State of Flux 2015 Global Supplier Relationship Management Research Report focuses on the business of supplier relationships. 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.
THE BUSINESS OF SUPPLIER RELATIONSHIPS
2015 Global SRM Research Report
FOREWORD
Welcome to the 2015 Global SRM Research Report . Thank you to
everyone who has supported us this year . The research is now in its
seventh year , and this time more than 360 companies have
participated globally . Over the course of the past seven years we
have seen input from more than 1 , 200 companies , giving us over
500 , 000 data points on supplier relationship management ( SRM ).
You may notice that our report has taken on a different look this
year . While our research has been as comprehensive as ever , we
have decided to focus on the business opportunity that SRM
presents and how this needs to be moved up to the senior executive
agenda . Companies that have a structured and well - supported
approach to SRM are reaping more direct financial benefits , as well
as broader commercial gains , such as access to innovation ,
improved speed to market and greater profitability . The gap in value
derived from SRM continues to increase between companies fully
committed to and investing in SRM ( leaders and fast followers ),
those who are at an earlier stage in their journey ( followers ) and ,
most certainly , those who approach it in a piecemeal way ( others ).
Our research and direct engagement with clients make us sure that
realising tangible value requires the whole business to embrace
SRM . It needs to be a business change programme rather than a
procurement initiative , and it needs full engagement and support
from the senior executive level down . This report is written with
senior executive or C - suite readers in mind , whose support and
engagement is critical to SRM achieving its full potential for
businesses . We hope the evidence within convinces you that
supplier relationships are a key lever to achieving the business
objectives of growth , profitability and increased shareholder value .
As for how you deliver this , please contact us or we have provided
many tools , tips , articles and case studies highlighting best practice
in our 2013 and 2014 SRM reports . These are available to download
at www . stateofflux . co . uk ( under ‘ Reports and publications ’).
I hope you enjoy reading the report and , as always , find it stimulating
and a valuable source of information .
Alan Day
Chairman and founder
State of Flux
INTRODUCTION
The business of supplier relationships
SRM is a business - critical issue . Our seven years of research in this
area have demonstrated that companies that get this right generate
higher profits , innovate more effectively and
are better able to manage risk . It is hard to imagine a more
commercially relevant set of issues , all of which we discuss in more
detail later in this report .
All the evidence suggests that the role of suppliers will only become
more important in the future . We can see that the nature of business
is changing , with many companies becoming both flatter and more
reliant on third parties to deliver everything from customer support
through to research and development as well as more traditional
products and services . 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 .
This is why business leaders – chief executives , managing directors ,
executive chairmen – need to take notice of SRM . Procurement
functions can and should offer support and advice , but at its heart
SRM is a strategic issue that requires senior strategic leadership .
In fact , this year ’ s research shows a direct correlation between
companies that are leading the way in this area and strong senior
backing of SRM , with 46 % of leading companies saying that SRM has
the support of their top executives . On the other hand , this is true of
only 21 % of all organisations in this year ’ s survey , while the
proportion that say their leaders are not engaged has risen , now
sitting at well over a fifth .
Why does this matter ? Because organisations that want to make a
real difference with SRM – and that should be any organisation that
wants to maintain its competitive edge – need to be led by people
who understand its importance . That means recognising that
changing business dynamics are giving suppliers more power and
choice about who they partner with , and how . It means in turn
recognising that 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 .
This understanding must be paired with a board - level commitment
to investing in the technology and training that underpin successful
SRM and to creating an organisational culture in which all
employees understand the part that they play in SRM , and the part
that it can play in meeting their own needs . Novartis ’ s Chris Holmes
offers a particularly good example of this on page 17 .
As in previous years , we have asked questions and analysed
answers around the six pillars of SRM :
1. Business drivers and value : this covers the SRM value
proposition – both the bottom - line benefits , such as the cost
reductions reported by 60 % of respondents ,
as well as less tangible advantages such as innovation and
preferential access to scarce resources .
2. Stakeholder engagement and support : this is often thought of
as something that concerns external stakeholders but , as our
research around the low levels of senior executive
engagement indicates , it is just as important to consider
internal stakeholders .
3. Governance and process : 80 % of respondents say that they do
not have robust risk management in place for more than three
quarters of their suppliers , despite the very real chance of
reputational , financial and even criminal damage when
governance fails .
