Supplier Relationship Management

For all of the potential benefits, many organisations have struggled to make it further along the road to supplier relationship management than the contract monitoring stage. What are the success stories doing differently?

Autumn 2010

 

By Rima Evans

 

Supplier relationship management (SRM) is hardly a new kid on the block. Yet its progress has been sluggish. Forward-thinking organisations, quick to recognise its benefits, were on the SRM road years ago but for many others it is yet to be fully exploited. For some of these, the destination remains unclear. “Are we there yet on SRM?” is not an uncommon query. If this sounds like something that children might ask from the back of the car, the response from experts resembles a parent’s reply: “I’m afraid there’s still some way to go.”

For Graham Collins, director of ProQuest Consulting, its development is still patchy. “There is a random hotchpotch of initiatives but there isn’t hard evidence of an integrated, joined-up approach,” he says. “Much effort is put into the upfront sourcing process but, once the contract has been let, there is an assumption that things will go swimmingly. Then there’s not much focus on the back end, which leads to a disconnect. There are good examples of contract management and good examples of SRM but there is uncertainty as to how these activities should be co-ordinated. It’s all a bit ad hoc.”

Katherine Kawamoto, vice-president, research and advisory services at the International Association for Contract & Commercial Management (IACCM), agrees. She explains that fully successful SRM has to be embedded in the contract management process so that any requirements are considered when the contract is being drawn up and signed and driven right through to the “back end”. “Most organisations are striving for that but it’s not yet a centrally driven process,” she says.

If this discipline is still relatively immature, why does the subject merit attention now? It’s because SRM has reached an important landmark on its journey. The recession fuelled a squeeze on suppliers as costs had to be driven down. But now purchasing organisations are looking for new ways to save money and create value.

According to Jamie Napper, global SRM excellence manager at insurance group RSA (see Case Study, below): “Firms are realising they have got to work with suppliers as they start to climb out of the economic hole. There was a focus on risk management and solvency during the recession but that has shifted and organisations are starting to see there are benefits outside this activity.”

New angle
Alan Day, managing director at the State of Flux consultancy, agrees. “It hasn’t been a formalised discipline and consistent process and that’s the new angle we are seeing. It’s been well understood that SRM can bring value but the big piece now is how organisations apply it consistently and rigorously. Organisations are immature in this area but the recession has brought it more into focus.”

The consultancy’s Global SRM Survey 2010, which attracted 373 respondents from more than 300 organisations, found that within most organisations (43 per cent) SRM was only moderately defined and recognised as a formal discipline. Thirty-five per cent responded that it wasn’t recognised in their organisation as a formal discipline either “at all” or “very much”. However, 58 per cent said they had made moderate progress in the past 12 months, and 82 per cent said SRM was expected to become either “more important” or “much more important” in their organisation over the next 12 months.

For example, one CPO who works for a $6 billion IT company (but wanted to remain unnamed) told CPO Agenda they are looking to set up a company-wide “SRM solution” within the next six months as part of its growth strategy.

“We see this as the next step in our evolution,” the CPO says. “Currently, there are pockets of activity where people think they are managing vendor relationships but in most cases this is not being done consistently. Our suppliers are often our customers too, so relationships are sensitive and have to be managed properly.

“Because senior managers understand the criticality of this, we are looking to set up a vendor management organisation. We are just at the point where this is right for us but the recession has been key in making our organisation realise we need to work out how best to leverage resources.”

This is an important point, stresses Day. “SRM activity is about value creation, not cost reduction. Companies understand that the recession isn’t going to last forever and that continuity of suppliers is going to be critical.”

A holistic, systematic approach is key to SRM, yet this is often where organisations fall short. Collins says: “In some sectors, such as aerospace or automotive, SRM is more advanced. But there’s little true SRM around: there is a big gap in the public sector and in the private sector it’s variable.”

One major battle in implementing SRM is the different interpretations of what it actually means. This is compounded by a frequent failure to distinguish between contract management and relationship management, says Collins.

Day adds: “The biggest problem is not so much within the procurement community but within the wider business. Without an understanding of SRM there is no understanding of the benefits that it brings.”

His definition is this: “A discipline of working collaboratively with those suppliers that are vital to the success of your organisation to maximise the potential value of those relationships.”

An alternative definition is offered by Steve Wallis, head of procurement development at the buyingTeam consultancy: “A structured programme of initiatives to drive continuous improvement through engagement with suppliers, typically including performance management and improvement, innovation, and cost reduction or value creation.”

