SUPPLIER RELATIONSHIP MANAGEMENT
John Henke
Academics and businesspeople generally agree that Toyota sets the standard when it comes to supplier relations, and that companies of all kinds can benefit from a more collaborative approach.
But the latest survey of supplier relationships at North America’s six major automotive manufacturers – taken from confidential responses from tier-1 suppliers – reveals that while the three foreign domestic companies – Toyota, Honda and Nissan – continue to lead the way, things may be slowly changing.
John Henke, who led the annual study, explains how Honda and Toyota supplier relations have been flat for the past four years while General Motors has improved its woeful record to the extent that Ford has replaced it as the poorest performer.
“Two years ago I wouldn’t have believed that this could take place,” says one supplier. “General Motors has done a 180-degree turnaround.”
Engaging in strong relationships enables suppliers to take a longer-term approach that can lead directly to bigger profits for customers, suggests Henke, while there is also evidence to suggest that the cost of goods falls, discounts rise and technology sharing increases in direct proportion to the strength of the OEM-supplier relationship.
INTERVIEW
Bo Andersson, General Motors
In recent years, the world’s biggest auto maker, GM, has been forced to take drastic action to try to turn its ailing fortunes around. Much of that burden has fallen on its global purchasing organisation, led by CPO Bo Andersson.
By 2005 its cost-cutting zeal had pushed supplier relations to rock bottom, according to an annual US survey of auto suppliers. But in the past two years they have shown a dramatic improvement. Why?
Against a backdrop of rising raw material and energy costs, Andersson launched an initiative to improve GM’s performance in softer areas such as communication, teamwork, visiting suppliers’ plants and helping them to resolve issues and cut costs.
He sees this as a “long march”, rather than a short-term fix, and says it is based on the idea that “the deeper you work with the supply base, the more transparency you have, the better results you will get”. Reducing complexity by using more standardised parts and solutions is a key focus.
Practical steps include inviting all 1,000 buyers to join regular conference calls with top suppliers, strengthening ties between purchasing and engineering, celebrating outstanding performance by suppliers, and encouraging them to take concerns straight to the senior executive level.
SUPPLIER RELATIONSHIP MANAGEMENT
Jon Hughes and Lars Mikkelsen
Maximising value in buyer-supplier interactions is the holy grail of modern procurement. The challenge, argue Jon Hughes and Lars Mikkelsen, is applying a different relationship and behavioural model in areas where value is potentially greatest. This is not a naive or soft option, but it does involve a more balanced approach and a readiness to explore shared benefits.
The authors advocate a segmentation approach to identify suppliers that are capable of creating value far greater than mere performance to contract and conventional performance improvement – what they term “breakthrough value”. Dealing with these suppliers requires strategic negotiating behaviour.
Traditional negotiation skills training, books and materials generally fail to differentiate tactical from strategic negotiation. The latter requires a degree of empathy to fully understand the motives and key interests of the other party and to integrate these into your own goals.
Four elements of effective strategic negotiation are:
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agreeing a joint agenda and relationship protocols;
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framing principles and mutual options;
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applying and objectively testing principles;
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agreeing a governance and performance framework.
CASE STUDY: FIRMENICH
Tim Tolhurst and Giuseppe Conti
Three years ago the authors joined Geneva-based manufacturer Firmenich to transform its purchasing organisation. In this article they draw on their experiences to advise new CPOs on managing change and overcoming stakeholder resistance.
They argue that there are four critical success factors. The first is top management sponsorship , where the key is to negotiate the scope prior to accepting the job and ensure you will have sufficient resources to achieve major results. The second factor is organisational structure . A centre-led function is preferred, but the first challenge is to build a balanced team and avoid the temptation to “over staff” or use consultants for too long.
Factor three is purchasing team capabilities . Competency models, joint sessions with sales and best practices exchanges are all useful, but care should be taken with e-learning. The final factor is integration with the business . A good first move for a new leader is to personally manage a project to get some early wins, but they must be careful not to get bogged down in operational projects. Establishing a relationship of trust with “active opposers” and not applying a one-size-fits-all approach to senior stakeholders are also essential.
