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People occasionally ask me why, when there is generally so much attention given to sourcing and procurement tech, do I persist in focusing on supplier relationship management as a means of securing best value from supply relationships.
There isn’t a single reason, but there are two major influences on why this remains a priority for me and in my work: (1) We’re all products of our experience, and I’ve been fortunate to spend time in sectors where long-term relationships really matter (and where re-sourcing to alternative suppliers is difficult and sometimes prohibited) and so SRM is at the heart of procurement competence and, (2) SRM is a fascinating area of procurement where leadership, strategy, maturity, negotiation, and project management are all at least as important as technical sourcing skills.
It calls for well-rounded individuals, it’s never boring, and always challenging. Here’s more on that journey and why I think SRM is as important as ever.
I’ve been in and around the procurement profession for over thirty years, starting out as a buyer for Black and Decker, before leading Procurement organisations in the automotive and aerospace sectors, including Rolls Royce where I was Procurement Director.
Since those practitioner days, and after which I decided that a new challenge was necessary, I’ve focused on providing consulting advice, training, and coaching to international clients in many different business sectors. Between times, I also lecture to MBA students at the University of Birmingham Business School (and occasionally other institutions). All through my business ‘Four Pillars’.
I am also an experienced practitioner and long-time student of negotiation practice, and am an accredited trainer from the Harvard/MIT Program on Negotiation, and am acutely aware of the challenges involved in setting-up and sustaining a supplier network that is genuinely and highly motivated towards helping the buying organisation achieve its commercial goals. And although we more often than not hear the case for collaboration in supplier relations, make no mistake that negotiation is absolutely key to securing benefits from SRM efforts.
In my early years at Black and Decker, the procurement role was, at least in principle, straight-forward: take customer demand (and a technical specification from Design Engineering), find potential suppliers, get them to bid, and then negotiate the best prices possible. Following the deal being done, and if it was for ‘direct materials’, responsibility passed to Expediting (or Production Control) who then managed the day-to-day contact with the supplier as call-off orders were placed and ‘expedited’ in to meet B&D’s production schedule.
The idea of working collaboratively with suppliers following a deal was, at best, minimal and mostly remedial.
Supplier performance management was focused on delivery and product quality. The former often required visits to the supplier’s production facility to risk assess supply continuity and/or to shuffle priorities, and the latter (when non-complaint components were received) involved negotiating concessions with Design (to enable those items supplied that didn’t meet the precise specification to be used, with follow-up corrective action demands placed on the supplier). The focus was on ensuring B&D’s production output met the demand of external customers as efficiently and predictable as possible.
Suppliers who failed to make improvements or persistently failed in quality and delivery terms were fairly easily replaced. Furthermore, the use of formal contracts was rare, as everyone knew that whilst good performance was rewarded with future business, poor performance would result in no further use of the supplier.
It is fair to say that the leverage in the customer-supplier relationship most often resided with Black and Decker, and suppliers were quite easily led, being often under huge pressure to retain B&D’s business. We didn’t call our work ‘SRM’ and, as indicated, the idea of working collaboratively with suppliers following a deal was at best, minimal, and mostly remedial.
The idea of taking a proactive (rather than a remedial) approach to managing suppliers came to my attention when I moved into the aerospace sector (and reinforced later when I spent some years in automotive). A particular feature of these two sectors is that suppliers are normally selected with great care, because switching mid-programme can be expensive, hugely time-consuming, and sometimes feels close to impossible.
Regulation and custom and practice in such safety-critical industries does lead to risk aversion and a conservative approach to sourcing. Change is, more often than not, pretty unwelcome. This can put procurement folks in a real bind, particularly if competitive tendering is their preferred method of securing best value.
And it’s not only regulation and safety that provides a challenge. Usually following the awarding of a contract, suppliers often encounter problems in fulfilling the requirement – this could be meeting the technical spec, taking longer than expected to get started, or delivering on time, in full. Any supplier shortcomings here result in the buying organisation (and indeed the supplier) making unplanned interventions to get things back on track. None of this is cost neutral and, these days, we call this ‘value leakage’.
