At the State of Flux Chicago and London Events, State of Flux released their 2015 Global SRM Research Report: The Business of Supplier Relationships. This report, which is their 7^th annual research report that analyzes detailed survey data from over 500 global companies, provides deep input into the state of supplier relationship management and the benefits that it can bring.

The importance of good SRM cannot be underestimated. As the report clearly states in its introduction, the nature of business is changing, with many companies becoming both flatter and more reliant on third parties to delivery everything from customer support through to research and development … in other words, businesses are putting more and more of their brands’ reputations into the hands of other companies. In such a scenario, a business can only be as good as its worst supplier.

On the other hand, becoming a key supplier’s customer of choice will bring access to a range of benefits, from price advantages to innovation — and that failing to do so will mean such benefits accruing to competitors instead. However, this is no longer as easy said as done as changing business dynamics are giving suppliers more power and choice about who they partner with, and how.

More than 40% of survey respondents have achieved a positive, quantifiable post-contract benefit from their SRM activities, with 31% reporting a benefit of 4% or more. Moreover, 60% report cost reductions, 52% report cost avoidance, and 39% report preferential pricing. These are substantial across-the-board benefits. While a strategic sourcing decision optimization event on a category might save 10% or 12%, that savings is limited to the handful of categories that the organization has time to strategically source. If the average organization has 60% of spend under management, only has time to strategically source ¹/_3^rd of that in a given year, then the organization only saves 10% on 20% of spend, for a grand savings of 2%. But a great SRM program can save 4%. Across the board. Year over year. This is substantial.

This is not unrealistic. As per our previous posts, research demonstrates that good SRM contributes to as much as 70% of a company’s gross profit. No other business function can make this claim. And, most importantly, State of Flux‘s seven years of research has demonstrated that the benefits, both ‘soft’ and ‘hard’, that have been secured by the companies leading the way in SRM have continued to increase. The gap between the leaders and the laggards is getting bigger and bigger.

Supplier relationships are big business, but improving them requires more than a will. It requires knowing the way. That will be the subject of our next post.

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 the recent State of Flux 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 7^th 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 who have independently found that not only does gross profit increase as working relations improve, but that 71% of the positive change is contributable to changes in the supplier relationship.

Then, in Part II, we gave additional examples of the value that can be obtained from good supplier relationship management (SRM), noting that a major oil and gas company extracts almost 1 Billion a year from its advanced SRM program while a major global electronics giant also extracts hundreds of millions from its SRM program. After this, we told you that while we don’t have permission to release specifics, we can share the general advice on how to structure a program and when you combine the basics covered in both presentations, which are quite similar, you can easily outline the foundations of a good SRM program.

Find opportunities.
Identify methods to capitalize on them.
Do it. Select the best method and go.
Overse the process. Don’t just set and forget.

Measure progress.
Accelerate implementation as circumstances permit.
Rsward success through recognition and remuneration.
Cooperate and collaborate at all times.

However, just knowing the basics is not enough. One needs to know how to put them into action and how to best capitalize on the opportunities available. In this post, we’ll present some of the best tips and tricks. Some will seem obvious, some not as obvious, but all are easy to implement and capitalize on.

Involve Suppliers From the Get Go

Don’t wait until after your supplier relationship management program is fully formed to reach out to your first supplier. Reach out to your strategic suppliers during formation of the program and ask for their input and help in creating the program. This will hasten your suppliers’ acceptance of the SRM program once it goes live and possibly give you some great insights that you can use to get a jump start on results from day one.

Align with Key Stakeholders

Success requires a unified front on the buyer’s side. This requires buy in from all key stakeholders, so align with key stakeholders before finalizing the SRM program and going live. Get buy-in and, more importantly, use these stakeholders to help get executive approval.

Start with a Pilot

Select a small group of key, willing, suppliers — preferably including some you engaged from the get go — and work-out the kinks before trying to go broad on a supplier relationship management endeavour. The last thing you want is to expand an inefficient program or replicate practices that have unexpected adverse or side effects. Get it right. Get it smooth. Then take it broad.

Challenge Suppliers to Solve Stakeholder Pain Points

It’s not just about savings, it’s also about value. If the stakeholders want new functionality in that electronics product, a more sustainable production method, a leaner production method that will allow for faster design (and line) changes, or the introduction of more environmentally friendly materials, challenge the supplier to come up with solutions that support this. This will help Procurement to not only secure the support of key stakeholders but to report wins early on in the initiative.

Regular, Positive, Supplier Feedback

Regular feedback is key to maintaining a good relationship. However, it’s important to make sure that the feedback is not just negative, what the supplier is doing wrong, but also positive, and what the supplier is doing right, and how they can build on this to do even better. It’s the old saying — you catch more flies with honey than vinegar.

Instill Relationship Management in the Supply Base

Make sure they understand that relationship management is about relationships, relationships are a two way street, and that it is up to them to manage their side of the effort. Moreover, they should take what they learn and use it in their supplier relationship management efforts to get better results from their suppliers, and push value further into the supply base.

These simple techniques, discussed at the State of Flux Chicago event, will go a long way to making your SRM efforts a great success.

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 7^th 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.

FIDO MARC.

Find

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

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.

Do

Once the different options are identified, select the best one for implementation and implement it.

Oversee

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

Measure improvements on a continual basis against an appropriate scorecard identified upon initiative implementation.

Accelerate

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

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.

Collaborate

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.

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 7^th 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.