Building the foundation for preferential supplier treatment:
Building the foundation for preferential supplier treatment: Suppliers have choices about which customer they will give new ideas to first. They also have choices regarding their use of scarce capacity, or even which potential customers they choose to target and work with in the first place. It makes sense therefore to become a “preferred customer” to a key supplier. A customer of choice.
To become a ‘customer of choice’ requires more than reliance on size of spend and volume alone. Other factors such as business values come into play and should form part of any collaborative SRM strategy.
In a traditional approach to supply base management, typical, companies will set up “project teams” to drive:
- supply base rationalization
- supplier segmentation to identify truly strategic suppliers
- improved supplier performance scorecards and capability metrics
- integration of performance data into sourcing decisions
- company change programs to improve supplier working relationships
At Purchasing Practice, we believe a more fundamental approach is required. We believe a transition is required from a “project driven” approach, to one that makes strategic supplier management part of “business as usual”. This represents a fundamentally different way of doing business with suppliers and requires that the organization must begin to view key suppliers as a strategic resource for the company. The following is a guide for achieving this:
Core Corporate Values:
Suppliers are unlikely to be regarded as a strategic resource if your company values are unethical, if you bolster cash flow by not paying suppliers on time, or are un-trusting and dishonest in your dealings with suppliers.
The first foundation for creating excellent supplier relationships therefore starts right at the top of the organization, with the company’s leaders who must demonstrate a clear and compelling vision for the organization together with a strong set of values. Executives must communicate what they want from their supplier relationships, and what they expect to get back. The messages they send must emanate from a set of values and ethical principles that supports the growth of long-term supplier relationships. A company’s values therefore, provide a solid foundation for developing existing supplier relationships and for creating new ones.
Culture and Behaviours:
Long-term supplier relationships are based on shared trust, honesty, integrity and a shared focus on results. Leadership clearly plays a key role, not only in demonstrating these values at board level, but also ensuring these values permeate throughout the entire organization.
However, if “price down” is the only measure of procurement performance, then combative negotiation will be the tactic of choice for all suppliers. Also, if buyers are rotated too frequently in their jobs, the organization has little opportunity to develop long-term relationships, so short-term results dominate.
For collaboration to succeed, it requires effort and investment that goes beyond that required of combative procurement relationships. Metrics therefore need to focus not only on supply chain improvements or maximizing value creation, but also on what competitive advantage each party gains for their own organization through their collaborative efforts. Such metrics will differ depending upon the sector your organization is in and its specific business objectives etc.
Systems & Processes:
Open two-way dialog can be applied to increase transparency, improve processes, integrate systems and drive performance improvements for both the buyers and suppliers company to integrate more effectively and reduce inefficiencies across extended supply chains.
By using their internal systems and those of suppliers, buyers can interface with suppliers more effectively to measure KPI’s and work more with fact based information. Accurate information makes the difference between a decision and a guess, and supply management executives can use this data to obtain greater transparency across their joint supply chains to generate greater analysis and decision-support capabilities in the future.
Supply base Strategies:
Supply base strategies need to be developed to ensure, predictability and consistency of supply, and transparency to support cost and financial knowledge across supply chains. As supply bases are restructured, and suppliers segmented, supplier development strategies must become more strategically focused as buyers work with fewer but closer supplier relationships. Investment in supplier development requires increased efforts in regular business reviews, training of buyer and supplier staff, joint improvement efforts, and joint investment programs, etc.
Finally, to better understand the risks companies are taking with less well-known suppliers, supply management will need to increase its efforts to better understand supplier capabilities.
Value Creation Strategies:
The goals of supplier relationship management must focus on improving value including:
- revenue growth
- supply continuity
- total cost of ownership
In other words, supply managements focus needs to extend beyond just driving down cost to reduce prices, which will require significant and sustainable change in people, processes, and systems:
- Category level strategies should be developed which are forward looking and flexible to adapt quickly to changing market conditions.
- Supplier level strategies will need to be developed to build a competitive supply base and develop suppliers who, can collaborate to create value in support of the buying company’s objectives.