COMMODITY PRICES
Nick Martindale
Global economic growth, freak weather events and the impact of the artificially created biofuel market have sent some commodity prices soaring to levels not seen since the 1980s. Research suggests they will remain at these levels until the next decade.
Yet many organisations do not attempt to manage such price rises, despite the fact that doing so can save money, create an advantage over the competition and boost the credibility of a company’s stock market rating.
By understanding the reasons behind the price increases, CPOs can have a better idea of whether and when to fix prices and better arm themselves for discussions with suppliers, disputing rises if need be.
But they can also use this as an opportunity to make themselves more efficient by reducing waste, modifying specifications and even developing their own sources of supply. Any remaining risk can be hedged on the financial markets, giving the company price security but at a price.
The CPO has a key role to play in settling on the right level of risk in an environment where the emphasis has shifted from cost-cutting to security of supply. But the fundamental principle of procurement – to buy better than the market – remains the same.
PEOPLE MANAGEMENT
Nicolas Reinecke
Purchasing performance depends directly on the quality of staff: how talented and motivated they are and the degree to which their activities are aligned with corporate strategic goals, according to a global survey by McKinsey and the Supply Management Institute. This is not a chance occurrence but the result of deliberate decisions by an organisation and its CPO.
The right organisational structure is essential, and 69 per cent of the highest performers have centralised purchasing. These companies also have more strategic personnel per $ billion of spend, staff have broader experience outside purchasing and they receive more tailored training.
CPOs at high-performing companies are also better at fostering an entrepreneurial mindset: articulating a clear vision, building a culture of innovation and instilling a relentless focus on execution. As a result, their departments are much more involved in the concept phase of product development, interact more with manufacturing, sales and marketing and are twice as likely to be involved in M&A due diligence work.
Top CPOs also develop a positive and relevant rationale for change, choose appropriate role models to pioneer new approaches and remove structural barriers to change.
EXECUTIVE DEBATE
12 panellists, Paris
To discuss how the profession is likely to develop during the next decade, CPO Agenda invited a group of French procurement leaders to Paris. The roundtable started by looking at more immediate challenges facing participants. These included coping with volatile raw material prices, securing supply and quality, fixing processes and managing working capital.
The debate then moved on to consider medium to long-term challenges. Claire Brabec-Lagrange of Thales cited being involved earlier with sales teams at the bid stage – becoming business partners – and upskilling purchasing staff. These views were shared by David Chambeaud of Thomson, who also saw a facilitation role between operations and R&D and, in a complex and competitive environment, the need for sourcing to be an “activist” function and to outsource non-core activities.
Several participants talked about risk management and capturing innovation from the supply base. Xavier Cassignol of manufacturer FCI foresaw a time when purchasing’s objectives had little to do with cost and were “mostly about how many alliances, how many partnerships, how many joint ventures have you built and how deep are they with your suppliers?”
PERFORMANCE MANAGEMENT
Mickey North Rizza
In a world of global supply chains, profitable, timely and reliable responses to customer demand are critical to business success. According to studies by AMR Research, companies that excel in their use of a Demand Driven Supply Network (DDSN) model, such as Nokia, Apple, IBM and Toyota, are three times more efficient in their use of assets, enjoy 50 per cent stronger growth and are two times more profitable than their peers.
The transformation to a DDSN is a multi-year journey, writes AMR’s Mickey North Rizza. It requires companies to align their business strategies to demand signals and measure themselves effectively both internally and externally across their entire value chain. Supplier performance measurement and management is the key to achieving this. Scorecards to track performance differ by business strategy and industry, but the key is to define the intended result and then drive the desired supplier behaviour.
Recent research shows that many customers and their suppliers are not using this tool effectively. It is often seen as an irrelevant, check-in-the-box process. However, those that are using it to beneficial effect cited in the article include an aerospace and defence firm, a US retailer, and telecoms and high-tech companies.
