Searching these terms on Google both collectively and individually revealed the following results:

1. Closing the loop between Strategic Sourcing, SRM, and Negotiation = 366 hits

2. Strategic Sourcing = 1.3m hits
3. SRM = 9.5m hits
4. Negotiation Planning = 12m hits

On examining the hits from the first search it was clear that none of the results were taking an integrated approach to these subjects. Purchasing Practice therefore decided to shine some light on the combined process:

Definitions:

Whilst we can argue about the precise definitions, at Purchasing Practice we believe most procurement professionals will accept the following as acceptable:

· Strategic Sourcing is a systematic process used to ensure the optimum supplier(s) is selected for goods or services that support the overall business objectives of the organization.

* Strategic SRM is a systematic process used to manage both the relationship and the performance of suppliers. This process treats suppliers differently by segmenting the supply base to determine each supplier’s strategic relationship the organization.

* Negotiation Planning is a systematic process used prior to conducting negotiations used to determine suitable strategies and tactics to optimize the negotiation outcome.

And, when asked about their importance, procurement professionals will answer that they are a critical aspect of purchasing and supply chain management. The problem is too many companies who think of themselves as “the best of the best” at these processes, generally lack a detailed understanding of them, and do not apply them consistently and with sufficient rigor to derive best value for their organizations. For example, how many sourcing organizations pay lip service to supply market analysis, and in doing so skip a key part of the planning that leads to adoption of a sourcing strategy and subsequent negotiation? This is clearly not a good foundation for strategy development.

The importance of planning as a prerequisite for successful negotiations cannot be overstated, and SRM and strategic sourcing are directly related to the negotiation planning process. Data from the day to day management of suppliers must first be captured and then inputted to the sourcing process, as part of defining requirements and setting goals for the future. This is usually done by profiling the category, and market analysis, which can also be used to determine each party’s power base, and to determine the appropriate negotiation style.

In order to ensure these processes become integrated, they must be clearly defined, and evaluated, to gain an understanding of the extent to which they are followed. In Purchasing Practices experience the more comprehensively and systematically these processes are followed, the more likely it is that a thorough negotiation plan is created. If the sourcing process is comprehensive and thorough, it in turn should direct the negotiation approach.

SRM helps determine the appropriate negotiation style by applying supply base segmentation and via steps 1-3 in the strategic sourcing process. These steps support the development of the strategic negotiation plan whist step 4 supports the negotiating plan at a tactical level.

Negotiating styles generally fall into two categories:

* Distributive negotiation is considered a combative or win-lose negotiation.
* Integrative negotiation is considered a collaborative or win-win negotiation.

Too many supply management organizations do not use SRM or the sourcing process outputs to determine the correct negotiation style; and instead, rely on corporate culture (combative or collaborative) to determine their negotiating style, regardless of the strategic sourcing process or SRM outputs. Such an approach is at best, hit and miss and at worse organizations will be using inappropriate negotiating styles to gain the best negotiated outcomes. For example if a corporate culture is collaborative and market analysis shows that the sourcing team are in dominant market position, then a “win win” approach may not be the optimum strategy. Supplier segmentation analysis can therefore be used to determine the correct strategy. SRM helps companies develop and execute critically important sourcing strategies in order to develop the kind of supplier relationships that add significant business value.

Companies that always use the “win-win” approach” and treat the relationship as more important than the immediate outcome are likely to be leaving large sums of money on the table and ultimately will be swallowed up by a more astute competitor or found lacking after a strategic integration.

To avoid these pitfalls supply management leaders must ensure process integration. These processes in isolation will not lead a sourcing team to the optimum outcome for a given buy. The team members must understand the importance of all the steps to fully integrate the results from strategic sourcing and SRM into the negotiation plan. In Purchasing Practices experience the most successful companies ensure this by setting up a strong governance framework for supply management to ensure strict application of best practice process steps to overcome strategic sourcing implementation shortcomings.

By setting up a series of review gates in the sourcing process the sourcing team reports to a senior team to review progress, the processes used and the stakeholder views involved. It also serves as a platform to discuss the proposed strategies and tactics etc and how these have been integrated into the negotiation plan. These gates ensure a rigorous application of the processes and also serve to ensure stakeholder support and empower the team to move on to the next phase in the process.

