Supplier relationships are a trending topic.
Let’s take the recent example of Volkswagen
who was forced to suspend part of the production in several plants after two suppliers took the unprecedented step of
refusing to deliver.Is it really an
extreme and isolated case? Unfortunately, I am not sure.
Do we really get the maximum value of our wide supplier panel (now
also called supplier network for very good reasons)? Once again, I am not sure.
On a daily basis, could we say that supplier relationships, supplier performance and our own company performance are linked? The answer is simple: Yes, they are fully interrelated.
How do we properly
manage the relationships with our suppliers?
To get the full benefits from our
wide supply base, we need to find the right balance among 4 possible types of
“relationships”.
Fireman: our time is
quite limited to be able deal with all company’s vendors; in many cases, we
just don’t manage them. We call the supplier when there is a problem to fix or
when there is something new to ask for or when we want to (re)negotiate prices.
Relationship is based on the task to be performed and the price to be paid. A
main goal is to have an efficient and automated purchasing/supply process.
Limited value is created. For very basic, simple and cheap goods and services
(as per the “non-critical” or “routine” quadrant of the Kraljik portfolio
matrix), this is a rather appropriate approach.
Follow-up: with our “key” suppliers (often selected based on the
annual spend), we sign a Service Level Agreement including operational KPIs. On
a quarterly basis, we meet with the vendor to review what went right and more
specifically what went wrong. We ask for corrective actions, and from time to
time we negotiate penalties. We also ask for the next productivity actions. It
is rather a one-direction and medium term relationship based on control. In the
best case, the agreed service level is delivered at the best cost. When, as a customer,
we face a highly competitive supplier market for standard goods or services
(somehow equivalent to the “leverage” quadrant of the Kraljik matrix), this method
is suitable.
Supplier Relationship
Management (SRM): with our few “strategic” vendors (according to the
Kraljik Portfolio matrix), we decide to enter into a long term transparent and
collaborative approach. We try to share both risks and benefits (incl.
bonus-malus scheme). This is the famous “WIN-WIN” mindset where we aim to
really know each other in order to share the pie and work together on
continuous improvement and innovation. It is about relational and operational
performance management. By focusing on results and outputs, real SRM programs
deliver good optimizations of the Total Cost of Ownership and also lead to
great innovations.
SRM
continues to be a hot topic in Procurement. This is normal as reality shows
that a few companies truly deploy robust SRM programs; the vast majority of
organizations only control their vendors through SLAs and productivity
management. We have a lot to do to improve this 3rd level of
relationship.
Suppliers
are becoming more and more integrated; they are highly responsible for the
success of their customers. And nowadays, due to the level of complexity,
change, globalization and competitiveness in so many sectors, when working with
a vendor, we definitely need to be able to constantly adjust the scope of work,
the expected outcomes, the ways of working and the commercial conditions. SRM
programs do not fully answer such challenge. This is why we see that a 4th
level of relationship is emerging.
Joint Account Management Program (JAMP): with an extremely limited number of “partners” (our
top critical vendors categorized according to value, risks and spend; the
segmentation criteria of the Kraljik matrix here do not apply anymore), we
create a deep and long term relationship based on the “WE” mindset. Jointly the
parties build trust, sign a shared vision, and set up strong governance in
order to adapt all business variations and changes, expand the pie, achieve
great improvements, implement innovations and breakthroughs. Through a robust 3
Dimension (relational, operational and transformational) Performance management
and shared investments, those very selective programs aim for co-created
sustainable value.
We cannot expect a limited team of buyers to lead and
manage hundreds of supplier relationships according to those 4 models. This is
just not realistic and it does not make sense.
Procurement departments should have the responsibility
to:
- Lead jointly with the business the supplier tiering
process (segmentation of the supply base and selection of the corresponding
type of relationship)- Co-lead with the business the partners’ relationships
- Train, support, advise the internal customers regarding efficient SRM programs with the strategic vendors
- Work on supplier panel reduction, product/service portfolio rationalization and process automation for all other vendors.
Today it is obvious that companies are committed to manage their employees to get the most of them; do they do the same with their external resources? How the Procurement function can help?
For more information on strategic relationships, please read P@37 – How did you get married with your strategic partners?