In aerospace and automotive what we now call SRM (and, to be clear, this includes supplier performance management) was termed ‘supplier development’, and it emerged from the Quality Management movement. The idea was that getting things ‘right first time’ was not only great for assuring quality, but for generating savings too. The most efficient and highest-performing supplier, could also be the cost leader. This laid the myth that cost and quality is a trade-off.
Don’t panic those who assume high ‘quality’ is about bells, whistles, and best technology (e.g. the difference between a Porche and a Datsun of yesteryear); in manufacturing it means compliance to the required specification (you get what you asked for).
Pioneering work in the Quality Management field by the likes of Ishikawa, Shewart, Crosby, Ackoff, and particularly Deming (the Toyota Production System was co-developed by him) bled into the procurement space via practitioners and research by the likes of Lamming, Womack & Jones, and Hines. Those above codified what the automotive sector in particular had been doing (and sign-posted collaboration as a major factor) and encouraged practitioners in other sectors to benchmark against this (superior) standard, and then emulate those practices. Some practitioners were successful, most weren’t.
Professor Andrew Cox came along and offered a large dose of realism, stating that benchmarking and copying were largely a waste of time, as each organisation is operating in a unique set of circumstances and that the relationship between the organisation and each of its suppliers similarly has unique characteristics. Instead of copying, procurement practitioners needed a method of analysing each relationship ‘dyad’ and then develop appropriate strategies to secure the best value for money. Cox proposed power analysis as the method most likely to equip buyers (and indeed sellers) with a comprehensive understanding of each relationship dyad, and the levers that are most likely to lead to optimum results.
Experience tells me the ‘presumption of competence’ is wrong, and it leads to inappropriate methods being applied to the wrong suppliers.
Today there are many advocates of partnering and collaboration between buying organisations and their suppliers, and there’s sometimes a whiff of harmony and optimism about it. But it’s not always realistic. I believe at the heart of this mindset is a misunderstanding of business in the real world; a presumption of supplier competence. The premise is if only we (the buying organisation) were to take a more collaborative approach, then willing suppliers will line-up to offer savings and other improvements.
This mindset is particularly in play at the time of contracting, when the parties smile and shake hands on a new deal, but frequently find the contract unravelling during implementation where value leaks from deal because of failure, delay, cost overruns, those unbudgeted interventions, etc. To give you an example, the on-time-in-full (OTIF) performance of suppliers when I joined the company was less than 10%!
Yet such a collaborative approach, whilst working in particular circumstances with specific suppliers, is all too often prescribed as the ‘way to do SRM’, but my experience tells me the ‘presumption of competence’ is wrong, and it leads to inappropriate methods being applied to the wrong suppliers.
Not long ago I was discussing a failing supplier relationship with a client company, and the evidence presented by the client of what it had communicated to the supplier up to that point was a like list of good intentions: commitments to collaboration, shared innovation, senior peer-to-peer relationships, long-term contract, etc. What proved missing from the client’s understanding of the relationship was the evidence that the client company was over-dependent on the supplier (which prioritised growth with other customers whilst saying the ‘right things’ to the client company).
The supplier’s words might have been “yes”, “of course”, “we’ll support that initiative”, whilst the actions meant “no”, “maybe”, “later”, “never”. It was a wake-up call for the client that led to a fundamental change of its relationship strategy, and notably a conscious reduction in dependency.
And this example illustrates a glaring error amongst some practitioners in that they assume negotiations with the supplier end at contract award. In the real world of SRM, negotiation never ends.
We were negotiating constantly, in the form of encouragement, persuasion, ‘selling’, cajoling, even coercing when the supplier showed resistance to our working together.
