THE BUSINESS OF SUPPLIER RELATIONSHIPS

Higher profits, lower costs, more innovation and improved competitiveness: organisations that get SRM right can benefit across the board. More than 40% of respondents have achieved a positive, quantifiable post-contract benefit from their SRM activities, with 31% reporting a benefit of 4% or more. Meanwhile, 60% report cost reductions, 52% cost avoidance and 39% preferential pricing. Nearly a fifth (18%) claim to be more profitable as a direct result of their SRM programme.

To put this in context, research by Dr John Henke, who writes on page 10, suggests that good SRM contributes to as much as 70% of a company’s gross profit – far more than any other business function can claim.

But the full business case for SRM is even richer and more nuanced than these direct financial benefits. An SRM programme that is aligned with an organisation’s strategic objectives also offers significant ‘soft’ benefits, which are hard to measure but immensely valuable.

Effective SRM enables organisations to become customers of choice. Customer-of-choice benefits include service level and quality improvements (each cited by 39% of respondents), improved customer experience (28%) and increased competitiveness. SRM brings a more constructive tone to negotiations, say 52% of respondents, and helps both sides to take a longer-term perspective and bring about better outcomes for both parties (each 46%). Collaborative partnerships with suppliers can also contribute significantly to innovation, as outlined on page 16.

The evidence also suggests that suppliers that are engaged through SRM programmes are more willing to put in effort and resources above and beyond what is contracted. More than half of respondents say that their key suppliers’ senior management team is more committed to their partnership as a result of their SRM activities, while the same proportion see improved account management as a result. Other examples of additional commitment from suppliers include: proactive ideas for continuous improvement (46%); collaborative problem-solving (45%); and priority access to the best people and resources (21%). All of these can help a business get a jump on its competitors, particularly in the case of the last two elements. But the flip side is that they also indicate areas of potential commercial risk: few chief executives would be happy telling their boards that they were struggling to get a product to market because their main competitor had done a better job of securing their supply chain.

It is worth pointing out, however, that over the past seven years the benefits, both ‘soft’ and ‘hard’, that have been secured by the companies leading the way in SRM have continued to increase–meaning these companies are pulling away from those lagging behind. In other words, the gap is big and getting bigger.

This combination of direct financial benefit and longer-term value creation presents a striking picture, but some leadership teams still struggle to recognise the contribution that SRM can make to their organisation’s success: only 40% of respondents believe that their organisation’s executive team can articulate the value SRM brings. Only slightly more say that their chief procurement officer (CPO) can do this, while more than a third of SRM teams suggest that they cannot.

Sometimes this is because soft benefits are hard to measure – less than 8% of respondents could quantify benefits such as competitiveness, supply continuity and improved customer experience in financial terms – which may explain why 42% of respondents do not know what post-contract benefit SRM activity brings them.

One company that has seen a raft of tangible benefits since implementing SRM is United Utilities. Its approach starts with how contracts are agreed, says Mark Hopkinson, the water company’s head of SRM. “The benefits we have seen are significant,” he says. “We can report improved service, reduced cost and improved sustainability performance. We know it’s difficult to measure SRM benefit on its own as it is intertwined with overall business and supply-chain strategies but we haven’t let this stand in our way.

“We believe it’s more important to get on with the job than to haggle over where savings are attributed. However, where we have made specific interventions, we have achieved post-contract savings in the region of £30 million, and contributed to much more.”

When it comes to value, however, it is important to stay on top of hard-won contract gains, says Mark Colechin, Legal & General’s head of SRM. This is where good governance, as discussed further on page 18, should be deployed to ensure that SRM’s reality lives up to the potential outlined in the business case. “There is plenty of evidence to suggest that much of the value negotiated in contracts is not actually delivered, because the contract isn’t effectively implemented and managed,” Colechin explains.

One final challenge to note when it comes to SRM is lack of a board-level champion. It is rare for CPOs to have a seat at the main board, with many reporting through the COO or CFO – or even a level below that. This does not necessarily mean that the CPO must become a more senior role, but it is vital for members of the senior leadership to have an understanding of, and commitment to, SRM.

