03 August, 2009

03 August 2009

Cost-cutting pressures have overshadowed SRM during this recession. But, writes Alan Day, procurement leaders need to upgrade their capabilities to be ready for recovery

In the current economic climate, where procurement functions are under severe pressure to free up cash, longer-term initiatives such as supplier relationship management (SRM) inevitably slip down the list of priorities.

This tendency is compounded by the sharp fall in prices for oil and other key raw materials during the past 12 months, and plunging demand for suppliers' products and services, turning sellers' markets into buyers' markets once again.

In such an environment, it is not surprising that many in procurement have reverted to stereotypical behaviour, such as firing off letters to suppliers demanding 10 per cent price cuts.

Although such actions are understandable, there are good short-term reasons why we should continue to nurture key supplier relationships and develop the internal capabilities to manage them. One clear reason is that the threat of suppliers going out of business across many industry sectors has never been higher. Keeping in close contact with key suppliers, and in some cases providing financial assistance such as paying invoices faster or guaranteeing volumes, helps mitigate the risk of bankruptcy while fostering goodwill.

Another reason to push ahead with SRM is that as economic conditions improve, supply shortages for commodities, components and other products are likely to return. And companies that have treated their suppliers fairly and continued to invest in their relationships during the downturn are more likely to be seen as 'customers of choice' - and enjoy continuity of supply - when things pick up.

While SRM takes procurement professionals beyond their usual boundaries of strategic sourcing and category management, most recognise its significance. Here we examine the barriers to SRM and how you can overcome them.

BREAKING BARRIERS

Ninety per cent of 295 executives and managers we surveyed worldwide (in 223 organisations) believed SRM would become more important. However, there are a number of barriers to overcome before its full potential can begin to be harnessed.

Defining what SRM means is one such issue. Nearly two-thirds of those surveyed acknowledged their organisation did not have an accepted definition. The findings, and 15 workshops we conducted to discuss them, also revealed many see SRM as a mechanism for monitoring and improving suppliers' performance. This contrasts with our broader definition of SRM as 'a discipline of working collaboratively with those suppliers that are vital to the success of your organisation, to maximise the potential value of those relationships'.

The former suggests a narrower, one-way process; the latter a two-way exchange that seeks to create value for both parties, whether in the form of lower costs, reduced risk, greater efficiency, better quality, access to innovation or faster speed to market.

Although when asked to choose the three most important attributes of successful SRM, participants highlighted shared benefits, communication and investment in the relationship (see chart below), in meetings with key suppliers the agenda is still dominated by contractual and service issues. Relatively few organisations use such occasions to elicit feedback from suppliers on how easy they are to do business with.

The internal perception of procurement as price or cost-focused means business and other functional managers often guard their key supplier relationships jealously and seek to keep procurement's involvement to a minimum. Despite this, the consensus was procurement should take a central role in co-ordinating supplier relationships. Reasons given included the function's understanding of market influences, access to supplier information and its overview of an organisation's operations.

So what steps should senior buyers take to enhance their internal SRM capabilities and position themselves as the best candidates for the job?

BUILDING BLOCKS

A solid SRM capability is founded on six building blocks: segmenting the supply base; securing executive sponsorship; embedding processes and governance; using technology effectively; upskilling your people; and measuring both hard and soft benefits. So how do you do that?

1 Segmenting the supply base Only by categorising suppliers into different tiers can an organisation know where to focus its relationship-building efforts. These tiers cover suppliers who are tactical, approved, preferred and strategic. Just over a quarter of respondents did not know how many of their suppliers were strategic.

In the past, volume of spend was seen as the main, if not the only, criterion for ranking suppliers, but business criticality of products/services was ranked top this time, with volume second and supplier capabilities third. The segmentation process needs to be conducted jointly with other functions and lines of business to seek a consensus about the suppliers to concentrate on, and it needs to be reviewed at least annually to maintain its relevance. Discussions also need to take place with selected suppliers to ensure both sides view the relationship as strategic.

2 Securing executive sponsorship Having C-level or other top executives engaged in managing the most strategic suppliers is vital if SRM is to be positioned correctly. The involvement of a CEO or CFO, for example, helps to align strategic objectives internally and with the supplier. It also sets the right tone for the relationship and ultimately unlocks value for both. Encouragingly, almost half (47 per cent) said they had this level of internal sponsorship.

3 Embedding processes and governance Sixty-four per cent said they had documented SRM processes, roles and responsibilities. But feedback from the workshops indicated these were patchy across the organisation, with "pockets of excellence", particularly in IT as a result of its early outsourcing of some operations. Others said they had a written policy, but had yet to detail the process by which they intended to manage supplier relationships or assign clear roles and responsibilities internally. The majority of organisations had taken a "one size fits all" approach to process and governance, rather than tailoring it for different supplier segments.

4 Using technology effectively Just 11 per cent believed existing technology strongly supported SRM. Most systems focused either on contract management or supplier performance management, while a number of organisations reported confusion among internal stakeholders as a result of transactional procurement modules in their ERP systems being badged as SRM. However, centralised web-based information portals, akin to customer relationship management systems on the sales side, are available and already being used by Vodafone and Royal Mail.

5 Upskilling your people Relationship management requires different skills to those usually found in procurement departments. Among those mentioned in the survey were a creative mindset, account planning and the ability to work cross-functionally. Almost half said they had not invested in training to equip people for SRM and the majority spent less than 30 per cent of their time on individual supplier relationships. In other words, SRM is an add-on to the day job rather than a core role. This contrasts unfavourably with the full-time, highly trained key account managers on the sales side. Some take the view that buyers aren't cut out for SRM. In the words of Martin Perminas, former procurement strategy director at Royal Mail: "Procurement personnel do not necessarily have the correct skill sets. A customer-focused or sales person is sometimes more suitable." But whether you train existing staff (perhaps by engaging your own colleagues in sales), bring in new talent, or do a mixture of both, upskilling the function is essential.

6 Measuring the benefits Quantifying the value from SRM initiatives and presenting a compelling business case (see box, right) can be extremely difficult. More than half of organisations were unable to put a number on the "hard" cost savings achieved as a percentage of annual supplier spend. But of those that could, a figure of 3 per cent or more was not uncommon. It's important, though, not to overlook the "soft" benefits of SRM, such as access to innovation and faster speed to market, because senior executives intuitively understand the value of these things and they may be worth far more to the organisation in competitive terms than savings alone (see chart above).

Martin Christopher, a supply chain academic at Cranfield University, says: "The opportunities for cost reduction through category management are finite. However, the opportunities for enhancing value are infinite through relationship management; we are only limited by our imagination." Improving your own internal SRM capabilities is, of course, only one side of the equation. To maximise the opportunities, you must engage key suppliers, listen to and act upon their ideas, make your organisation easier and more attractive to do business with and, in doing so, develop the trust that is still so often lacking in customer-supplier relationships.

Leading organisations are already doing many of these things and achieving real value from their investments, but in most cases they are limited to "pockets of excellence" in particular business units or functions. The challenge now for those in procurement is to develop the skills and capabilities that will enable them to spread these good practices more widely and make SRM a way of operating rather than just another initiative or programme that can be shelved when economic conditions are tough.

Alan Day is managing director of supply chain change consultancy State of Flux. For a free copy of the Value Added: Supplier Relationship Management report, call +44 (0) 20 7842 0600 or email: alan.day@stateofflux.co.uk

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