Supply Management leaders must therefore ensure their staff, has a thorough understanding of the strategic sourcing, SRM and negotiation planning processes. Control of these processes can be a potent source of power, one that lets you steer the proceedings toward the outcomes you want. This calls for meticulous attention to designing the processes and influencing the negotiation agenda. Strong processes and governance lay down a framework from which, knowledge and critical skill sets can be developed until they become routinely engrained within the organizational culture and capability. Then the focus must shift to managing the risk that this very “routine” starts to become ineffective.

Look out for the September edition of “Transform” where we will publish the first of a three part series on developing a corporate level negotiation capability. Visit: www.purchasingpractice.com/information

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A strong business case, driven by a clear set of objectives owned by the key senior stakeholders, should be an essential pre-condition for any supply management leader.

2. Lack of sustained leadership at senior management level

Supply management fails to achieve the sustained attention they need at the highest levels in the organization, or those in leadership positions do not have the skills they need to exercise effective leadership of supply management change.

3. Lack of effective engagement with stakeholders

Supply Management involves managing a complex set of stakeholders – users, suppliers, senior management etc. Stakeholder management activity is often squeezed for time and priority.
However, failure to engage closely with stakeholders and failure to understand their needs on a sufficiently segmented basis can result in damaging tensions and a failure to meet key business needs.

4. Narrow skill base

Purchasing executives must attract, retain and motivate great people. In addition to standard supply management and program/project management skills, transformational supply management programs require a broad range of skills.

5. Poor supplier management

The impacts of poor supplier performance are felt across the enterprise. Poor supplier performance translates into lost profits, increased requirements for sales revenues, and tops the list of contributors to an organizations ability to deliver service excellence to its customers. Supply management must ensure it excels in managing its suppliers.

6. Make your numbers believable.

CEO’s and CFO’s strongly complain they cannot find the savings claimed by purchasing executives. This lack of credibility is deadly, and unfortunately still happens today.  “Cost avoidance” and soft, inapplicable cost benchmarks, such as “PPI”, should be avoided.

7. Failing to define the right performance metrics

Too often performance metrics are defined in isolation of the business. Procurement leaders should involve the CEO and CFO when establishing metrics to measure supply performance. Best-in-class company metrics require both top and bottom line measures, such as innovation from suppliers and cost out.

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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” for a key supplier.

To become a “preferred customer” 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 untrusting 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.

Focused Metrics:

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:

• innovation
• 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.

Collaboration:

External

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.

Internal

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

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.

Alignment

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.

Embrace Technology

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.

Conclusion:

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”:

1. The values and culture within the organization will support collaborative relationships.

2. Alignment exists between functional leaders on corporate goals, responsibilities, initiatives and resources.

3. Procurement has the, strategy, metrics, and mandate to secure competitive advantage that goes beyond “price down”.

4. Clear category strategies have been developed approved and opportunities identified where collaboration is appropriate and benefits have been targeted from the collaboration.

5. 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.

The striking prediction came as the International Energy Agency, the developed world’s energy watchdog, warned that record high prices were needed to choke off demand in order to balance the oil market. read more

How many procurement professionals have spent their careers with this echoing loudly in their minds?

Procurement professionals are indoctrinated into the profession with messages such as “You have to take the internal customer along with you”. “You have to persuade them”. “You have to get their buy in first”

Well why is this the case? Surely procurement “owns” the procurement process and must therefore have the authority to drive procurement strategy. Furthermore, whilst these statements are in themselves not wrong, all speak to the same problem. They emphasize a core helplessness within the purchasing profession caused by the absence of a clear and unambiguous endorsement from senior leadership that says what procurement is mandated to do.

One reason for this may be that procurements role is frequently not associated with the key business goals or one that must be “done right”. Instead, it is perceived to be about support and cost reduction. Procurement itself suffers from a “support mentality” and frequently defines itself as a “support function” whose status is derived by the size of money it spends and the amount it saves. Procurements dilemma is to lead or support and to lead effectively procurement needs a clear mandate to define its role.

Procurement is not optional. If you are in business then you are in procurement, and procurement has three key roles in any business:

1.      Business role to contribute to company strategy, separate out its procurement implications, and then act to make the strategy happen.

2.      Functional role to develop and maintain the supply markets the business needs for sustainable success.

3.      Transactional role to provide the systems and processes to enable day to day procure to pay transactions to be optimized.  

To be successful companies must optimize procurement by positioning it strategically within the business, raise awareness of its importance across the business and harness the talents of its workforce to deliver tangible benefits.

Class leaders have no doubt about procurement’s role and their goal is to excel at it. 

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