4. People and skills : responses make clear that training people in
communication and other skills needed to deliver effective
SRM is not a organisational priority for many – 40 % have not
spent much on SRM - specific training , while more than a quarter
have invested nothing at all .
5. Information and technology : this has the potential to make
every other pillar easier to manage in a more effective manner .
6. Relationship development and culture : on this last pillar more
than 90 % of respondents cite good cultural alignment as being
important or very important to successful supplier relationships .
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Our research enables us to compare responses to our six pillars of SRM best - practice
model and thereby assess the SRM maturity of companies . These assessments allow
us to group companies that , based on their responses , are regarded as leaders , fast
followers , followers or others . It ’ s clear from this analysis that even the leading
companies still have much room for improvement .
As you read through these findings we ask you to remember that all
six pillars are interlinked . It is only with the commitment and support
of its leadership team that any organisation will be able to make the
changes needed to embed SRM into its culture in a way that makes
it the responsibility of every employee – not simply those that work
in a procurement or supply role . This does not mean that chief
executives have to become de facto chief procurement oficers – far
from it . It simply means they must recognise that the strategies they
develop and the examples they set have a crucial role to play in
shaping SRM , and that the shape of SRM has an equally important
role in the success of the organisation as a whole .
ABOUT THE RESEARCH
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BUSINESS CASE
MAKING THE CASE
SRM can deliver significant gains across a business .
Articulatingthe benefits is key to getting board - level buy - in
Higher profits , lower costs , more innovation and improved
competitiveness : organisations that get SRM right can benefit across
the board . More than 40 % of respondents have achieved a positive ,
quantifiable post - contract benefit from their SRM activities , with 31 %
reporting a benefit of 4 % or more . Meanwhile , 60 % report cost
reductions , 52 % cost avoidance and 39 % preferential pricing . Nearly
a fifth ( 18 %) claim to be more profitable as a direct result of their SRM
programme .
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To put this in context , research by Dr John Henke , who writes on
page 10 , suggests that good SRM contributes to as much as 70 % of
a company ’ s gross profit – far more than any other business function
can claim .
But the full business case for SRM is even richer and more nuanced
than these direct financial benefits . An SRM programme that is
aligned with an organisation ’ s strategic objectives also offers
significant ‘ soft ’ benefits , which are hard to measure but immensely
valuable .
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Effective SRM enables organisations to become customers of
choice . Customer - of - choice benefits include service level and quality
improvements ( each cited by 39 % of respondents ), improved
customer experience ( 28 %) and increased competitiveness . SRM
brings a more constructive tone to negotiations , say 52 % of
respondents , and helps both sides to take a longer - term perspective
and bring about better outcomes for both parties ( each 46 %).
Collaborative partnerships with suppliers can also contribute
significantly to innovation , as outlined on page 16 .
The evidence also suggests that suppliers that are engaged through
SRM programmes are more willing to put in effort and resources
above and beyond what is contracted . More than half of
respondents say that their key suppliers ’ senior management team
is more committed to their partnership as a result of their SRM
activities , while the same proportion see improved account
management as a result . Other examples of additional commitment
from suppliers include : proactive ideas for continuous improvement
( 46 %); collaborative problem - solving ( 45 %); and priority access to the
best people and resources ( 21 %). All of these can help a business
get a jump on its competitors , particularly in the case of the last two
elements . But the flip side is that they also indicate areas of potential
commercial risk : few chief executives would be happy telling their
boards that they were struggling to get a product to market because
their main competitor had done a better job of securing their supply
chain .
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It is worth pointing out , however , that over the past seven years the
benefits , both ‘ soft ’ and ‘ hard ’, that have been secured by the
companies leading the way in SRM have continued to increase –
meaning these companies are pulling away from those lagging
behind . In other words , the gap is big and getting bigger .
Soft benefits are hard to measure
This combination of direct financial benefit and longer - term value
creation presents a striking picture , but some leadership teams still
struggle to recognise the contribution that SRM can make to their
organisation ’ s success : only 40 % of respondents believe that their
organisation ’ s executive team can articulate the value SRM brings .
Only slightly more say that their chief procurement oficer ( CPO ) can
do this , while more than a third of SRM teams suggest that they
cannot .
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Sometimes this is because soft benefits are hard to measure – less
than 8 % of respondents could quantify benefits such as
competitiveness , supply continuity and improved customer
experience in financial terms – which may explain why 42 % of
respondents do not know what post - contract benefit SRM activity
brings them .
