Category Archives: Supplier Management

State of Flux Has the Treatment for Your SRM Ailments: Part II Chicago

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.

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.

State of Flux Has the Treatment for Your SRM Ailments: Part I The Need

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.

Provider Damnation 66: Tier 1 Suppliers

Suppliers. Some days you can’t deal with them but you cannot survive without them. You’re in business to serve customers, who want the products your organization sells, but which your organization can only provide if your tier 1 suppliers manufacture those products you need, to the customer’s specifications. And that’s the kicker.

No suppliers, no products.

You absolutely need suppliers, even if you are a pure services agency because you still need products (be it laptops, janitorial suppliers, or even paper for reports) to deliver services. There is no such thing as a fully integrated self-sustaining business that is self-contained all the way back to the mining or harvesting of the raw materials, the production of the energy required to process them, the pumping of the water required, and so on. So you need suppliers. Lots of them. Sometimes thousands of them. And trying to manage that many suppliers, even with a best of breed SRM system, is a nightmare on a daily basis, because, if things go wrong

Once you have a contract, barring catastrophic supplier failure, you’re locked in.

A contract locks you in until an exit clause is hit, which, in an average contract in an average organization, typically is only invokeable when a supplier fails to deliver a significant portion of the contracted goods after a significant amount of time has passed (and your organization has been stocked out for weeks and lost millions of dollars), the quality gets abysmal and the warranty return rate hits the double digits, they violate a federal safety or import regulation, or they commit a crime — assuming you have a well drafted contract.

This means that, if they’re always a few weeks late, running up costs with unnecessary expedited shipments, tacking on fuel surcharges, or slacking on quality and continually shipping orders with DOA rates just within limits, there’s nothing you can do about it. You can employ the best SRM techniques up your sleeve, but if they refuse to respond, until the contract is fulfilled and you can kick them to the curb, they’re your problem because your customers are yours to satisfy, not your supplier. Moreover, if you can’t break the contract, you can’t even shift demand to another supplier temporarily until a force majeure event occurs when they are allowed to claim inability to fulfill you orders until the event is over but

When force majeure hits, you may not be able to respond fast enough.

If it’s a custom product, it’s impossible to just go back to the runner-up in the sourcing event, award them a short-term contract (with the promise of an extension in the future when you kick your current supplier to the curb), and expect them to start production the next day. Even if, after being turned away, they say yes, and even if they say yes quickly, and even if they have capacity opening up, it takes time to retool a production line and get the engineers up to speed on a new product design. It’s going to be weeks, at the minimum, before you see the first unit.

But if you don’t find a temporary supplier, your solvency is in danger.

Cash-flow is the life-blood of the business, and without a product, it’s no sale, and no sale, no store. A company that does not sell does not survive long.

A poor supplier that locked you in to a three-year contract before you found out that they were a poor supplier (that just marginally met the minimums necessary to prevent you from cancelling the contract without a huge penalty that the organization is not likely able to afford) is a damnation of the worst kind. Fortunately there aren’t many suppliers like this because even one is way too many.

Is Your SRM Program Leaving Hundreds of Millions on the Table?

With external spend in an average company between 60% and 80%, a considerable amount of an organization’s value is dependent upon its supply base. Quality, reliability, and attractiveness are all dependent upon the supplier’s ability to create a quality product for your supply base. Service, repair, and timely customer interactions related to such all rely on the suppliers ability to deliver quality service and quality, timely, communication.

Moreover, the average organization is not only relying on its suppliers to create its value, but is losing out on hundreds of millions of dollars of value due to inefficient, and sometimes ineffective, supplier relationship management. For example, a recent study by Vantage Partners found that the top ten performers in SRM reported an average of $298 Million in financial benefits from SRM in 2014. That’s a lot of cash. As summarized in this article titled “unlocking potential value srm through effective governance” over on My Purchasing Center, there is a lot of value to be had by investing in better supplier governance.

For example, companies with good supplier relationships have suppliers who alert them to potential issues or potentially late deliveries at the earliest sign of trouble and jointly work with them to identify a resolution. But this is just the tip of the value iceberg. Joint cost reduction initiatives. Joint innovation. And so on.

But how do you get there? According to the article, the starting points are

  • supply base segmentation
  • policies and procedures
  • alignment with sourcing, category, and contract management
  • (designated) executive sponsors
  • (designated) relationship managers
  • strategic business plans

which is true, but this only addresses three of the six pillars of SRM, namely

  • stakeholder engagement & support
  • governance & process
  • business driver and value

but doesn’t really address the other three pillars of SRM,

  • people and skills – talent matters
  • information and technologies – platforms enable process
  • relationship development and culture – management is just the start

But, fortunately, there’s still time to get a handle on all of this and, more importantly, find out where your organization stacks up with respect to its peers as you still have one week to participate in the 2015 SRM Survey by State of Flux. Taking this survey, which is the most extensive survey out there on SRM, will not only give you first look into the survey results, but also give you first access to what has become the largest, most in-depth, SRM report on the planet. The 2014 SRM Survey Report clocked in at 216 pages of data, results, and expert interpretation and was full of valuable, actionable, insights — including the pillars and the ten essential starting points, not six — that your organization can use to launch an SRM program — and it’s free to all survey participants as well! Moreover, you’ll also get the full 2015 Report as soon as its available – and this will be invaluable as it will be the first report focussing on what a Supply Management organization can do to gain the executive sponsorship and support it needs for success, and the first report written with the C-Suite in mind. You will be able to use it in your quest for purchasing fire.

So don’t delay and take the 2015 SRM Survey today, before it’s too late!

Your Supply Chain is in Flux. Last Chance to Find Out How Big those Oscillations Are!

A few weeks ago we asked if your SRM was in a State of Flux because good SRM is critical to smooth supply chain operations. Later or sooner your supply chain is going to be disrupted, and without good supplier relations, you will not have any notice, or any help dealing with the disaster that is headed your way. (The chances of your organization NOT not having a major supply disruption in the next 12 months are less than 15%. Think about that.)

Then, a couple of weeks ago we remind you that your SRM, despite what you may think, is in a state of flux and that you should find out where. Especially now that you have the chance to do it for free. State of Flux, a provider of Supplier Relationship Management software and services, and the initiators of the ground-breaking SRM Research Report, are undertaking the seventh annual study which aims to understand not only the state of the practice in SRM, but what is needed for companies to get the executive sponsorship and support they need to not only master SRM but excel.

Last year’s 2014 publication was one of the most ambitious Supplier Relationship Management reports ever published — clocking in at 216 pages of data, results, and expert interpretation and full of valuable, actionable, insights that any organization can use to advance their SRM practices. This year’s study, which will likely have over 500 global participants, should be equally insightful and all those organizations that participate get full access to the results and underlying research ahead of the market. You can measure up against your peers, and improve, well before the average, laggard, organization (which will only have restricted data access if not a State of Flux customer), has a chance to register, download, and review the final report.

Considering that this study will only take about 45 minutes of your time, the reward is infinitely more valuable than the cost! But you’re running out of time. The deadline for participation in this year’s study is July 10th. (Next Friday.) Don’t miss out on this great opportunity — take the 2015 SRM Survey today!