What is Supplier Relationship Management and Why DoesIt Matter?

A White Paper

by Jonathan Hughes

Brighton Landing West 10 Guest Street Boston, MA USA 02135 T +1 617 354 6090 F +1 617 354 4685

www.vantagepartners.com

© 2004 Vantage Partners, LLC. All rights reserved.

About Vantage Partners

Vantage Partners, a spin-off of the Harvard Negotiation Project, is a management consulting fi rm that specializes in helping companies achieve breakthrough business results by transforming the way they negotiate, and manage relationships with, key business partners. To learn more about Vantage Partners or to access our online library of research and white papers, please visit www.vantagepartners.com

Jonathan Hughes is a Partner at Vantage PartnersE-mail: jhughes@vantagepartners.com

PART ONE

Introduction

Supplier Relationship Management (SRM) — whichemerged as a term or an idea only a few years ago —has rapidly gained traction in the marketplace.Presentations on SRM are by now standard fair atmost procurement and sourcing conferences. InMarch of 2005, the Conference Board hosted its firstconference devoted specifically to SRM. But as withmany big business ideas, reality falls short of hype. Forexample, few companies have yet implemented aformal SRM function within their Procurementorganization.

Moreover, there is no standard definition of, and notmuch clear discussion about, what SRM is or why it isimportant. Witness the following description of SRMfrom the popular website Bitpipe: “The consolidationand classification of procurement data to provide anunderstanding of supplier relationships in order todevelop procurement strategies that reduce costs,make procurement predictable and repeatable,enlighten supplier partnership decisions and provideleverage over suppliers in negotiations. Also calledsourcing, strategic sourcing, e-sourcing.”1 Note theoverly narrow focus on data management andpurchasing, the somewhat contradictory aims of“enlightened partnership” and “leverage oversuppliers,” and the imprecise and unhelpful equationof SRM with strategic sourcing and e-sourcing.

Before proceeding to offer a definition of Supplierrelationship Management (SRM), it is important toexplain why it is so important to articulate a cleardefinition. As with CRM, software vendors areincreasingly at the forefront of the SRM wave. Siebel,Oracle, Ariba, and others have multiple products thatbear the label “SRM.” According to IDC, $2.3B wasspent on SRM software in 2004, and this amount isprojected to increase to $3.1B by 2007. Consequently,SRM seems poised to follow the evolutionary path ofCRM — another powerful concept and set ofprinciples that were overshadowed by an often myopicfocus on software tools. This is not to say that CRMsoftware has not been valuable — only that its fullpotential has often not been realized, because it has sooften been implemented in the absence of the kind ofbusiness structure and process changes that are clearly

suggested by an understanding of what CRM actuallyis, and why it matters. This article is an attempt tohead off at the pass waste and missed opportunities inthe emerging discipline of SRM by defining clearlyand robustly what it is, and why it matters.

A brief primer on CRM

The original and fundamental insight of CRM wasthat the multiple interactions (multiple purchases,customer service requests and responses, etc.) betweena company and a customer that occurred over timewere not simply a collection of atomic, unrelatedevents. Instead, they were properly and usefullyunderstood as comprising a relationship betweencompany and customer. This fundamental insightsuggests a clear definition of CRM — themanagement of a company’s multiple interactions withits customers in a systematic way based on the theorythat they are not discrete events, but instead related invarious ways — that they collectively comprise anarrangement that can be usefully understood andtreated as a relationship.

This fundamental insight has many implications. Oneis that information about customer needs andpreferences can be gleaned by analyzing the universe oftransactions with them. This in turn createsopportunities to increase sales, to decrease the cost ofsales, to increase the return on marketing andadvertising expenditures, and so on. Obviously, suchanalysis required previously unavailable data, and hencepowerful new software tools to track, and then toanalyze and report that data. Another, perhaps slightlymore subtle insight is that customers are not all equal.It is essential to segment customers based on the valueof relationships with them, that is, based on anassessment of the financial benefit those relationshipscould be expected to return. Hence the further insightthat some customers should be “fired” because they areunprofitable, and are likely to remain so. Moregenerally, deployment of finite resources againstcustomer service and account management should notbe equal or random across customers, but clearly tied tothe value the deployment of those resources is expectedto return.

Further insights can be inferred from the principlesabove. One fundamental insight, increasinglyrecognized yet often profoundly shortchanged, is theneed to transcend the functional silos that exist in

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1 Bitpipe.com. “Supplier Relationship Management.” Available: http://www.bitpipe.com/tlist/Supplier-Relationship-Management.html

every company in order to realize the potentialbenefits of CRM. At the most basic level, this meansthat developing a comprehensive picture of a customerrelationship (in order to make fact-based decisionsabout how to manage that relationship, that is, how toconduct future interactions in a purposeful andcoherent manner) requires gathering data frommultiple sources, e.g., Sales, Customer Service,different business units that sell to and service the samecustomer. These sources of data inevitably sit indifferent organizations within a company, and aregathered by and affect different functional processes— and are therefore inevitably maintained in differentdatabases. Hence the major data integration effortsthat often accompany an effort to roll out a CRMstrategy (read: system).

One other thought is worth noting, (but not exploringat this point since this is an article about SRM, notCRM), namely that little attention has been paid tosystematically differentiating CRM in the B2B contextand the B2C context. Many important aspects of B2Brelationship management have been inadequatelyanalyzed or misunderstood as a result. This issignificant because SRM is inherently B2B in nature.Individual consumers do not have “suppliers” in anymeaningful or useful sense, nor do medium to large-sized companies source goods or services to a materialdegree from individuals. Consequently, this paper willexplicitly analyze the implications of the fact that SRMis intrinsically B2B so as to avoid pitfalls ofmisapplying lessons about B2C relationshipmanagement, and even more importantly, ensuringthat the nature of B2B relationship management isfully analyzed and understood. (This chain of thoughtsuggests further work in the field of B2B CRM).

