2014 Global SRM Research Report - Customer of choice

State of Flux 2014 Global Supplier Relationship Management Research Report focuses on becoming the customer of choice for your supplier. Nearly 500 Supply Management professionals have contributed to this year's research. Its free to download but provides incredible insights into the SRM market right now.

COPYRIGHT © 2014 STATE OF FLUX LIMITED State of Flux Limited has asserted the right under the Copyright, Designs and Patents Act 1988 to be identified as the author of this work. All rights are reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means – electronic, mechanical, photocopying, recording or otherwise – without the prior permission of the copyright owner. INFORMATION DISCLAIMER The information contained within this report is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received, or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.

Publication date: November 2014

Publication name: 2014 Global SRM Research Report – The Journey to Customer of Choice

STATE OF FLUX

2014 GLOBAL SRM RESEARCH REPORT

FOREWORD 1

TTTTTTTU FOREWORD

ALAN DAY

On 9 th February this year we celebrated our tenth birthday. So firstly, a big thank you to all of you who have worked with us over the years; it has been an exhilarating time and great fun working to solve business challenges together.

Chairman and Founder, State of Flux

This year’s report is entitled ‘The Journey to Customer of Choice’. We choose this title in recognition of the need for companies to develop a better understanding and awareness of the importance of being a good customer. We first highlighted the changing market dynamic that was the emergence of customer of choice back in 2010, and have worked since then to define it and map the path to achieving it. The challenge to become a customer of choice for your most important suppliers joins those around defining and capturing SRM value; getting stakeholders engaged and supportive; implementing good governance; developing the skills of our people; harnessing technology; and developing more mutually beneficial relationships. I sincerely hope that the content of this report will go some way to helping you address these challenges. So let me thank you again for your support over the last ten years and I hope you enjoy reading our 2014 global SRM report, ‘The Journey to Customer of Choice’. I hope you get as much from it this year as your generous feedback suggests you have in previous years.

For six of our ten years, the annual global research into SRM has been an integral part of our annual cycle. It has made an invaluable contribution to our ability to bring insight and order to the world of SRM, and we hope also to its recognition and development as a key business discipline. State of Flux reaching the ten year milestone was cause for reflection on what’s changed in the industry, and what still needs to be done. As a profession, we have seen procurement grow in so many areas. Having been on a journey from a back office function responsible for buying and expediting, procurement is increasingly viewed as a strategic partner to suppliers and business stakeholders. Its remit now more generally extends to a role in business strategy and planning. This includes category management and strategic sourcing, and is extended to owning the process for, and in many cases managing key supplier relationships. However, let’s not forget that for over 30% of those responding to our survey, this latter role is also being carried out by the wider business.

Click here to join the ‘SRM research and best practice’ LinkedIn group, supported by State of Flux, to continue the SRM discussion.

Contributors

STATE OF FLUX

2014 GLOBAL SRM RESEARCH REPORT

TTTTTTTTTTU CONTRIBUTORS

ALAN DAY CHAIRMAN AND FOUNDER STATE OF FLUX

MEL SHUTES HEAD OF SRM STATE OF FLUX

Alan founded State of Flux in 2004, and has more than 20 years’ experience designing and implementing procurement best practice. He leads State of Flux's global operations and maintains direct client ownership for a number of State of Flux's key clients, many of which retain its SRM services.

Mel has been a procurement and supply chain professional for over 30 years. Since 2005, he has lead State of Flux's SRM service line. He has delivered a range of international consulting projects covering SRM, procurement transformation, strategic sourcing and training for some of the world’s leading companies.

EDITING AND INSIGHT PATRICE DAY Head of Marketing and Shared Services, State of Flux CHARLOTTE RUGGINS Marketing Executive, State of Flux WAI-LENG CHON Consultant, State of Flux ERICA MALINEN Analyst, State of Flux ARTICLES JOHN NEWTON Head of Learning & Development, State of Flux LANCE YOUNGER CEO, State of Flux Technologies ALIS SINDBJERG HEMMINGSEN Founder, Responsible Procurement Excellence MEL SHUTES ALAN DAY

LUXURY BRANDS FEATURE ALAN DAY With thanks to DOM TRIBE McLaren Automotive

A report like this doesn’t happen without a substantial amount of work and commitment from a strong team of people with complimentary skills. We would like to acknowledge the following people who have contributed to the production of this research report. Firstly, thank you to everyone that completed the online survey and participated in the post-survey workshops. We greatly appreciate your time and feedback. And thank you to our partners listed on page 200 for helping to publicise this work, and those that contributed articles and case studies. Your support continues to enrich the final output of this document.

