PERFORMANCE MANAGEMENT
Jonathan Hughes
If you want more from your suppliers, you need to change the way you measure their performance. While metrics cannot in and of themselves transform relationships, they play an important role in determining the way a company works with its suppliers and, in turn, the value it derives from them.
At many companies, however, performance monitoring has become an end in itself. Huge amounts of time are invested in gathering data to fill reports that, ultimately, deliver little in the way of insight. Faced with an overload of more easily obtainable and largely operational metrics (costs, parts per million defects rates, response times, and so on) managers overlook more challenging areas, such as the quality of relationships with suppliers.
While there is no ideal set of generic metrics, the author proposes a balanced scorecard that takes a broader view of supplier performance, taking in not only operational performance, but also strategic and financial value, and relationship quality – “how we are working together” rather than “what we do”.
Examples of the former include the degree of trust and mutual understanding, and the number of cross-company staff rotations.
CUSTOMER ATTRACTION
Carlos Cordon and Tom Vollmann
Hard-hitting price negotiations of the sort made famous in the automotive industry often sit uncomfortably with collaborative partnerships with key suppliers. In a competitive marketplace, companies such as Ford have stated their aim of becoming a “customer of choice” to benefit first from supplier innovations. The dilemma for many, though, is how to become attractive to suppliers without paying higher prices.
Based on their research into relationships between food and beverage companies and their packaging suppliers, Carlos Cordon and Tom Vollmann – professors at the IMD business school in Switzerland – explore what makes customers attractive to suppliers, and vice-versa. For suppliers, they argue, the “expected value” of a relationship and the “comfort” it feels in securing this value are powerful factors. A supplier can rate a customer differently on these than the latter’s own purchasing managers.
While “alignment” of goals might appear to be a solution, it is almost impossible to achieve, because an initiative that is positive for one party may be disruptive for the other. So managing misalignment is one of the 10 “golden rules” for fostering customer-supplier attraction.
PUBLIC-PRIVATE PARTNERSHIPS
Andy Davies
Recent research into public-private partnerships (PPPs) in UK local government suggests what many contract managers have suspected for years – negotiating hefty outsourcing contracts at great cost in time and legal fees does not guarantee success. The research indicates that partnerships run on trust and governed by lighter contract documents work better.
Government-promoted PPPs in frontline services such as social care, education and waste management have presented fertile opportunities for the private sector to complement those in back-office, financial and support activities such as IT. Some have enabled significant and accelerated investment in public infrastructure.
The research examined six partnerships from both sides and the forces that act to bring them together (eg, community pressure for better services) or pull them apart (eg, a clash of cultures). It identifies the practices and behaviours that influence the success of partnerships as measured against expectations.
From this, 10 practical recommendations are made, aimed at increasing the likelihood of success, and which are capable of implementation by council procurement teams and their private-sector partners.
COLLABORATION
Andrew Cox
Like partnering, “win-win” is a term that is now so overused that it is in danger of becoming meaningless, argues Professor Cox. More fundamentally, the notion that buyers and suppliers can both achieve their ideal outcomes simultaneously is simply not feasible, because commercial exchange is by its very nature contested.
While it is normal for buyers to believe that both parties need to benefit from a long-term collaborative relationship, the important point is just how much each receives from it. Full win-win is, in fact, only one of nine theoretical outcomes, ranging from lose-lose, through to win-lose and win-partial win in favour of either side.
Using four case studies – covering telecommunications and IT, professional design services, capacitor supply and drilling rig sourcing – the author seeks to show how these different outcomes can be played out in practice. The bottom line is that uncritical and unthinking acceptance of the “win-win” concept by buyers is likely to result in suppliers taking advantage of their naivety.
Five steps are suggested that buyers should consider when entering long-term relationships to ensure that they avoid ending up on the losing side.
