In recent months we’ve seen the re-emergence of Supplier Relationship Management (SRM) as a topical issue and a genuine priority for CPOs. Sadly, the topicality has mainly been case after case of evidently inadequate SRM from ‘bullying’ customers, particularly from the food and beverage sector. Apparently extending supplier payment terms arbitrarily is ‘the new black’ amongst such names as Tesco, Cadbury, Sainsbury, Diageo, (add your own lamentable example here), behaviours about as far as one can get from acknowledged best practice in relationship management.
At this point, it’s worth reminding readers what SRM is really about. In my judgment, SRM is about value for money; how it is created, realized, and distributed fairly between participants in a supply chain. I say fairness, not because I’m about to get all soft and fluffy and talk about ‘partnerships’, but because SRM is a ‘long game’; results take time to achieve and, for the investment required by buyer and supplier, both need the confidence that the relationship is interdependent, is going to remain so, and that both ‘win’ enough to want to stay in the game. And I will go further: positive results from SRM don’t happen by accident. It requires ambition, determination, commitment and constancy of purpose to firstly, get an SRM programme established at all, and then to begin to realize those VFM benefits.
The reported actions of the big name companies mentioned above suggest they’ve, at least to some extent, lost sight of what it takes to optimise value from supplier relationships. The crude financial instrument of pushing payments to suppliers out an extra 60 days might please the CFO but, frankly, makes the CPOs look foolish and as far away from real boardroom influence as ever.
The question for us, is how do we discourage such dysfunctional corporate behaviour, and avoid wasting the opportunity to shift the focus from tactical ‘savings’, to real cost reduction as part of an overall value-for-money-generating agenda? In short, how do establish an SRM programme that truly works? Below is a method of evaluating how successful your own SRM programme is today, and how likely it is to become ‘the way we do things around here’.
1. What are you doing it for?
Why has your organisation embarked on a path to implementing SRM? Are you doing it because everyone else is? Has someone advised you that it is an essential part of any procurement transformation? Has the boss told you to get it in place? Do you urgently need extra savings to hit cost reduction targets? Is supplier performance to contract not good enough and you see SRM as a means of getting to grips with that? Or is SRM a natural, incremental, development of your organisation’s category-management practice, but this time putting some horsepower into what happens after the supplier contracts have been signed?
I’ve seen all of the above (and more) cited as reasons for deciding to implement SRM, and there are circumstances where any of them would be considered as valid. For example, sometimes implementing SRM really is a political, me-too exercise, done to demonstrate that we’re not falling behind others in our sector, although there are obviously better reasons for doing it.
Regardless, what’s most important is for your SRM programme to have real purpose, a one meaningful to senior management, key stakeholders and peer groups, and those practitioners charged with leading the day-to-day effort. My recommendation to CPOs is to articulate the purpose of SRM for your organisation in a way that makes sense to everyone, and that is a call to action. A compelling vision and strapline that makes it clear why you’re doing it will come in handy when support wavers and stakeholders complain that progress is not as smooth or as rapid as they expected.
2. Who benefits?
An Achilles Heel for many procurement organisations is their relationship with other business stakeholders: the struggle to become relevant in a business that sees procurement as merely a service function, and not the strategic contributor many professionals believe it is (or at least can be). For most stakeholders, SRM will be just another Procurement initiative, something that might get in the way of, or slow down, their own day job. In these circumstances, suggesting that you’re implementing SRM because the boss said so, or because a competitor organisation has done so, is obviously unlikely to generate the enthusiasm and support required to make the programme a success.
CPOs need to answer the ‘what’s in it for me?’ question for every stakeholder constituency in the organisation, because they don’t all want (or would benefit from) the same things from an SRM programme. Finance want numbers (savings, and delayed payment terms, natch), Operations want a fast and reliable supplier response, Design want supplier innovation, ideas and engagement with their new products and services pipeline, Marketing want suppliers to provide something worth spending campaign money on, financial contributions to promotions, and enhanced end-customer experience of the company, Quality Assurance want compliance and maintenance of standards and specifications, and of course senior management want the whole SRM enterprise to provide a favourable return on investment. CPOs must define the SRM value proposition to each of these constituency groups, ensuring that those value propositions are both constructed with those stakeholders, and endorsed by them.
The key question will always be to what extent does SRM demonstrably contribute to the success of each group of stakeholders (how can it make their work easier and better), and the organisation as a whole?
3. Show them the ‘money’
This is not just about savings targets.
You’re going to have to work hard (and most definitely with the CFO) to define meaningful value-for-money measures. Cost reduction is a given, but what else are you going to measure and manage as part of your SRM effort? Risk is a major factor for most CPOs these days, covering everything from regulation, supply continuity, and reputation management. What measures are in place, or should be developed for those (and other) risk factors? And what about suppliers’ contributions to the top line? How will you measure innovation provision, supplier brand value to the business, and marketing contributions from suppliers?
These are just some of the many value levers that can be improved through systematic deployment of SRM and, even though some are easier to measure than others, your measurement system should be motivational; it should enthuse users to want to get better, to improve, not create fear of failure. Embrace the notion of recognising and rewarding those involved in SRM work, the effort they put in, and the progress they make (including the suppliers themselves). Sustaining positive momentum and a pipeline of value improvements are some of the reasons why you started down this path anyway. Whichever way your measures are developed, ultimately the arbiters of value delivered are those stakeholders you will (hopefully) have already consulted. I’m not promising it will always be easy developing measures and negotiating who gets credit or that there aren’t organisational politics involved, but claiming savings and other benefits that are not endorsed by the internal stakeholders is a recipe for their disengagement and even conflict.
