Right now you are probably thinking that you are a customer of choice with your most strategic suppliers because you went through an in-depth, multi-stage, strategic sourcing event, spent a long time qualifying the supplier and emphasizing that the buy was significant and makes your organization a customer of choice, and inserted language into the contract that said you were a customer of choice and will always get preferred pricing at least as good as other customers of the same size for the same products. But are you really a customer of choice?

A supplier’s customer of choice gets more than good pricing. That customer gets preferential delivery (if inventory gets low or transportation options become limited due to strikes or other supply chain disruptions). That customer gets suggestions on how it can help the supplier serve the customer better (through timely order placement, different delivery schedules or options, or slight alterations to specifications that the supplier can produce faster or cheaper). That customer also gets first access to supplier innovation (that would allow it to use new production lines or technologies to produce superior or significantly cheaper products using different materials or production techniques). And, sometimes, it even gets operational insight into how to streamline its logistics on the sell side from the supplier. The reality is that if you’re not getting this from your supplier on a regular basis, even if you are getting what you perceive to be competitive pricing, your organization is not a customer of choice.

Why do you want to be a customer of choice? The recent Global SRM Research Report by State of Flux found that many of the organizations that were leaders, fast followers, or that realized returns that were greater than the average return in their category had one thing in common — they were all perceived as a customer of choice by their most strategic supplier(s). Also, the study found that one market segment not only understood this need better than other segments but also better understood what the requirements for being a customer of choice truly were. Can you guess which segment it was? Contrary to what your intuition might be, it was not the segment with the best cost performance in their market or vertical. It was, in fact, the producers of luxury goods who often saw more value in working with a supplier who treated it as a customer of choice and went the extra mile to understand the organization’s brand and market segment than with a supplier who could cut costs. And while it might be counter-intuitive at first that these organizations often saw more value when they paid more, when you consider that luxury good producers profit by expanding their market share to people who care more about brand and quality than price, and will pay more than necessary for the product they are buying, these companies can often profit much more by selling more units at higher double (or triple) digit markups than by saving a couple of percentage points on the unit cost.

Thus, while cost reduction and control is important to the average company, if a company wants to realize long term success from its SRM efforts, it needs to take a page from the luxury brands’ playbook and make sure it is a customer of choice with each and every strategic supplier it does business with. (The Global SRM study found that more luxury organizations were regarded as a customer of choice than any other organization type.)

Why are luxury brand organizations so successful at becoming a customer of choice? While it’s hard to zero in on just one activity that they do differently that makes a difference, there are a set of activities that, collectively, cause these luxury brands to stand out with the average supplier:

• They proactively listen to suppliers.
• They use collaboration to innovate.
• They work hard to create supplier loyalty.
  — AND —
• They recognize they are only as good as their worst supplier.

And the best part is that there’s nothing unique or special about these activities that limit them to luxury brands. Any organization that truly wants to be a customer of choice and is honestly willing to work with its suppliers can pull these activities off and become a customer of choice.

In other words, there’s no reason for your organization to be in a State of Flux when it comes to SRM. The recipe for success is easy to understand, it just takes hard work, adaptability, and perseverance to master the art of the relationship soufflé.

In our last post we reminded you that State of Flux is a global leader in Supplier Relationship Management (SRM) research that has been producing the Global SRM Research report for six years. Their most recent report, which is thicker than many (e-)books, should be seen as a wake-up call to organizations that claim they understand the importance of suppliers and relationship management, but really have no idea what relationship management means and what is involved to get it right as only 17% of companies fall into the emerging leaders category and only 21% fall into the followers category, which, using the classic Aberdeen Model, says that these companies are average at best (and, to be blunt, average companies are not very good at SRM). This also means that 62% of organizations really have no clue what SRM is, why it is important, and/or how to get it right. Given the percentage of spend that the average organization directs to suppliers and other third parties (which is as high as 80% in some verticals), this is not a good thing.

The good news is that it’s not hard to be above average in SRM. All it requires is a little (okay, a lot of) elbow grease, a focus on the essentials, the implementation of good processes and supporting technology, and a plan to address the critical gaps against each of the six pillars of SRM. A company that focusses on the essentials, identifies processes and platforms to address each critical gap, implements those processes and technologies, and makes steady progress will likely find that it goes from “needs improvement badly” to “above average” in 12 to 24 months, depending on the organizational commitment and resources dedicated to SRM.

So what are these six pillars?