CASE STUDIES Special thanks to our case study contributors for sharing their SRM insights and experiences: JOHN HUDSON

AstraZeneca DAVE WYER BBC CHRIS THOMSON

Dairy Crest PAUL KEEN FirstGroup TOM LEWERS and KEITH BRAY LV=

JEFF ARLOTT Premier Foods

DESIGN RICHARD HUDSON www.richardhudson.me

Mel Shutes

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Contents 3

TTTTTTTU CONTENTS

EXECUTIVE SUMMARY

121

PEOPLE & SKILLS

INTRODUCTION

135

ARTICLE: THE PEOPLE AND SKILLS AGENDA

SIX PILLARS OF SRM, BENCHMARKING & MATURITY MODEL EXPLAINED

142

CASE STUDY: BBC

145

INFORMATION & TECHNOLOGY

LUXURY BRANDS' APPROACH TO SRM

161

ARTICLE: THE JOURNEY TO BEST-IN-CLASS SRM TECHNOLOGY ENABLEMENT

CURRENT STATE OF SRM

ARTICLE: BACK TO BASICS – SRM OR SPM

165

CASE STUDY: LV=

171

RELATIONSHIP DEVELOPMENT & CULTURE

CASE STUDY: ASTRAZENECA

ARTICLE: WHY DO PUBLIC SECTOR SUPPLIER RELATIONSHIPS SEEM SO ACCIDENT PRONE?

187

CASE STUDY: FIRSTGROUP

192

ARTICLE: WHAT CAN SRM DO FOR A 21ST CENTURY BPO?

BUSINESS DRIVERS & VALUE

195

CONCLUSIONS & CALL TO ACTION

EXTENDED FEATURE: AN INDUSTRY SECTOR PERSPECTIVE

197

GUEST ARTICLE: ADVANCING THE RESPONSIBLE PROCUREMENT APPROACH BY WORKING MORE COLLABORATIVELY WITH SUPPLIERS

ARTICLE: THE JOURNEY TO CUSTOMER OF CHOICE

STAKEHOLDER ENGAGEMENT & SUPPORT

200 OUR PARTNERS

203 ABOUT THE RESEARCH

CASE STUDY: DAIRY CREST

205 ABOUT US

ARTICLE: IT’S ABOUT THE SUPPLIER EXPERIENCE

206 LIST OF CHARTS

SELL SIDE PERSPECTIVE

CASE STUDY: PREMIER FOODS

101

GOVERNANCE & PROCESS

118

ARTICLE: EAUCTIONS & SRM – ARE THEY MUTUALLY EXCLUSIVE?

Executive summary

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2014 GLOBAL SRM RESEARCH REPORT

TTTTTTTTTTTTTU EXECUTIVE SUMMARY

This is our sixth annual SRM report and the survey this year attracted responses from over 500 companies globally, across more than 20 industry sectors. This is an increase of more than 30% on last year, showing interest in SRM is high.

In addition to examining the broad range of feedback on the development of SRM practice, this year’s report also contains features on the journey to customer choice and how luxury brands approach supplier relationships. As per previous years, the research and analysis is based on our six pillars of SRM best practice and maturity model, allowing us to identify three benchmarking groups of companies: leaders, fast followers and followers.

 SRM MATURITY IN 2014

Global research.

500+ companies have responded to the survey. 20+ industry sectors have been represented. 6 years of SRM research.

This year’s results reveal a picture of steadily improving capability and progress. Of the companies identified as leaders in 2013, most would only be featuring in the fast followers group this year had they not improved their capability. The gap between leaders, fast followers and followers is widening, and is increasingly defined by the value being realised. The leading companies are demonstrating better alignment to business objectives and increased benefits. Their investment in SRM is resulting in more collaborative and open supplier relationships. The maturity profile across the six pillars of SRM best practice remains much the same as last year, with the exception of people and skills where all three benchmark groups report stronger practices. Many companies believe they have strengthened their governance and process capabilities. However, we believe this pillar should encompass robust performance, contract and risk management. Feedback on these processes highlights this is an area requiring urgent attention. Information and technology remains the area where the most improvement is required.

30% more buy side company responses attracted in 2014

454 BUY SIDE COMPANIES

○ 2014 ○ 2013

314 BUY SIDE COMPANIES

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Executive summary 5

6 LEADERS ARE GETTING MORE VALUE

CUSTOMER OF CHOICE

The concept of customer of choice has become more widely understood and leading SRM companies are increasingly reporting benefits consistent with that status. However, our research reveals that for most organisations, the realisation that they may not actually be a customer of choice for many of their key suppliers, is difficult to absorb and in some cases even more difficult to address.  RELATIONSHIP MANAGEMENT AND DEVELOPMENT IS INCREASINGLY THE FOCUS Defining exactly what SRMmeans for a company has long been a challenge. In many cases this can be attributed to confusion between SRM and supplier performance management (SPM). While an effective and holistic approach to supplier management is important, the failure to focus sufficiently on relationship management and development has been a missed opportunity for many companies. However, this year we have seen a significant increase in the number of companies reporting that the primary focus of their SRM programme is on managing key supplier relationships collaboratively to deliver more value.

The gap in benefits that leaders receive versus followers has grown over the 6 years we have studied SRM. Leaders and fast followers are more than twice as likely than followers to get 6% or more post contract benefits. Leaders are also more likely to receive preferential pricing and they are twice as likely to get access to innovation. Leaders work on and progress all 6 pillars, to achieve sustainable SRM value.

 BUT BARRIERS TO ACHIEVE SRM LEADERSHIP REMAIN

Some areas of SRM are still a challenge. For example: a lack of people with requisite skills; budget and resource challenges; and uncertainty caused by changing business priorities. These barriers have been stubbornly consistent over the years and are again highlighted this year’s findings.

