22 January 2009 | Roundtable

Will good supplier relationship management fall victim to the current recession? The SM roundtable debates

PARTICIPANTS:

Steve Bagshaw, editor, Supply Management (chairman)

Larry Beard, director of purchasing and supply chain management, Severn Trent Water

Paul Bestford, senior director, procurement EMEA, Wyeth

Ian Campbell, head of Group Property and Procurement, Bradford & Bingley

Sue Craig, commercial manager for Centrica Energy, part of Centrica

Liz Holford, programme manager, Supplier Diversity Europe

Richard Jowers, supplier relationship manager, Essex County Council

Sourav Niyogi, senior manager, supply chain management practice, Accenture

Roger West, procurement director, NHS Supply Chain

Steve Bagshaw (chairman): Has the economic downturn affected your organisation's relationship with its suppliers?

Paul Bestford: We're concerned about firms' ability to continue to operate and ensure continuity of supply. We've used Dun & Bradstreet reports to identify vendors that might have a greater exposure to short-term bank debt but our ability to access data and information is limited. All we can do is to rely on published data, which is often out of date, and rely on what suppliers tell us. It's tough.

Larry Beard: This is the first time many of our buyers have experienced a recession. The focus will change from, say, long-term competitive advantage to survival of your business and supply chain. We are nervous about supply and we have categorised them by looking at areas such as financial viability. How good are we at paying? The ethos of supplier reduction will be on hold as more businesses dual supply. People will also be tested as far as understanding the supply chain is concerned.

Roger West: We already pay our suppliers reliably and quickly. There are some practical challenges about whether you can pay all your suppliers or even your SMEs - if you know who they are - within 10 days [which the Government wants]. The cash flow requirements would be huge. If I'm going to give them shorter payment terms, I'd like something in return, some price improvement. Organisations will have to value the benefit of liquidity versus a slight haircut on profitability. At a local level, that is one area where SRM should be proactive.

Ian Campbell: We've slid away from being a FTSE 100 company. Following nationalisation, I'm now in the public sector. As our credit rating slipped, some suppliers actually started to worry whether we would pay. We spent a good part of the last year working closely with the FSA (Financial Services Authority) to ensure there wasn't another run on a UK bank. That brings challenges - some of which affect the supply base - such as always having cash in branches and ensuring nothing happens in the media that might affect confidence in us.

Roger West: We need to be resilient so if something happens we can buffer or absorb it. That influences your thinking about single sourcing - aside from some branded products, for most things we have an alternative.

Sourav Niyogi: If you already have an integrated relationship with suppliers, you will probably have more information on them and be more capable of understanding the situation. If you're a strong company you may be able to use the situation to drive competitive advantage in the short and possibly medium term. Either way, it's imperative companies start focusing on SRM and more are doing so.

Liz Holford: Financial services companies are going for cost savings above anything. Many have struggled with true SRM and the economic climate has pushed them back towards straight transactions. Up to now, SMEs saw supplying a much larger organisation as a non-risk. The demise of Lehman Brothers undermined confidence. Now SMEs are diversifying into the public sector. There's also a risk of large organisations not looking at new suppliers but sticking with those they think are safe but the data is very often out of date.

Sue Craig: We're bringing in some new suppliers, in the main because we are running transformation programmes. We're looking at the percentage they spend with us, if it is higher than a certain amount we are looking to see if they are safe. If not, are there alternatives or could we acquire them, which sounds a bit bullish, but if it involves business critical systems, that is a distinct possibility.

Richard Jowers: We're focusing on our council tax bill commitment, which is driving our focus with our suppliers on efficiency. Are we an expensive customer? To find out we take our suppliers through a structured process and ask for feedback. We then create aligned goals to bring about improvements in 12 months.

Paul Bestford: In the private sector, profit and risk are almost inextricably related: the greater the risk, the greater the profit. There's a natural tendency to swing the other way now and de-risk our supply chains but we have to be careful because a risk-free chain is probably profit-free. The smart thing is to understand the risks and manage them - perhaps through SRM, but also our agility and ability to respond to risk.

Chairman: How would you categorise that agility?

Paul Bestford: In procurement it is in terms of switching effort, cost and complexity. People have probably been guilty of pursuing the rationalisation mantra. It often delivers a short-term gain but introduces a level of risk. That risk is not so much a problem if you can switch tomorrow.

Roger West: We are trying to focus on the needs of the customer, rather than pursuing a linear programme of cost cutting, supplier rationalisation or anything else. Ultimately that will not be successful.

Paul Bestford: We spend time talking about the needs of the business and supporting them, but are also willing to challenge the customer. They have a set of needs to perform their function but we want a conversation about the broader business needs as well. There is a degree of educating the customer and listening to them in equal measure.

Ian Campbell: You are getting into strategic issues about where the company is going and what the nature of the supply contract should be to support that. Many companies will go through this kind of major realignment of their strategic objectives and procurement has to flex its supply base to cope. I feel completely engaged; one of the advantages of a crisis is procurement gets engaged very fast.