Defining SRM

In many fundamental ways, SRM is analogous to CRM.Just as companies have multiple interactions over timewith their customers, so too do they with their suppliers— negotiating contracts, purchasing, managing logisticsand delivery, collaborating on product design, etc. Thestarting point for defining SRM is a recognition thatthese various interactions with suppliers are not discreteand independent — instead they are accurately andusefully thought of as comprising a relationship. Butwhy? (See the sidebar on ACME.)

With CRM, the case is straightforward and intuitive.If I see all of my customer interactions as parts of awhole, I can track and analyze them to betterunderstand what my customers want. This will helpme market to, sell to, and service customers moreeffectively, leading to more revenue and higher profits.I can also make more effective decisions about how toallocate finite resources across my customer base,based on a better understanding of the value I couldpotentially realize from each customer.

With SRM, the case is somewhat less straightforward.After all, while it seems intuitively obvious that there isvalue in understanding my customers better bytracking and analyzing all my interactions with them,it is certainly not equally obvious that there is a parallelbenefit to understanding my suppliers in the same way.With customers, the overwhelming goal is sales.There may be objectives beyond profitable sales thatmatter with some customers (reference-ability —which drives sales with other customers; reducing costof sales; getting early insights about needs andpreferences that may represent major marketopportunities). Nonetheless, these interests are largelyat the margins. The best customer is one who buys alot at attractive margins. You want as many of thesecustomers as possible.

But is the best supplier one from whom you buy a lotat low prices? Not in an analogous way. Typically, ahigh volume, low price supplier is a commodity vendor:relatively easy to replace, and by most measures not asource of competitive advantage. Other factors, likeproduct and service quality, willingness and ability toinnovate, and the degree to which a supplier’s productsand services help you differentiate your own in themarketplace are more important than volume or pricein determining how important or valuable a supplier is.

An essential insight of SRM: View suppliers as a source ofcompetitive advantage, not just a cost center

In the early days of CRM, there was skepticism aboutwhether CRM could really deliver higher sales andprofit. But there was no uncertainty about the natureof the potential value. On the contrary, with SRM, noclear definition or framework for evaluating value hasbeen defined. Many companies are simply looking forways to continue to drive costs down — typically bydemanding lower prices from suppliers, and are trying

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to figure out whether and how SRM might help themdo so. Other companies have an instinctual sense thatbetter relationships (whatever “better” might mean)will deliver more value.

While not exhaustive, the chart above provides aframework within which to think about the potentialforms of value that can be realized from suppliers.

The framework above should not be interpreted tomean that every supplier should be managed in orderto realize all the kinds of value noted. In fact, analysisusing this framework will often indicate (or validate)that the most important way to realize competitiveadvantage from many suppliers is by driving costsdown. Indeed, in some cases, the primary lever may beusing sourcing and negotiation to get lower prices,though in other cases (certainly not all), greater costsavings will be available though more collaborativeapproaches like streamlining supply chain activities,jointly redesigning product specs for cheapermanufacturability, etc.

How strategic sourcing and SRM are distinct, and related

In part, SRM is about the need to rigorously analyzewhen and how to leverage suppliers’ assets, capabili-ties, and knowledge as a source of competitive advan-tage; and the resultant need to view and manage sup-plier relationships as a strategic asset, as opposed tomerely a cost center. In this sense, certain key distinc-tions between strategic sourcing and supplier relation-ship management become clear. Sourcing is aboutapplying analytic rigor (at an enterprise, rather thanlocal, level) to decisions about what to buy and from

whom to buy it. SRM is about looking at supplierassets and capabilities (also from an enterprise-wideperspective), and determining where formal manage-ment of relationships makes sense, and, given thenature of the opportunities identified, what sort ofrelationship management infrastructure (organiza-tional governance, business processes and the like) isrequired to realize different forms of value from dif-ferent types of suppliers over time.

Sourcing is driven by internal needs analysis; SRM isdriven by external opportunity analysis. Sourcing takesas its fundamental unit of analysis carefully definedcategories of purchasing; SRM takes as its fundamen-tal unit of analysis carefully defined categories of sup-plier relationships. As such, strategic sourcing andSRM are natural, and necessary, complements: viewyour business through only one of these interpretivelenses and you will miss important opportunities, andimportant risks.

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Figure 1

� Elimination of redundant supply chain assets and processes (e.g., QA, Distribution)

� Joint (re-)design of product specs for more efficient manufacturing

� Reduction of inventory levels

� Shift of inventory to suppliers

� Reduction of capital expenditures by shifting them to, or sharing them with, suppliers

Bottom Line Savings

� Faster product development cycles; faster time-to-market

� Customer and marketplace insight

� Technology, process, and product innovation

� Joint marketing/advertising

� Access to, or penetration of, new markets

� Suppliers as customers and channels

Top Line Value

� Improved value-chain forecasting and response

� Improved quality and speed of decision-making

� Reduced time and effort in scope management

� Enhanced service quality, responsiveness, flexibility

� Reduction in errors, conflicts

� Streamlined management of order, fulfillment, rebates, etc.

� Reduced time spent on selection and contract negotiation

Operating Efficiencies

SRM is about the need to rigorouslyanalyze when and how to leveragesuppliers’ assets, capabilities, andknowledge as a source of competitiveadvantage; and the resultant need to viewand manage supplier relationships as astrategic asset, as opposed to merely a costcenter.

Finally, inasmuch as common outcomes of strategicsourcing analysis are to consolidate more purchasingwith far fewer suppliers and to forge more interde-pendent relationships with certain key suppliers, SRMis about putting in place the organizational capabilitiesrequired to manage these more complex supplierinteractions — to manage them strategically, as part ofan overall relationship, rather than tactically throughthe various organizational and functional silos thatseparate R&D from Purchasing, Finance fromManufacturing, and the other functions which affector involve suppliers.

PART TWO

What is a “good relationship”?

The term relationship has never been clearly defined inthe CRM context, nor yet in the SRM context. This isno surprise because the word has three different butrelated senses — each of which is fundamental to SRM(as to CRM), and hence essential to distinguish among.