• Business Drivers & ValueLike any Procurement function, success ultimately depends on alignment with organizational goals and key business drivers.
• Stakeholder Engagement & SupportStakeholder engagement must be proactive, include internal stakeholders and executives and key supplier personnel, scheduled, tracked, and managed like any project as each key stakeholder, if she is doing her job, will provide input and insights critical to realizing value from the supply base.
• Governance & ProcessJust like categories and sourcing events, SRM needs to be managed against a model or plan to be successful. Formal governance methodologies and processes need to be defined, tools need to be implemented, and adherence to process needs to be monitored.
• People & SkillsRelationships are always between people. It’s critical that an organization not only identify the best people, but place them where they can have the biggest impact. This requires identifying people who are not only strong in EQ, but who have the IQ necessary to manage the projects associated with the supplier that may require a strong technical background in one or more areas.
• Information & TechnologyThe reality is that there is more than one supply chain. There is the physical supply chain through which goods flow. There is the financial supply chain through which money flows. And there is the information supply chain through which all of the information needed to manage the physical and financial supply chains flow. This is the most critical supply chain from a SRM point of view as you have to capture requirements, performance, and capability data on a regular basis in order to properly manage a supplier relationship.
• Relationship Development & CultureManaging is just the first step in a good SRM program. The most successful relationships are those that are collaborative, innovative, constantly improving, and mutually beneficial.

A significant amount of work might be required to identify (and then implement) the actions that need to be taken to achieve a sufficient level of competency, but its a lot easier to do so with a high-level game plan, which the pillars provide, than it is to start from a blank slate.

Recently we introduced you to State of Flux and their Statess solution for Supplier Relationship Management (SRM), which, despite its recent market entry, is a relatively mature SRM solution as it was built on eleven years of best-practice SRM consulting and over six years of SRM Research. However, we did not cover their consulting services or research services in that series, which also differentiate them from their peers.

As per our previous series, State of Flux has been producing a Global SRM Research Report for six years, and their 2014 report summarized the results of a survey that was responded to by over 500 global organizations, including 454 buy side companies, that collectively provide deep insight into what makes a leader, a fast follower, a follower, or an average company that needs development (which is where 62% of companies fall) where SRM is concerned. (In other words, when it comes to SRM, using the classic Aberdeen groupings, 17% of companies are best-in-class and [emerging] leaders, 21% of companies are average, and 62% of companies are laggards.) This study, which is thicker than many (e-)books, is a wake-up call to organizations that claim they understand the importance of suppliers and relationship management, but really have no idea what relationship management means and what is involved to get it right.

In our next post we’ll discuss the six major pillars of the SRM maturity model put forward by State of Flux, which provide a solid foundation for any organization wanting to measure its progress on its SRM journey, but first we’re going to highlight the ten SRM essentials summarized in the executive summary and dive into those essentials that SI deems most critical (as they support the other essentials and more advanced capabilities). Why? Unless an organization addresses each of these ten essentials, its performance against one or more of the SRM pillars will be limited, and it will never achieve true excellence in SRM. (In other words, these ten essentials address necessary conditions of SRM success.)

• Benchmark where you are now.An organization that does not understand where it is, how its definition of SRM aligns to the corporate strategy and business drivers, and where the biggest gaps are will not be properly focussed and it is unlikely that it will align suppliers to the business.
• Prioritize the gaps according to their impact on business drivers.
• Define metrics and KPIs that quantify the financial and non-financial benefits and capture them on a regular basis.
• Engage proactively with all stakeholder groups in a two-way dialogue.
  For a SRM activity to be deemed successful, the needs of all major stakeholders need to be met. This means that they need to be properly defined and understood at an organizational level, not just within an individual organizational unit.
• Listen to suppliers. Understand how they perceive you as a customer, where they think you can improve, and what innovation they can offer you. This is key to defining appropriate development programs and effective performance measurements.
• Properly segment your suppliers into critical, strategic, and non-strategic
  and then into sub-groups that would benefit the most from a formal SRM program and those that would benefit the least. It’s important to focus limited resources and efforts where they will have the most impact.
• Ensure SRM is properly defined and attracts the best talent for the job.
• Information is at the heart of relationship and performance management.
  Implement proper systems to capture, analyze, and distribute that information.
• Take a proactive, collaborative, approach to relationship development.
• Leverage sell-side strategic account management.

It’s not a complete list of tasks, or areas, but a fundamental list that provides a solid starting point for your organizational effort.