Executive summary

STATE OF FLUX

2014 GLOBAL SRM RESEARCH REPORT

VALUE

_1_ BUSINESS DRIVERS & VALUE

_2_ STAKEHOLDER ENGAGEMENT & SUPPORT

_3_ GOVERNANCE & PROCESS

_4_ PEOPLE & SKILLS

_5_ INFORMATION & TECHNOLOGY

_6_ RELATIONSHIP DEVELOPMENT & CULTURE

KEY HIGHLIGHTS

Following are the key highlights from this year’s SRM study. These are divided across the six pillars of best practice, which is explained in more detail in the next section.

1. BUSINESS DRIVERS AND VALUE ö ö SRM leaders are aligning SRM more effectively to their key business drivers. ö ö Cost reduction is the most important business driver (88%), followed by risk (78%). ö ö Supplier innovation is regarded as an important business driver by 78% of respondents. ö ö A majority (64%) of leading companies have developed a clear value proposition to act as an SRM ‘sales pitch'. 2. STAKEHOLDER ENGAGEMENT AND SUPPORT ö ö Stakeholder support is far below its optimum level to make SRM work in most organisations. ö ö Leaders are twice as likely as followers to have strong and active senior stakeholder support. ö ö Strong and active support for SRM from business and operational areas is low, averaging less than 35%.

ö ö Leaders enjoy a financial advantage, with 46% reporting benefits equivalent to 4% or more of contract value. ö ö Of companies that have identified a business driver as important, only around 50% are receiving corresponding benefits. ö ö Customer of choice benefits are more commonly reported by leaders.

ö ö Fewer companies report supplier resistance as a barrier to SRM than in 2013. ö ö Around 60% of leaders have gathered feedback from suppliers on how they are perceived as a customer, compared to 43% overall. ö ö There is a lack of executives accountable for key supplier relationships in many companies.

ö ö 53% of respondents have stakeholder management plans in place for SRM, compared to 69% of leaders.

STATE OF FLUX

2014 GLOBAL SRM RESEARCH REPORT

Executive summary 7

3. GOVERNANCE AND PROCESS ö ö More than eight in ten companies have now completed a formal segmentation of their supplier base. ö ö Spend and risk remain the key segmentation criteria but other more value-based criteria are increasingly being used. ö ö Governance models are more prevalent but have gaps. The most significant being the lack of regular risk reviews and the absence of RACIs. 4. PEOPLE AND SKILLS ö ö 70% of leading companies have defined the SRM role compared to 41% of others. ö ö Less than half have moved onto having an SRM-specific skills and competencies matrix, performing an SRM competency assessment and having SRM-specific training options available. ö ö SRM leaders and fast followers are more likely to be creating dedicated SRM jobs responsible for a portfolio of supplier relationships. 5. INFORMATION AND TECHNOLOGY ö ö Information and technology remains the lowest performing area across all pillars with leaders, fast followers and followers all still in the developing phase. Other respondents are ‘undeveloped’. ö ö Leaders and fast followers are three times more likely to be making significant use of technology. ö ö Lack of functionality, disparate systems and accessibility are some of the key reasons for poor adoption. ö ö Leaders and fast followers are three times more likely to have technology in place to manage relationships. 6. RELATIONSHIP DEVELOPMENT AND CULTURE ö ö Leaders are far more likely to be sharing strategic information with suppliers. ö ö Leaders report that negotiations are concluded faster and have better outcomes as a result of SRM. ö ö Regular collaboration with suppliers takes place with around 75% of leaders, compared to 50% across others.

ö ö 68% of respondents place responsibility for SRM in procurement. ö ö Less than 20% of respondents report having robust supplier performance, contract and risk management in place for more than 75% of their key suppliers. ö ö The majority of companies are conducting periodic strategic reviews with key suppliers.

ö ö Cross-functional teams are essential to good SRM and over half of all respondents are making use of them. ö ö The previously reported demand and supply gap for SRM training remains. ö ö The proportion of companies investing in training has declined since we started our research in 2009. ö ö Companies identified as leaders in SRM are also the ones that are making the training investment. ö ö 81% of respondents are using Excel to create and manage supplier management reporting. ö ö Leaders share more information with their key suppliers than other organisations. ö ö The top four benefits of having effective supplier management technology in place are: ö ö Information management, sharing and reporting (69%) ö ö Supplier performance improvement (68%) ö ö One place to manage suppliers (68%) ö ö Supplier management oversight (62%) management information.

ö ö Only around 50% of leaders consider themselves to be good at capturing supplier innovation. ö ö 77% of leaders believe they are a customer of choice for more than 50% of their key suppliers. ö ö Only around 30% of companies are using a 360° type tool to assess the health of their key relationships.