More than 11 years of working with leading companies and seven years of industry-leading research reveal that the business case for SRM remains one of the perennial challenges for procurement and SRM leaders.

For many, SRM simply feels like the right thing to be doing. But it is much more than that. Defining the value proposition and business case for SRM allows business leaders to focus on real value opportunities. We suggest that leaders do this by focusing on the four drivers of value:

• post-contract benefits
• sustained sourcing savings
• contribution to profits
• customer-of-choice (soft) benefits

Effective SRM offers business benefits that go well beyond boundaries of the procurement function. Improved profitability, better risk management and increased innovation are all issues that boards and leadership teams should be considering in their assessment of their organisation’s progress towards its strategic goals. This in turn helps SRM to be embedded more thoroughly into the corporate culture, as discussed on page 26, and thus to have a commensurately bigger impact on the bottom line.

Leading companies clearly grasp the power of senior support for SRM, with 46% of them indicating that they have the backing of their chief executive. This compares to a much smaller overall figure of just 21% of all respondents feeling that their senior managers are strongly and actively engaged in SRM. In fact, 23% identify a lack of engagement, while 4% face active opposition. Alongside this, only 40% of respondents say that their executive team can articulate their organisation’s SRM value proposition. This direct correlation between being a leading company and having the backing of senior executives paints a clear picture of just how important such support is.

The lower levels of executive support at organisations more broadly may well be connected with the fact that nearly half of respondents do not have a stakeholder management and communications plan for senior executives, perhaps failing to recognise the important part that this group of stakeholders plays in SRM. At least engagement levels have generally increased over the past two years, with the number showing opposition dropping sharply from more than 20% for both operational and senior executive staff in 2013. However, in both cases, there has been a slight rise in the number that are not engaged.

Senior executives who want to change this picture in their own organisation need to take on two interlinked roles. The first is around programme support. This means backing
the business plan, creating a culture that supports SRM and allocating the resources needed to do this.

Alongside that is the need to offer individual support. Key suppliers are key stakeholders, and should be managed as such. Very often this means that the chief executive will play an important role in building their company’s relationship with the supplier by forging their own relationship with his or her counterpart there. This demonstrates to others in both organisations that SRM is taken seriously at the highest levels, which will in turn assist with work on cultural change.

Executives need to play two roles: supporting the SRM programme, and proactively leading important supplier relationships. The challenge is to find time within executives’ already busy schedules. The key to getting executive time and focus is having a well-articulated and compelling case for SRM and selling it at the most senior level. It is only at the very top that such a case can demonstrate how SRM supports the company’s strategic priorities, and can thus secure the training, technology and other budgets needed to support it to its fullest extent. For more detail on what should be included in a SRM business case, please refer to www.stateofflux.co.uk/ideas-insights/articles

It is not just organisations that are hurt when governance processes fail. Individual leaders can face significant reputational damage, fines and – in some cases – the possibility of criminal sanctions.

Not all governance risks come from direct employees. The way in which suppliers do business can also present a risk in terms of both public perception and legal or regulatory compliance. For instance, companies could fall foul of the UK Bribery Act if an “associated person”, such, as a supplier bribes someone to win or keep business. And every time a company is found to have bought from a supplier that uses child labour to make clothes that end up in UK shops or pick tea that is brewed in UK pots, its directors can be sure they will face a difficult time in the press and from their shareholders.

Adrian Clements, general manager of operational risk management at ArcelorMittal, says there are “three types of supplier risks: those risks inherent in a complex and interlinked supply chain; the possibility of supplier-created risks; and finally the risks created internally on how we work with, measure, manage and monitor suppliers and supply chains.”

Despite these very real threats, 78% of respondents indicate they do not have robust risk management processes in place for more than three quarters of their key suppliers. A similar proportion, 80%, say the same about performance management. Unsurprisingly, leaders and fast followers are more likely to say that they do have robust performance, contract and risk management in place for the vast majority of their key suppliers.

When it comes to oversight of SRM governance, process compliance and general activities for key suppliers, only 10% of respondents think what they do is very good, with 28% reporting good, 34% adequate and – worryingly – 21% poor or very poor. The only good news here is that the results are all slight improvements on last year.

