specific supply base. A key lesson from this is to avoid false, binary debates about who owns srm, or who owns specific supplier relationships but rather to ensure all organizational stakeholders discuss and align around specific roles and responsibilities for various srm activities and decisions, with a recognition that these ought likely to vary depending on the nature of a given supplier and the relationship a company has with them (e.g., does a supplier interact only with one business unit, or multiple business units). this may sound so obvious as to not need stating but unfortunately, dysfunctional battles over ownership and decision-making are quite common, especially in large matrixed organizations. that is rarely because anyone is ill-intentioned or incompetent. but rather, when the stakes are high, and people are under pressure with limited time to come to decisions, it is easy to fall into a pattern of reacting to one s worst fears about the intentions of others who have a different perspective and different priorities. once a cycle of interactions begins in which local procurement groups or business unit end-users believe corporate procurement is seeking to expand its power by imposing an srm program that is INTERNAL BUSINESS PARTNER PERCEPTIONS OF survey PROCUREMENT, AND VALUE DELIVERED BY SRM in our survey, we asked responds to indicate the extent to which they agreed (or disagreed) with the following statement: Business unit leaders and end users at our company see the procurement (and/or supply chain) organization at our company as a strategic business partner. of the top 10% of srm performers: 81% agreed or strongly agreed with the above statement. of the bottom 10% of srm performers, 64% disagreed or strongly disagreed with this statement. those who strongly agreed with this statement realized almost twice the value from their suppliers as those who strongly disagreed (from an average of slightly more than 25% of total potential value to over half of total potential value). goals OF srm program governance / goals OF individual supplier ReLATiOnship governance Goals of SRM Program Governance Goals of Individual Supplier Relationship Governance Ensure alignment of SRM strategy and program with overall business strategy and objectives Ensure optimal allocation of resources for supplier management activities Strike optimal balance between central coordination and consistency, with flexibility based on regional and category-specific goals/needs Ensure clarity and alignment of SRM roles and responsibilities among procurement/supply chain, business units, and other functions Facilitate systematic segmentation of suppliers Create accountability to ensure execution of SRM strategy and program Rationalize effort and investment across multiple opportunities identified by individual supplier account teams Build and maintain deep understanding of individual supplier strategy, organization, and capabilities Cultivate preferred customer relationships with key suppliers Ensure systematic identification of significant opportunities and risks with individual suppliers Ensure early identification of marketplace or organizational change within a supplier that create significant new risks and/or opportunities Facilitate efficient and collaborative resolution of problems and conflicts with individual suppliers (before they metastasize) Create accountability to ensure effective performance by individual suppliers Create accountability to ensure effective execution by internal staff in order to maximize performance and value delivered by individual suppliers Figure 2. Source: Vantage Partners DILForientering SEPTEMBER 2014 ÅRGANG 51 3
insufficiently attuned to their needs and concerns, and corporate procurement perceives other parts of the enterprise to be acting out of parochial self-interest, conflict tends to escalate and it is often very difficult to come to agreement on effective srm policies and processes. A helpful starting place is the framework (Figure 3), which makes explicit the different levels at which srm governance and roles and responsibilities need to be defined. in the remainder of this article, we explore key practices that differentiate top srm performers from bottom performers, with a focus on srm program level governance, and individual relationship governance with key suppliers. SRM program-level governance Supply base segmentation segmenting suppliers is foundational to determining what level of investment to make in governance with different suppliers. the effective management of relationships, especially with large and/or strategic suppliers, is a time-intensive process, and often requires alignment and coordination of multiple functions (depending upon the supplier, these might include r&d, logistics, it, marketing, etc.). consequently, strategic decisions need to be made at the enterprise level about where and how to focus limited management resources, and how to ensure the right level of business unit and cross-functional engagement. 75% of top srm performers systematically segment suppliers and do so with balanced assessment of risk-exposure, and upside potential for new value creation. by contrast, only 31% of bottom performers do so. the process of supplier segmentation at top performing companies is highly consultative, with the corporate procurement or supply chain management organization facilitating the process, and gathering detailed input from business unit and other functional stakeholders. the transparency of the segmentation process is critical, as it creates opportunities for different functional and business unit stakeholders to be educated on potential benefits of more consistent and coordinated action with suppliers that work across different regions and/or business lines, as well as the risks of failing to do so. SRM policies & procedures in past benchmarking efforts, we found that many companies claimed to have segmented suppliers, but were unable to describe what practical difference it made to place a supplier in one seg-ment versus another. our current research was designed to probe a bit deeper. 