Very few companies manage strategic supplier relationships well, but many have now started on this journey and good practices are beginning to emerge. That was the overall message that came out of a fascinating conference on the subject organised by DILF, the Danish Purchasing and Logistics Forum, in Copenhagen at the beginning of this month.
Top-class speakers from both the US and Europe – many of them contributors to CPO Agenda – spent two days sharing their experiences, explaining their research, outlining their models and processes, and arguing their point of view in front of an audience of more than 100 Scandinavian procurement professionals.
Not that these participants needed convincing about the importance of strategic supplier relationship management (SRM) – as a show of hands at the start of day one illustrated. Rather, what the conference aimed to do was sharpen their thinking and equip them to both make the case for SRM more effectively within their organisations and to begin to capture the significant value to be gained from closer co-operation with key suppliers.
The long-term perspective – and, crucially, behaviour – that strategic SRM demands is likely to be sorely tested as the fallout from the global financial crisis spills over into wider economy during the coming weeks and months. Nevertheless, the mood at the conference suggested that while individual programmes may be slowed or stalled, the search for competitive advantage means that these are likely to be temporary diversions on an unstoppable journey.
After all, as conference chair Jon Hughes, executive chairman of consultancy Future Purchasing, noted in his opening remarks, the purpose of SRM is not only to secure innovation and top-line growth, but also jointly to seek ways to eliminate cost, waste, risk and inefficiency from supply chains – precisely what many companies will need to do in the difficult times ahead.
Here, then, is my take on 10 key messages that came out of the event:
1. ‘A matter of belief’ rather than solid KPIs
“It’s fiscally irresponsible not to develop good supplier relations,” declared John Henke, president of specialist US consultancy Planning Perspectives and a professor of marketing at Oakland University in Michigan. “There’s a lot of money to be made.”
Henke is currently working on research that aims to prove its economic impact in the US car industry. At the conference he shared some early analysis of Toyota, which suggested that 14 per cent of its revenue, 33 per cent of its profit and 56 per cent of its profit per vehicle could be directly attributed to the high level of trust it enjoyed among its suppliers rather than its own skills, people, processes and manufacturing capabilities.
In the meantime, however, the quantification of value continues to be challenging for CPOs. “Maybe we can’t do a business case to take to management,” noted Claus Pejstrup, vice-president of global procurement at Lego, the iconic Danish toymaker.
“We don’t have a lot of KPIs [key performance indicators] that tell us we have improved value by X per cent.”
He argued instead that SRM was “a matter of belief” that was vital for procurement to “fulfil its mission”.
Lego’s procurement team had played a key role in helping the company to survive financially during 2004-05 through its focus on getting savings to the bottom line. But as its attention turned to growth, “we were potentially yesterday’s heroes”, Pejstrup said.
It was a similar story at Diageo, the world’s biggest alcoholic drinks company, according to Oliver Cock, its head of European procurement. While the procurement function had been “pretty successful”, delivering 10-12 per cent savings year on year, the company’s strategy now meant that value had to be defined more broadly. There was “a belief we could do more”, he said.
2. Seek to create value quickly
Despite difficulties in measuring the financial impact of SRM, and the fact that many of its fruits were likely to be harvested in the longer term, several speakers stressed the importance of proving to business colleagues that value – whether in the form of security of supply, better quality or assuring brand reputation – could be delivered quickly.
Jonathan Hughes, who leads the sourcing practice at another US relationship management consultancy, Vantage Partners, argued that unless SRM programmes were seen to create real value, they wouldn’t survive a change of senior management personnel, whether at the CPO or CEO level.
“If you’re not Toyota or Honda, the probability is that it will crash and burn,” added John Henke.
3. Concentrate your focus and your resources
Given the amount of time and effort required to build strategic relationships, an essential first step was to decide which suppliers to focus attention on.
“Segmentation is very important,” said Henke, but he noted that companies often took different approaches.
For example, while Toyota segmented its supply base according to the size of its spend, at Honda the critical factor was how much help a supplier needed to improve its processes and capabilities.
Of Lego’s 140 suppliers of direct materials, just 2 per cent were considered to be “critical relationships”, with a further 10 per cent classed as “selected collaborative relationships”, and these two groups were the focus of its two-year-old SRM programme.
“I want to be personally engaged in all of these development plans,” said Pejstrup. That meant focusing on just 10-15 suppliers.
4. New people and processes are required
“You cannot take a procurement person who’s been squeezing suppliers for the past 20 years and make him collaborative,” declared Christian Verstraete, chief technology officer at Hewlett-Packard in Belgium and co-author of the book Collaborative Sourcing.
Lars Mikkelsen, programme director at DILF, said psychological profiling of 3,500 buyers using the “DiSC” model had found that 83 per cent exhibited “D” behaviour – that is to say, they were sceptical, wanted to control their environment and were power-orientated. When it came to suppliers, he said, their instincts were to give them “a serious beating”.
At Diageo, Oliver Cock admitted that “we had used our baseball bat to great effect over a number of years, and we had used it consciously”. But the different agenda meant that “some people we’ve tactically moved” because they couldn’t do SRM. “It’s a very different skillset.”
Earlier this year, Diageo split its procurement function into tactical and strategic arms, with a separate team focused on sourcing innovation. It also revised its approach to sourcing to create what is known internally as “The Loop” – an intranet-based twin-track process that adds an SRM dimension alongside traditional category management.
“Our category management process was a good tool,” Cock explained, “but it had its limitations and those were primarily around supplier relationship management.”
5. Develop better internal alignment
“Lack of alignment between business functions internally is a huge barrier to greater collaboration with suppliers,” said Jonathan Hughes in his lead-off presentation. Procurement couldn’t design an SRM programme alone; it had to talk to stakeholders to find out what they were already doing and work with them to implement and improve on it.