There are, however, still some significant gaps in many companies’ governance models when it comes to their key supplier relationships. For a start, only 16% say that they have a model that is both fully documented and implemented, while 38% describe theirs as a work in progress and 32% say their model has been documented but only partially implemented.

Typically, these models incorporate: regular performance review meetings (78%); periodic strategic relationship review meetings (71%); a performance scorecard or dashboard (64%); and a designated accountable executive. It is rarer to find a relationship scorecard or dashboard (27%) or a documented responsibility assignment matrix for each key relationship (25%) – despite the fact that this is basic good practice, as well as a regulatory requirement in some industry sectors.

It could also be argued that the strength (or otherwise) of a company’s relationships with its key suppliers is a risk in and of itself given the very real impact they have on profits, as outlined earlier in this report. So it is perhaps surprising that relatively few organisations use a tool such as 360-degree relationship assessment to check things over. As things stand, only 34% of organisations do this, the findings suggest.

Understanding which areas of governance and which risks to focus your attention and resources on is key. Leading organisations segment their supplier base according to multiple criteria (see page104 of the 2014 SRM report) and conduct segmentation at least annually.

The output of this segmentation creates a tiering of suppliers, typically into four groups: strategic, preferred, approved and tactical. Different supplier management strategies, process approaches and resources (including respective roles and responsibilities) can be applied to each of the different groups.

Like any discipline, SRM requires professionals with a specific skillset and behaviour profile. Possibly the most important is communication, which is cited by 83% of respondents. This is closely followed by strategic thinking (77%), trust building (71%) and cross-functional working (70%).

Leaders who take SRM seriously also realise that, just as SRM is an organisational concern rather than a functional one, these skills are needed by all employees who interact with suppliers, regardless of their job title or level of seniority.

However, our research suggests that too few organisations are willing to invest in the training needed to support SRM and thus secure the business benefits it offers. Some 40% do not spend much on SRM-specific training, while more than a quarter spend nothing at all – a significant increase on last year’s figure of 19%. Less than a third reported moderate spending – a drop of four percentage points on last year – with only 6% giving it significant financial backing.

This lack of investment is particularly serious, given that 46% of respondents believe that their organisation needs to improve strategic thinking, 41% say cross-functional working skills need to get better and 37% say communication skills need attention. This is especially shocking given that a lack of people with the requisite skills is seen as the second-biggest barrier preventing progress in SRM. In other words, this failure to invest in training is having a direct impact on performance, which in turn may limit the value that SRM brings.

On the other hand, leading companies such as Procter & Gamble are reaping the rewards of comprehensive, well-structured training programmes. The fast-moving consumer goods business, the world’s biggest manufacturer of household and personal care products and a leader in SRM, ensures that its staff have the technical and business skills that they need. “Successfully managing supplier relationships takes great listening and communication skills, strong strategic thinking and analytical skills, leadership and influencing skills, and even project management skills,” explains Mary Wagner, P&G’s director of Greater China product supply formally responsible for developing tools and best practices (see P&G case study www.stateofflux.co.uk/ideas-insights/case-studies/procter-gamble).

“When I picked up responsibility as the global SRM skill owner, we taught the skill based on theory and documentation of best practices. The most common question I received was: ‘OK, I get it, but what do I do with it?’

“This led to shifting to a more systematic, pragmatic approach, with a common methodology focused on several core levels of activity and tools that buyers can apply to better understand or analyse a key relationship.”

Influencing, one of the areas emphasised by P&G, is a skill that 35% of respondents feel could be improved. This skill is particularly important given that significant elements of SRM involve interactions where individuals do not have official hierarchical authority, for example because they are working with colleagues from different departments or functions. The chance that people are working in such a team has increased slightly this year over last, with 61% of organisations now relying on a cross-functional team for supplier management. However, this is still lower than 2013, when nearly 70% did so.

One of the most effective approaches for organisations that want to improve their SRM skills base is to start by defining the relevant skills and competencies for each role. Once this is clear, it is possible to tailor training and development opportunities to meet the particular needs of the organisation and the individuals within it, thus avoiding a ‘sheep dip’ approach where everyone gets the same treatment, whether they need it or not.