PROFESSIONAL SERVICES
Raju Patel
A large multinational company may spend up to £800 million a year on professional services. A cut of 10-20 per cent in rates, therefore, has the potential to deliver massive savings and grab the board’s attention. Face-to-face interviews conducted by the author with 30 chairmen, CEOs and other board executives found that most worry about how their companies buy these services and want their procurement functions to be involved.
However, only a quarter believe procurement is doing a good job. Many believe it is poorly prepared and prone to unnecessarily upsetting key relationships with consultants, bankers, lawyers and marketing agencies. To avoid this perception and deliver impressive results, CPOs first need to understand the often very personal and long-standing relationships board directors have with companies such as McKinsey and Goldman Sachs, as well as the political games that are played at board level.
Using an adapted version of the “chasm theory”, Patel then identifies the three “cracks” that even the most savvy of CPOs can unwittingly fall into during the five phases typically associated with a professional services strategic sourcing initiative, and offers suggestions on how they can avoid this fate.
POST-MERGER INTEGRATION
Interview: Patrick Le Laouenan
In August 2004, Sanofi-Synthélabo took over Aventis to become the world’s third-largest pharmaceutical group and top in Europe. A year on, its Paris-based CPO, Patrick Le Laouenan, talks about the different purchasing philosophies and practices in the two companies and the steps that have been taken to fuse them together.
While Sanofi was decentralised and “upstream” orientated – with a big emphasis on early involvement in sourcing projects – Aventis, he says, was more centralised and focused “downstream” on processes and systems, such as e-procurement. This manifested itself in different definitions of purchasing’s spend coverage.
Simplifying Aventis’s structure and organisation has been an early priority, with multi-functional “spend teams” abolished and “zone managers” appointed to help translate head-office policies into action by buyers locally. The primary objectives are achieving synergy savings of around €400 million by 2006 and increasing coverage by 10 percentage points, primarily in clinical trials and marketing.
Post-merger, says Le Laouenan, the most important things are acting quickly to sustain momentum and accepting that you do not have a monopoly on best practice.
SPEND ANALYSIS
Malcolm Wheatley
Despite spend analysis being pivotal to effective procurement, all too often in practice it is “plagued with functional silos, ad-hoc management, weak technology support and poor source data quality”, according to analysts AMR Research. More than a third of companies have no visibility into over half of their spend, it reckons.
Spend analysis projects have been under way for more than 20 years, yet it is only relatively recently that technology has begun to convert a time-consuming, manual and static process into a more real-time and useful one. Nevertheless, the challenges of gathering data in the first place, “cleaning” it, reconciling different product codes and handling feeds from multiple ERP systems remain.
Three technology solutions have emerged in the market: first, those of data analysis specialists, such as SAS, Zycus and Kalido, which have moved into the procurement space; second, “master data management” of the sort advocated by SAP, which seeks to build quality data into the fabric of the enterprise system; and third, solutions offered by procurement vendors such as Ariba and Emptoris, which have been acquiring niche spend analysis firms in the past couple of years.
BEST PRACTICE
Mike Lewis and Elmer Bakker
Stories and storytelling are as common in organisational life as they are elsewhere, providing sources of information that shape both our perceptions and our behaviour. But while some stories offer valuable insights, others can be misleading and potentially damaging. Understanding how stories are used – and abused – is vital if procurement functions are to benefit from the former and avoid the latter.
Using the “tipping point” theory developed by Malcolm Gladwell, the authors analyse why certain stories become particularly influential, while others fail to take hold. The three key ingredients are: first, the involvement of people who by virtue of their personality, position and network “spread the word”; second, “stickiness” – a factor that is aided by simple messages that resonate with people’s own experiences and are widely repeated; and third, the context in which a story takes place.
To illustrate this theory, Lewis and Bakker – academics at the University of Bath in the UK – discuss briefly the “lean production” revolution inspired by the well-known book, The Machine That Changed the World. They conclude with a checklist of key points to remember when listening to business stories.