Sense one: A relationship refers to the collective set ofinteractions between two (or more) parties (e.g., acompany and a supplier, a company and a customer,three companies in a joint venture). In this sense, agood or bad relationship is most naturally understoodas referring to the value of the relationship.

Sense two: Relationship refers to the manner inwhich interactions take place between two (or more)parties. Are they efficient or inefficient? Contentiousor cooperative? Characterized by secrecy or openness,deception or honesty? This sense of relationship isprocedural rather than substantive. To distinguish it

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SRM is about putting in place theorganizational capabilities required tomanage complex supplier interactions —to manage them strategically, as part ofan overall relationship, rather thantactically through the variousorganizational and functional silos thatseparate R&D from Purchasing, Financefrom Manufacturing, and the otherfunctions which affect or involve suppliers.

Although ACME has interactions with many suppliersthat are relatively simple (focused primarily oncommodity purchase and fulfillment), the companyalso has many suppliers with whom it has wideranging and complex interactions. Despite a generallypositive history with many key suppliers, ACME foundit was incurring significant costs and failing tocapitalize on major opportunities, because it lackedappropriate governance structures and businessprocesses to manage these interactions as comprisinga single, integrated relationship.

For example, interactions with suppliers weremanaged by Procurement (and overwhelminglyfocused on purchasing), with only indirectinvolvement from product groups, and almost noinvolvement, or even input from, R&D or Marketing.Yet a critical challenge for ACME was to spotopportunities to extend its brands, spot new fads andtrends quickly (and differentiate between the two),and to bring new or radically improved products tomarket. In the absence of formalized joint businessplanning with suppliers to carefully manageexchange of sensitive information about long rangeplans, market intelligence, as well as sharing ofintellectual property, major opportunities wereregularly missed.

Once a year “executive to executive” meetings werenot enough; ACME tried that. Occasionally, high levelopportunities were spotted, but then nothinghappened because there was no infrastructure toenable resourcing and effective management of jointefforts with suppliers. For example, it still took monthsof time for engineers, product managers, and othersto obtain approval, if it could be obtained at all, toexchange all but the most limited information with

ACME:The costs of failing to implement SRM

from the first sense, it is useful to refer to it as theworking relationship: how we interact with each other;how we work together. It is worth noting that theworking relationship has a significant impact on thevalue generated by a relationship.

Sense three: Relationship also refers to how partiesperceive each other and feel about one another. Herethere is a common and natural tendency toanthropomorphize companies. It is often said that acompany and one of its suppliers trust or mistrust eachother. While this could clearly be true of individualpeople, what could it mean to say that an organizationtrusts or mistrusts another organization? A usefuldefinition of relationship in this third sense would be“A systematic tendency of individuals in oneorganization to believe things about, and expectcertain attitudes and behaviors from, individuals inanother organization.” Again, it is worth noting thatrelationship in this third sense has a significant impacton the quality of the working relationship, and ultimatelyon the value of a relationship. For example, whether I(and others in my company) have confidence (or lackit) in the ability of one of my customers to reliablydeliver on commitments made by the individuals Iinteract with from that organization will have asignificant impact on whether or not we share IP orother sensitive and valuable information, whether weinvest in assets dedicated to servicing that customer,and the like.

suppliers. “Intellectual property” meant manydifferent things to executives and managersacross different product groups and functionalareas at ACME, and no tools or guidelineswere in place to evaluate the risks of sharingagainst the potential to create value.Moreover, when suppliers shared newtechnology or market opportunities withACME in the hopes of collaborating, moreoften than not, they felt like they got burned— not out of ill-intent, but because ACME’sbusiness processes, organizational structures,and management systems were all butdesigned to thwart even the best of intentions.

For example, supplier-generated opportunitieswould languish for months because no onehad the responsibility to review them, nor theauthority to make a go or no-go decision. Amore complex challenge arose in those raresituations when collaboration on a newproduct technology did occur. No sooner didProcurement get involved (as the R&D aspectof the collaboration wound down), ACMEbegan to pursue strategies designed tocommoditize the new technology in themarketplace as quickly as possible so theycould buy it for less. Not surprisingly, supplierswho had been through this experience oncewere loath to bring new technology to ACMEthe next time; they went instead to ACME’scompetitors. ACME had no formal means bywhich to internally assess optimal timeframesfor commoditizing new supplier-generatedtechnology (balancing cost concerns with theneed for suppliers to realize an attractivereturn on their investment, and thus beincented to continue to innovate and shareinnovations with ACME), nor the processes orskills with which to engage in collaborativeresolution of the inherent tension withsuppliers.

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A relationship refers to the collective set ofinteractions between two (or more) parties.

Relationship refers to the manner in whichinteractions take place between two (or more)parties.

Relationship also refers to how partiesperceive each other and feel about oneanother.

sense 1

sense 2

sense 3

As Jeffrey Dyer has usefully pointed out, suchperceptions and expectations are not solely or evenprimarily a function of judgment about individualcounterparts2. After all, I may trust my contact at a keysupplier, but he might take a new job tomorrow, or hemight make a commitment to me in good faith, but beoverruled by his boss. Instead, perceptions about andexpectations of any given individual in an organizationare largely based on what most people in thatorganization do, and a theory (not necessarily explicit)of how policies and procedures in that organization arelikely to lead anyone in that organization to think andbehave.

From this perspective, the comment by a seniorexecutive at a Fortune 500 company (which we’ll call"Matrix Corp" to protect the innocent) that "Ourcompany’s goal in any negotiation is to beat the otherside" could be expected to have a negative impact onrelationships (in every sense of the word) withsuppliers, as well as customers, channel partners, andthe like — irrespective of, though not unmediated by,personal relationships between individuals at thosecompanies and the people they interact with at Matrix.That is, if I believe this executive’s views carry weightand affect his company’s policies, I will need to beskeptical, and careful, in my interactions with anyonefrom Matrix, regardless of how much I may like, trust,and respect them as individuals. After all, if you’regoing to be evaluated by management at Matrixaccording to whether or not you "beat me" in ournegotiation, then I’ll have to be wary of assertions that

any deal between us is fair or good for me.