One company that has seen a raft of tangible benefits since
implementing SRM is United Utilities . Its approach starts with how
contracts are agreed , says Mark Hopkinson , the water company ’ s
head of SRM . “ The benefits we have seen are significant ,” he says .
“ We can report improved service , reduced cost and improved
sustainability performance . We know it ’ s dificult to measure SRM
benefit on its own as it is intertwined with overall business and
supply - chain strategies but we haven ’ t let this stand in our way .
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“ We believe it ’ s more important to get on with the job than to haggle
over where savings are attributed . However , where we have made
specific interventions , we have achieved post - contract savings in the
region of £ 30 million , and contributed to much more .”
Suppliers that are engaged through SRM programmes are more willing to put in effort andresources above and beyond what is contracted
SRM ensures contacted value is delivered
When it comes to value , however , it is important to stay on top of
hard - won contract gains , says Mark Colechin , Legal & General ’ s
head of SRM . This is where good governance , as discussed further
on page 18 , should be deployed to ensure that SRM ’ s reality lives up
to the potential outlined in the business case . “ There is plenty of
evidence to suggest that much of the value negotiated in contracts
is not actually delivered , because the contract isn ’ t effectively
implemented and managed ,” Colechin explains .
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One final challenge to note when it comes to SRM is lack of a board -
level champion . It is rare for CPOs to have a seat at the main board ,
with many reporting through the COO or CFO – or even a level
below that . This does not necessarily mean that the CPO must
become a more senior role , but it is vital for members of the senior
leadership to have an understanding of , and commitment to , SRM .
Best practice : Alan Day , chairman and founder of State of Flux
More than 11 years of working with leading companies and seven
years of industry - leading research reveal that the business case for
SRM remains one of the perennial challenges for procurement and
SRM leaders .
For many , SRM simply feels like the right thing to be doing . But it is
much more than that . Defining the value proposition and business
case for SRM allows business leaders to focus on real value
opportunities . We suggest that leaders do this by focusing on the
four drivers of value :
• post - contract benefits • sustained sourcing savings • contribution to profits • customer - of - choice ( soft ) benefits
Leadership teams still struggleto recognise the contribution that SRM can make to their organisation ’ s success
BUILDING PROFITABLE RELATIONSHIPS
HARNESSING SHARED VALUE
Every chief procurement officer in every business is sitting
on anopportunity to add substantially to their firm ’ s
profitability
Our research indicates that good SRM contributes to between 30
and 70 % of a company ’ s gross profit .
Where does this figure come from ? For the past 25 years we have
studied the relationship between major manufacturing companies
and their tier - one suppliers – first in the automotive industry , and
then in another 17 sectors . From this research we developed the
Working Relationships Index ®, which shows that the more
collaborative the relationship between supplier and customer , the
greater the supplier ’ s contribution to the company ’ s profitability . In
the auto industry this contribution is , on average , around 70 % of
gross profit . In other sectors , where customers spend a smaller
proportion of their revenue on suppliers , the supplier impact can
drop to 30 % – still a substantial contribution to the firm ’ s profit .
This contribution comes in two ways . The first is that better
relationships give suppliers the assurance that they will continue to
supply the company in the future , which results in suppliers being
willing to offer greater price concessions in the present .
The second factor relates to non - price benefits . For example , the
more collaborative the relationships , the more willing are suppliers
to share new technology without the assurance of a purchase order
or to invest in innovation in anticipation of future business . In
addition , when the customer needs support , suppliers will give this
‘ customer of choice ’ A - team support ( rather than B - team ), and will
invariably provide more support than is contractually required .
Mutual benefits
Together these non - price activities allow customers to be more
eficient and effective in their operations and to get products to
market faster than their competitors . At the same time , the
arrangement also benefits suppliers : our latest research suggests
that collaborative relationships improve not only customer profits ,
but supplier profits as well . The reason
for this joint benefit is that neither side has to waste time on
nonsense such as the adversarial accusations associated with non -
trusting relationships , which are much more dificult to maintain . With
a collaborative , trusting relationship things run more smoothly and , if
a problem does arise , it can be resolved in a quick and
straightforward manner .