Executive summary

STATE OF FLUX

2014 GLOBAL SRM RESEARCH REPORT

TEN SRM ESSENTIALS

6. Complete or revisit segmentation to ensure you are focusing your scarce resource on supplier relationships that will make the most difference. Build robust governance at each segmentation level. Ensure governance and process once built are comprehensively deployed, adopted and outputs measured. 7. Ensure the SRM role is properly defined and one that will attract the best talent. Invest in training to equip your people with the requisite behavioural and technical skills to manage all aspects of the supplier relationship. 8. Information is at the heart of relationship management. Become ‘masters’ of it and enable real collaboration by using technology. Connect the enterprise inside and out, with scalable, secure and accessible supplier management technology that is integrated. 9. Take a proactive approach to relationship development by sharing information to promote openness, transparency and trust. Seek opportunities to collaborate on a wider set of challenges. Look inside your key relationships for strategic and cultural alignment using a 360° assessment. Work with your key suppliers to produce a joint account plan. 10. Leverage sell side strategic account management (SAM). Look for the synergies in both parties seeking to create value and assure mutual benefits.

Our experience of working with companies to identify and develop their SRM opportunities, alongside our research, make us more confident than ever that SRM has huge untapped potential to deliver real long-term sustainable value. An aspect of that value which is often misunderstood and undersold is that of being a customer of choice. A company’s standing as a customer of choice, in particular with its critical suppliers, represents both risk and opportunity. If SRM is implemented effectively, it will without doubt make a positive contribution to a company being regarded as a customer of choice. However, there are clearly challenges that need to be overcome. Our call to action for companies seeking to implement SRM or improve existing capability, is to create a 12 month plan that will work across these 10 essentials: 1. Understand where you are now, and how your SRM definition and value proposition aligns to your company strategy and business drivers. Use this insight to shape and develop your SRM programme to deliver what the business needs. 2. Close the business drivers to benefits gap. Create strategies that focus on the most important business drivers and develop a collaborative approach with suppliers to drive benefits. 3. Capture and report both financial and non-financial benefits to demonstrate the business impact of SRM and create momentum in the business. 4. Engage proactively with all key stakeholder groups in a two-way dialogue. For internal stakeholders this involves not only ‘selling’ the SRM value proposition but also listening to their needs as customers of third party products and services. 5. Listen to suppliers. This means gathering data using a voice of the supplier survey to understand how they perceive you as a customer, how you compare with your peer group and your standing as a customer of choice. To fulfil its potential, SRM needs strong and active stakeholder engagement.

Introduction

STATE OF FLUX

2014 GLOBAL SRM RESEARCH REPORT

TTTTTTTTTU INTRODUCTION

Welcome to the State of Flux 2014 Global SRM Research Report – The Journey to Customer of Choice.

We chose to focus this year’s report on the journey to customer of choice because it reflects how this topic has emerged and is increasingly recognised as an integral part of SRM, and indeed a desired outcome for key supplier relationships. We have also created a special feature on how luxury brands, arguably experts at achieving customer loyalty, manage their suppliers. Read on to find out whether they put as much effort into their supplier experience as they do managing the customer experience. We have gathered feedback, analysed and commented on key aspects of SRM from over 500 companies. Alongside the research and analysis, we are happy to share a range of thought provoking cases studies and articles. We hope you will find these not only interesting and insightful, but also helpful and easy to put into practice.

In this year’s report, we continue to analyse and comment on developments and trends in SRM using our six pillars of SRM model. Since we started this research in 2009, we have seen steady and sustained progress achieved in the development and implementation of SRM strategies. This progress has been achieved against a very challenging economic background. As we now begin to experience a return to growth, the value of SRM takes on new significance. Increased demand always represents both an opportunity and a challenge, and this year’s report is intended to provide insight into how SRM manages both of these equally.

Our focus is to look at how companies are approaching activities aligned to SRM, defined as:

A discipline of working collaboratively with suppliers that are vital to the success of the organisation, to build trust and maximise the mutual value of those relationships. However, this definition as always must be considered within the wider context of good practice supplier management, including category management, strategic sourcing, risk management, contract and performance management.

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six pillars of SRM, benchmarking & maturity model explained 11

TTTTTTTTTTTTTTTTTTTTTTU STATE OF FLUX SIX PILLARS OF SRM, TTTTTTTTTTTTTTTTTTTTTTTTTTTTU BENCHMARKING & MATURITY MODEL EXPLAINED

VALUE

_1_ BUSINESS DRIVERS & VALUE

_2_ STAKEHOLDER ENGAGEMENT & SUPPORT

_3_ GOVERNANCE & PROCESS

_4_ PEOPLE & SKILLS

_5_ INFORMATION & TECHNOLOGY

Measures to develop supplier relationships to be more collaborative, innovative and mutually beneficial. _6_ RELATIONSHIP DEVELOPMENT & CULTURE

SRM value proposition

Effective and proactive stakeholder engagement

Creating an effective

Understanding of the required skills and capabilities, organisation structures, job profiles, and training solutions.

Optimised use of technology to enable connection, collaboration and value creation across the business and with suppliers.

clearly aligned to business drivers. Value captured and measured.

operating model, and governance and process methodologies and tools.

across executives, the business and suppliers.

SIX PILLARS OF SRM

Our research and experience of working with companies to implement SRM makes us confident that the value and benefits derived from SRM will increase if the activities described in the six pillars are implemented effectively.

