Article
The importance of strong supplier relationships
How you manage your supplier relationships can mean the difference of success or failure, controlled or out of control, cost effective or expensive, innovative or inertia.
Put simply, weak supplier management will lead to a slow and painful contractual relationship, one that jolts from one crisis call to the next….
Author:
Craig Hill
Managing Director
9th May 2023
Building partnerships with your key supplier relationships is an essential element to not only managing an efficient supply network, but it is the building block of unlocking non contractual value.
At a time of increased uncertainty with uncontrollable inflation, geopolitical tension and commodity shortages, there has never been a more crucial time to reduce the management gap between your company and that of your suppliers.
The Business Case
The investment case for building an effective Supplier Relationship Management approach has always been a tough sell, with CFOs and CEOs demanding solid return on their investments, on a topic that is often mistaken as only delivering a softer set of benefits. Research has found that 50% of SRM programmes fail due to insufficient investment, lack of buy-in and poor planning.
Unless you work in either a small company or have a centralized supply chain team, effective supplier management needs a joined-up approach across your whole organization including all teams that interact with a supplier, not just those working in procurement. Aligning both the internal organization to that of your supplier’s organization and ensuring you have an eco-system of effective relationships all working to the same goal is both time-consuming and demanding.
Given the lack of understanding of the value return of SRM and the amount of effort needed to get it right, you can see why most companies either do not attempt it or fail trying.
Implementing SRM
Before you take a step on your road to implementing SRM you need to tackle the internal and external resistors. These come in various forms but can include an organizations cultural resistance to any change, which can slow adoption to anything new or risky; employee resistance due to a lack of time, skills or understanding to how to build collaborative relationships and an external supplier resistance can often exist if there is shortage of basic trust between both companies.
Once you have tackled the resistors and then gained the full support of your CEO, CFO, and senior leadership team to embark on implementing a more robust approach to supplier management, you then need to decide which suppliers you plan to include. Like the approach of managing risk, contract, and supplier performance, the application of a rigorous supplier relationship management framework should only be applied to your most important suppliers. Not only does this keep costs to a minimum it will also focus your internal teams on where they invest their time and effort.
Segmentation
Most firms have a vast number of suppliers which support the day-to-day running of your company; however not all of these have a material impact on your future success. Choosing the right suppliers by spending time building a segmentation model makes it easier to separate those strategic suppliers from more tactical relationships.
Designing the attributes of an effective segmentation model depends on the sector and organization, but typically includes spend, value, risk, complexity, and innovation. As an example, for financial services which have a strong regulatory environment the need to include risk as a heavily weighted criteria are essential, while the automotive industry may see a supplier’s reputation for R&D and innovation more important in the race for securing new components.
For speed, taking a purely data driven exercise may quickly segment your supplier base, drawing on both internal and external data sources, however it is equally important to take the time to check the results and get buy in from those closest to the relationships to ensure you include the right choice. However, be prepared for challenge and debate, often stakeholders will champion their own suppliers for self-promotion, even if the supplier does not call for full SRM.
An important question to factor in when selecting the right suppliers to actively relationship manage, is “How are we perceived by our supplier?.” For SRM to be a success and invested by both parties it needs to be on the principle of mutual value in the relationship. If your supplier does not see you as an important client, then implementing SRM may face stiff resistance.
Stakeholder Mapping
Fundamentally, SRM is a people led activity and requires two sets of aligned stakeholders to work closely together in a mutually balanced relationship.
Spending time to map out both your organizations and suppliers’ key stakeholders and aligning them appropriately.
A useful starting point is mapping the supplier organization, as typically most firms will have an established strategic account management (SAM) team which will include a lead / global account manager, regional account management and operational leads. Mapping to these individuals the equivalent internal person in your organization and creating a stakeholder plan helps to shape the way both day to day information flow is best designed and creating a hierarchical structure for information flows upwards / downwards which also helps to escalate and deal with problems quickly.
Its also a good idea to appoint an accountable executive to sponsor the overall relationship, an individual with enough seniority in your firm to provide strategic oversight, unblock issues and help guide the teams.
Current State Assessment
Before the team’s race after new value and innovation and focus on the fun stuff, a current state assessment that encompasses an end-to-end review of both the state of the overall relationship, the effectiveness of your contract, risk and performance management and a capability assessment of those responsible for managing the relationship.
At this stage it is essential to identify both gaps and weaknesses and put in plans to fix. Unaddressed, these cracks will widen and erode any aspiration to deliver added value through more advanced SRM activity.
Establish joint goals and a clear interaction framework
Once clear that the fundamentals are in place, the next step is to build a set of measurable goals that both organizations can align on. Once agreed and communicated across both firms, it will set a direction of travel for both leadership teams to concentrate on, supporting future decision making and enabling the creation of a joint vision and strategy.
Often overlooked is the need to create and maintain an interaction framework, which sets out pathways and interface points across each organization. This does not need to cover every point of contact but should have enough detail to document how the teams interact day to day and how they deal with more escalated serious problems throughout the relationship life cycle.
The interaction framework should also set out the broader governance, like how often the leadership teams meet, what meeting agendas need to cover, how and when the supplier will report data.
Make sure it sticks
Making SRM stick is by far the hardest part, left to its own devices the energy levels could fade and inconsistency appear in individuals’ interpretation of how to apply SRM.
Investing upfront in a technology platform to embed SRM is a wise investment, this will enable you to gather essential data, increase visibility across your supplier KPIs and manage your obligations. Without it you will need to resort to excel and lengthy email chains, which given the complexities of certain relationships is never the most effective way of managing things.
Also ensure you actively report progress and achievements to senior sponsors and leadership, apportioning gains (both financial and non-financial) to the SRM activity. If those making funding decisions see the return on investment and true value of a strong supply chain, then you can expect more sustainable support.
Summary
SRM is not a new topic, but at a time of increased economic disruption and seismic supply chain events there has never been a more crucial time to adopt a more robust approach to partnering with your supply chain.
Need help?
At Total Procurement we have experience of designing, building and running large SRM programmes. Contact us for advice.
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