So what does it take to become a customer of choice ? First , get the
foundation in place . Customers need to follow good business
practices that are conducive to suppliers wanting to work with them :
pay invoices on time , resolve any payment issues in a timely manner ,
and have purchasing personnel who are willing to work to develop
good supplier relationships . Second , build on this foundation with
relationship initiatives that benefit all involved . For instance , help
suppliers reduce their costs by sharing information with them early
in the product development cycle , and minimise any conflict
between purchasing and engineering or other functions in the
business .
Good supplier relationship management contributes to between 30 – 70 per cent of a company ’ s gross profit
Finally , it is worth noting that companies do not need to build great
relationships with all their suppliers . Our advice is that firms should
concentrate their attention on those suppliers whose role is critical
to their own success . However , others , even those suppliers with
whom dealings are transactional , should be treated in a trusting
manner . The bottom line is that any company that wants to improve
its profitability would be well advised to put effort into working with
its suppliers in a manner that is commensurate with the supplier ’ s
importance .
Dr Henke is president of consultancy Planning Perspectives , Inc , a
professor of marketing in the School of Business Administration at
Oakland University in Rochester , Michigan , and a research fellow at
the Center for Supply Chain Management , Rutgers University , New
Brunswick , New Jersey .
SUPPLIER VIEW
WHAT SUPPLIERS WANT
To secure the commercial advantages of a strong
relationship withsuppliers , companies first need to address
the barriers they themselves have put in place
On average , State of Flux conducts one or two Voice of the Supplier
( VoS ) studies for clients every month – that ’ s more than 1 , 200
different suppliers in the past two years . These give us a unique
insight into industries as varied as the automotive , financial services
and food and drink industries . From this work we have identified a
number of consistent themes that exist across sectors and that send
a powerful message to business leaders .
It is also worth pointing out that many leading companies conduct
their VoS studies to increase mutual understanding and ensure that
they are remaining customers of choice . Such VoS studies have
three key uses : they enable the company to assess whether it is
operating in a way that gets the best out of its relationships with
suppliers and whether there are any gaps that threaten its standing
as a customer of choice ; they can add suppliers ’ perspectives to any
business case being made for change or investment ; and they can
position the customer as one that is prepared to listen and engage .
Slow decision - making
This is suppliers ’ biggest complaint , with 58 % reporting that client -
led delays in making decisions are a major barrier to successful
implementation of innovation and change . Things do not seem to
get better once the decision is finally taken , with 55 % reporting that
bureaucratic approval and sign - off processes cause problems too .
Lack of engagement or alignment between different functions
A supplier will only want to invest in innovation to support its client if
it is confident that the client is actually interested in its ideas . If not , it
makes more sense to find someone else who is . The problem here ,
say 53 % of suppliers , is that many organisations lack the internal
alignment needed to know this themselves .
Unwilling to share risk and reward
Suppliers want to work in partnership with their most important
customers by exploring joint investment opportunities and ways to
share risk and reward . This approach offers companies significant
opportunities to secure a commercial advantage over their
competitors . However , 53 % of suppliers say that their clients do not
want to talk about sharing risk and reward , while 42 % rule out joint
investment discussions .
Corporate social responsibility
Effective management of CSR risk shapes the reputation of both
organisations and the chief executives that lead them . Despite this , a
large number of companies fail to engage with their suppliers on this
issue , with 38 % of suppliers saying that their clients are not
receptive to ideas that promote CSR improvements .
Unwilling to consider ideas outside current priorities
Some of the most powerful , market - changing innovations in recent
years have come from people and companies thinking outside
traditional markets and models , from Uber ’ s taxi hire to Spotify ’ s
music streaming service . Despite this , too many companies are
unwilling to look at any ideas beyond their rigidly defined list of
priorities , say 33 % of suppliers .
Slow decision - making is suppliers ’ biggest complaint , with 58 per cent reporting thatclient - led delays are a major barrier to innovation
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STAKEHOLDER ENGAGEMENT AND SUPPORT
GETTING C - SUITE BUY IN
Getting stakeholders – in particular senior management –
to understand and champion the benefits of SRM is
critical to itstake - up and success
Effective SRM offers business benefits that go well beyond
boundaries of the procurement function . Improved profitability ,
better risk management and increased innovation are all issues that
boards and leadership teams should be considering in their
assessment of their organisation ’ s progress towards its strategic
goals . This in turn helps SRM to be embedded more thoroughly into
the corporate culture , as discussed on page 26 , and thus to have a
commensurately bigger impact on the bottom line .