At Rolls Royce, we were able to take team experience, marry it to the knowledge of what academic research told us had worked elsewhere, undertake a series of analyses at the category and key supplier levels (including power analysis), and develop bespoke strategies for each key supplier relationship. At it had organisational implications: due to bandwidth limits in the category manager role, we dedicated specialist resources from our team to work intensively alongside suppliers. These ‘business improvement’ experts were skilled in waste reduction, understanding cause and effect, process innovation, and facilitating groups of people who would work hard to identify value improvement opportunities and bring them to fruition.
Nevertheless, our progress was ‘three steps forward, two steps back’. It was hard going. We were negotiating constantly, in the form of encouragement, persuasion, ‘selling’, cajoling, even coercing when the supplier showed resistance to our working together; all with the intention of maintaining the supplier’s attention to the task in hand – to improve performance, and value for money (including savings). These negotiations were genuinely strategic, as they needed to be when practiced in the context of long-term relationships.
In the end, the results were impressive: OTIF performance up to 80%+, quality performance improved by a factor of 4, and savings over three years were over20%. Of course, some categories and suppliers contributed more than others, and so we learned that you don’t get sustainable and better results by simply giving suppliers and across-the-board target to hit. The benefits from SRM are emergent, and come from the buying organisation and the supplier studying how the work is (or will be) done and then jointly working to make improvements. It’s detailed work and it requires enquiring minds and a few models or frameworks to help codify the learning.
For us, it also meant that both organisations required some dedicated resources to facilitate and manage the improvement process, often for extended periods so, although the results don’t come for free, the whole endeavour is cheaper than rectifying problems on a day-to-day basis.
One particularly important learning is that unless the buying organisation offers (and demonstrates) something of value to the supplier (for example, real expertise that could help the supplier genuinely improve its business), then the supplier will ‘drag its feet’, passively resist, or outright reject the collaboration overtures coming from the buyer.
Suppliers have preferences for some customers over others, for a whole variety of reasons. Good intentions and supplier conference speeches are not enough.
This SRM work wasn’t (and is never) a quick fix, and the approach taken by Rolls Royce above sounds an awful lot like collaboration. But it wasn’t collaboration in the naive sense. What we found at the time (and others will find now) in the real world, is that suppliers (just like everyone else) have competing priorities and limited bandwidth. They also have multiple customers, each of which have their own interests or demands on the supplier’s time. Furthermore, suppliers have preferences for some customers over others, for a whole variety of reasons. Good intentions and supplier conference speeches are not enough.
In my consulting and training practice I’ve come across many organisations that have implemented their version of SRM (sometimes having refreshed their programmes several times), and it’s abundantly clear the task of managing key suppliers is not plain-sailing. It’s not a given that simply making an argument to suppliers promoting continuous improvement is necessarily going to result in enthusiastic supplier engagement.
It’s also challenging to enthuse stakeholders so that they will actively participate in strategy development and implementation, even when some are positioned to get the best out of long-standing relationships. There’s the wider competence issue (is it better to train people or institute an action-learning approach, working on real cases?). How well-developed are people’s negotiation and interpersonal skills (in my view, crucially important) and, finally, does the whole endeavour hold together with a coherent strategy at its heart?
Over recent years we’ve seen SRM go in and out of favour (at least in terms of where procurement investments are concerned) and yet with an estimated 44% of value ‘left on the table’ SRM remains an area of high potential for organisations prepared to put in the hard yards. I firmly believe SRM to be the biggest source of value improvement procurement leaders can offer the business, and a source of competitive advantage for those that commit to it. And it is at the heart of procurement competence. Hence it is a significant component of the Four Pillars service portfolio.
I once jokingly described procurement as ‘professional shopping’ to some career-minded youngsters curious about what my career path had been. ‘Three bids and a buy’ procurement might suggest that professional shopping wisecrack is not always far from the truth. Real sophistication comes with mastery of sourcing, negotiation, consulting and facilitation skills, stakeholder management, and post-contact SRM. It’s a ‘to-do’ list of those with the highest ambitions in our profession.