This sort of structured formal training combined with on-the-job development opportunities through project working can be very effective. Another option that may suit some organisations is initiatives such as assignments on cross-functional projects and interdepartmental secondments. In some cases it may even be appropriate to arrange secondments or temporary job-swaps between supplier and customer. This sort of opportunity gives the individuals involved a chance to build their own professional skills, but also strengthens connections between functions or even companies.

SRM requires the right balance of people, process and technology capability and needs investment in developing the skills and competencies required to fulfil its potential.

It all starts with defining the role, developing a job description including competencies and then conducting a competency assessment before embarking on up-skilling of people through a learning and development programme.

We see the supplier relationship manager role as truly multidisciplinary: business coach, cross-functional team leader, master influencer, communicator and innovation champion. It is imperative to recognise the importance of context when defining training. Developing these skills should be addressed in the context of the day job, using realistic day-in-the-life scenarios to make training relevant and immediately transferable to a live supplier relationship.

Our research shows leading companies invest in training and in developing their people’s SRM skills.

The message is clear: effective SRM technology can help the bottom line. More than two thirds of companies with IT systems that do a good job of supporting SRM report seeing supplier performance improvement as a result. Some 65% note benefits in information management, sharing and reporting, 58% in value capture and delivery, and 52% in risk identification and management.

It has certainly helped Ladbrokes, says Liz Cockburn, its head of procurement: “Technology… has enabled us to link all our parts of the business with suppliers and procurement. Several people thought it would mean a lot more work for them but actually it doesn’t – it has eased some of their workload.”

Unfortunately, the proportion of organisations that actually have technology in place to secure these benefits is relatively small. Just over a third of respondents are using it in a significant (9%) or even moderate (26%) way to support the management of key supplier relationships. But 61% say they do not use IT systems and software applications in this way much, if at all.

Turning this around requires strategic investment undertaken in conjunction with a clear understanding of the business case for SRM as it applies to each individual organisation. This integrated approach is necessary to ensure that the technology being used can enable SRM in the most effective way possible. It can also be seen in the fact that companies that are leading the way in SRM generally are much more likely both to be using relevant IT or software to support SRM and to feel that it is doing a good job. More than 70% of leading organisations use IT to actively support the management of key supplier relationships either significantly or moderately, while almost as many feel that it supports SRM activities very strongly or adequately.

It is important to note that best practice here is for technology to cover all areas of supplier management including risk, contracts, performance, innovation and relationship management.

The unifying power of technology also offers considerable potential to improve consistency across organisations by ensuring that everyone who interacts with suppliers, not just procurement professionals, has access to the same information and the same guidelines for interaction. Suppliers as well as their clients will appreciate such standardisation and consistency, as they will be able to rely on a uniform approach whoever they deal with in an organisation. This in turn increases the chance that the company will become a customer of choice, and thus secure the associated benefits.

Energy company Centrica implemented Statess SRM technology to improve the consistency of its conversations with suppliers, says David Wylie, its group procurement director. “One of the challenges that we have at the moment is a lack of oversight of different supplier engagements, which means that our messages to suppliers can be very inconsistent,” he explains. “We see technology as a way of starting to pull all those strands together and provide a common platform for how we engage with suppliers in the marketplace.”

It is also worth bearing in mind the knock-on benefits that the right system can have on other areas, including in the support it can offer to senior leaders who are committed to championing SRM. At the moment, most companies – 60% – manage information about key supplier relationships using documents on a shared drive, while 79% rely on reports created manually in Excel. Only 6% use an SRM system to produce customised reports.

But with a dedicated SRM system a chief procurement or finance officer put on the spot by their chief executive could quickly and easily create a report that included the information requested without any clutter. And, should that chief executive later find themselves preparing to meet with their chairman, or indeed their counterpart at a key supplier, they could pull out their smartphone and use the Statess technology to get a snapshot of the relationship’s status while being driven to the meeting. The end result? Better use of the CEO’s time and a better, more informed, discussion.

When evaluating SRM technology it should cover five key elements: relationships, performance, contracts, risk and innovation.

The benefits are clear: our research shows an effective SRM programme, supported by SRM technology, can deliver 2–4% post-contract gain. In addition, technology can also be a catalyst for change in the organisation, providing a mechanism for a seamless and consistent approach.