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Leading companies clearly grasp the power of senior support for
SRM , with 46 % of them indicating that they have the backing of their
chief executive . This compares to a much smaller overall figure of
just 21 % of all respondents feeling that their senior managers are
strongly and actively engaged in SRM . In fact , 23 % identify a lack of
engagement , while 4 % face active opposition . Alongside this , only
40 % of respondents say that their executive team can articulate their
organisation ’ s SRM value proposition . This direct correlation
between being a leading company and having the backing of senior
executives paints a clear picture of just how important such support
is .
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Just 21 % of all respondents feelthat their senior managers are strongly and actively engaged inSRM
The lower levels of executive support at organisations more broadly
may well be connected with the fact that nearly half of respondents
do not have a stakeholder management and communications plan
for senior executives , perhaps failing to recognise the important part
that this group of stakeholders plays in SRM . At least engagement
levels have generally increased over the past two years , with the
number showing opposition dropping sharply from more than 20 %
for both operational and senior executive staff in 2013 . However , in
both cases , there has been a slight rise in the number that are not
engaged .
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Senior executives who want to change this picture in their own
organisation need to take on two interlinked roles . The first is
around programme support . This means backing
the business plan , creating a culture that supports SRM and
allocating the resources needed to do this .
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Alongside that is the need to offer individual support . Key suppliers
are key stakeholders , and should be managed as such . Very often
this means that the chief executive will play an important role in
building their company ’ s relationship with the supplier by forging
their own relationship with his or her counterpart there . This
demonstrates to others in both organisations that SRM is taken
seriously at the highest levels , which will in turn assist with work on
cultural change .
THE CHANGING ROLE OF THE CPO
As the procurement function continues to mature and embrace the
benefits of SRM , so to should the role of the modern chief
procurement oficer ( CPO ). This is particularly so when we consider
the influence needed on the wider business , in an indirect way , to
unlock the strategic objectives and to ensure procurement as a
function plays a wider and more strategic role as a true business
partner . In simple terms , we cannot wait for the invite to come from
the CEO to do something ; we need to ensure we create a natural
path to their door by understanding how the organisation works and
thinks , and how the SRM value proposition needs to be aligned . This
is particularly true when we look at the associations made in the
thought processes of senior management and how people behave .
Those involved in behavioural economics , a practice underpinned
by psychology and decision science , reafirm this in that how
decisions are arrived at … does not follow linear formulaic patterns of
total predictability , but instead is influenced by ‘ rules of thumb ’,
experiences , biases and sometimes instinctive decision - making . The
job of the modern CPO is to understand these better , to position the
function and to articulate the benefits of SRM in a way that will
resonate with senior executives . As the procurement function
evolves from leading on category management and strategic
sourcing into process ownership of the whole supplier management
lifecycle , the skills required will change . None more so than those of
the CPO . David Loseby , group procurement director at Arriva
Best practice : Mel Shutes , head of SRM , State of Flux
Executives need to play two roles : supporting the SRM programme ,
and proactively leading important supplier relationships . The
challenge is to find time within executives ’ already busy schedules .
The key to getting executive time and focus is having a well -
articulated and compelling case for SRM and selling it at the most
senior level . It is only at the very top that such a case can
demonstrate how SRM supports the company ’ s strategic priorities ,
and can thus secure the training , technology and other budgets
needed to support it to its fullest extent . For more detail on what
should be included in a SRM business case , please refer to
www . stateofflux . co . uk / ideas - insights / articles
INNOVATION
CAPTURING SUPPLIER INNOVATION
SRM is a key enabler of innovative collaboration
betweencompanies and their suppliers
“ Innovation is not often a eureka moment , but rather a continually
evolving process where all parties are focused on a common goal ,”
says Dom Tribe of McLaren Automotive – a company that is rightly
respected for its creativity .
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By “ all parties ” he means not just McLaren ’ s own staff but also its
suppliers . “ Creating the right environment for suppliers and their
internal teams to work together is critical to making innovation
work ,” Tribe explains .
There is an intrinsic link between effective SRM and innovation –
one of the reasons why the ability to harness suppliers ’ creative
thinking is such an important part of the business case for SRM .
Innovation brings tangible benefits for 39 % of respondents , although
quantifying these in financial terms can be dificult . ( SRM technology ,
discussed on page 24 , could help here .)