The State of Flux six pillars of SRM is a model for SRM excellence, developed and refined over the last ten years. It will be familiar to previous readers of this report and to those companies we have engaged with around SRM. For those unfamiliar with the model, it is explained here. Our initial SRM research identified key themes and activities that were common to more successful approaches to SRM. Progressively, we developed these into a model that defines the key elements of SRM and the range of practices that support these elements. Each element or ‘pillar’ is important in its own right, but it is the successful combination of activities that make for the most successful SRM outcomes.

10 years – the time taken to develop, refine and prove this model for SRM excellence. 6 pillars stand for key elements of SRM and the range of practices that support these elements. All You need to work on all six pillars to achieve sustainable progress.

You will find our research and report on SRM best practice is aligned to each of the above pillars.

six pillars of SRM, benchmarking & maturity model explained

STATE OF FLUX

2014 GLOBAL SRM RESEARCH REPORT

SRMmaturity model

ADVANCED

ESTABLISHED

DEVELOPING

UNDEVELOPED

BUSINESS DRIVERS & VALUE

STAKEHOLDER ENGAGEMENT & SUPPORT

GOVERNANCE & PROCESS

PEOPLE & SKILLS

INFORMATION & TECHNOLOGY

RELATIONSHIP DEVELOPMENT & CULTURE

MATURITY MODEL

The State of Flux SRM maturity model provides a benchmark against which the maturity of a company’s SRM activity can be consistently measured. It has four levels of maturity across the six pillars of SRM. At each level, maturity is characterised as follows:

ADVANCED ö ö Clear alignment between SRM value and key business drivers. ö ö Wide range of SRM value being captured, with both financial and non-financial benefits realised. ö ö Strong and active C-level support. ö ö Strong and active stakeholder engagement and support across all impacted business operations. ö ö Strong support from suppliers. ö ö Supplier segmentation using a range of criteria, and differentiated supplier management strategies implemented, aligned with business drivers. ö ö Robust risk, contract and performance management in place and delivering results.

ö ö Effective governance in place with high levels of compliance. ö ö Skilled practitioners in clearly defined roles. ö ö Capability regularly reviewed and leading training solutions in place. ö ö Technology solution in place that enables proactive information management and sharing, and collaboration across all SRM areas. ö ö Strong and sustainable relationships in place with high levels of trust and collaboration. ö ö Relationships assessed using a 360° approach on a regular basis. Ongoing relationship development plans in place.

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six pillars of SRM, benchmarking & maturity model explained 13

ESTABLISHED ö ö Good alignment between SRM value and key business drivers. ö ö Good range of SRM value being captured with both financial and non-financial value being realised. ö ö C-level support established. ö ö Good level of stakeholder engagement and support achieved across impacted business operations. ö ö Suppliers supportive. ö ö Supplier segmentation using a range of criteria and differentiated supplier management strategies implemented. DEVELOPING ö ö SRM value proposition developed but clear links to business drivers not fully defined. ö ö Some SRM value captured. ö ö Stakeholder engagement and support building. ö ö Some suppliers engaged. ö ö Supplier segmentation completed or underway. ö ö Risk, contract and performance management capability being developed. ö ö Some governance structure in place. UNDEVELOPED ö ö No specific SRM value proposition developed. ö ö No clear evidence of SRM value demonstrated. ö ö Stakeholder engagement and support low. ö ö Few, if any suppliers engaged in a constructive dialogue. ö ö Supplier segmentation not complete or very rudimentary. ö ö Risk, contract and performance management capability poor.

ö ö Robust risk, contract and performance management in place. ö ö Effective governance in place with a good level of compliance. ö ö Skilled practitioners in clearly defined roles. ö ö Capability regularly reviewed and leading training solutions in place. ö ö Technology solution in place that enables information management and sharing, and collaboration across key SRM areas. ö ö Good relationships being established with high levels of trust and collaboration. ö ö Relationships assessed using a 360° approach. Relationship development plans in place. ö ö Work underway to define the SRM role. ö ö Some practitioners in place. ö ö Some general training delivered. ö ö Information generally collected from various sources and reports most likely created in Excel. ö ö SRM activities and suppliers are managed on Excel. ö ö Number of supplier relationships being developed that are more collaborative. ö ö Supplier relationships not currently assessed using a 360° approach. ö ö Very little structured governance of supplier management in place. ö ö SRM role not defined. ö ö No recognised SRM practitioners in place. ö ö Very little supplier related information collected or shared. ö ö Supplier relationships not developed. ö ö Supplier relationships not currently assessed using a 360° approach.

six pillars of SRM, benchmarking & maturity model explained

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2014 GLOBAL SRM RESEARCH REPORT

Leaders, fast followers and followers as a proportion of all respondents

10% LEADERS 8% FAST FOLLOWERS 21% FOLLOWERS 61% OTHERS

LEADERS, FAST FOLLOWERS AND FOLLOWERS

model – the fast followers. This group will represent those companies that in previous years would have been close to the top of the followers group. They are reporting some very positive SRM attributes, while not yet in the leader category. This year there are 32 companies that fit into the fast followers group. These represent 7% of the total respondents. The criteria applied to fast followers are: ö ö Achieving a State of Flux SRM index score of at least 3.25. ö ö No more than three of the six pillars of SRM still in the developing stage of the SRM maturity model.

