But before we talk about the treatment, we’re going to talk about State of Flux‘s recent event in Chicago which was the US launch for their most recent Global SRM Research Report, The Business of Supplier Relationships, which is their 7th annual research report on the subject. We’ll talk about this report too, but first, let’s talk about the event, or more appropriately, the need for SRM as explained by the event.
Large organizations, including those desperate for savings, around the globe are leaving millions on the table on a regular basis. Some of this is due to a failure to capture negotiated savings (as per AMR’s classic series on Reaching Sourcing Excellence), and some of this is due to a failure to maximize the value of supplier relationships.
The heart of the matter is that the value delivered by your organization to its customers is ultimately dependent upon the value created and delivered by your suppliers that manufacture the product, pack the product for delivery, and provide warranty and repair services for the product. If the product is poor, delivered late (which results in stock outs and lost sales), packaged very poorly (which results in a large number of damaged units on delivery), or the warranty and repair services are slow and leave much to be desired, your customers won’t be happy with you, and there goes your perceived value and future revenue.
In other words, suppliers are critical to delivering the value that you promise your customers. But they are also critical to delivering the value required by your organization. Regardless of how good the products are, your organization needs higher quality products at a lower cost, new products to attract new marketshare, leaner production, lower cost delivery, and other renovations and innovations that add to the top line while shaving from the bottom line. This won’t happen without supplier involvement.
And suppliers won’t be involved unless the relationship is collaborative. Even though CAPS Research (Japan) has been telling us for almost a decade that collaborative supply management is the key to success, the concept hasn’t taken off much (yet) here in North America. While collaborative supply management has penetrated the Hackett Group top 8%, it’s not daily practice in the Sourcing and Procurement groups at many companies. But it should be.
The fact of the matter is there is considerable research, in addition to State of Flux’s Global SRM Research report (which has now been published 7 years in a row), that demonstrates the value of SRM. Consider the research undertaken by Planning Perspectives Inc. on the automotive sector over the last 14 years, which was presented at the Chicago event, which has not only found that the gross profit per vehicle increases as working relations improve (as per the Working Relations Index), but that 71% of the positive change is contributeable to changes in the supplier relationship. Let’s repeat that: 71% of profit increase in the automotive sector can be directly correlated to improvement in supplier relations. Not e-Procurement. Not spend analysis. Not strategic sourcing. Supplier relations. In addition, the more collaborative the working relation, the greater the price recessions offered up by suppliers in response to requested price reductions, even if the requested price reduction requested is lower than the average price reduction request. More specifically, companies with good supplier relations typically achieve 8% to 12% more price concessions than their peers.
Moreover, when there is a good working relationship:
- suppliers are more willing to share new technology and innovations without the up-front assurance of a purchase order
- suppliers are willing to invest in new technology in anticipation of new or additional business
- suppliers are willing to communicate openly and honestly, which prevents surprises down the road that can lead to stock-outs or supply chain disruptions
- suppliers are willing to support the organization above and beyond contractual obligations
And a good working relationship stems from supplier relationship management. In our next post we’ll delve deeper into some of the highlights of the State of Flux Chicago event before we reveal some of the most interesting findings from this year’s report.