THE BUSINESS OF SUPPLIER RELATIONSHIPS

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.

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 officers – 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.

BUSINESS CASE

MAKING THE CASE

SRM can deliver significant gains across a business. Articulating the 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.

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.

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.

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 officer (CPO) can do this, while more than a third of SRM teams suggest that they cannot.

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 difficult 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.

“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 and resources 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.

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 struggle to 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 an opportunity 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 efficient 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 difficult 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 with suppliers, 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 that client-led delays are a major barrier to innovation

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 its take-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.

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.

Just 21% of all respondents feel that their senior managers are strongly and actively engaged in SRM

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.

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.

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 officer (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, reaffirm 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 between companies 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.

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 difficult. (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.

Leading companies recognise they can harness the expertise of 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 HEALTHCARE INNOVATION THROUGH SRM

SRM has helped the Swiss pharmaceutical company drive innovation, which will ultimately lead to better products for its customers

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 efficiency 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 allows us 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.

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 difficult 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.”

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.

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.

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 and strategic 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 right skills

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%).

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.

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).

“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.”

Leaders invest in training and deliver 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 official 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.

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 at State 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.

It all starts with defining the role, developing a job description including competencies and then conducting a competency assessment before embarking on up-skilling of people through a learning and development programme.

SRM training must be developed in the context of the day job to be most effective

We see the supplier relationship manager role as truly multidisciplinary: business coach, cross-functional team leader, master influencer, communicator and innovation champion. It is imperative to recognise the importance of context when defining training. Developing these skills should be addressed in the context of the day job, using realistic day-in-the-life scenarios to make training relevant and immediately transferable to a live supplier relationship.

Our research shows leading companies invest in training and in developing their people’s SRM skills.

TECHNOLOGY

TOOLS FOR THE JOB

SRM technology can facilitate better relationships between companies and suppliers, delivering big gains on both sides, yet take-up remains relatively low

The message is clear: effective SRM technology can help the bottom line. More than two thirds of companies with IT systems that do a good job of supporting SRM report seeing supplier performance improvement as a result. Some 65% note benefits in information management, sharing and reporting, 58% in value capture and delivery, and 52% in risk identification and management.

It has certainly helped Ladbrokes, says Liz Cockburn, its head of procurement: “Technology… has enabled us to link all our parts of the business with suppliers and procurement. Several people thought it would mean a lot more work for them but actually it doesn’t – it has eased some of their workload.”

Unfortunately, the proportion of organisations that actually have technology in place to secure these benefits is relatively small. Just over a third of respondents are using it in a significant (9%) or even moderate (26%) way to support the management of key supplier relationships. But 61% say they do not use IT systems and software applications in this way much, if at all.

Turning this around requires strategic investment undertaken in conjunction with a clear understanding of the business case for SRM as it applies to each individual organisation. This integrated approach is necessary to ensure that the technology being used can enable SRM in the most effective way possible. It can also be seen in the fact that companies that are leading the way in SRM generally are much more likely both to be using relevant IT or software to support SRM and to feel that it is doing a good job. More than 70% of leading organisations use IT to actively support the management of key supplier relationships either significantly or moderately, while almost as many feel that it supports SRM activities very strongly or adequately.

Companies that are leading in SRM are much more likely to be using IT as an effective enabler

It is important to note that best practice here is for technology to cover all areas of supplier management including risk, contracts, performance, innovation and relationship management.

The unifying power of technology also offers considerable potential to improve consistency across organisations by ensuring that everyone who interacts with suppliers, not just procurement professionals, has access to the same information and the same guidelines for interaction. Suppliers as well as their clients will appreciate such standardisation and consistency, as they will be able to rely on a uniform approach whoever they deal with in an organisation. This in turn increases the chance that the company will become a customer of choice, and thus secure the associated benefits.

Energy company Centrica implemented Statess SRM technology to improve the consistency of its conversations with suppliers, says David Wylie, its group procurement director. “One of the challenges that we have at the moment is a lack of oversight of different supplier engagements, which means that our messages to suppliers can be very inconsistent,” he explains. “We see technology as a way of starting to pull all those strands together and provide a common platform for how we engage with suppliers in the marketplace.”

It is also worth bearing in mind the knock-on benefits that the right system can have on other areas, including in the support it can offer to senior leaders who are committed to championing SRM. At the moment, most companies – 60% – manage information about key supplier relationships using documents on a shared drive, while 79% rely on reports created manually in Excel. Only 6% use an SRM system to produce customised reports.