The second and third sense of relationship aresymmetrical (between customer and supplier) in theB2B context, but not in the B2C context. That is, B2Brelationships are comprised of interactions, (oftencomplex and strategic), among multiple people in twoor more companies, and those companies and theirrelationship outlast the vast majority of relationshipsbetween or among individuals who interact on theirbehalf. By contrast, in the B2C context, manyrepresentatives of a company typically haveinteractions (rarely complex, almost never strategic)with a single consumer.

Inasmuch as the majority of thinking and writing about

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WORKING RELATIONSHIP

Figure 2

� How efficiently do we communicate?

� How well do we understand each other (goals, constraints, etc.)?

� To what extent do we rely on persuasion rather than coercion to resolve our differences?

� How efficiently and creatively do we solve problems together?

The sum and substanceof our interactions

Relationship Sense 1

What we believeabout each other

Relationship Sense 3

� How much do we trust each other?

In particularIn particular

� To what extent do we believe they will do what they say they will do?

� To what extent do we believe they will actively try to help us and avoid actions that would harm us?

Key Questions

� What is the actual value of our interactions?

� What is the potential for value through any (other) interactions we might have?

Key Questions

HowHowwe interact

Relationship Sense 2

Key Questions

B2B relationships comprise interactions,(often complex and strategic), amongmultiple people in two or more companies,and those companies and their relationshipoutlast the vast majority of relationshipsbetween or among individuals who interacton their behalf. By contrast, in the B2Ccontext, many representatives of a companytypically have interactions (rarely complex,almost never strategic) with a singleconsumer.

2 Dyer, Jeffrey H. Collaborative Advantage: Winning Through Extended Enterprise Supplier Networks. Oxford: Oxford UP, 2000: 96-99.

relationship management has been in the context ofB2C customer relationships, the exploration of thesecond and third senses of relationship (what theyentail, why they matter, what can and should be doneto address them) that has been undertaken has littlerelevance to B2B relationship management,particularly with suppliers. As is apparent in the sidebaron ACME, what is needed to build trust and a highquality of interactions with individual consumers haslittle to do with building trust and having efficient andproductive interactions with suppliers.

What is a good working relationship (Sense 2)?

While electronic marketplaces and reverse auctionshighlight the opportunity to substantially automatesome business arrangements with suppliers, manyother arrangements with suppliers are more complex(or complex in ways that resist automation). Inparticular, they involve far more interdependence thanthe setting of price, and the order and delivery of basicgoods or services. These more complex, and typicallymore strategic, supplier relationships may involvecollaboration on design of product specifications,around joint business planning on research anddevelopment, around logistics, on qualitymanagement, and the like. Inherently, theserelationships depend in large part on the ability ofmultiple individuals on each side to regularly solveproblems, make decisions, and resolve conflicts in theface of multiple, competing priorities — some shared,and some not.

The more complex the interactions which comprise arelationship with a given supplier, the more a goodrelationship (in the second and third senses of theterm) matters, that is, the more they impact the valueof (or created by) that relationship (relationship in thefirst sense). Why? Because more complex interactionstend to require the application of human intelligenceand judgment, and thus depend for their success onwhether people are able to work effectively together.

Is it necessary to make more explicit the logic thatundergirds the assertion in the preceding sentence?Consider the case of a large manufacturing companyand one of its key suppliers who decided to collaborateon a new product design that optimized for variousproduct performance criteria, as well as variousmanufacturing criteria, e.g., low cost and low defectrates. A joint engineering team made up of the best

and the brightest from each company was assembled.Unfortunately, the individuals on the team neitherliked nor trusted one another, and also each believedthat the other company was committed tosystematically taking advantage of its business partnersin order to maximize gains for itself. Did this groupefficiently come up with an optimal design? Of coursenot. Information was withheld rather than shared.Ideas proposed by individuals from one company wereattacked or ignored by individuals from the other. Sixmonths after it began, the effort was disbanded, eachside blaming the other (somewhat schizophrenically)for a combination of incompetence and conscioussabotage of the effort. The original business case(which ran into the tens of millions of dollars in benefitto each side) was never realized, and each side wastedthe time and effort of some of its most talented peoplefor half a year.

Debriefing the effort a year later, one of the executivearchitects of the deal reflected that “I really thoughtthat if the business case was there, although it might bedifficult, rational self-interest would inevitably lead tosuccess. Now I know that’s not true. I also thought thata group of engineers would behave rationally, thatsomething as “soft” as relationship management didn’tmatter. I now know firsthand that people don’t checktheir emotions at the office door. All the emotionalenergy that, in a collaborative, high performing team,is channeled into exchange of ideas and creative debatebecame, in this situation, absorbed and reflected by adhominem attacks, defensiveness, and absolutelyirrational, ego-driven arguments about who was moreor less competent, who was ethical and who wasn’t,and who had secret agendas.”

It is essential to formally define what constitutes agood working relationship in order to maximizesupplier relationship value through effective supplierrelationship management. A useful place to begin is tojuxtapose common, often implicit ideas about whatconstitutes a good working relationship, versus a morerobust and rigorous set of characteristics. Thesecontrasting views of a good relationship are depictedin Figure 3 at the individual, rather than theorganizational level, specifically because certain classesof organizational relationships (in the SRM context —those that are least like arms-length commodityvendors), depend so heavily on the quality ofinteractions among individuals. Further, the quality of

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these interpersonal interactions is driven in part byassumptions held by individuals about working with,and managing their relationships with, others. (Laterwe will examine how these common assumptionsabout relationships and relationship management leadsenior management in many companies to create anenvironment — instantiated through managementsystems, business processes, and organizationalstructures — which systematically underminespeople’s ability to work effectively together.)