His namesake, Jon Hughes, argued that there was a need to link together SRM, CRM (customer relationship management) and IRM (internal relationship management). Changing people’s attitudes within the organisation to achieve this was a significant challenge, he said, and one that “calls for very high levels of persuasion skills”.
Lego’s Claus Pejstrup described SRM as “reverse key account management (KAM)” and noted that on the sales side this methodology had been widely used for a number of years. KAM methods had helped Lego to dramatically improve a once poor relationship with Wal-Mart, its biggest customer, he said.
Procurement people had much to learn from their sales colleagues about how to conduct meetings in a more professional and structured way, for example. Pejstrup told the audience he had been using a sales-orientated training provider to help his staff develop their stakeholder and relationship management skills and that this had been “a tremendous multiplier to our process”.
6. Trust is essential, but takes time to build
Verstraete made the point that “building collaborative relationships with existing suppliers takes time”.
Sharing information was a good first step in developing trust, he said. One way HP had done this was through a weekly teleconference with suppliers to explain changes to demand forecasts, for example. But it had taken a year of doing this before improvement ideas began to flow.
Henke said Toyota and Honda were particularly good at sharing data, but noted that “they don’t tell suppliers one bit of information more than they think they need to do a good job”. Research evidence from US automotive suppliers showed that there was a direct relationship between trust and innovation, but also with suppliers’ willingness to lower their pricing when the customer was under cost pressure.
Lars Mikkelsen argued that many in the procurement community struggled with the concept of trust, fearing “that suppliers will cheat us, take advantage of us”. This mindset had to change, he said. “Trusting too much is a limited risk, in my view, because we learn from our mistakes. The biggest risk is not trusting enough.”
“Sometimes you have to take a leap of faith,” agreed Oliver Cock. He gave the example of an Italian buyer at Diageo who consistently got the best cost, service and capacity from his suppliers. When asked how he did it “he said ‘it’s all about trust. I look them in the eye’”.
Empathy, respect and candour were three vital ingredients in building trust. But a surefire way of destroying it was not paying your bills on time.
7. Individual behaviour matters
“It’s not so much what you do, but how you do it,” observed Jon Hughes. Change management focused on individuals’ behaviour was therefore essential.
“A lot of companies fall down in that they aren’t able to translate SRM concepts into how people do their jobs every day,” said Jonathan Hughes.
Mikkelsen used the analogy of marriage to argue that buyers needed to be careful about using the threat of substitution, whether veiled or not, to govern relationships with key suppliers. “We don’t tell our wife ‘I’m going down to the disco to see if you are still competitive. I may or may not be back, don’t wait up!’,” he said. “Well, we shouldn’t do that in business either.”
He noted that there was a tendency for the quality of long-term relationships to deteriorate over time because people didn’t “pay attention to each other”. Leaving relationships to operate on “auto pilot” was dangerous.
Buyers, said Haidé Villuendas, global cost reduction director of Danone’s baby and medical nutrition division, needed to display constant openness in their dealings with suppliers. They needed to be prepared to “show their emotional side” and “show they care”.
8. Listen to suppliers’ ideas
All too often, suppliers believed that their ideas for improvement, whether of the incremental or breakthrough kind, simply got lost in a customer’s “black box”, said Jonathan Hughes. This increased the likelihood that they would either stop putting ideas forward or, worse still, give their best ones to your competitors instead.
He gave the example of an aerospace company facing a cashflow crisis that was good at squeezing suppliers’ margins but poor at listening to their ideas. Only when senior executives went to talk to them to ask for their help did they discover that good ideas for reducing costs had been suggested in the past but not acted upon.
And when companies did listen to suppliers’ ideas, they had to be careful about trying to claim ownership of them through the contract, Hughes added.
9. Work hard to be an attractive customer
“Just because we are big does not mean we are attractive,” noted Mikkelsen. And yet being seen by suppliers as a good customer was increasingly vital in a world characterised by supply shortages and capacity constraints.
A perfect example of this was offered by Haidé Villuendas. The recent deaths of several babies in China from contaminated milk powder meant that local producers were likely to start sourcing from the same suppliers used by Danone, increasing demand and making it essential that the company was seen as a preferred customer, she said.
As part of its “Partners for Growth” initiative, Danone used a confidential, internet-based questionnaire to find out how the company was perceived by key suppliers. A similar exercise took place twice a year at HP as part of its strategic supplier scorecard, explained Christian Verstraete. Suppliers were asked to detail how HP could be a better customer at both the operational and strategic levels.
10. Consult suppliers, share the benefits
Despite the obvious benefits of asking suppliers for their views, “very few companies when building their SRM programmes go out and talk to suppliers and ask for their input and advice,” said Jonathan Hughes. “That is critical, in my view.”
Joint processes, joint metrics and joint benefits were all essential ingredients in a successful collaborative relationship, he suggested.
“You may have the most wonderful [SRM] process, but if your suppliers don’t feel engaged it’s not going to work,” argued Villuendas. Awards dinners, where top suppliers could meet and discuss issues with senior executives and be recognised for their service, were good, she said, but they were “once a year” – and therefore could only be part of the answer.
When asked, during a question-and-answer session, about Lego’s approach, Claus Pejstrup admitted that his team had not directly sought suppliers’ input, despite the “supplier perspective” and the attractiveness of Lego’s business being one of the three dimensions it considered when identifying its most strategic suppliers.
Benefits were also not explicitly shared with suppliers, although he believed they had “indirectly benefited” – for example, in the area of logistics and vendor-managed inventory. “We don’t have gainsharing,” said Pejstrup. “Perhaps we should.”