Leading companies understand that they can trust their suppliers to
know what they are doing and that there is , therefore , no need to
spend a lot of time telling them how to do their job . Instead , they
build a relationship that actively encourages suppliers to present
ideas based on their own insight . And , critically , they respond
promptly to those supplier ideas rather than letting them disappear
into a black hole , never to be seen again . When that scenario
happens , it is incredibly frustrating for suppliers , who will quickly
learn not to waste time sharing ideas with companies that treat them
this way – and may of course mean that they share their ideas
instead with the companies ’ competitors .
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Leading companies recognise they can harness the expertiseof key suppliers
To avoid such supplier fatigue , it is up to the chief executive and
their leadership team to create the environment and corporate
culture needed to encourage innovation with suppliers . At Harley -
Davidson , for instance , the company has adopted a partnership
approach and works hard to engage its suppliers in design and
product development , even bringing bikes and other merchandise
to supplier meetings . And Bang & Olufsen , the high - end audio
equipment business , builds a sense of partnership by offering
strategic suppliers benefits such as staff discounts that are normally
only available to employees .
Alongside these softer relationship initiatives , it is a good idea for
companies to develop a strong process for evaluating and providing
feedback on ideas that are proactively suggested by suppliers . This
should be transparent and offer clear time frames so that all involved
know where they stand . An equivalent process for handling
innovation requests – where the company crowdsources ideas from
its supplier base – is just as important .
Innovation in action
NATS , the air navigation services provider , has also secured tangible
results in innovation thanks to its collaborative relationships with
suppliers , says Dominic Hastings , head of category management at
the organisation . “ An excellent recent example is Time - Based
Separation , developed with Lockheed Martin , which provides
controllers with a new way of separating arriving aircraft at Heathrow
in order to cut delays caused by strong winds .”
Best practice : Mel Shutes , head of SRM at State of Flux
It ’ s important to define what innovation means to you as a company .
Establish business processes that support both supplier - led or
business challenge - led innovation . We recommend technology
being used to help enable these processes and support
communication . When you have decided your innovation strategy ,
processes and technology approach it needs to be communicated
to suppliers . Once you have done this , and innovative ideas are
flowing , our advice is to focus on areas where you see real
challenges or opportunities and where innovation will provide the
greatest return on investment .
CASE STUDY
NOVARTIS : ENABLING COLLABORATIVE
HEALTHCAREINNOVATION THROUGH SRM
SRM has helped the Swiss pharmaceutical company
drive innovation , which will ultimately lead to better
products for itscustomers
Innovation is at the core of what Novartis does . This global company ,
headquartered in Switzerland , builds innovation into all aspects of its
business , from scientific discovery right through to the eficiency of
its manufacturing processes . Novartis also collaborates closely with
external partners to drive innovation , says Chris Holmes , the
company ’ s head of global procurement strategy and transformation .
“ We pride ourselves on our strong research and development
capabilities , supported by robust processes along the entire value
chain . But at the same time we recognise there is a huge amount of
external experience , talent and expertise that we can draw on for
the benefit of our customers .”
Involving diverse parties allowsus to secure the best and brightest brains to work challenges into innovative solutions
While the focus on innovation has been part of the company ’ s ethos
for some time , SRM at Novartis has only really come into its own in
the past five years or so , Holmes says . “ It began with a procurement
transformation project in 2011 – 12 that looked at how the
procurement function could contribute to innovation in collaboration
with our supplier base . That was when we introduced the SRM
concept , which we call supplier performance and innovation ( SP & I ).”
This name was chosen over SRM to emphasise the initiative ’ s focus
on outcomes , Holmes explains . “ We want to improve performance of
the total relationship and to drive innovation together for the benefit
of both parties .”
Novartis now has a number of SP & I managers who work alongside
the firm ’ s category teams to ensure that procurement , the business
and suppliers are collaborating effectively . “ They focus on supplier
segmentation and on the areas where there are opportunities to
work more closely with our most important suppliers – the ones with
game - changing potential ,” Holmes says . “ They look for ways to add
value beyond the contracts in these key relationships .”
One example that neatly illustrates how the procurement function is
connecting its key suppliers to the business comes through the
Innovation Factory . This Novartis approach was developed to
leverage a 360 - degree viewpoint from in - house and external
experts to address patient and brand challenges . “ Involving diverse
parties allows us to secure the best and brightest brains to work
challenges into innovative solutions ,” Holmes explains .