Individual versus organizational relationships and rela-tionship management

In Figure 3 above, a description of what constitutes agood (working) relationship is juxtaposed against amore common picture. As written, the description inthe right column refers to relationships between oramong individuals. So what does it look like to extendthis thinking to the organizational level? One usefulway to think about a good working relationshipbetween organizations is that the beliefs held byindividuals in each organization about individuals inthe other organization, and interactions among thoseindividuals, are generally consistent with the attitudesand behaviors articulated in column two of the chartabove — call this a picture of “collaborative” attitudesand behaviors.

An added gloss would be that people in each organiza-tion believe that the other organization is character-ized by policies, management systems, and businessprocesses that will systematically lead people whowork in that organization to think and act in a collab-orative manner. So, another way of defining supplierrelationship management is “Actions taken by an

organization (namely, by people in that organization,in particular senior management) to create an environ-ment (through policies, management systems, businessprocesses) that reliably leads people in that organiza-tion to exhibit collaborative attitudes and behaviors intheir interactions with suppliers.”

Implications for SRM of distinguishing among the threesenses of relationship

Why is it so important to distinguish among thesethree senses of relationship? Primarily because bydistinguishing among them, it is possible to articulateand map out a series of causal connections that provideorganizations with a framework for maximizing thevalue of their interactions with suppliers (see Figure 4).

As depicted in Figure 4, a good relationship (firstsense) is fundamentally distinct from a goodrelationship in the second and third senses of the word.In the first sense, a good relationship is one thatproduces significant value. This sense of the termrelationship is descriptive and outcome focused. In thesecond and third senses, a good relationship is onecharacterized by attitudes and behaviors that accordwith some picture (generally not explicitly or robustlydefined) of the attitudes, actions, and individualbehaviors likely to lead to significant value beingproduced by, or through, the relationship (first sense)over time. The second and third senses of the termrelationship are normative, and have to do with factorsthat are causally related to relationship (first sense)outcomes. (See Figure 5)

Unfortunately, most organizations (not only leaderswithin those organizations, but also, in turn, the

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Figure 3

� You do what I want

� I keep you happy

� We like each other

� We have little or no conflict

A Common Viewof a Good Relationship

� We trust each other

� Communication is robust and efficient

� Tensions are surfaced early and easily

� We understand and respect each other, even when we don’t agree

� We rely on persuasion rather than coercion to resolve differences

A More Realistic Viewof a Good Relationship

Another way of defining supplierrelationship management is “Actions takenby an organization (namely, by people inthat organization, in particular seniormanagement) to create an environment(through policies, management systems,business processes) that reliably leads peoplein that organization to exhibit collaborativeattitudes and behaviors in their interactionswith suppliers.”

organizations themselves through their policies andbusiness processes) conflate these senses ofrelationship. Consequently, most managers lack aneffective framework within which to make optimalstrategic decisions about how to create more valuewith and through suppliers, or (perhaps moresignificantly) about how to create an organizationalenvironment in which their people consistentlyoperate and interact with suppliers in ways thatmaximize the value of interactions with them.

Of course, most people intuitively grasp that the kindof working relationship attributes articulated in Figure3 are important. They know that a high level of trustis correlated with more open and efficientcommunication, and hence to more productiverelationships with suppliers. Similarly, most peopleunderstand that the ability to collaboratively resolveconflicts over competing objective and priorities isessential to creating value with and through suppliers.

Nonetheless, through our research, and by workingwith senior management across hundreds of ourclients, my colleagues and I consistently observe thatmost people believe there is little that they and theirorganizations can do to systematically build andmaintain strong working relationships with suppliers.They tend to think of a good working relationshipprimarily as a consequence of a valuable relationship(first sense), rather than as a critical enabler of valuecreation. Hence much that could be managed is left tochance, and many levers for producing greatersubstantive value with and through suppliers areunder-utilized. In particular, few managers act tocreate an environment that encourages and enables allthose who interact with suppliers (as well as thosewhose have significant impact on supplierrelationships) to consistently make decisions andexhibit the kinds of behaviors that maximize the valuerealized from suppliers over time.

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Figure 4

Relationship Sense 3

What parties believeabout each other

Relationship Sense 2

HowHow parties interact

Relationship Sense 1

The sum and substanceof interactions

between parties

What parties believe about each other affects how they interact (e.g., their willingness to disclose information)

Over time, the value produced by the interactions between organizations often affects beliefsbeliefs about each other, and (often in conjunction with investments in the relationship) also affect howhow parties interact

The manner in whichmanner in which individuals conduct interactions affects the efficiency and effectiveness with which those interactions are executed, and thus the net value they create

Perceptions of and beliefs about each other are largely formed by the collective experiences individuals have interacting with each other

Incremental Value Generated through StrongWorking Relationships with Suppliers

Figure 5

9%

20%

33%

21%

17%

76-100% more value

>100% more value

0-25% more value

26-50% more value

51-75% more value

Hughes, Jonathan, Mark Gordon, et al. Negotiating and Managing Key SupplierRelationships: A Cross-Industry Study of 20 Best Practices. Boston: Vantage Partners,LLC, 2003: 7.

As seen in Figure 3 — the common (usually implicit)picture of what constitutes a good relationship giveslittle guidance on how to build one. Insofar as itinvolves a relationship where suppliers do what wewant, it is unrealistic — especially if our suppliers holda similar theory of what constitutes a good relationship(namely, that we do what they want). That is, it is

highly unlikely in a complex customer-supplierrelationship that we will both simply do “what theother side wants” on a regular basis. Similarly, whileinterpersonal affinity may be helpful, it is not nearlyenough to make a complex B2B relationship successfulwhen large numbers of people need to work together,and who those individuals are regularly changes.(Though it is this idea that leads companies to attemptto avoid or solve complex B2B relationshipmanagement challenges primarily through ropescourses and other “team building” activities.)

To a large extent, the common view of a goodrelationship is a fantasy — we might think we wantrelationships like that with suppliers and otherbusiness partners, but we’re not going to get them.