Larry Beard: The test for all our businesses, not just purchasing, is truly how agile we are. We have to tell the business that we need to be fleet of foot and wake up because things are changing so quickly.

Sue Craig: We now have all the heads of the business units involved in trying to put some plan in place as to what we will do.

Chairman: Is there a danger we will force out suppliers through longer payment terms?

Larry Beard: Extending at this moment would be ridiculous. Who are the SMEs? That is the first challenge. Are you paying consistently? If not, do you realise? Who were the top 10 suppliers we owe money to? That's what we're trying to understand.

Paul Bestford: It's a bad time to have a problem with your accounts payable. That could be taken very badly by the market. Being consistent is crucial. Suppliers, particularly SMEs, understand the payment performance of customers and price accordingly. When that suddenly changes, extends or gets delayed you have huge exposure problems.

Roger West: There is an undue focus on SMEs, those I've had contact with tend to be prudent, family-managed businesses who don't borrow more than they can afford. We have to work out who needs help and treat them accordingly. Having a shake out may be right for the economy. When a volcano erupts and you lose all the trees, new growth happens fairly quickly afterwards.

Liz Holford: You get fall out as well though. It does push down other organisations, who, had they not got mixed up in that situation, would have survived. What's called for are new skills among procurers. We come back to agility again; you have to be able to think and behave differently.

Richard Jowers: We've done some process reviews internally and identified that while we were meeting our payment terms, if we had a set of errors, it would hold up a whole batch. So we've worked hard at addressing it and suppliers really appreciated that.

Ian Campbell: Anything to do with confidence is key. That is one of the strongest messages. Any signals that are caused by normal operational difficulties you need to deal with quickly.

Sourav Niyogi: With some of our high performing clients, paying suppliers on time is a KPI. This brings a huge amount of visibility not only to procurement, but also others in the businesses.

Chairman: Has the "customer of choice" now been forgotten?

Paul Bestford: In any marketplace - good or challenging - we compete for customers and suppliers but I would be concerned if people understand it to mean 'easy going customer who will accept high prices, margins and sign up to a massive long-term agreement'.

Larry Beard: To be attractive, the criteria has changed to financial longevity. That would probably have been number 10 on the list six months ago, now it's number one. Purchasers need to recognise the agenda has changed: longevity, plus payment terms are important.

Paul Bestford: Being easy to do business with is also hugely important. Some customers are not good at telling you what they need or at the purchase orders and payment processes. Other customers are slick and professional: they are the ones you want to do business with.

Chairman: Do suppliers look at credit ratings, and so on, before deciding to supply to you?

Roger West: Historically the emphasis has been on the buyer doing due diligence. We are now seeing a shift towards suppliers doing it too. They don't have to supply; it is a mutual process.

Richard Jowers: Sometimes suppliers are concerned if they can't get access to that information or speak to someone in the buying organisation. Through an SRM programme you open up that channel.

Roger West: We did some work in 2007 to develop a value proposition for our suppliers. We're quite new so we decided it was important for us to consistently explain our focus to suppliers. We may need to revisit that now and continue to explain why we're an important customer.

Chairman: Does SRM make a difference to innovation?

Roger West: The supply base brings more arms and legs to focus on removing waste. They can bring us ideas, for example, stacking pallets in a more efficient way to unlock some value. It is important to have the kind of relationship with them where you come together on these projects.

Liz Holford: It is as difficult as ever for new potential suppliers to get a foot in the door, unless it is a public sector organisation issuing an OJEU notice.

Roger West: Even current suppliers complain they didn't know we were out to tender despite it being in the public domain. For suppliers who have something innovative to sell, that is difficult. One thing I shall be trying to do in 2009 is make that slightly easier.

Paul Bestford: In consultancies innovation comes through people - that's their asset base, so they measure staff churn. Do procurement organisations have a target on a sensible or acceptable level of churn within their supply base? We don't do that, but maybe we should.

Larry Beard: On our SRM dashboard we measure how many innovative ideas come from suppliers. They tell us the idea and monetary business benefit. The first thing is to say the door is open. About 50 per cent of the ideas are getting traction.

Richard Jowers: Suppliers are saying: "We've told you about our ideas; let's implementthings because it will help us both." I see a degree of eagerness to drive waste from the system by some of the suppliers we are engaging with.

Ian Campbell: You tend to get more traction where there is a risk-reward framework - the empowerment to bring ideas to you and implement them subject to your agreement. Especially if the supplier keeps some of the benefit of implementing it.

Larry Beard: We're saying to our suppliers: "If you've got an innovative idea, come to us first." It might not be unique; I don't mind being a fast follower. If historically you've pushed them away, that's a big change in mindset. If they're not already supplying to us, finding us is half the challenge. We were like any corporate, we thought we knew everything and it was difficult to enter, especially for the SMEs. We are pseudo public sector and some suppliers believe the cost of going through the process outweighs the potential outcome.