The concept of leaders and followers, as a means of comparing the maturity and effectiveness of SRM approaches, has featured in our last few reports. We continue to evolve this method of benchmarking to give companies an even better idea of where they are on the journey towards SRM excellence compared to others.

LEADERS

The criteria to be described as a leader will continue to be tough. We believe that as SRM develops, we should maintain high standards in order that organisations will continue to improve and strive for excellence in this field. This year we have identified 46 companies that are regarded as leaders. These represent 10% of the total respondents. The criteria applied to leaders are: ö ö Achieving a State of Flux SRM index score of at least 3.75 (SRM index explained on the next page). ö ö No more than two of the six pillars of SRM still in the ‘developing’ stage of the SRM maturity model.

FOLLOWERS

The followers group consists of 96 companies, around 21% of all respondents. Followers will have a minimum SRM index score of at least 2.25, with no more than three pillars in the developing stage. The remaining 62% of respondents have reported SRM practices that are generally developing or undeveloped, or did not respond to sufficient survey questions for us to gain an overall understanding of their capability. These responses are used in the individual question analysis in the report but have not been used to create the leaders, fast followers or followers groups.

FAST FOLLOWERS

This year we have received more responses to our survey than ever. We have therefore introduced an additional category to the leaders and followers

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six pillars of SRM, benchmarking & maturity model explained 15

SRMmaturity model

6.0

ADVANCED

4.5

ESTABLISHED

3.0

DEVELOPING

1.5

UNDEVELOPED

BUSINESS DRIVERS & VALUE

STAKEHOLDER ENGAGEMENT & SUPPORT

GOVERNANCE & PROCESS

PEOPLE & SKILLS

INFORMATION & TECHNOLOGY

RELATIONSHIP DEVELOPMENT & CULTURE

STATE OF FLUX SRM INDEX

Your SRM index

In 2013, we introduced the State of Flux SRM index. This has enabled companies to translate the graphic representation of their SRM capability on the maturity model into a numeric value, and therefore make it easier to establish a baseline and set a target for improvement. An index score is calculated based on the self- assessed responses received to specific questions within our 2014 SRM survey. These questions are selected to reflect what organisations are actually doing and experiencing, and are weighted to reflect their importance to an effective overall approach to SRM. Scores are calculated for each of the six pillars and the SRM index is the average across all six.

Participants in this year’s research are all able to receive their SRM index calculation* by contacting enquiries@stateofflux.co.uk If you didn’t participate in this year’s research but would still be interested in receiving an SRM index rating, please contact enquiries@stateofflux.co.uk *Please note: the index can only be calculated if the survey was completed in full.

The SRM index is on scale of zero to six and correlates to the maturity model as shown above.

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Luxury brands' approach to srm 17

uxury B R A N D S ' A P P R O A C H T O S R M

Luxury brands' approach to srm

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TTTTTTTTTTTTTTTTTTTT TTTU LUXURY BRANDS' APPROACH TO SRM

Special feature

Luxury brand organisations are likely to spend more time with their suppliers and understand them at a personal level. They are also more likely to enjoy stronger working relationships because of the high levels of trust and brand loyalty they create.

THE VALUE OF SRM IS CLEARLY UNDERSTOOD

However, there is still work to be done to put governance and structure around how the luxury brand organisations manage their supplier relationships. Our SRM research this year included a detailed look at how luxury brand organisations approach SRM. Luxury brands build their reputations on creating an exceptional customer experience and building brand loyalty with customers. We wanted to see if they do anything differently with their suppliers, and if they recognise the concept and the value of being a customer of choice. Because they are experts at creating brand loyalty, we also wanted to know if they put as much effort into their supplier experience and building supplier loyalty as they do with customers. As a group, the luxury brand organisations were all strong in the relationship development aspects of SRM, however they were less mature in the areas of governance and process. Their results were interesting – 65% were in the followers group and there were only 12% that we would regard as leaders. However, analysing the results further and incorporating the interview and workshop notes, we saw a number of impressive attributes displayed by the luxury brand organisations on SRM and a couple of areas for improvement.

It’s about getting suppliers engaged. If they’re there with you on the journey then trust and loyalty will develop. Dom Tribe – McLaren Automotive

We asked the organisations if they had developed and documented a clear value proposition or business case for SRM. Figure A clearly shows that luxury brand organisations have a better understanding of the value SRM brings to their organisation, and how it aligns to the organisational strategy, than even the SRM leaders. They were also able to document this. In fact, we observed that the luxury brand organisations are often more focused on the customer of choice benefits rather than savings benefits because of their need for quality, exclusivity and cutting-edge technology – which aligns to their luxury strategy and focus on the customer experience. Not all luxury brand organisations found it easy to start. A luxury mobile phone manufacturer explains, “We had resistance as our executives wanted to see the results before we started; but you can’t get the results without the initial impetus. Our marketplace is difficult; we have very fast turnover and the technology is continuously changing. We would get bumped by our suppliers if a large competitor came knocking, so we need to make sure we have the best relationship to ensure we remain a customer of choice.”