But with a dedicated SRM system a chief procurement or finance officer put on the spot by their chief executive could quickly and easily create a report that included the information requested without any clutter. And, should that chief executive later find themselves preparing to meet with their chairman, or indeed their counterpart at a key supplier, they could pull out their smartphone and use the Statess technology to get a snapshot of the relationship’s status while being driven to the meeting. The end result? Better use of the CEO’s time and a better, more informed, discussion.

Best practice: Alan Day, founder and chairman of State of Flux

When evaluating SRM technology it should cover five key elements: relationships, performance, contracts, risk and innovation.

The benefits are clear: our research shows an effective SRM programme, supported by SRM technology, can deliver 2–4% post-contract gain. In addition, technology can also be a catalyst for change in the organisation, providing a mechanism for a seamless and consistent approach.

If companies care about providing a more consistent supplier experience, technology will help achieve this. Currently supplier management is the only business process that has so much value at stake that is not supported by good technology.

CONSULTING.
TRAINING.
TECHNOLOGY.

Headquartered in London UK, State of Flux is a global procurement and supply chain company.

Our services include:
• Supplier management
• Category management and strategic sourcing
• Contract lifecycle management
• Training and development
• Statess SRM technology

Seven years of global research into supplier management gives us a deep understanding of our clients’ needs and underpins our consulting, training and technology services. Call us to discuss how we can help you deliver savings, reduce risks and drive value without destroying valuable supplier relationships.

CALL US ON +44 (0)2078 420 600 OR
EMAIL US AT ENQUIRIES@STATEOFFLUX.CO.UK
WWW.STATEOFFLUX.CO.UK
WWW.STATESS.COM

RELATIONSHIP
DEVELOPMENT

ACHIEVING BUSINESS CHANGE

The commercial benefits of good SRM are clear: more innovation, better speed to market, greater profitability

The starting point for any organisation that wants to secure these benefits is a well-designed business case; but that is not, on its own, enough. Improving SRM is not about the actions of one person or department, but about the whole company. More than 90% of respondents say that good cultural alignment is important or very important to successful supplier relationships. This means that organisations that want to unlock the full value of collaborative, innovative and mutually beneficial supplier relationships need to transform their whole corporate culture rather than simply tinkering around the edges.

The culture within which SRM can deliver real value is one where all staff are prepared and willing to collaborate with suppliers. They will share information openly, work to build trust and search for opportunities that will add value for both parties. They will hold suppliers accountable for achieving the appropriate standards but will not blame them for their own mistakes or behave in a way that undermines trust. In a very real sense they treat them as an extension of their own organisation.

Embedding this sort of attitude requires leadership from the very top and the backing of champions throughout the organisation. It requires leaders to set the tone by treating suppliers as they would like to be treated themselves – as professional partners with expertise and value to offer, not golfing buddies or, worse, cost centres that are only interesting if there are price concessions to be won.

It can also help to be able to demonstrate quick wins so that the organisation as a whole can see the results of the changes they are making, as this will encourage people to get behind SRM. As Mark Hopkinson, head of SRM at United Utilities, explains: “It was very mixed when we started, but as the benefits have started to come, there is much more engagement.” He advises organisations that are just starting out on SRM to “focus on a case study to deliver SRM value that has the highest likelihood of success, not necessarily the one with the greatest benefit, which may be very difficult to deliver.”

This is also why the value proposition really needs to resonate with the business and represent its broader interests. For a company like TSB Bank, for example, this means aligning SRM with its core aim of providing great customer service. “As a bank we are really focused on our customers. We believe they want us to do the basic things brilliantly,” says Kate McKnight, supplier management oversight, and Laura Ryan, supplier relationship manager, procurement and property. “So from a supplier management perspective we need to optimise the supply of goods and services, in particular those that have a direct impact on our customers.”

Business and cultural change is required to deliver sustainable value

State of Flux’s experience indicates that each business area and stakeholder will have a slightly different take on what they need SRM to deliver. As Melanie Evans, head of supplier relationship and contract management at Essex County Council, explains: “I think it was the increased realisation that effective category management and strategic sourcing had created more of a dependency on fewer suppliers, delivering more integrated solutions, but where the risk remained with the council. It was clear that we needed to drive more than just financial value – although this was still critical. We needed to deliver better, more effective services while still saving money.”

Our survey suggests, however, that this is not currently being treated as a priority, with only 38% of respondents saying that they have a strategy or plan in place to improve their standing as a customer of choice with key suppliers. There are also some gaps in the information that they share with them, with only 47% of respondents imparting their supplier relationship improvement strategy with the suppliers themselves. The picture is different in the leaders’ group, however: there, more than 70% have a strategy for improving their standing as a customer of choice.