Suppliers benefit from the SP & I approach through improved
understanding of the company , which in turn helps them to see new
opportunities to grow their own businesses while at the same time
supporting achievement of Novartis goals . “ A relationship needs to
go both ways . There has to be a balance of benefits .”
Getting to this point required a clear strategy and sponsorship from
the highest levels . But it was having the right people with the right
mentality across the business – not just in procurement – that was
key , says Holmes . It also required flexibility and openness to change ,
he adds . “ You need a good process as an anchor , but you shouldn ’ t
get hung up on it . You need to be willing to burn it down and start
again as often as you need to .”
GOVERNANCE AND OVERSIGHT
GOOD GOVERNANCE
Key suppliers can make or break company reputations and
profits , so successfully managing the governance of supplier
relationships is vital to business success
It is not just organisations that are hurt when governance processes
fail . Individual leaders can face significant reputational damage , fines
and – in some cases – the possibility of criminal sanctions .
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Not all governance risks come from direct employees . The way in
which suppliers do business can also present a risk in terms of both
public perception and legal or regulatory compliance . For instance ,
companies could fall foul of the UK Bribery Act if an “ associated
person ”, such , as a supplier bribes someone to win or keep
business . And every time a company is found to have bought from a
supplier that uses child labour to make clothes that end up in UK
shops or pick tea that is brewed in UK pots , its directors can be sure
they will face a dificult time in the press and from their shareholders .
Adrian Clements , general manager of operational risk management
at ArcelorMittal , says there are “ three types of supplier risks : those
risks inherent in a complex and interlinked supply chain ; the
possibility of supplier - created risks ; and finally the risks created
internally on how we work with , measure , manage and monitor
suppliers and supply chains .”
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Key suppliers
Despite these very real threats , 78 % of respondents indicate they do
not have robust risk management processes in place for more than
three quarters of their key suppliers . A similar proportion , 80 %, say
the same about performance management . Unsurprisingly , leaders
and fast followers are more likely to say that they do have robust
performance , contract and risk management in place for the vast
majority of their key suppliers .
When it comes to oversight of SRM governance , process
compliance and general activities for key suppliers , only 10 % of
respondents think what they do is very good , with 28 % reporting
good , 34 % adequate and – worryingly – 21 % poor or very poor . The
only good news here is that the results are all slight improvements
on last year .
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There are , however , still some significant gaps in many companies ’
governance models when it comes to their key supplier
relationships . For a start , only 16 % say that they have a model that is
both fully documented and implemented , while 38 % describe theirs
as a work in progress and 32 % say their model has been
documented but only partially implemented .
Typically , these models incorporate : regular performance review
meetings ( 78 %); periodic strategic relationship review meetings
( 71 %); a performance scorecard or dashboard ( 64 %); and a
designated accountable executive . It is rarer to find a relationship
scorecard or dashboard ( 27 %) or a documented responsibility
assignment matrix for each key relationship ( 25 %) – despite the fact
that this is basic good practice , as well as a regulatory requirement
in some industry sectors .
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It could also be argued that the strength ( or otherwise ) of a
company ’ s relationships with its key suppliers is a risk in and of itself
given the very real impact they have on profits , as outlined earlier in
this report . So it is perhaps surprising that relatively few
organisations use a tool such as 360 - degree relationship
assessment to check things over . As things stand , only 34 % of
organisations do this , the findings suggest .
COULD THIS HAPPEN TO US ?
The 1992 Cadbury Report defined corporate governance as the
system by which companies are directed and controlled . Boards of
directors are responsible for the governance of their companies .
The board ’ s actions are subject to laws and regulation and include :
• setting the company ’ s strategic aims • providing the leadership to put them into effect • supervising the management of the business • reporting to shareholders on their stewardship .
• This governance and oversight responsibility clearly extends to supplier management and relations . When it falls short , it can have
disastrous results . One has to look no further than the recent Gulf of
Mexico oil disaster or the UK horse meat scandal .
The question that chief executives and their board colleagues
should be asking themselves is simple : could this happen to us ? As
stewards of their companies ’ values and leaders of their business
decisions , senior executives must assure themselves that they have
a firm grasp of both how they treat their suppliers and how their
suppliers behave if they are to be confident in their overall corporate
governance position .