70.4% of top srm performers define and document different implications for different supplier segments: there are different policies and procedures for supplier engagement, different meeting cadences, different standard contract terms, and different relationship governance models (including whether or not a supplier relationship manager is assigned, and how senior that person is). once again, the contrast with bottom performers is stark only FRAMewORk OF DiFFeRenT LeVeLs AT which srm governance AnD ROLes AnD RespOnsiBiLiTies need TO Be DeFineD SRM Program & Enterprise Supply Base Enterprise supplier network Segmented Supply Base Company to Company enterprise management Supplier enterprise management Supplier BU management Business Unit to Business Unit Supplier BU management Supplier Site Level Engagement site site management Supplier site management Supplier Cross-functional customer team Project Level Engagement Cross-functional supplier team Supplier Figure 3. Source: Vantage Partners 4 DILForientering SEPTEMBER 2014 ÅRGANG 51
SUPPLIER supplier MANAGEMENT management CONFERENCE COnferenCe supplier management will be the focus area at DiLFs procurement 2014 conference, which is held in copenhagen October 22nd. you can look forward to a full day of networking, inspiration and knowledge sharing with your professional peers when we discuss and present insights from both national and international companies under the headline - supplier Mmanagement. conference agenda and registration are available at www.dilf.dk 30% define real-world implications associated with the segmentation of suppliers into different categories. Alignment of strategic sourcing, category management, contracting contacting and contract management, and SRM 80% of top srm performers invest time and effort specifically in aligning and integrating srm goals and strategies with their category management strategies, sourcing process, and negotiation and contract management strategies and processes. doing so enables them to be more predictable and reliable customers to their suppliers, and thus to reap the many benefits of being a customer of choice. only 19% of bottom performers have taken action to ensure such alignment. some number of companies in this latter group continue to follow a strategy of beat the supplier up through strategic sourcing and then repair the damage and gain the benefits of collaboration through srm though this has become much less common over the past five years. such an approach is typically grounded in the misguided belief (which may or may not be consciously held and explicitly articulated) that it is not possible to simultaneously challenge suppliers and hold them accountable, while also helping them succeed and engaging in close cooperation. Individual supplier relationship governance Designated executive sponsors 73% of top srm performers have designated executive sponsors for important suppliers, contrasted with 31% of bottom performers. executive sponsors play a valuable role in supporting effective collaboration with important suppliers by serving as a senior escalation point in the event of major problems or conflicts, and by advocating for appropriate investment (of people, capital, time and effort) in strategic opportunities with suppliers. through interaction with supplier executive counterparts, executive sponsors are often ideally positioned to identify emerging risks (e.g., is the supplier considering exiting a market where we depend on them?) and emerging opportunities (e.g., is the supplier considering major invest-ments in new technology or capacity that we can leverage to sup-port our own strategic objectives?) Designated supplier relationship managers 80% of top srm performers have dedicated supplier relationship managers for important suppliers that spend a minimum of one third of their time managing one or more supplier relationships. of bottom performers, only 23% have invested in this. We added the qualification related to time spent specifically acting as a supplier manager based on our past research, which showed that at many companies, this role existed in name only. individuals with other full-time jobs (whether as a sourcing manager, contract manager, project manager, etc.) were simply told they were now also responsible for managing some number of supplier relationships. Without having time freed up to do so, and often without any guidance or training on how to do so, individuals given this additional responsibility were poorly positioned to improve supplier performance or uncover new opportunities to collaborate with suppliers. Figure 4 provides an overview of the supplier relationship manager (or supplier account executive) role as it is typically defined at top performing companies. Joint strategic business plans 74% of top srm performers have multi-year, strategic plans in place with their most important suppliers. these are plans jointly developed with key suppliers and define shared objectives, are used to guide investments, and ensure effective joint responses to marketplace changes and emerging risks. depending on the industry (and associated