Taking the latter description, SRM can cover a range of initiatives including joint process improvement, cost reduction, innovation, sustainability, joint product development, risk management and quality improvement.

These also highlight the benefits SRM can deliver, which include faster speed to market, supply chain efficiency, higher profit margins, service level improvements and shorter lead times.

Systematic application
Wallis explains that applying SRM systematically results in a more effective sourcing process. “You can achieve great results with a supplier but these are dissipated if the relationship is not managed,” he says. “Performance issues might go unresolved, for example.

“Effective relationship management also brings the advantage of access to your suppliers’ ideas, knowledge and innovation. Suppliers have first-hand knowledge of how things work in practice and are well placed to help organisations improve efficiency.”

Wallis points out another key benefit. “The best suppliers are going to be in demand. Those organisations that take the SRM approach with a supplier are more likely to be seen as a preferred customer.”

However, the intangible improvements are often overlooked. Napper says SRM is not only about revenue but can generate softer results. “The focus isn’t merely money,” he explains. “Better relationships can also improve communication and that can benefit areas such as employee engagement through better understanding of what’s happening.”

Acknowledging all of the advantages in SRM is one thing but putting it into practice is quite another. The use of words such as collaboration, communication and joint working to describe the benefits of SRM show it is about more than process and procedure. It also requires the right behaviours, skills, resourcing, and organisational backing to ensure it delivers to its maximum potential. There also has to be an understanding of where it fits in with the sourcing process and with the organisation as a whole: the holistic approach, on which many organisations fall down.

David Loseby, CPO and head of SRM at Westminster City Council in the UK, spells it out. “It’s a change in our way of working and thinking,” he says. “It’s moving from a tick-box approach to one of building collaboration and sharing information.”

Day explains that putting SRM in place first of all involves four “building blocks”: process and governance; people and development; establishing the technology system; and a communication and management/infrastructure programme.
For Loseby, the people side is fundamental. Westminster has embarked on a two-year investment programme in SRM as part of a strategy to transform its operating model and deliver efficiencies. It is on track to save this year’s target of £20 million. Loseby explains that the new focus is SRM rather than contract management because this is where the greatest value is.

The key investment has been on the people side. A procurement and SRM function was created last October, with 45 people being given training in this discipline at a cost of £2,500 a year each over the next two years. Given the UK government’s immediate programme to cut public spending, Loseby admits it has been a “bold move”. But the council’s CEO and Cabinet members have supported the investment, recognising its strategic importance.

“The training and development is critical,” he says. “If you haven’t put investment in the people nothing is going to change. Their commitment is what we depend on.”

Loseby explains that the programme is centred on new ways of working – getting people to rethink the way they work with key suppliers and service providers. “We want them to think differently about the way they approach them and away from only focusing on the monitoring aspects,” he says. “It’s about working collaboratively to find solutions and puts the relationship on a completely different footing.”

For example, he explains, it has enabled higher-level discussions – and delivered efficiencies – with suppliers in catering. “One contract, for example, was managed by more than one full-time officer but this was adding no value. We decided it wasn’t a strategic supplier and the contract would have performed automatically anyway. So we took away the dedicated officer with no detriment to the service. In fact, it resulted in the supplier feeling more trusted.”

Loseby says that collaborative working is behind valuable discussions that benefit both parties. He adds: “Any problems are headed off by good relations, not by reverting to the contract to resolve issues. SRM can be misunderstood, but it brings huge amounts of value. We have delivered more cost savings through SRM than any procurement exercise.”

Behaviours
ProQuest’s Collins agrees that a big part of SRM is behaviours – building trust, good teamwork and being co-operative, open and communicative: “If you are hard-nosed and cost-focused the supplier will be looking to claw back profit.” The motivation for the supplier has to be set up at the front end of the process, he points out.

Turning the rhetoric of collaboration into a reality requires a common language, a structured two-way communication process and information sharing, increasing trust and perhaps sharing benefits.

Wallis says: “We have one client that shares information with suppliers one month, then the next the suppliers will share knowledge with the client.”

Day says that building suppliers’ trust is vital. It emerged as one of the most important factors to successful SRM in the Global SRM 2010 Survey.