Once definitions of value have been agreed, then a mechanism for monitoring VFM improvements coming down the pipeline will need to be created, enabling the CPO to determine not only the aggregate benefits of SRM, but the benefits emerging from specific SRM activities.
Finally, through the diligent pipeline management of ideas, it will become possible to predict future benefits from SRM and enable the CPO to help shape budgets. Because knowing what can be achieved from deploying SRM with each selected supplier cannot be precisely estimated up front, then setting top-down targets for SRM is a risky business. Arbitrarily imposing targets on SRM, potentially disconnected from what stakeholders (customers) need, will deflate morale and undermine the chances of success. VFM improvements are emergent; they are the result of a range of SRM interventions with the supplier and the internal organisation. That’s not to say, however, that we shouldn’t keep count.
4. Know what you need to be good at
To deliver tangible value for money improvements (including cost savings) desired by the business, and to deliver outstanding customer service to internal stakeholders, then the CPO and colleagues involved in leading SRM must decide which processes and activities the SRM teams must excel at. These include the heartland procurement processes of category management, negotiation planning, and contract management. Although these technical procurement processes are not of much interest to stakeholders (at least typically), they are essential in ensuring the business selects the most appropriate suppliers and secures the best commercial deals available so that stakeholder functions are working with supply inputs that allow them to excel at their own business activities.
With SRM, it should be expected that CPOs also develop excellence in supplier relationship strategy development, segmentation, performance management, supplier development practices (including lean and process improvement) and, crucially, customer support activities (structured stakeholder engagement, demand management, etc.)
CPOs and their teams need to excel at these because their credibility with stakeholders depends on it, and because they are the explicit connection to the needs (and wants) of stakeholders, and the financial inputs required of procurement. It is these links that ensure day-to-day procurement and SRM practices explicitly reflect the purpose of the programme, instead of a grab bag of seemingly good, but disconnected, ideas.
5. Be so good they can’t ignore you
The recently-published Deloitte Global CPO Survey 2014 reports that 57% of CPOs feel their teams lack the skills to deliver their procurement strategy. Most of the concern appears to be around soft skills, yet most of the training budget is going on technical skills. Make no mistake, both are important, not just in practical terms, but politically too. If peer stakeholders and senior management don’t trust the procurement team to be competent, then support for programmes such as SRM will be withdrawn, leaving procurement trapped in a spiral of short-term tactical deal-making. Any CPO exhortations to re-focus on total cost of ownership and value for money will fall on deaf ears.
There’s no doubt there remains a talent shortage in the procurement field. Despite twenty years of Masters level education offered by a variety of business schools and CIPS for even longer, the demand for procurement skills shows no sign of receding. This is why I firmly believe that ‘learning by doing’ is the most pragmatic approach to up-skilling an organisation in its SRM practice, not least because SRM is most definitely a cross-functional endeavour (you’re not going to get design engineers to devote their time to specific training in SRM, for instance). The idea that key supplier relationships can be managed from the procurement office is wrong technically, and politically. Stakeholders won’t (and don’t) put up with it. Far better for the CPO to harness the skills, experience, insight and interest of stakeholders and involve them in the relationship analysis and strategy development work necessary to assure internal alignment and clarity of direction for strategic supplier relationships.
Working hand-in-glove with stakeholders is the way forward, and many organisations are already there. And when we consider the key value-adding processes that enable the CPO deliver outstanding customer service to stakeholders, and deliver value for money improvements, then we almost come full circle: we can’t do it without those stakeholders. This way credibility and a collective, team competence can be assured and trust between procurement and the business only enhanced.
Returning specifically to SRM, the CPO must understand the learning and skills requirements for the effective operation of those key processes, and ensure shortcomings are resolved. Develop the optimal organisational design for engaging key suppliers, blending technical procurement skills, leadership and influencing skills, and clear roles and responsibilities.
Finally, once the key processes have been defined, and optimised, then (and only then) consider what technology can further improve the operation of those processes. Researchers Gauld and Goldfinch found that 30% of large IT projects fail, and a further 60% require more time, resource and effort to get working properly, so if you’re looking to technology to drive your SRM programme, then think again. IT can help, but don’t be a slave to it; it isn’t the difference between success and failure in SRM implementation.
SRM is not a Procurement initiative
Managing key supplier relationships to protect the value you have contracted for, and to secure continuous improvements thereafter, should not be optional in modern-day business. We’re on a relentless path towards the ‘virtual’ organisation as the preferred business model in both private and public sectors, as outsourcing continues its unabated growth. Being able to effectively manage external resources will become one of the genuinely core competences in our organisations, and the more it does, the more silly it will be to present SRM as an initiative from the procurement department. Instead, CPOs should accept their role as one of educator and coach to key stakeholders and their cross-functional SRM teams.
The faster organisations establish SRM as an organisational competence, and develop programmes based on clear cause and effect relationships between action and purpose, then the more likely SRM can become a source of competitive advantage and a proven method of delighting customers, clients, and the users of public sector services.
By David Atkinson