If companies care about providing a more consistent supplier experience, technology will help achieve this. Currently supplier management is the only business process that has so much value at stake that is not supported by good technology.

The starting point for any organisation that wants to secure these benefits is a well-designed business case; but that is not, on its own, enough. Improving SRM is not about the actions of one person or department, but about the whole company. More than 90% of respondents say that good cultural alignment is important or very important to successful supplier relationships. This means that organisations that want to unlock the full value of collaborative, innovative and mutually beneficial supplier relationships need to transform their whole corporate culture rather than simply tinkering around the edges.

The culture within which SRM can deliver real value is one where all staff are prepared and willing to collaborate with suppliers. They will share information openly, work to build trust and search for opportunities that will add value for both parties. They will hold suppliers accountable for achieving the appropriate standards but will not blame them for their own mistakes or behave in a way that undermines trust. In a very real sense they treat them as an extension of their own organisation.

Embedding this sort of attitude requires leadership from the very top and the backing of champions throughout the organisation. It requires leaders to set the tone by treating suppliers as they would like to be treated themselves – as professional partners with expertise and value to offer, not golfing buddies or, worse, cost centres that are only interesting if there are price concessions to be won.

It can also help to be able to demonstrate quick wins so that the organisation as a whole can see the results of the changes they are making, as this will encourage people to get behind SRM. As Mark Hopkinson, head of SRM at United Utilities, explains: “It was very mixed when we started, but as the benefits have started to come, there is much more engagement.” He advises organisations that are just starting out on SRM to “focus on a case study to deliver SRM value that has the highest likelihood of success, not necessarily the one with the greatest benefit, which may be very difficult to deliver.”

This is also why the value proposition really needs to resonate with the business and represent its broader interests. For a company like TSB Bank, for example, this means aligning SRM with its core aim of providing great customer service. “As a bank we are really focused on our customers. We believe they want us to do the basic things brilliantly,” says Kate McKnight, supplier management oversight, and Laura Ryan, supplier relationship manager, procurement and property. “So from a supplier management perspective we need to optimise the supply of goods and services, in particular those that have a direct impact on our customers.”

State of Flux’s experience indicates that each business area and stakeholder will have a slightly different take on what they need SRM to deliver. As Melanie Evans, head of supplier relationship and contract management at Essex County Council, explains: “I think it was the increased realisation that effective category management and strategic sourcing had created more of a dependency on fewer suppliers, delivering more integrated solutions, but where the risk remained with the council. It was clear that we needed to drive more than just financial value – although this was still critical. We needed to deliver better, more effective services while still saving money.”

Our survey suggests, however, that this is not currently being treated as a priority, with only 38% of respondents saying that they have a strategy or plan in place to improve their standing as a customer of choice with key suppliers. There are also some gaps in the information that they share with them, with only 47% of respondents imparting their supplier relationship improvement strategy with the suppliers themselves. The picture is different in the leaders’ group, however: there, more than 70% have a strategy for improving their standing as a customer of choice.

To become a customer of choice, our research has shown that suppliers value three things from a relationship: brand alignment and association; money (revenue and/or profit); and behaviours that signal they are a trusted partner. In our experience it is the third area that makes the largest difference; yet it often gets overlooked.

In the 2014 report we looked at what questions you should ask your organisation to ensure you are demonstrating the right customer-of-choice behaviours. Are you:

• open and transparent (willing to communicate business strategy, growth and plans)?
• an innovation partner (open to suppliers’ innovation ideas and able to manage them)?
• trustworthy (acting with integrity,
reliable and sticking to agreements)?
• trusting (allowing suppliers to act with integrity, reliable and sticking to agreements)?
• good at communication (frequent, clear, concise and two-way)?
• collaborative (working together is business as usual)?
• fair and reasonable (seeking mutuality, treating with respect and sharing benefits)?

To display these customer-of-choice behaviours consistently across your organisation, SRM must be regarded as a business change programme if it is to be successful. This comes back to senior stakeholder engagement: the wider business will follow the lead and behaviours demonstrated from the top. Clear endorsement and strong, active engagement from C-level executives will pave the way for SRM value being realised.