- Additionally, buyers must look for ways to leverage key supplier-buyer capabilities for innovation and growth, whilst reducing risk and overall cost.
This is in contrast to traditional behaviours which have encouraged tactics where one companies gain is at the others expense.
Value can be gained by locking out competitors from accessing scarce resources, gaining a cost advantage or by influencing supply markets. Competitive lock outs may take the form of technological exclusivity, or they may be as simple as buying up supplier capacity. However, such advantages are likely to have a relatively brief lifespan until the supplier wants to expand sales elsewhere.
Many companies have already reduced their number of suppliers; they have also reduced potential alternative sources of supply and created much reduced competitive activity in their supply base. In this environment, buyer’s strategies must move towards getting those remaining suppliers to pay more attention to them as a customer and require that suppliers, work closely with them and share their plans for the future.
For some organizations, collaboration may be as simple as having purchasing interface with their own sales and R&D departments as well as with their suppliers. In more complex situations, collaboration will enable companies to better integrate technological advances with customer demands and so increase the pace and need for product and service integration.
Purchasers who successfully establish collaborative relationships that provide visibility of information and data for increased operational effectiveness will be highly valued by strategic suppliers.
Supply management executives must influence across the whole organization from top to bottom. They must be focused on the organizations future needs and identify potential new suppliers to meet them. It is therefore a strategic imperative that it collaborates to obtain functional and executive stakeholder views on the future.
Corporate behaviour can constrain or support collaboration. Collaboration requires great trust, something many companies may not be comfortable with. Supply management must also be suitably positioned in the organization, and command the respect needed to make internal collaboration happen. In class leading organizations supply management is positioned at a senior level and, excellence in supply management is seen as a source of competitive advantage.
Collaboration requires alignment between supply management and internal business partners. Typical approaches are to hold formal alignment meetings, ensure access to executive level sponsorship to support opportunities, and to develop standardized business processes.
Breakdown functional Silos
Historical corporate behaviour has typically supported functional boundaries, in the way procurement was managed. Sales collaborated with customers; technical functions interacted with their counterparts at suppliers and supply management interfaced with only a limited number of suppliers. Over the past 10-15 years however, class leaders have been expanding procurements role to manage an ever increasing portfolio of external spend, where supply management provides functional expertise and interfaces and collaborates with a wide range of internal stakeholders.
The use of collaboration tools such as Microsoft Groove and its equivalents can have a significant impact on a company’s sales and profitability. Information is the lifeblood of procurement, and for procurement executives, the information provided by collaboration tools can play a critical role in improving the effectiveness and efficiency of sourcing initiatives. The data from these tools can help buyers understand demand profiles and specification requirements, making discussions with suppliers much more productive and also enable supply management to work more effectively with key stakeholders.
Much of the information available on how to manage strategic suppliers is frequently enacted upon by organizations without addressing the underlying barriers to collaboration within their own organization, which can lead to difficult problems. Purchasing Practice believes organizations must review existing procurement policies, processes and procedures to ensure they are aligned to support a collaborative strategy.
Procurement is best positioned to lead on collaboration, but to do so, it will need to move beyond the traditional range of skills and tools that have made it successful in reducing costs with the majority of suppliers. This is a tremendous challenge for the profession, but the potential rewards are enormous and should be beguiling to any procurement professional -the recognition as a vital strategic function within the organization.
In summary – 5 best practice steps for effective collaboration:
Companies should complete the following steps to effectively embark upon collaborative relationships, to become “preferred customers”:
- The values and culture within the organization will support collaborative relationships.
- Alignment exists between functional leaders on corporate goals, responsibilities, initiatives and resources.
- Procurement has the, strategy, metrics, and mandate to secure competitive advantage that goes beyond “price down”.
- Clear category strategies have been developed approved and opportunities identified where collaboration is appropriate and benefits have been targeted from the collaboration.
- A structure has been implemented that will continuously manage relationships internally and within the supplier organization.
Procurement leaders will need to ensure that their team has the right skills to make this happen.
Nuff said …