enrich white paper how to maximise mutual benefits supplier relationship management

7/24/2019 Enrich White Paper How to Maximise Mutual Benefits Supplier Relationship Management

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2014 Enrich LLC. All rights reserved.

How to maximise mutual

benefits: Supplier Relationship

Management (SRM)


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Supplier Relationship Management is a philosophy and a process that seeks to

maximise benefit between contracting parties and manage risk in the supply chain.

It requires all the parties to enter the process with an open and mature outlook and

also requires buy-in from the stakeholders on both sides of the contract.If the above positions are clear and understood then the environment is right to

commence a Relationship Management programme.

Executive Summary


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I would suggest that SRM is best defined as The management of the relationship

to maximise mutual benefit for both Parties and it is in this context that this

White Paper is written.

Now, this definition and the sentiment that underpins it are rarely fully

appreciated or understood. In itself the definition presupposes a maturity of the

relationship that might not actually exist. In such cases, where that maturity is

absent, SRM will not be successful; in these cases relationships could take the

form of a dominant customer managing a supplier in a narrow context, usually

price, or vice versa.

An SRM programme is a philosophy and a process embracing the following:

Alignment of procurement and the business in the requirements of a

supply Innovation in products or services

Provision of the environment for growth in other categories that a supplier

might also offer

The dynamic creation of value for both parties

The management of risk in the supply chain, local and global

The achievement of such aspirations requires that:

Procurement is aligned with the business stakeholders

There is a well-managed sourcing programme and process There is like mindedness at the supplier: solutions not problems

There is a robust Supply Chain Risk Management process

A risk share approach to problems

There is a mechanism to track performance to feed into the review and

sourcing programmes

Introduction

We expect to achieve value over time from a sourcing process. Invariably therecan be changes which could simply be passage of time and change of people, or

The Chartered Ins ti tute

of Purchasing and Supp ly

(CIPS) sugg ests t hat 75%

of sourc ing sav ings can

disappear in th e f i rst 18

months wi thout r igorous

con tract management.(1)

Why establish an SRM Programme

Change of people, or change of control of a supplier.

In any event benefit erodes over time and when the

business is screaming about performance, what

usually happens? You retender! (see Figure 1).

There is always a danger that tendering is seen

as the panacea to the poor or ineffective

management of a supplier: this is a naive belief

as prices can go up as well as down.

The expectation is that we should again achieve

benefit over time from the retender process.


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So where do you start? Which suppliers should you

include in the SRM programme?

SRM can have a considerable payload so the implementation of such a programme

is best phased and my suggestion is that you initially target your high risk

suppliers. The process of identification of such suppliers is sometimes referred to

as Supplier Segmentation.

To begin the process I suggest that we start with a simple supplier Spend and Risk

matrix. Risk should be considered in terms of impact on Day of Operations. Keep it

simple to start: no doctorates in the definition of risk at this stage; I have seen

organisations become paralysed in their machinations on how to define risk, use a

simple 1-10 rate for the purpose of the exercise. Once this exercise is completed

you should also consider impact on revenue/profit in order to achieve a full

picture. For instance: consider the toilet manufacturer for an aircraft. In the

aviation scheme of things a toilet might be considered as low value; however canyou fly without a toilet? Well Yes, but not with 200 people on board. With an

aircraft scheduled to fly say three rotations a day the toilet impact on profit could

be considerable. Consider impact not just spend.

As is demonstrated in the below diagram, lost benefit can be substantial to say

nothing of the costs of change and the costs of running another procurement

which can be lengthy processes.

Figure 1: Benefit lost over time when SRM is not practiced

Much is written about the management of relationships and much of this centres

on the power of buyers versus the power of suppliers. But in reality how do these

power bases actually manifest themselves? Well, as mentioned before, the

relationship can take the form of a dominant customer managing a supplier in a

narrow context, usually price and vice versa.

More enlightened organisations will view spend as an asset and manage it

accordingly to extract maximum value.


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Behaviour of Suppliers: Driving your procurement

decision

This process will help identify the suppliers with whom you want to explore

deeper relationships and will be candidates for the Supplier Relationship

Management Programme (see Figure 2).

SRM is a journey and its implementation is best through a phased approach. Dont

try to boil the ocean. Consider why you are implementing the programme and

this may well influence the scope across the supplier base. Define your rules of

engagement and the desired behaviours and outcomes by Kraljic quadrant. Ensure

alignment with stakeholders as it will not work without their buy-in. As the SRM

programme matures, insights gained should be fed into the sourcing process so

that right minded suppliers are selected first time.

Figure 2: Target High Risk Spend for SRM

Many large enterprises have sophisticated intelligence gathering networks which

plug into your organisation at various levels and which, when well honed, will

glean information which will be analysed to determine their sales strategy. Thesestrategies are designed to drive yourdecision in terms of award, as a minimum.

Unfortunately, few procurement functions have control of the communications

network within their own organisation with such suppliers and consequently lose

considerable leverage. This can be hugely costly and is difficult to measure. It can

happen through the unguarded conversations of stakeholders during the sourcing

process.

When major purchasing campaigns are being run, the sales organisation of the

supplier will, among other things, plot the executives of your organisation on an

Influence & Affinity chart. Needless-to-say there may be varying hospitality

packages aimed at the various quadrants in order to move those decision makers

into the top right hand quadrant, if not already there.


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Where there is an acquisition, and especially in the case of VC ownership, the

usual letter referring to the Change of Control clause (if there is one) in your

contract (if there is one) will arrive and will usually be from the nice existingmanagement seeking a continuance of relations and the relationship. Few

Procurement organisations reserve the right at this point to determine an answer

six months into the new management of the account. Yet this is imperative given

the behaviour of organisations such as VCs and especially in large contracts. Any

promised investment by the former management should be well documented and

the deliverables very clearly defined otherwise value will disappear out the

backend and not into the product or service being purchased.

Organisations that fail to track changes agreed with suppliers, during formal or

informal operational reviews, in contract side letters will suffer in any change ofcontrol of the supplier.

Properly organised Supplier Relationship Management programmes will pick up

any diminution of quality in service or product and will provide the Early Warning

System that such detrimental activity is occurring and thereby alerting

Procurement to proactively challenge such behaviour to prevent loss of benefit.

In addition, with SRM programmes the appropriate mechanisms will be in place to

record changes to contract in side letters or other appropriate medium thereby

maintaining the currency of the contract with the supply.

These channels of communication can completely undermine the best practice

procurement processes as the real discussion and negotiation can be a concurrent

sideline process.

Supplier Relationship Management is a fundamental counter to this potential

parallel activity which is solely designed to influence or disrupt the normal

decision making process in your organisation. A professional sales organisation

will normally cultivate an environment of positivity in respect of their organisation

so decisions become a rubber stamp exercise. Ideally, this positivity should be

achieved through excellence in service delivery.

Change in Control

Supplier Development

Again, this term appears to have multiple definitions some of which are

mentioned below:

Encouraging suppliers to provide a wider basket of goods or services in

order to aggregate demand

Through outsourcing, providing a supplier with a capability that they didnt

have that may have been hitherto an in-house capability Risk management through greater integration of the supply chain

Quality and cost improvements through close management


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Insights gained through Spend Visibility coupled with the companys strategic

direction will inform the Supplier Development aspects of any SRM Programme

and help target and prioritise initiatives.

Risk Management

One of the primary reasons to implement an SRM programme is to establish a

robust risk management process between the contracting parties and into the

Supply Chain tiers. It is quite astonishing that recent research has identified that

few organisations conduct any rigorous Supply Chain Risk Management

programmes. While some may consider internal company risk either legal or

financial few consider Supply Chain Risk. Please see the research from the

University of Tennessee on Managing Risk in the Global Supply Chain(2)

for a fuller

exploration of Supply Chain Risk.

Market FormThe relationship management aspects of SRM can also be driven by the market

form, whether you are dealing with monopolies, duopolies or oligopolies. This

should be considered when defining the Rules of Engagement by Kraljic quadrant.

Consideration of the maturity of the market and market behaviours may differ

considerably country by country and continent by continent. Again, such market

and cultural differences must be taken into account when defining the correct

rules of engagement for your organisation.

Reporting

Today there are many reporting requirements and many fall in the bailiwick of

procurement such as: CRC Energy Efficiency, Global Reporting Initiative

(Environmental and Corporate Social Reporting), Regulatory Compliance, Diversity

and Risk to name a few.

These are in addition to the standard requirements of:

Where are the Contracts?

What is the usage against contract?

What is the spend against contract?

When do the contracts expire?

Where are we against the deliverables?

Other requirements can include:

Compliance certification

Validation/audit

Performance Tracking


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(1). Tilford, T. et al. (2013). Guide to SRM.Available:

http://issuu.com/redactive/docs/capita-guide-to-srm. Last accessed 25th July 2014.

(2). University of Tennessee. (2014). Managing Risk in the Global Supply Chain.Available:

http://globalsupplychaininstitute.utk.edu/publications/documents/Risk.pdf. Last accessed 20th July 2014.

Without any doubt systemisation will be required to support and manage this

plethora of information that needs to be recorded against suppliers. Add the

complexity of multiple geographies or/and system instances and the effort grows

exponentially.

In summaryIn simple terms, we expect to achieve value over time from a sourcing process but

we have to consider not just how this value manifests itself in the business but on

how you harness it. Much depends on how well you PLAN, SOURCE, CONSUME

and REPORT.

The reporting output should normally inform your next round of PLANNING,

SOURCING, CONSUMING andREPORTINGand so the iterative dynamic is formed.

The intelligence gleaned from this continuous sequence will allow your business

to optimise the various elements of the cycle and provide evidence that you are

spending effectively. Systemisation of the cycle supported by flexible contracts

will provide your organisation with the agility that is necessary for survival in

todays tough business world. Innovation is what will drive competitive

advantage.

Successwill be achieved by thedynamic combinationofAgilityandInnovation.

Make no mistake, your external spend is a critically importantcomponent of your

organisations success. So, how do you convert that utility to give your business

the bounce you should expect from your external spend total? As mentionedpreviously, enlightened organisations will view spend as an asset and manage it

accordingly to extract maximum value.

A well designed and well executed SRM programme with the necessary

systemisation will play a major part in locking in that value therefore ensuring

success.


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To discuss any of the issues or schedule your health check, contact your local Enrich:

Author: Padraic Phelan, Consulting Director, Enrich

Padraic Phelan, Consulting Director at Enrich, has held a series

of high profile purchasing and commercial directorships,

including the Director of Purchasing at TUI AG, one of the

worlds largest travel organisations, and Director of Purchasing

(and subsequently Commercial Director) of The City Universityin London. During these tenures, Padraic was responsible for

global procurement systems and the processes behind the

technology, including the management of P2P processes for

over six years. Padraic offers a unique perspective on the

challenges facing both private and public sector organisations

in an increasingly global environment, and helps these

businesses add value to their bottom line.

Enrich offers an entire suite of Procurement Solutions and Procurement

Concierge Services to help our clients succeed; from spend analytics,

opportunity assessments and sourcing, to contract management, catalogue

management, iProcurement, tail spend management and working capital initiatives.

We offer a range of deployment options to suit our clients specific needs including;

Cloud, On Premise or Hybrid and provide a one-stop shop for implementation and/or

managed services to help clients squeeze the maximum value from their Oracle Solution.

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