“As a procurement community we have a lot of work to do to build up trust,” adds Day. “It’s not only because of the recession – suppliers have been beaten up on so many occasions they have become cynical of programmes, or they have been suggesting improvements for so long that have been ignored they have given up. Sharing information is effective in building trust. You are really only as good as your worst supplier.”

The skills required for SRM are different from procurement’s traditional strengths, which underlines the importance of the people question – not only in development terms but in deciding whether it is procurement that should carry SRM responsibilities.

The consensus seems to be that SRM works best when separated from procurement, because each discipline has such distinct goals and requires different skills. On the procurement side it’s about hard-nosed negotiation, and on the SRM side it’s stakeholder management and collaboration. Napper says: “Negotiators think about the ‘me’ and the now. SRM managers thinks about the ‘we’ and the future.

“Keeping the two disciplines separate has worked well for us. I don’t see how it’s possible to have someone trying to squeeze every last penny out of a supplier one day then the next day turning around and saying, ‘OK let’s work together’. The two disciplines are separate but have got to be linked. Here they report to the same line manager.”

Having properly trained SRM managers is a success factor, despite which the State of Flux survey found that more than half of organisations make little or no investment in training and development for SRM. Thirty-seven per cent said they invested a “moderate” amount. A lack of training can result in a set of people who are confused about what SRM is and how it differs from performance management. Kawamoto says: “People are good at getting the data and monitoring it but what get lost are the desired outcomes. People get tangled up in the metrics and forget about expanding the pie, and looking at growth or value. Most procurement departments are not trained to think in those terms.”

Day adds that organisations might do an excellent job of measuring on-time delivery targets but are awful at measuring softer issues. “How often might they measure whether they are disrupting the supplier or how the supplier feels about the relationship or even the trust in the relationship?” he asks. “A supplier can perform really well technically but have a terrible relationship, just as others can perform badly in respect of targets but have a good relationship.”

The process infrastructure around SRM is another stumbling block. For many orgnisations, such as RSA (see case study, below), it requires stripping back to basics and putting in place a comprehensive and simple step-by-step process that ensures it is treated holistically and delivers full benefit. Napper says: “When we go out to tender, we build in all of the SRM bits up front so those requirements are implemented immediately with all new suppliers.”

However, Collins warns that in many cases the appropriate infrastructure is not there to support SRM. The other pitfall is in the process of selecting the suppliers to target for SRM investment: some contracts require only basic performance management.

Day says organisations are getting better at segmenting suppliers according to business criticality in order to decide where to target SRM effort, but they are still not doing it frequently enough. “This should be reviewed annually as a minimum,” he advises. “Risk profiles and spend profiles change and that affects the amount of effort that you should be willing and prepared to put into a relationship.”

Lower-tier investment
Napper also warns that organisations should not assume only their top-tier suppliers are worth SRM investment. At RSA, he says, investment is put into lower-tier suppliers that have a greater alignment of goals and brand.

“You have to consider what you want SRM to achieve,” he says. “We are not on the radar of some of our key suppliers, so I’m not going to waste good SRM resources trying to influence huge suppliers. Instead, we just performance manage them. Similarly, the partner-suppliers that we have a huge amount of spend with, such as those that provide IT, are too big so it’s like moving a supertanker. A lower level of supplier, still with a significant spend, and that considers you an important customer is going to have more of an appetite for SRM.”

Kawamoto agrees that organisations can be too dismissive of suppliers that are not in the top tier. “What’s more important for SRM is that there is an alignment with the supplier. It has to want to partner with your organisation, it’s not about being nice.”

However, purchasing organisations are neglecting to consider whether they are on their supplier’s list of strategic customers. The SRM 2010 survey showed that most – 55 per cent – only occasionally compare notes with strategic suppliers to ascertain where they stand.

As with any programme that aims to change organisational culture, sponsorship from top management is pivotal. “It’s absolutely critical,” says Loseby. “We have had the backing of the CEO, which has reinforced its importance.”

Loseby admits there are challenges ahead still for Westminster council. “We are not there yet, but this is a key strategic piece of work. We are still on a journey to achieving world-class SRM.” 

Case Study - Premier foods and british sugar

Premier Foods and British Sugar scooped the overall winner prize and best SRM category prize in this year’s CIPS Supply Management Awards (above) for their work in building strategic relationships.

For the first four years that Premier Foods traded with British Sugar, their dealings were infrequent and cautious. The company, whose brands include Hovis and Sharwood’s, took a tactical approach to sourcing and British Sugar was just one of a number of sugar suppliers that it was using.

