In Part I we noted that while State of Flux had the treatment, before we could talk about the treatment, we had to talk about the ailments, but before we did that we needed to give a bit of background on State of Flux’s recent SRM 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). But before we could talk about either the event or the research, we needed to start with the need — which we nicely summarized using the research from Planning Perspectives which have been doing detailed research in the automotive sector for the last fourteen (14) years, and who found that not only does gross profit per vehicle increase as working relations improve, but that 71% of the positive change is contributeable to changes in the supplier relationship. Let’s repeat that yet again: 71% of profit increase in the automotive sector can be directly correlated to improvement in supplier relations.
The impact of good supplier relations is not restricted to the automotive sector. A major oil and gas company, which also invests heavily in supplier relationship management and innovation, identifies over 100 innovations a year working with their suppliers and realizes an average return of over 750,000 per innovation. Some innovations return millions of dollars to the bottom line. The company realizes almost a billion dollars a year in value from better supplier relations. That’s a damn big number.
How does it do this? It has a good supplier relationship management program. What is this program? While we can’t give specifics, as permission has not been granted for deep coverage, we can give an overview of the solid foundations. Moreover, in addition to a presentation by the major oil and gas company that realizes almost a billion dollars a year in value from better supplier relations, there was also a presentation by a major electronics corporation which also realizes hundreds of millions of dollars a year in returns from their advanced supplier relationship management program. By combining the best advice and insights from both presentations, we can provide a great foundation for your SRM efforts.
Find an opportunity where the organization would benefit from an improved supplier relationship — either through performance analysis, need identification, brainstorming, or even open submissions from employees and suppliers for potential value chain improvements.
Identify the different ways to take advantage of the opportunity. For example, if on time delivery is poor — does the supplier work with the supplier to lean production, take over shipping (possibly through a 3PL), or work with the supplier on better demand projection so orders can be placed earlier. If production costs are high, does the buyer lead a lean initiative or challenge the current supply base to find a better, cheaper, method with the promise of additional award, or award shift, to the best supplier.
Once the different options are identified, select the best one for implementation and implement it.
Manage the process from kick-off through major deliverables, performance improvements, and other milestones. Don’t just set-it-and-forget-it, that never works.
Measure improvements on a continual basis against an appropriate scorecard identified upon initiative implementation.
Once all of the key stakeholders are on board and everything is going smoothly, accelerate implementation or, if appropriate, replicate (a variation of) the initiative with another supplier that could also benefit.
Reward suppliers for their success, either with an increased margin or additional business and publicly recognize them either at annual supplier recognition events, publications, or on the company website.
Continually collaborate with the supplier to look for additional improvements that can be made to tweak the process and additional opportunities that can be pursued in the future.
SRM is really a simple process. However, as with every other initiative that can bring great value to an organization, the devil is in the details. In our next post, we are going to discuss some of the tips and tricks that these, and other, organizations have used to accelerate their SRM programs and achieve great results, including some of the tips and tricks outlined in State of Flux‘s publications.