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Most companies’ interactions with suppliers are guidedby an implicit theory that building (or preserving) agood working relationship requires making substantiveconcessions: not aggressively negotiating for the bestprice, not holding suppliers rigorously accountable forcommitments made around project scope or deliveryschedules, and the like. The common view that goodrelationships must be “bought” produces anirresolvable paradox at the heart of relationshipmanagement: either sacrifice substantive businessvalue today in the hopes of getting greater valuetomorrow, or focus on maximizing value today (oftenat the expense of suppliers), recognizing that thetactics employed to do so will likely damagerelationships, and hence reduce opportunities torealize value over the longer term.

While Section Three deals with principles of suppliersegmentation that can be used to guide such trade-offs, the reality is that short and long-term relationshipvalue are not opposed in such a binary fashion.Certainly there are some trade-offs betweenmaximizing current value versus a longer-term valuestream, but in fact, a more sophisticated way of

thinking about relationships and relationshipmanagement recognizes the positive feedback loopbetween how interactions with suppliers are managedand the value realized in both the short and long term.Upon reflection, most managers realize that trying to

buy good relationships with suppliers, customers,

and other business partners only trains them to hold

the relationship hostage in order to extort further

concessions in the future. That is clearly not a “good”

relationship in any sense of the word.

Why then do management decisions and the behaviorof individuals who mange important businessrelationships so often manifest this approach? Themost plausible explanation is that most organizationsand individuals lack a better one, and recognizing theoverwhelming importance of building and maintainingstrong business relationships with key partners, theyproceed with this strategy despite the clear downsidesof trying to buy strong relationships. The key to

avoiding unnecessary trade-offs between short and

long-term relationship value is a clearer distinction

between the first (substantive) sense of the term

relationship and the second and third (procedural)

senses of relationship, and in turn, a more robust

theory for how to build and maintain a strong

working relationship.

On building and maintaining good relationships

Too often, people think of a good workingrelationship primarily as a consequence ofa valuable relationship (first sense), ratherthan as a critical enabler of value creation.

Moreover, even when such relationships exist, theyrarely produce significant value — they are captivevendor relationships — they do not nimbly respond toor weather change, and they do not producebreakthrough savings, substantial innovation, orotherwise contribute to competitive advantage.

PART THREE

At the most fundamental level, SRM is focused on fourcategories of activity:1. Identifying opportunities to create value with

and through suppliers

2. Evaluating opportunities and determiningwhich to pursue with which suppliers

3. Creating value through effective managementof interactions with suppliers

4. Distributing value between customer andsupplier

While conceptually distinct, these activities, inpractice, are highly interrelated and iterative, andinvolve myriad individuals at multiple levels of acompany from senior management to individualcontributors. Consequently, it is an essential and anon-trivial task to design and implement effectiveinternal and supplier-facing business processes thatensure these activities are effectively managed. Beforesharing a framework for designing and implementingsuch business processes, it is useful to consider whatchallenges must be overcome to ensure effectiveexecution of these fundamental SRM activities.

Two kinds of relationship management challenges:Operational Complexity and Strategic Complexity

Note that the ability to manage differences effectively, so that they are asource of innovation and value, rather than a source of dysfunctionalconflict and an impediment to value creation, is at the heart of SRM (andof B2B relationship management in general).

While conceptually distinct, the forms of complexitynoted above are not only often correlated in practice,they are also often causally related. For example, acompany that works with a supplier who provides arange of products and services to multiple businessunits is more likely to confront a greater number ofdifferences, and potential conflicts over goals andstrategy, than with a supplier who provides only asingle product.

11

Figure 6

Value Producedby Relationship

(i.e., by the sum totalof our interactions)

A Good Working Relationship

(i.e., how we interact)

Common View Guiding Decision-Making About, andInteractions with, Suppliers A More Accurate View of how Value is Created with Suppliers

GoodBusinessResults

A GoodWorking

Relationship

� Number of business units involved

� Volume of business

� Number of products or services involved

� Total transaction volumes (orders, shipments, etc.)

� Geographic breadth of customer/supplier interactions

Sources of Tactical/Operational Complexity

Sources of StrategicComplexity (i.e., Differences)

� Differences in goals

� Differences in business strategy

� Differences in organizational culture (values, norms)

� Differences in expertise and capabilities

� Extent and frequency of technological change relevant to the relationship

Segmenting supplier relationships

Based on the ideas above, it is possible to segmentsuppliers in a more sophisticated and useful way thanmost companies have done. Working with the firstsense of what constitutes a relationship, suppliers canbe segmented, not just by spend, but by the total actualand potential for value (measured across multipledimensions) of interacting with them. Further,suppliers can be segmented by the degree of risk(based on the framework on p. 11) to which therealization of that value is subject. One criticaldimension of such a risk analysis is the extent to whichsupplier interactions require human judgment andintelligence, and hence the ability of people to workeffectively together. Evaluation according to thiscriterion therefore indicates the extent to whichcapabilities for building and maintaining goodrelationships (senses 2 and 3) are important.

While it is certainly possible to put value and risk onorthogonal dimensions to produce a two-by-twomatrix for supplier segmentation, in practice, the mostuseful supplier segmentation tools are more likedecision trees than a simple matrix. The number offactors that need to be weighed in assessing potentialbusiness value, as well as the interrelationships amongthem, plus the various interrelated factors that createrisk require analysis along multiple, numericallyscoreable dimensions. Nonetheless, a visualization ofthe basic concept of supplier relationshipsegmentation based on potential business value, andrisk in the form of strategic and operational complexitymay be useful, and is depicted in Figure 7.

What enables the formation and management of effectiveworking relationships?

At the most general level, there are two fundamentalapproaches to, or strategies for, maximizing the valuerealized through interactions with suppliers. One ismore effective coordination, both internally acrossgroups and functions, and externally, with multiplefunctional and organizational touch points at thesupplier. The more analysis suggests that the risks andbarriers to value associated with a given supplier haveto do with tactical complexity, the more improvedcoordination should be the focus of SRM. Of course,this almost always involves leveraging moreintegrated, and often enhanced, IT tools, and so thefocus on software in the implementation of CRM andSRM is not surprising.