Best practice: Alan Day and Mel Shutes

To become a customer of choice, our research has shown that suppliers value three things from a relationship: brand alignment and association; money (revenue and/or profit); and behaviours that signal they are a trusted partner. In our experience it is the third area that makes the largest difference; yet it often gets overlooked.

In the 2014 report we looked at what questions you should ask your organisation to ensure you are demonstrating the right customer-of-choice behaviours. Are you:

• open and transparent (willing to communicate business strategy, growth and plans)?
• an innovation partner (open to suppliers’ innovation ideas and able to manage them)?
• trustworthy (acting with integrity,
reliable and sticking to agreements)?
• trusting (allowing suppliers to act with integrity, reliable and sticking to agreements)?
• good at communication (frequent, clear, concise and two-way)?
• collaborative (working together is business as usual)?
• fair and reasonable (seeking mutuality, treating with respect and sharing benefits)?

To display these customer-of-choice behaviours consistently across your organisation, SRM must be regarded as a business change programme if it is to be successful. This comes back to senior stakeholder engagement: the wider business will follow the lead and behaviours demonstrated from the top. Clear endorsement and strong, active engagement from C-level executives will pave the way for SRM value being realised.

BOARD-LEVEL PERSPECTIVE

SUPPLIER RELATIONSHIPS: A KEY TOOL

Technology is making it easier for company bosses to see the critical value of their supplier relationships

Business leaders are facing a new industrial revolution. Technological innovation is changing the world at a speed not seen in generations and in ways that have the potential to entirely reshape business as we know it. Chief executives must ensure that they know exactly what tools they have at their disposal to compete effectively now and in the future.

One of the most powerful tools available to businesses – yet one that is not always visible at board level – is a strong relationship with their key suppliers. My experience turning around The Monarch Group between 2011 and 2013 showed me that companies have far more to gain from creating a true partnership with suppliers than from engaging in an old-style master–servant relationship. In our case it allowed us to take out £52 million of annualised cost, representing around 12% of the discretionary cost base, over just two years. This was not achieved in one fell swoop but through thousands of incremental improvements that were achieved by us working in partnership with our suppliers. It also meant recruiting skills into the group that resonated with this approach.

Working in a spirit of partnership means embracing the idea that both parties will grow their businesses together. It creates an atmosphere of goodwill that makes it much easier to adopt the flexibility that is becoming ever more critical to business success. It makes it easier, for instance, to vary a contract whether in response to changing market conditions or the wish to innovate.

Creating this sort of partnership approach takes leadership. SRM is not something that can be parcelled up, handed to the procurement department and then ignored by everyone else. It must be embedded in the culture and values of the company. As it is the senior team that shapes that culture, it must be the senior team that leads the way on promoting SRM. If there are internal barriers preventing this, it is the senior team that should constructively break them down.

Any chief executives that are struggling to grasp why they should do this, or exactly what value SRM brings to their business, should take responsibility for doing whatever is needed to gain that understanding. In my experience the main reason why SRM is not given the C-suite attention it deserves is that time-constrained senior executives fear getting into the detail of supplier arrangements. This is easily overcome thanks to technology that now makes it much more straightforward for senior executives to access supplier information in a succinct and relevant way.

With this information, supported by strong and genuine supplier partnerships, business leaders will be able to position themselves and their companies to grasp the multitude
of opportunities that the innovation revolution is bringing with it.

Without it, they should prepare to see their company struggle to thrive, or even to survive.

Iain Rawlinson is the managing partner at Rawlinson Partners Limited and chairman or director of a number of organisations. He was executive chairman of The Monarch Group from 2009 to 2014.

PARTNERS

ABOUT STATE OF FLUX

State of Flux is a global procurement and supply chain consultancy. We specialise in consulting, training and technology in supplier management, strategic sourcing, category management and contract lifecycle management.

Founded in 2004 by Alan Day, State of Flux is headquartered in London, UK and currently has offices across Europe and Asia Pacific, with plans for US offices. Our clients are large global and high-growth companies across many industry sectors, including financial services, oil and gas, FMCG and technology. Seven years of global research into supplier management gives us a deep understanding of our clients’ needs and underpins our consulting, training and technology services. Our services improve clients’ procurement capabilities and deliver sustainable value.

Call us on +44 (0) 20 7842 0600
or email us at enquiries@stateofflux.co.uk
www.stateofflux.co.uk
www.statess.com

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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 2015
Publication name: 2015 Global SRM Research Report – The Business of Supplier Relationships