Every organisation has between five and 50 strategic suppliers. Unlocking the
value in these relationships calls for sophisticated influencing strategies
by Jon Hughes, Mark Webb and Marc Day
The overwhelming majority of procurement leaders have little interest in navel gazing about their role and purpose. They are busy reshaping procurement into a more entrepreneurial and business-aligned activity, where the full value of strategic suppliers is inextricably linked to financial performance, operational excellence and sustainable growth.
Our assertion is that procurement success and the impact of strategic supplier management is in direct proportion to the quality of leadership and people at your disposal. This is an enterprise-wide issue and is the key factor in successful performance. It is also closely related to the career development of CPOs: building high-performing teams provides a stepping stone into executive management.
Importance of strategic suppliers
Although strategic suppliers are, by definition, vital to business success, few organisations have sufficiently well-developed operating models, process structures, tools, techniques and team strength to maximise the value available. Here are some examples to illustrate the opportunity, and also potential risks of neglecting this area:
- US consumer goods company targets suppliers for 50 per cent-plus of its future product innovation.
- German turnaround executive team drives financial improvement by at least one quartile on shareholder value metrics against competitors. Three-quarters of sales turnover is third-party spending.
- Anglo-American pharmaceutical company focuses on securing molecules and new chemical entities from biotechnology partners while maximising R&D productivity.
- Asia-Pacific retail bank sets up a governance and investment structure for sole access to $1 billion of proprietary technology.
- UK government department commissions a new supply chain and invests £10 billion with providers to deliver stated policy outcomes at a time of budget cuts.
- European marketing services leader not in control of its €6 billion advertising production supply chain.
- Offshoring to India a complete business process with considerable impact on 750,000 customers.
All of these scenarios will result in a high level of dependency on strategic suppliers. The issue is not that potential risk is higher (it is), but how well it is managed, and how competent business executives and major project leaders are in appropriately balancing risk with return.
SRM as a business tool
These scenarios demonstrate an explicit link between the value that can be obtained from strategic suppliers and superior business, financial and service performance. The requirement is to unlock that value across end-to-end relationships.
Because of the large numbers of suppliers involved, there is a need to allocate the best resources to the areas of greatest opportunity. Prioritisation and executive attention can then focus on to the five to 50 strategic suppliers that are the major multipliers of value. This makes SRM a business tool, owned and led by very senior staff with the most able members of the procurement community.
Segmenting relationships and value
As figure 1 shows, there are simple ways of segmenting suppliers against strategic impact and operational criticality. The terms used to describe these suppliers may vary, but the segmentation principle is one element of SRM best practice.
Exactly the same segmentation can be applied to leading executives from the board down. This approach produces an extremely interesting map of important internal and external stakeholders. Affecting the bottom of the two pyramids is a straightforward, day-to-day, operational procurement task, and is not a strong test of influencing and engagement skills. But as you work higher up the two pyramids, you enter the heartland of the procurement influencing zone, where relationships are invariably controlled by top executives, heads of functional groups, general managers, senior project leaders and major budget holders.
All of these groups are controllers and gatekeepers of value, and define it in very different ways. Procurement leaders who want to be central to this agenda have to connect fundamentally to those definitions, and talk the business language appropriate to them. An acid test is the extra value that can then be released by their embracing strategic supplier management. A further test is the way in which the business then measures, incentivises and rewards against a defined value framework, going way beyond purchase price variance and cost savings. Some examples:
- Financial performance. For example, cost to income ratios; cost of goods sold; margin improvement; fixed to variable cost ratios; earnings before interest, taxes, depreciation and amortisation (ebitda); cash flow; weighted average cost of capital; return on invested capital.
- Business growth. For example, innovation pipeline; speed of customer responsiveness; revenue from new products; entry into new markets and geographies; brand equity; ethical sourcing; reputation management and CSR indices.
- Operational excellence. For example, product and service quality improvement; agility, resilience and reliability of supply chains; complexity and stock-keeping unit reduction; derisking on major projects; streamlining, overhauling and simplifying manufacturing operations and processes.
IRM meets SRM
Internal relationship management, therefore, is absolutely central to the maximisation of external SRM. The checklist helps to test your influence. It may look simple, but it is not simplistic. Procurement success is defined by the strength of the internal relationships and the quality of the external ones. The confidence to operate at a higher level, to interact with C-level executives and to be capable of initiating and shaping multiple agendas involving strategic suppliers calls for leadership and influencing strategies of a high order. Here are a number of pointers to success:
- Identify the pivotal roles in your procurement organisation and invest in high-potential individuals. The internal stakeholder view depends heavily on the individuals in front of them at any point in the influencing cycle.
- Recognise the power of influencing networks. Work out how to connect with large numbers of dispersed but powerful stakeholders whose decisions affect strategic suppliers. Foster positive relationships with them. Share best practice. Set up forums and high-impact events involving top executives of strategic suppliers.
- Closely align with the internal structures of power. Build influential bridges with top executive groups, managing boards, operating councils and wherever decision-making is exercised. Claim your share of voice. Determine the interventions that open their eyes to strategic supplier value.
- Influence the correct interpretation of supplier value. Reshape out-of-date perceptions that stakeholders may have of procurement and supplier activity. Develop a more value-generative interpretation of procurement’s contribution. Develop the organisation so that it opens up to the full potential of supply market opportunities.
- Highlight incremental and breakthrough value added. There has to be a significantly substantial benefits case, as defined by the stakeholder value framework, to justify the necessary investment in people and processes in SRM.
- Produce a human resources and talent management strategy that builds a stronger talent pool around SRM project leaders. It is vital to attract the right calibre of staff. Securing that investment is probably the real test of your influencing skill.
Strategic supplier management is about performance and capability. Excellence in this area is strongly linked to superior business and organisational performance. The huge scope for maximising value depends heavily on leadership quality, influencing strategies and the ability to connect with the business agenda of top executives.
Benchmark your performance
A major global benchmarking study has been launched at www.futurepurchasing.com/srmsurvey.html, in conjunction with CPO Agenda. The intention is to examine these opportunities in greater detail, and your participation in the study is both invited and warmly appreciated.
Test your influence
1. What makes a supplier strategic to your organisation?
2. How is such strategic value defined?
3. Is there a plan to maximise that supplier value?
4. How involved is procurement in shaping such a business plan?
5. How many strategic suppliers are there in total?
6. Who ‘owns’ each strategic supplier relationship?
7. What level of influence does procurement have on each owner?
8. Is there a defined relationship strategy for each supplier?
9. How involved is procurement in implementing each strategy?
10. What increase in resources have you secured to do this?
Jon Hughes (ejhughes@futurepurchasing.com) is executive chairman and Mark Webb is chief executive of Future Purchasing; Marc Day is associate professor of operations management at Henley Management College in the UK