However, when strategic complexity constitutes animportant, or even the primary, risk and barrier tocreating value with suppliers, enhanced coordination,while useful, is not enough. Total transparency, instantaccess to perfect information, and the like, will still notensure efficient and effective resolution of conflictover multiple conflicting priorities. Nor will it bepossible to eliminate significant uncertainty in highlyinterdependent relationships in which companies and

12

Degree of Strategic Complexity

High

Integrated Alliance

Arm’s Length Collaborative

Low

Figure 7

High

Deg

ree

of T

acti

cal C

ompl

exit

y

1

2

2

3

3

3

41

2

3

4

Very High

Somewhat High

Moderate

Low

Potential Supplier Value

Effective coordination itself depends inlarge part not just on technology, but oncollaboration, or, if you like, on thequality of working relationships.Coordination and sharing ofinformation bring risk, namely, the riskthat others will use informationopportunistically. Coordination andintegration also entail the sacrifice ofautonomy, something that becomesexponentially more risky and lessattractive if there is not a high level oftrust between or among the partiesinvolved.

suppliers are collaborating on long-term initiatives —uncertainty which by its nature requires interpretationof ambiguous and incomplete data, and hence on thecollaborative application of human judgment to arriveat good decisions.

Moreover, as Robert Spekman demonstrates in hisbook The Extended Enterprise, effective coordinationitself depends in large part not just on technology, buton collaboration, or, if you like, on the quality ofworking relationships3. Coordination and sharing ofinformation bring risk, namely, the risk that others willuse information opportunistically. Coordination andintegration also entail the sacrifice of autonomy,something that becomes exponentially more risky andless attractive if there is not a high level of trustbetween or among the parties involved.

Maximizing Coordination and Collaboration: A basicframework for the implementation of SRM processes

Capitalizing on the potential of SRM to create valuerequires work along multiple dimensions: integratingcategory-centric sourcing strategies with strategicanalysis of supplier relationship-centric opportunities;improving coordination and collaboration (internally,as well as with suppliers); systematically addressing theinterplay of the organizational and interpersonaldimensions of collaboration and relationshipmanagement. What does this last point entail?Supplier relationships characterized by significantstrategic complexity comprise interactions that are

resistant to automation; therefore success requireseffective collaboration among multiple individuals.Consequently, enabling effective interpersonalinteractions and relationships is essential. However,these individuals act within an organizational context,and so addressing the organizational policies,structures, and business processes that shape the wayindividuals interact (for better or worse) is alsoessential.

A basic framework that depicts the key businessprocesses that need to be put in place and integrated toenable effective coordination and collaboration at boththe organizational and the interpersonal level is shownin Figure 9.

■ Develop Sourcing Strategies — The process offorecasting and analyzing materials or service needsand creating optimal strategies (e.g., volumeconcentration, rationalization of specifications, solesourcing, global sourcing, and the like) to obtainthose goods and services

■ Supplier Evaluation and Selection — Theprocess of identifying and selecting suppliers(including requests for information and/orproposals, site visits, and the like). Ideally thisprocess is designed and managed so that it producesnot only good selection decisions, but serves togather information about how best to work withsuppliers selected (e.g., identifying risks that willneed to be need to be proactively managed), andbuilding a foundation of mutual understanding andtrust that will enable effective collaboration

13

Figure 8

Coordination Collaboration

Without visibility to relevant data (from different touch points across different points in time), the most skilled people will make poor decisions.

Different goals, access to different information, different competencies, different ways of operating, all create barriers to spotting and capitalizing on opportunities to create value.

3 Spekman, Robert E. and Edward W. Davis. The Extended Enterprise: Gaining Competitive Advantage through Collaborative Supply Chains. Upper Saddle River, NJ:Financial Times Prentice Hall, 2004.

Enabling effective interpersonal interac-tions and relationships is essential.However, these individuals act withinan organizational context, and soaddressing the organizational policies,structures, and business processes thatshape the way individuals interact (forbetter or worse) is also essential.

■ Negotiation and Contracting — the process ofdeveloping and putting in place master contractsand other supply agreements after suppliers havebeen selected.

■ Supplier Portfolio Governance — The processby which a company regularly evaluates what kindof relationships it wants with its different suppliers(e.g., where it will invest in forming andmaintaining alliance-like relationships), and whichopportunities to pursue with which suppliers insupport of enterprise strategic objectives (e.g.,should we design a new product component on ourown, or jointly with one of our suppliers?)

■ Supplier Development — The process by which acompany (1) identifies and evaluates opportunitiesto enhance suppliers’ capabilities, and (2) resourcesand manages initiatives to do so, thereby ensuringthey produce results. The philosophy behind thisprocess is one of enlightened self-interest - whereare there investment opportunities with suppliersthat will produce an attractive return for us in theform of improved quality, reduced cost, and thelike?

■ Joint Business Planning — The process by whichindividuals representing different functional andbusiness areas within a company and a supplierjointly exchange information about business plans,priorities, capabilities, and marketplace trends andopportunities, and analyze where and how tocollaborate in order to create value for both sides

■ Coordination of Day-to-Day Operations — Theprocess by which various ongoing activitiesbetween and company and its suppliers (e.g.,ordering and fulfillment, project management,quality assurance, and the like) are monitored andsupported in a coordinated way across the variousfunctional areas and groups that need to interact.

■ Performance and Value Measurement — Theprocess by which a company and its suppliers defineand align around appropriate metrics to measureand manage performance and value delivered toboth sides. Ideally this process is collaborative, andtwo-way (that is, suppliers give feedback to theircustomers and well as vice-versa) and aimed not atsimply producing scorecards, but also at enabling

data-driven conversations about the diagnoses andpossible solutions to problems, as well as theidentification of opportunities. A goodperformance measurement system is based not onlyon outcome oriented metrics (e.g., cost savings,incremental revenue contribution), but also onleading indicators that enable proactivemanagement of the relationship. Similarly, metricsshould address both tangible operational andfinancial factors (e.g., cycle time, inventory levels,etc.), as well as intangible factors (like level of trust).