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Luxury brands' approach to srm 19

Figure A. Percentage of respondents that have developed and documented an SRM value proposition

0% 10% 20% 30% 40% 50% 60% 70% 80%

○ YES ○ NO ○ DON’T KNOW

Don't kn No Yes

LEADER

LUXURY BRAND FOLLOWER FAST FOLLOWER

Figure C. Percentage of respondents that have reported tangible benefits in supplier innovation fromSRMprogrammes / activities so far

Figure B. Percentage of respondents that have gathered feedback from suppliers in the last 12 months

0% 10% 20% 30% 40% 50% 60% 70% 80%

○ YES ○ NO ○ DON’T KNOW

Don’t kn No Yes

LUXURY BRAND FOLLOWER FAST FOLLOWER LEADER

LEADER

LUXURY BRAND FOLLOWER FAST FOLLOWER

THEY PROACTIVELY LISTEN TO SUPPLIERS

THEY USE COLLABORATION TO INNOVATE

We asked survey respondents if they have gathered feedback from suppliers on how they are perceived as a customer over the last 12 months. Like SRM leaders, luxury brand organisations are more likely to gather feedback on how they are perceived as a customer than the majority of organisations. Most luxury brand organisations use a formal voice of the supplier exercise to gather feedback from their top 100 to 200 suppliers. This informs them what relationship attributes are important to their suppliers and how they compare relative to their key competitors. In addition to conducting a voice of the supplier review, Harley-Davidson stood out here for actively creating opportunities for two-way dialogue. They have a supplier advisory council to ensure they are working in harmony with suppliers. The Harley-Davidson’s supplier advisory council’s remit is to seek out issues of strategic importance at Harley-Davidson. There are now 16 supplier delegates who serve on a four-year rotation on the council and those suppliers sign a charter stating they represent and act on behalf of all suppliers, rather than on their own individual needs.

The luxury brand organisations are generally design led; often at the cutting-edge of technological advancement and in many cases using small volumes – always pushing suppliers’ capabilities and testing their flexibility. This is backed up by the numbers: we saw that 59% of luxury brands reported improved supplier innovation as a result of their SRM programmes and activities, compared to 43% of survey respondents as a whole.

McLaren Automotive understands the importance of supplier relationships to

innovation. Dom Tribe said that “creating the right environment for suppliers and their internal teams to work together is critical to making innovation work” . He adds that “innovation is not often a ‘eureka’ moment, but rather a continually evolving process, where all parties are focused on a common goal”. This continuous process requires work from both parties, but especially the buying organisation in providing quick and factual feedback to the suppliers. Dom cautions on the dangers of not providing feedback to suppliers, which can create a learned helplessness where suppliers feel unable to provide input and / or their ideas are not valued or listened to. One poor supplier experience can impact the morale of others, magnifying this learned helpless state.

Luxury brands' approach to srm

STATE OF FLUX

2014 GLOBAL SRM RESEARCH REPORT

Figure D. Percentage of respondents and proportion of key suppliers currently regarding them as a customer of choice

10% 15% 20% 25% 30% 35% 40%

○ LEADER ○ FAST FOLLOWER ○ FOLLOWER ○ LUXURY BRAND

0% 5%

76% TO 100%

51% TO 75%

26% TO 50%

0 TO 25%

THEY WORK HARD TO CREATE SUPPLIER LOYALTY

important but so are the simple things like thanking suppliers for their contribution, promoting them in the industry and inviting them to join on cycling trips. This was echoed by one of the luxury clothing organisations, where their focus was initially operational starting with performance management, but evolving into better value, relationships and innovation. Some of the luxury brands have started out small, or were considered small in their respective sectors. Tony Burt, founder of East Imperial luxury tonic water shared their initial challenge to get the bottler to produce the right design, quality and volume. When they first set up, they often spent more time selling their vision, strategy and plans to prospective suppliers than customers. This view was echoed by a number of the other luxury brand organisations that were often dealing with suppliers much larger themselves, and despite the cache of the brand still, found themselves ‘selling’ to their suppliers. Figure D shows the percentage of respondents and the proportion of their key suppliers who currently regard them as a customer of choice.

One thing all luxury brand organisations have in common is they work hard to create supplier loyalty. Sunseeker are a good example of a company that go the extra mile to create brand loyalty with customers and they work very hard to extend this to their suppliers. Initially, brand loyalty from suppliers is relatively easy to achieve given the attractiveness of the brand, however effort is required to sustain it. This involves continuing to create the right operating environment – consistently focusing on collaboration and displaying the right behaviours to reinforce this. Some organisations offered benefits to their strategic suppliers, usually reserved for staff (such as staff discounted products). Others like Bang & Olufsen focused on ensuring the supplier always left with more knowledge about design. One ensured suppliers are invited to attend customer events / activities and another offered full access to internal training courses, treating the supplier staff as members of the extended team. Rapha acknowledge the need for building trust on both sides by doing the basics well and keeping the relationships with suppliers human. Rapha like to take people on the journey with them. Clearly quality and performance are

