AEP

After focusing on upfront acquisition costs, the procurement team at American Electric Power is starting to engage the management team in SRM, says CPO Craig Rhoades. It aims to get more value from long-standing service contracts. 

Some people call it the rule of seven, at least in marketing. It means you have to go over an idea at least seven times before the penny drops. It’s something we’re trying to apply to SRM as we start to build a strategy to improve how we manage long-term, strategic relationships with suppliers.

I have already held meetings with senior executives at the top of the organisation to tell them that SRM is coming. Beyond that, we have a communication plan with the leaders of corporate and business unit functions. Those conversations are a bit more detailed and specific to the unit or function. We want to get the message out that we are doing something different to set the stage for what will come next. We want them to understand that we might need to talk to our suppliers differently or segment them in another way. But we’re not engaging the business units in how we’re going to do that because we’re still figuring it out ourselves.

So that is what we are doing right now with the messaging, which will be reinforced over time. We’re telling our colleagues elsewhere in the business this is something we’re working on and this is what it might look like. We just have not told them who our strategic suppliers are, how we are going manage them and who will be responsible for that management. We’ve given them the context of what we will do and they have been supportive.

Behind the scenes, we are working with State of Flux on the first phase of the SRM programme. We are mapping out our strengths and trying to understand where the gaps are by speaking to both suppliers and internal stakeholders.

Our plans for SRM follow nearly four years of work to put procurement on a more strategic footing. SRM has been on the roadmap since 2013, but I think we had to establish trust in the overall procurement process before we moved on to it. We had to work on getting our organisational structure in place, building relationships with the business units and setting expectations. It took a couple of years to build trust in and engagement with the sourcing process. Now we have some successes under our belt, our colleagues trust the procurement organisation to do business so it’s time we started to take advantage of the opportunities in better understanding how we work with strategic suppliers on an on-going basis.

Here’s why. Our biggest challenge as our business evolves is that we have got to think about things differently. Our suppliers can give us new ideas from both inside and outside our industry to help us forge a path forward. It is about getting a more holistic view of business processes and trying to maximise the value we gain from them, with the support of suppliers.

We’ve done a good job in the past couple of years in taking costs out of processes, particularly the up-front and acquisition costs. But now we need to look more at value. We spend around $6 billion on external procurement: about two-thirds of that is services and the rest products. In services, you can have the lowest up-front price and the best labour rates, but if the service itself is not well executed, you see the fall-out really quickly.

Sometimes business practices and rules fail to capture value through the whole life of the contract. That is where we’ve got to be doing things a bit differently and where we hope SRM will help. 

"Now we have some success under our belt, our colleagues trust the procurement organisation to do business so it's time we started to take advanatge of the opportunities in beter understanding how we work with startegic suppliers on an on-going basis."

Craig Rhoades, Chief Procurement Officer, American Electric Power