Best practice : Chris Thomson , head of category management
andstrategic sourcing at State of Flux
Understanding which areas of governance and which risks to focus
your attention and resources on is key . Leading organisations
segment their supplier base according to multiple criteria ( see
page104 of the 2014 SRM report ) and conduct segmentation at least
annually .
The output of this segmentation creates a tiering of suppliers ,
typically into four groups : strategic , preferred , approved and tactical .
Different supplier management strategies , process approaches and
resources ( including respective roles and responsibilities ) can be
applied to each of the different groups .
SKILLS AND ORGANISATION
SKILLS FOR THE JOB
Effective SRM depends on having the right people with the
rightskills
Like any discipline , SRM requires professionals with a specific
skillset and behaviour profile . Possibly the most important is
communication , which is cited by 83 % of respondents . This is closely
followed by strategic thinking ( 77 %), trust building ( 71 %) and cross -
functional working ( 70 %).
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Leaders who take SRM seriously also realise that , just as SRM is an
organisational concern rather than a functional one , these skills are
needed by all employees who interact with suppliers , regardless of
their job title or level of seniority .
However , our research suggests that too few organisations are
willing to invest in the training needed to support SRM and thus
secure the business benefits it offers . Some 40 % do not spend much
on SRM - specific training , while more than a quarter spend nothing at
all – a significant increase on last year ’ s figure of 19 %. Less than a
third reported moderate spending – a drop of four percentage
points on last year – with only 6 % giving it significant financial
backing .
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This lack of investment is particularly serious , given that 46 % of
respondents believe that their organisation needs to improve
strategic thinking , 41 % say cross - functional working skills need to get
better and 37 % say communication skills need attention . This is
especially shocking given that a lack of people with the requisite
skills is seen as the second - biggest barrier preventing progress in
SRM . In other words , this failure to invest in training is having a direct
impact on performance , which in turn may limit the value that SRM
brings .
On the other hand , leading companies such as Procter & Gamble
are reaping the rewards of comprehensive , well - structured training
programmes . The fast - moving consumer goods business , the
world ’ s biggest manufacturer of household and personal care
products and a leader in SRM , ensures that its staff have the
technical and business skills that they need . “ Successfully managing
supplier relationships takes great listening and communication skills ,
strong strategic thinking and analytical skills , leadership and
influencing skills , and even project management skills ,” explains
Mary Wagner , P & G ’ s director of Greater China product supply
formally responsible for developing tools and best practices ( see
P & G case study www . stateofflux . co . uk / ideas - insights / case -
studies / procter - gamble ).
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“ When I picked up responsibility as the global SRM skill owner , we
taught the skill based on theory and documentation of best
practices . The most common question I received was : ‘ OK , I get it ,
but what do I do with it ?’
“ This led to shifting to a more systematic , pragmatic approach , with
a common methodology focused on several core levels of activity
and tools that buyers can apply to better understand or analyse a
key relationship .”
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Leaders invest in training anddeliver more as a result
Influencing , one of the areas emphasised by P & G , is a skill that 35 %
of respondents feel could be improved . This skill is particularly
important given that significant elements of SRM involve interactions
where individuals do not have oficial hierarchical authority , for
example because they are working with colleagues from different
departments or functions . The chance that people are working in
such a team has increased slightly this year over last , with 61 % of
organisations now relying on a cross - functional team for supplier
management . However , this is still lower than 2013 , when nearly 70 %
did so .
Tailored training
One of the most effective approaches for organisations that want to
improve their SRM skills base is to start by defining the relevant
skills and competencies for each role . Once this is clear , it is
possible to tailor training and development opportunities to meet
the particular needs of the organisation and the individuals within it ,
thus avoiding a ‘ sheep dip ’ approach where everyone gets the same
treatment , whether they need it or not .
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This sort of structured formal training combined with on - the - job
development opportunities through project working can be very
effective . Another option that may suit some organisations is
initiatives such as assignments on cross - functional projects and
interdepartmental secondments . In some cases it may even be
appropriate to arrange secondments or temporary job - swaps
between supplier and customer . This sort of opportunity gives the
individuals involved a chance to build their own professional skills ,
but also strengthens connections between functions or even
companies .
Best practice : John Newton , head of learning and
development atState of Flux
SRM requires the right balance of people , process and technology
capability and needs investment in developing the skills and
competencies required to fulfil its potential .
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