In 2006, however, the European Commission announced major reforms to the sugar industry. Over a three-year period, it would move from a surplus to relying on imports of about three million tonnes to meet demand.

In response to the change in market dynamics, the EU supply base began to consolidate, and it soon became apparent that Premier Foods should start to develop a strategic relationship with one of the four major players emerging in the marketplace. Premier Foods identified British Sugar as the supplier of choice because it felt the company’s expertise would help to drive growth and innovation.

In 2007, the executive board of Premier Foods endorsed a proposal to develop an SRM approach. Discussions were held with senior management at British Sugar, part of Associated British Foods, who also viewed Premier Foods as a core customer. To enable a new way of working, workshops were held; a clear set of jointly agreed goals, objectives and action plans were drawn up; and executive sponsors were appointed from both organisations.

Three years on, both companies have derived a large number of benefits from the relationship. Among them, Premier Foods made £5.7 million cost savings within two years, while British Sugar posted Premier sales revenue growth of 10 per cent during 2009 and greater adherence to payment terms.

Briefing - How SRM leaders differ from followers

What characteristics do the more advanced SRM organisations exhibit? To find out we asked the 300-plus organisations that took part in our Global SRM 2010 Survey to classify their initiatives against one of four defined maturity levels: “undeveloped” (chosen by 40 per cent of respondents); “formalised” (37 per cent); “established” (20 per cent); and “optimised” (3 per cent). We then analysed how the answers of those in the first two groups (the “followers”) compared with those in the latter two (the “leaders”). Here’s what we found:

Organisation and business support
Leaders such as Procter & Gamble, Toyota and RSA Group are more than twice as likely to have enterprise-wide SRM activities. These are more likely to be led by a central function and to focus on both direct and indirect spend. They are also three times more likely to have a formal SRM programme in place (61 per cent to 18 per cent).

Progress made by leaders during the past 12 months is consistently better and the barriers consistently lower. For example, leaders are twice as likely to enjoy strong and active support from executive sponsors and three times more likely to have full/broad business unit and functional involvement in SRM activities (although only half of them have this currently).

Business drivers and metrics
Leaders are more likely to have presented a formal business case for SRM (42 per cent have done so). Although cost and risk reduction and service/quality improvements top the list for both leaders and followers, the former put more emphasis on SRM’s ability to drive innovation, sales/revenue growth, higher profit margins and faster speed to market.

Benefits delivered to date through SRM activity in all of these areas are greater and leaders are better able to measure them. On innovation, two-thirds of leaders say they’ve seen benefits, compared with only a third of followers.

SRM leaders also place greater importance on the use of softer metrics, such as supplier satisfaction or number of joint initiatives under way, and they are much more likely to measure collective performance using joint key performance indicators.

Governance and process
SRM leaders are up to seven times more likely to have their governance structure, key roles and responsibilities, relationship strategy and account plans fully documented and implemented. They are also more likely to have conducted a thorough segmentation of their supply bases and put more emphasis on criteria such as technology/innovation, supplier capabilities, significant value improvement potential and competitive advantage when doing so.

Leaders share a greater variety of data and information with their strategic suppliers (for example, demand forecasts, business plans and sales targets). They are also more likely than followers to discuss collaborative initiatives and to ask suppliers for feedback on their own performance.

People and skills
At the leading organisations, SRM is seen as a formal business discipline and a bigger slice of procurement’s annual operating budget is devoted to it. More than 80 per cent of leaders have invested in SRM training to at least a moderate extent – twice as high as the figure for followers – and their skill gaps in areas such as communications, trust building and cross-functional working are narrower.

About twice as many SRM leaders as followers (61 per cent compared with 31 per cent) have cross-functional teams in place for key suppliers and their SRM manager roles are more than three times more likely to be full time rather than part of a wider job description.

Tools and systems
Although software applications and IT systems are not seen as particularly helpful in supporting SRM currently, leaders do report higher usage rates. And whereas followers highlight contract management and supplier performance management as the key areas for future development, the leaders accord a higher rating to tools that could drive better relationship management and collaborative product/service development.

Overall, SRM leaders put more emphasis on the “R” in “SRM”, recognising that their relationship with strategic suppliers is a two-way interaction involving mutual rewards and is not simply about managing contracts and supplier performance more effectively.
Source: State of Flux

* Rima Evans (rima.evans@redactive.co.uk) is projects editor at CPO Agenda