Liz Holford: The intention was to ensure equality and transparency in procurement, but the infrastructure to make that happen has become cumbersome.

Paul Bestford: Twenty years ago you could say that OJEU had transformed public sector procurement. Is it a 21st century process? No. I've heard Zara, the fashion chain, get a product from catwalk and into the shops within six weeks. I'd like to see them do that with an OJEU process.

Roger West: There's an accelerated procedure, but if you use it incorrectly you're told off. If someone came to me with an innovative product, I'd say, "Let's pilot it and see if people buy it." However, as soon as the sales reach £90,000 I've got to tender it. National frameworks can also help keep costs down for suppliers. We've introduced a new tendering and supply management system coded against the OJEU process which doesn't allow variation. It is forcing buyers to consider their strategy before they tender.

Paul Bestford: We're open to innovative ideas. However, there is a difficult resource judgement to make when you are managing a procurement organisation about how much time you can afford to spend nurturing new ideas versus driving performance out of our existing supplier relationships. That's a tough call.

Chairman: How about the role of your staff with SRM?

Roger West: The challenge is changing the prevailing thinking. I'm now spending £20,000 a year on toner cartridges within procurement. Instead of focusing on buying refilled or cheaper ones, one of my team suggested distributed or managed print solutions where you charge back the cost to the individual department. That changes behaviour. It's necessary to have the capability in the procurement team to think a bit more left field.

Ian Campbell: The big gainshave been made where we've addressed demand management at source. This is about purchasers getting out into the business. They need knowledge of the existing supply base and the drivers of their own business. You only get that by getting round your own business, not operating as a discrete unit.

Roger West: People who are curious are generally the ones who find some weird solution that no one else has ever thought of before, rather than someone who is good at process.

Richard Jowers: At Essex we've placed people into the business functions. For instance, in HR we've got someone based as project management to bring people together, managing specific projects as an additional service. It allows us to get a foothold in that area and then we can put in more resources, get to know more people and build momentum.

Ian Campbell: My IT procurement team sit in group IT and have a dotted line to the IT director. They feel part of IT as much as they feel part of procurement.

Paul Bestford: You can teach a procurement person to understand IT and you can teach an IT person to understand procurement. In some senses it is good to have a mixture of that. It is a strong combination to have a mixture of technical and process skills.

Ian Campbell: They are physically embedded in the unit, so on a day-to-day basis know what's going on. They understand the issues on the ground because it is going on around them. It makes the relationship less formal and fosters a closer involvement.

Larry Beard: For our three main sectors we have business partners who report to me, but who live and breathe in the business. If the water services director has a problem, he doesn't come to me. He has someone on his senior management team, who goes to all his meetings and he is his focal point. He's also the eyes and ears of what is going on and it works well.

Richard Jowers: It can help from a supplier relationship perspective as well. When I worked with Ford we had a contract with a supplier to sell a number of particular vehicle systems a year and it wasn't happening. I spent some time with our sales team and found the reasons were simple such as lack of marketing and training. Co-location is challenging, but it's a good thing to do.

Chairman: Any practical hints and tips for readers on how to approach SRM?

Sourav Niyogi: We did some surveys and 84 per cent of clients in high performing procurement functions used a segmentation-based approach to their supply base. Only 1 per cent of low performing clients did this. Also 83 per cent of high performing clients used an automated tracking or reporting method to manage the second tier of their supply base as against 1 per cent in the lower performance bracket. If you are proactive in managing your supplier relationship, it is reflected in your performance.

Paul Bestford: We looked at the things we spend money on that make a difference to our business. We then examined which vendors are most crucial to that value proposition. You have to have open table conversations about what you're trying to achieve, what suppliers want to achieve and what they can bring to that.

Roger West: I am interested in the potential, latent talent or capability for improving our business that isn't visible without forming the relationship. A key supplier that doesn't figure on my top 10 list could be sitting on a pile of unlocked value I don't know about.

Larry Beard: We score suppliers on a 360-degree feedback. They like it because it shows them how they compare with their peers. We are used to getting our suppliers to understand what is on our agenda but we are about to go to the suppliers and ask them what questions they would like to measure us on. Your perception of yourself is here and their reality is down there. The gap shows you the difference and you can improve.

Sue Craig: If you have a firm supplying more than one of your business units you need to keep a central view of them. It maybe one of our MDs will take responsibility for a relationship with a supplier, we also use dashboards and reports. There is the sharing of that knowledge through a database or sitting round the table to review our suppliers.

Richard Jowers: We measure business indicators on people, leadership, strategy and results. We test our perception of ourselves by asking suppliers for their view and we do the same for them, then look for big gaps. Typically the supplier sees their result level as higher. We also get issues around how well we understand the supplier's strategy and they ours. The aim is to move the relationship up the bar together. If we can get to that stage we will be delivering value in the relationship with our key partners.