STATE OF FLUX

2014 GLOBAL SRM RESEARCH REPORT

Luxury brands' approach to srm 21

Figure E. Percentage of organisations with a plan to support being a customer of choice

Compares to a 31% average

60%

○ YES ○ NO ○ DON’T KNOW

50%

40%

30%

20%

10%

LEADER

FAST FOLLOWER

FOLLOWER

LUXURY BRAND

THEY RECOGNISE THEY ARE ONLY AS GOOD AS THEIR WORST SUPPLIER

We can see in figure E , luxury brand organisations scored higher than average; a profile similar to leaders and fast follower organisations. Partly this is due to the cache of the brand, but we think it’s more due to the effort they put into the supplier experience. Somewhat surprisingly, less than 50% of luxury brand organisations have a strategy or plan in place to improve their standing as a customer of choice with key suppliers. Although this is still higher than the overall average of 31%. We did note that overall, the luxury brand organisations are less likely to be structured in their approach to SRM, compared to peer organisations with a similar SRM index score. There were some notable exceptions. Harley- Davidson adopts a partnership approach as opposed to treating suppliers as commodities. They work hard to engage their suppliers in design and product development, and try to make it a bit more fun to work with them – often inviting suppliers to customer events or bringing bikes and merchandise to supplier meetings.

BMW: the honourable merchant

Each year in the SRM report we highlight the need for segmentation and focusing effort on the top tier of suppliers. Interestingly, luxury brand organisations often extend their focus to any supplier that can affect the customer experience. This is especially evident with those that manufacture products. For manufacturing organisations, the second tier of preferred suppliers is usually larger than other organisatons, and will include all suppliers that produce an item used in the end product. We have written in the past about ‘only being as good as your worst supplier’ and this mantra is practiced by luxury brand organisations with their fastidious approach, especially to supplier quality. Unfortunately this expansion of the preferred supplier tier and focus on performance management can sometimes cause confusion in luxury brand organisations. This confusion is often between supplier performance management and supplier relationship management, as well as a merging of the first two tiers of supplier segmentation. This is to the detriment of an SRM approach that should be putting more focus on genuinely strategic suppliers.

The family-owned nature of BMW has fostered the development of suppliers being treated as a part of the BMW family and the birth of the idea of ‘the honourable merchant’. They strongly believe in ‘treating others as you wish to be treated’ and that supplier relationships go beyond business relationships. They recognise their reliance on the abilities and innovations of suppliers for business growth and development, therefore close relationships are more highly valued than short term negotiation strategies.

Luxury brands' approach to srm

STATE OF FLUX

2014 GLOBAL SRM RESEARCH REPORT

Figure F. How SRM has changed the nature of supplier negotiations

○ LEADER ○ FAST FOLLOWER ○ FOLLOWER ○ LUXURY BRAND

BETTER OUTCOMES FOR BOTH PARTIES

QUICKER TO REACH AGREEMENT

MORE CONSTRUCTIVE TONE / DISCUSSIONS

SUPPLIER BRINGS MORE ADDED VALUE TO THE TABLE

LONGER TERM PERSPECTIVE TAKEN BY BOTH

LESS ADVERSARIAL

LESS LEGAL INVOLVEMENT

NO CHANGE TO NEGOTIATIONS NOTED

0% 10% 20% 30% 40% 50% 60% 70% 80%

MORE GOVERNANCE AND PROCESS REQUIRED TO BECOME LEADERS IN SRM

Sunseeker recognise the strategic nature of suppliers. Part of the Sunseeker experience is giving customers the ability to customise their own boat. Because of this, there is a need for the supply chain and suppliers to be very flexible and adapt to customer requirements, while still delivering exceptional quality. Stephen Potts said, “We can’t achieve this on our own, we need the support of our strategic suppliers, and like everything, there is a need to continually improve on how we interface and collaborate with them to ensure we remain a customer of choice.” When we investigated the luxury brand organisations’ average SRM index scores, we noted that overall their average was 3.0 which was similar to the followers. However, on closer observation we noted that the luxury brand organisations scored higher in the pillars that involved human involvement or interaction, and lower in the pillars that required more structure, such as governance and process. This was mirrored in our interviews and site visits where we saw some good examples of treating suppliers as part of the ‘family’, integral to their eco-system, yet very often they had only the beginnings of a process or structure in place. So has SRM changed the nature of negotiations with key suppliers for luxury brands? We can certainly see in figure F it has brought more constructive discussions and better outcomes for both parties.

Luxury brand organisations are extremely good at the human elements of SRM. The value proposition is clear and they recognise the need to have strong collaborative relationships with suppliers. They need to be a customer of choice to maintain their position in the luxury goods market and continuously improve the customer experience. However, there remains an opportunity to introduce more structure and rigor to their governance and process models. Luxury brand organisations vary in size and complexity, and as such have many of the same characteristics and challenges as other companies. One such challenge is an over- reliance on personal relationships, particularly at an executive level. As vital as these are, they need to be supported by an appropriate governance model that provides structure and continuity. These important supplier relationships need to be ‘change proof’, that is, able to withstand change either in a personnel or business environment. It is a good governance model including a meeting schedule, standard agenda items, and defined roles and responsibilities that will help them be more resilient.

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