COLLABORATION
Jonathan Hughes and Jeff Weiss
Genuine collaboration with suppliers can add long-term value to a company, but customers' treatment of them as vendors rather than partners and a lack of alignment in the two parties' goals is holding it back, according to a global study carried out by the authors, US-based consultants.
Companies that want to achieve real value from key suppliers, they argue, must be prepared to question their own assumptions about where to focus their efforts and listen to suggestions from suppliers. One possible solution is to broaden supplier access to stakeholders outside the procurement function and take additional steps to improve internal co-ordination.
The major barrier to long-term relationships for buyers is the perceived risk of being dependent on one supplier. But while this was cited by a majority of buy-side respondents, it was rarely cited as a frequent event. A more likely reason is the focus of both procurement and sales functions on short-term targets rather than long-term value.
To develop collaborative supplier relationships, companies need to alter the way they measure and reward performance and put more of an emphasis on joint success. Procurement has a key role to play in making this strategic vision a reality.
INTERVIEW
Mark Adams, Toyota Europe
Toyota's success in Japan is partly the result of a tightly knit group of domestic suppliers and its long-term, collaborative approach to supplier relations, notes Mark Adams, senior general manager of purchasing at Toyota Motor Europe.
The company's approach is to conduct "open-book" negotiations with suppliers and then work closely with them to cut their costs so that both companies make a profit.
But while such an open approach has grown up with Toyota in Japan, it can be more difficult to persuade suppliers in North America and Europe to adopt such a policy. "It's very difficult to expect a supplier to behave in one way for one set of customers and then to completely change character for the way it deals with Toyota," he admits.
The challenge for Toyota in Europe is to develop a collaborative relationship with companies that may only derive small percentages of their revenue from Toyota. "I think we are viewed as a difficult - certainly different - sort of customer with globally benchmarked targets against unfamiliar technical standards," Adams says.
He also explains why Toyota is bucking the trend by not insisting that first-tier suppliers source or manufacture in low-cost countries.
SRM OWNERSHIP
Alan Day
In the battle to develop effective relationships with suppliers, CPOs have to win over not only suppliers themselves but also other functions within their organisations. This challenge is typified by one global supplier executive who was recently overheard telling his team: "If you're talking to procurement, you're talking to the wrong people."
However, running an effective supplier relationship management (SRM) programme can save 3-5 per cent a year, and failing to get to grips with this only allows suppliers to divide and rule.
Procurement should be best placed to take on the "ownership" of SRM, but it has not helped its cause in the past by emphasising its negotiating prowess over post-contract supplier management.
Taking on more established functions for control of the relationship with suppliers can be difficult. Procurement needs to position itself as an executive decision-maker at the heart of the organisation and should start with supplier management frameworks, processes and governance, as well as those supplier relationships over which it has budgetary ownership.
Responsibility for managing supplier relationships isn't just going to fall into your lap. It's time for you to take the lead.
PERFORMANCE MANAGEMENT
Beth Barling
For companies that rely on key supply chain partners, being able to assess performance and identify future trends is vital.
According to research by Aberdeen Group, 85 per cent of companies with a formal assessment programme were able to improve supplier performance. But only half of those surveyed actually had such a programme in place.
The exact type of tools you should use - spreadsheets, ERP packages, e-sourcing applications or specialist performance management software - depends on what you want to use it for and what you already have in place.
It's important to understand why you're measuring suppliers' performance. If you simply want to reduce their prices, you're likely to need very different information than if you want know how effective the company's procurement strategy is.
But it is the interpretation of this data that will help companies to get real business benefits. Breaking the data down into demand forecast accuracy, order fulfillment and cost is perhaps the best way to gain an effective understanding of how efficiently your supply chain is working. The end result should be better visibility into your operations and a better alignment of objectives with your suppliers.
CASE STUDY:P&G
Rick Hughes and Uldis Sipols
When Procter & Gamble (P&G) acquired Gillette in January 2005 it threw up purchasing challenges on a scale rarely seen before, their respective CPOs recall.
At the time, P&G purchasing had embarked on expanding its strategic sourcing reach, while Gillette had already completed a similar process.
But the two companies had different approaches to sourcing, with Gillette conducting three-year "waves" while P&G preferred more of a continuous system. The two firms also had a history of competing for the same suppliers, materials and staff.
The two CPOs united their functions around a common goal of delivering major cost savings to the combined company. New scorecards were developed and a team consisting of key leaders from each organisation was set up.
To get bigger savings faster, it was decided to go beyond the traditional "clean room" model (where sensitive information is shared through a third party) and use a new approach, dubbed "JumpStart", to ensure that supply plans and sourcing strategies were ready to execute on day one of the new company's existence.
More than 80 per cent of Gillette's operations have now been integrated and buyers are working side-by-side on strategic sourcing initiatives.
EXECUTIVE DEBATE
14 panelists, London
In the first of six CPO Agenda Executive Debates in 2007, a panel of British procurement leaders discussed what world-class procurement looks like.
For some participants it could be measured in terms of operational results, while others focused on alignment with the company's overall strategy. But there was agreement that it was impossible to achieve world-class performance unless there was board-level recognition of the contribution procurement could make. Some felt that being world class in one area did more harm than good.
In terms of characteristics, a world-class procurement function needs to put in place clear processes for internal customers to follow, supported by user-friendly software tools. It needs to be able to attract talented people, including from other disciplines, and show leadership in how external relationships are managed. The involvement of internal customers and suppliers in the transformation process is also vital.
As well as cost reduction, being world class can deliver other benefits, including competitive advantage, risk mitigation and a major impact on business performance.
Participants agreed that world-class procurement was a never-ending journey rather than a final destination.
GLOBALISATION
Nick Martindale
When IBM's CPO, John Paterson, announced in October last year that he would be relocating from Somers, New York, to Shenzhen, China, it divided opinion in the procurement world between those who thought it was a logical move and those who saw it as more of a public relations stunt.
However, the IT giant's decision is part of a wider trend where western companies that have key suppliers and customers in Asia are opting to base their heads of procurement in the region. (Nortel and Wal-Mart being two further examples.)
There are other reasons, too - not least the need to develop a new generation of procurement staff from among the local population and to meet the challenges posed by the emergence of Asia as a major market to sell into, as well as to source from.
But some critics argue that relocating the CPO could isolate them from their senior executive colleagues back home, and conclude that most companies are likely to retain their CPOs at head office.
Tim Carroll, vice-president of IBM's global supply chain operations, acknowledges that its move may not be a permanent one: "In the next generation," he says, "it could be somewhere else: to Europe, South America or even Africa."