planning and investment cycles, rate of marketplace change, and the like), such plans are typically defined with a threefive year time horizon. Needless to say, companies that follow this practice are well-positioned to have disproportionate influence on the investments their suppliers make, with all the attendant benefits that result. of bottom srm performers, only 22% follow this practice. Alignment of SRM with supplier SAM/KAM programs based on our research, a substantial number of individuals who have spent their careers in sourcing and supply management roles are unaware of the prevalence of strategic account management/ key account management programs that sales organizations use to manage relationships with their important customers. such programs are in essence the mirror image of srm programs, characterized by similar goals and practices. OVeRView OF The supplier ReLATiOnship MAnAngeR ROLe Overview of the Supplier Relationship Manager Role Figure 4. Source: Vantage Partners Expert on supplier expertise, capabilities, viability, strategic direction, etc. Advocate for supplier within customer organization - ensure awareness of supplier capabilities and fair treatment of supplier Primary voice of customer to supplier - ensure robust communication and consistant messages; educate suppliers on customer needs, priorities, SOPs, etc. Strategic partner to business units - help match their needs with supplier assets and capabilities; help identify new opportunities for them through collaboration with suppliers Responsible for key SRM activities: development of strategic supplier account plans with key suppliers; facilitation of supplier scorecard development and regular business reviews with suppliers, ect. DILForientering SEPTEMBER 2014 ÅRGANG 51 5
73% of top performing srm companies formally align their srm efforts with the sam/kam programs at their key suppliers. doing so ensures balanced investment by both sides in a mutually beneficial business relationship, and maximizes the efficiency and effectiveness of collaboration by aligning parallel processes, tools, and metrics at both companies. by contrast, only 6% of bottom performers take action to ensure such alignment. Across our entire respondent data set, companies that align their srm pro-grams with their suppliers sam/kam programs report realizing an average of 39% more total value from their suppliers versus those companies that do not. Further data on value delivered by investments in supplier governance companies that have dedicated supplier relationship managers for important suppliers are 56% more likely to report that their suppliers consistently come to them at the earliest sign of difficulty, to jointly work to avoid or mitigate the costs of problems, versus those that do not have supplier relationship managers in place. companies that have designated executive sponsors for important suppliers are 66% more likely to report that their suppliers consistently come to them at the earliest sign of difficulty, to jointly work to avoid or mitigate the costs of problems, versus those that do not have supplier relationship managers in place. companies that designate executive sponsors for important suppliers are 45% more likely to report that they get access to suppliers best people, pricing, and ideas, versus those companies that do not have executive sponsors in place. Conclusion A large majority (69%) of participants in our study reported that srm would be very important to their companies success over the next three-five years, and an additional 27% reported that srm would be at least somewhat important (versus the remaining 4% that stated of little or no importance). We also asked about the extent to which policies, procedures, attitudes, and behaviors at their companies need to change to capture the full potential value of optimal collaboration with suppliers. more than half of respondents reported that either major change, or total transformation, would be required. in light of both the importance of srm, as well as the challenges associated with realizing the potential benefits of srm, it is critical that companies focus on effective governance practices both at the enterprise srm program level, as well as at the individual supplier relationship level governance. in order to make the promise of srm a reality, senior executives (not only in procurement and supply chain organizations, but across the enterprise), need to act to ensure sufficient and appropriately focused investments in srm, and to enable cross-functional stakeholder engagement and alignment across the lifecycle of interactions with suppliers. 6 DILForientering SEPTEMBER 2014 ÅRGANG 51
About Vantage Partners Vantage Partners, LLC is a global strategy and management consulting firm that specializes in helping companies achieve breakthrough business results by transforming the way they negotiate and manage relationships with key business partners, as well as by enhancing internal collaboration across functions and business units. Sourcing & Supply Chain Management Consulting and Training Through our sourcing and supply chain management practice, we lead supply chain transformation initiatives, support development of category strategies, help implement supplier relationship management programs, advise on high-stakes supplier negotiations, and provide a range of training solutions to executives and professionals who need to work effectively with third party suppliers. 2014 by Vantage Partners, llc. All rights reserved. Brighton Landing West 10 Guest Street Boston, MA 02135 USA T +1 617 904 7800 F +1 617 904 7850 www.vantagepartners.com