Supplier Relationship Management Challenges:
Many companies that have transformed their supplier environment in recent years advanced procurement techniques experience a common set of pain-points and challenges:
While risk management has received significant boardroom attention, in most organizations, supplier risk remains largely unmanaged while reliance on suppliers and exposure to supplier risk continues to increase dramatically.
Increased focus on strategic sourcing, outsourcing, and low-cost country sourcing has transferred to suppliers many activities that were previously performed in-house and has simultaneously driven consolidation in the supply base. The result has been dramatically increased reliance on key suppliers, often accompanied by development of more complex supplier interactions with growing numbers of touch-points and dependencies. While this rapid deployment of sourcing has increased most organizations’ exposure to supply risks, mechanisms to enable visibility and management of these risks have not kept pace. Many companies do not have a comprehensive view of the risks associated with their supply base, nor do they have a well-thought-out, repeatable approach to managing these risks. Furthermore, it is not clear who in the organization has the responsibility to evaluate and manage supplier risks, what risk conditions should trigger actions or, even what those actions should be.
Processes and roles post-transaction are ill-defined, often inhibiting further performance improvements, limiting value from supplier relationships, and making performance gains difficult to sustain.
In many large and even mid-sized companies, the sourcing discipline is well established and repeatable enabling companies to lock in savings in category after category. However, while typical sourcing methodologies provide guidance leading up to execution of a supplier contract, once a contract is signed and the relationship moves into ramp-up and operation phases, there is remarkably little clarity and definition around what management processes must be in place, who within the company is (and, equally importantly, is not) responsible, how executives should be involved, how management activities can be conducted in an efficient manner, and how the relationship can be managed. In such environments, supplier relationship activities are little more than a series of reactive firefighting exercises with duplicated effort across the organization, with little management transparency of what actions have been taken or will be needed. The result is relationships that are inefficient and fail to harness the full capabilities of the supplier translating into increased lifetime costs.
While hundreds or even thousands of supplier metrics are tracked and reported, performance problems can persist and organizations often do not recoup resulting costs.
While contracting with a supplier after a major sourcing effort often locks in significant savings, it also locks in a number of headaches and challenges. A flaw in most companies’ sourcing efforts is that they treat contracts as legal exercises or transactions. This results in contracts that do not hold suppliers accountable, that do not motivate suppliers to improve, and that omit actionable steps the organization can take to improve supplier performance. As a result, many organizations find themselves with contractual Service Level Agreements (SLAs) that are not aligned with business value drivers, few, if any individuals that understand what suppliers are actually accountable for, and a lack of clarity in what actions should be taken when issues occur. The result is significantly diminished value from the supplier relationships, lost opportunity in recouping costs from ill-performing suppliers, and frustrated employees who know that suppliers are underperforming, but can not correct the problem.
Most organizations can not precisely identify which suppliers are truly strategic or even how such strategic supplier relationships should be managed, leading to an inability to effectively focus resources or realize strategic value from the supply base.
When managed effectively, strategic relationships can deliver impressive returns and competitive advantage to both companies and their suppliers. Through strategic relationships, companies and their suppliers can drive lower total lifetime costs while allowing suppliers to profit, can reduce risk for both parties, can help create advanced joint capabilities not available to other competitors, and can provide strategic options for additional value for both parties. Sadly, the word “strategic” is often over used when it comes to suppliers. While most organizations are proud to declare that they view some suppliers as strategic, few organizations can describe the implications of making a supplier strategic. Many organizations have not formally spelled out a set of expectations for what makes suppliers strategic, how such suppliers will be managed differently, and what suppliers must deliver in return to maintain their strategic status. Furthermore, in many organizations, asking 10 individuals to name the strategic suppliers will yield 10 different answers. As a result, many organizations manage strategic and non-strategic suppliers in an undifferentiated fashion, resulting in too much time wasted on non-strategic suppliers while little strategic value is derived from strategic relationships.
In the absence of a clear set of supplier management processes and roles in the organization, suppliers are often able to set the agenda and canvass the organization to build business.
Major supplier relationships tend to have multiple facets and touch points – operational, contractual, financial, executive-to-executive, etc. Through multiple touch-points, supplier account teams often “work the relationship”, seeking to protect their existing business with the organization and to make inroads into new areas to build further sales. While the organization can gain value from consolidating business with key suppliers and forming strategic, multi-faceted relationships, such relationships should be defined in a structured transparent manner rather than through a free-for-all sales frenzy, that can distract many individuals across the organization, consume a lot of time, and lead to poor procurement choices.
While initial aggressive sourcing in a category has for many companies yielded dramatic savings and other benefits, sustaining those benefits and attaining further reductions can be difficult without effective SRM.
For many companies that have undertaken sourcing initiatives, initial efforts have unlocked large savings opportunities, often delivering savings of 15% or more. However, re-sourcing categories where significant savings have already extracted often yields disappointing returns and often has a very poor ROI. This is because once spend is consolidated, specs rationalized, excess supplier profit margins removed, and work offshored (where applicable), sourcing offers little on-going opportunity. In order to unlock the next layer of savings, companies are finding that they must address the structural and process inefficiencies in supplier relationships and collaborate with suppliers to improve joint capabilities.