■ Issue Escalation and Resolution — The processby which important business issues and conflictsbetween a customer and its suppliers are escalatedand jointly resolved at the proper organizationallevel (based on a clear articulation of escalationpaths, and of which stakeholders at each companywill be involved in what ways), thereby ensuringtimely and effective resolution, and minimizingthe risk of disruption to operations or to theworking relationship.

As with any processes, carefully defining roles andresponsibilities is essential to ensure that activities areexecuted (if it’s not part of someone’s job it won’thappen), and executed efficiently and effectively (ifthere’s lots of overlap or lack of clarity acrossresponsibilities and authorities associated withdifferent roles the result will be inefficiency at best,significant conflict at worst).

14

Capitalizing on the potential of SRM tocreate value requires work along multipledimensions: integrating category-centricsourcing strategies with strategic analysis ofsupplier relationship-centric opportunities;improving coordination and collaboration(internally, as well as with suppliers);systematically addressing the interplay ofthe organizational and inter-personaldimensions of collaboration and relationshipmanagement.

CONCLUSION

In a global marketplace characterized by ever-increasing levels of competition, companies need toreorient themselves to systematically identify andcapitalize on ways to create value with and throughtheir suppliers. To be successful, companies will needto build the capabilities required to be collaborative,trustworthy, and desirable business partners to theirsuppliers. Seeing the value Eli Lilly has realized bypositioning itself as a “partner of choice” within thepharmaceutical industry, a number of companies arebeginning to try to position themselves as a “customerof choice.” To date, few of their suppliers have foundreason to be impressed, perhaps because fewcompanies have made the investments Lilly has madein becoming truly competent partners.

The discipline of strategic sourcing is not enough.Partnering with key suppliers, not merely purchasingfrom them, requires systematic coordination across

multiple boundaries within companies and afundamental change in how companies view, and workwith, their suppliers. Leading this change representsan enormous opportunity for Procurement in itscontinuing evolution from a back office purchasingfunction to a strategic business partner to theenterprise.

15

Supplier Evaluation and Selection

Coordination of Day-to-Day Operations

Figure 9

Supplier Portfolio Individual Supplier

SourcingSupplier R

elationship Managem

ent

Business Strategy

Develop Sourcing Strategies

Supplier Development

Joint Business Planning

Supplier Portfolio Governance

Negotiation and Contracting

Performance Monitoring Issue Escalation & Resolution

16

While significant research and experience support thebroad relevance of the key SRM business processesnoted above, there is no one right model for definingorganizational structures to enable execution of theseprocesses. Because an essential aspect of SRM is toensure coordination of processes and functions thatimpact, or are impacted by, suppliers (Procurement,Logistics, Marketing, R&D, etc.), and because compa-nies are organized differently, (and equally, becausecompanies have different business models and strate-gies, and thus confront different opportunities and riskswith their suppliers), there is no one-size-fits-all struc-tural solution for deploying SRM.

That said, the following structural elements of SRM arerelevant in most organizational contexts.

1. Creating a formal SRM team or office at the corpo-rate level, with a mandate to facilitate and enablethe kind of coordination across functions and busi-ness units that is essential to maximizing the valueof supplier relationships. Such a structure is mosteffective when it serves to broker and coordinatedevelopment of policies among multiple stakehold-ers (rather than dictate those policies), and when it

helps to coordinate and support execution of SRMbusiness processes among multiple groups, asopposed to owning the majority of resourcesrequired to execute those activities.

2. Creating a formalized relationship manager role(and/or full time job - depending on the complexi-ty and importance of the supplier relationship) forkey suppliers. These individuals may be part ofProcurement, but often sit within a business unitthat has significant reliance on, and interactionwith, a given supplier. Relationship managers act asinternal champions for the relationship with thesupplier, act as a point of contact and resource tothe supplier, and coordinate the execution of sup-plier relationship management processes like jointbusiness planning and performance measurement.

3. Creating a formalized executive sponsor role andcross-functional steering committees for complex,strategic, supplier relationships. Such structuresensure appropriate linkage to overall businessstrategies, provide a forum for making trade-offsamong a company’s different priorities as theyimpact suppliers, and act as a final point of escala-tion for conflicts.

A note on organizational structures

When designing and implementing processes andadjusting organizational design and structures to supportSRM, it is useful to think of this effort as one that isaimed, in part, at creating an environment in which themany individuals who interact with suppliers will be opti-mally enabled and encouraged to exhibit collaborativebehaviors — those behaviors that support the develop-ment and maintenance of effective working relation-ships, which in turn enable greater business value to berealized from supplier relationships. As a result, it is worthnoting five core individual competencies that are essen-tial to effective B2B relationship management.

1. The ability to diagnose problems by identifyingeach party’s contributions to a situation or out-come, rather than by attempting to allocate andassign blame

2. The ability to explore and learn from different per-spectives and opinions, rather than focusing onassessing who or what is right or wrong

3. The ability to develop solutions that maximize jointvalue by exploring the underlying interests (needs,goals, constraints) of each party, rather than byhaggling over positions (preconceived solutions ordemands) and trading concessions

4. The ability to resolve conflicts through the identifi-cation and application of relevant criteria, ratherthan through threats, bribes, or coercion (therebysetting useful precedents for the efficient resolutionof future conflicts)

5. The ability to manage strong emotions (e.g., frus-tration, anger, anxiety) — one’s own and those ofothers — in a constructive way so that they do notimpede effective problem-solving and collaboration

A note on individual competencies

© 2004 Vantage Partners, LLC. All rights reserved.

About Vantage Partners

Vantage Partners, a spin-off of the Harvard Negotiation Project, is a management consulting fi rm that specializes in helping companies achieve breakthrough business results by transforming the way they negotiate, and manage relationships with, key business partners. To learn more about Vantage Partners or to access our online library of research and white papers, please visit www.vantagepartners.com

Jonathan Hughes is a Partner at Vantage PartnersE-mail: jhughes@vantagepartners.com

What is Supplier Relationship Management and Why DoesIt Matter?

A White Paper

by Jonathan Hughes

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