Procurement brings to bear resources with transactional or sourcing skill sets, operations brings to bear resources with functional and people management skills – none are a good fit for day-to-day supplier management.
In most organizations, the personnel responsible for on-going supplier management are the same individuals who drove strategic sourcing and those who managed internal functional departments before they were outsourced. In both cases, such individuals often lack both the knowledge and the skills required to manage supplier relationships effectively. Procurement personnel are trained in sourcing methodologies, negotiation, and other procurement skills. Operational personnel have a deep functional understanding and can be excellent people managers; however, they often lack the understanding of procurement best practices. The result is that the best skills and knowledge are not brought to bear in managing supplier relationships. In addition, these legacy skill-sets combined with individuals’ desire to do what is best for the company can actually prevent suppliers from being held accountable for performance and can increase internal costs – employees that are accustomed to being responsible for a function’s performance will often take on the responsibility of solving issues and will apply internal resources even when the function has been outsourced. The result is that supplier accountability is diminished and internal costs can rise.
Formal programs for supplier development often do not exist limiting the organization’s ability to create win-win value improvements with the supply base.
When a company’s suppliers develop capabilities to perform valuable new services, expand coverage to regions where the company has locations, improve processes and technology to deliver better performance and lower total cost, both the company and the supplier benefit. However, most companies lack effective programs for supplier development. Without formal criteria for selecting the suppliers for development, pre-defined development “tracks” that accelerate specific development techniques, and standardized supplier development management tools, companies must rely on the blunt instruments of contract negotiation and performance penalties to drive improvement.
Inefficiency introduced as too many employees spend time on unnecessary or redundant interactions with suppliers.
As companies outsource more activities to suppliers, they often find that not all the internal work goes away – an alarming number of employees across the organization end up spending time and effort managing and interacting with the supplier. This overhead is exacerbated by the duplication of supplier management effort that typically occurs across different corporate functions, business divisions, and geographies. Because internal roles and responsibilities are not clear, because many aspects of the relationship are ill-defined, because vendor management is seen as a viable job in departments where headcount reductions routinely occur, and because suppliers make every attempt to spread their relationship footprint, too many employees become involved in performing supplier management tasks that are often redundant, inefficient, unnecessary, or even competing. In our experience this can translate into dozens or even hundreds of employees involved with tracking supplier activities, dealing with issues, interacting with supplier personnel, etc. This “relationship creep” can lead to increases in retained cost of up to 10%.
While the procurement function has played a leadership role in sourcing and outsourcing activities, as sourcing matures in an organization, the objectives and value proposition of the procurement function need to evolve.
In many organizations, the procurement function has played a leading role in deploying strategic sourcing, outsourcing, and low cost country sourcing. However, as sourcing has become mature in many organizations, as the key categories have already been sourced, as sourcing practices have been institutionalized, and as many functions and business groups have become more or less self sufficient when it comes to further sourcing, procurement organizations are finding that they must develop a new value proposition. One path is for procurement organizations to champion effective SRM become centers of excellence, not just of strategic sourcing, but of on-going SRM across the entire lifecycle of supplier relationships. The procurement function can add significant value by spreading SRM best practices, by helping to add structure to the organization’s existing key relationships and by helping to flush out excess retained costs in the form of multiple redundant vendor management roles across the organization.
Many organizations lack the systems capabilities needed to support day-to-day supplier management across the supplier life-cycle.
The result is excessive manual effort, lack of a single view of supplier impact on the organization, and reduced ability to improve supplier performance. While many large organizations have deployed systems for e-procurement and ERP systems to manage purchasing transactions and accounts payable (AP), supplier data remains fragmented between corporate systems and desktop hard drives and system support for SRM across the entire relationship life-cycle is often minimal. Instead of a single source of supplier information, most companies have “islands” of data with minimal integration; purchase / AP data along with supplier master data often resides in an ERP system (though it typically requires significant cleansing and structuring before it can be used); supplier performance data often resides in one-off standalone spreadsheets on user desktops and is rarely linked with contracts and their SLAs which are typically stored in a stand-alone contract management system. Data pertaining to supplier relationship governance, supplier development activities, etc. can reside on various desktop hard drives and email in-boxes. Forming a single picture of a supplier relationship is not easy. In addition, very few companies have systems that support day-to-day SRM activities such as relationship governance, SLA management, joint process improvement, and supplier stratification. Where such system capabilities exist, they are fragmented leading to inefficient processes.
To address these challenges, companies are adopting SRM capabilities and revisiting their processes, organizations, and systems to manage their new supply environments.
Supplier Relationship Management (SRM) is a set of principles, processes, templates, and tools that help companies maximize relationship value and minimize risk and management overhead over the entire supplier relationship lifecycle. SRM enables organizations to effectively:
SRM is comprised of five key elements:
Companies that have adopted SRM best practices are realizing a number of important benefits: