2018 Global Interactive Research Report - Sustainable SRM

Organisations are under increasing pressure to become more sustainable, and in most cases the majority of the social and environmental impact comes through suppliers. Only by managing relationships with them can we improve practice through the value chain.

Nurturing growth in a new climate Sustainable SRM

2018 GLOBAL SRM RESEARCH REPORT 10 TH EDITION

INTRODUCTION

INTRODUCTION / FOREWORD

Ten years of research reveal the secret to sustaining SRM

Contents

03 04

Procurement’s path to sustainable SRM

Sustainable SRM: how supplier relationships affect risk and growth on a global scale

The iceberg has become a fitting metaphor for suppliers’ impact on business value. Hidden under the surface is a greater source of growth – and risk – than exists within most organisations. The supply chain also produces a greater environmental and social impact than internal activity, as consumers and customers well know. We chose Sustainable SRM as our theme for this year’s report for two reasons. Firstly, organisations are under increasing pressure to become more sustainable, and in most cases the majority of the social and environmental impact comes through suppliers. Only by managing relationships with them can we improve practice through the value chain. Secondly, if supplier relationship management is the route to more sustainable business, as well as other benefits, is it important to embed it in day-to-day business practice. We are very proud and grateful to reach our 10th year of publishing the SRM report. A huge thank you to all those past and present who have contributed to the research, the report and the SRM summits. Special thanks go to you, the readers, and survey participants, without whom we wouldn’t have been able to keep the study going for so long. More than 2000 organisations have taken part and to date, we have analysed approximately 1.5 million data points measuring SRM performance. All this hopefully helps you in implementing, improving and extracting maximum value from your programmes. We first started our SRM research because clients said to us, ‘SRM is great, but how do I prove the benefits internally?’ So, each year we have looked what organisations gain from their SRM programme, both ‘hard’ bottom line benefits and ‘soft’ what we call ‘customer of choice’ benefits. Over the ten years the ‘hard’ benefits leading SRM organisations receive have remained consistently at 4% to 6% post-contract gains. However, in ‘customer of choice’ benefits there is an increasing gap as leaders pull away from the rest of the field.

Our first SRM book, ‘Value Added Supplier Relationship Management’, shows what has changed in the last 10 years – and what has remained the same. The book starts with a quote which I think is as relevant today as it was then. “Winning organisations recognise the importance of the supplier support team and equally that you are only as good as your worst supplier”. Other things have changed. Ten years ago we said organisations should segment suppliers with wider criteria than just spend and criticality, but we hadn’t identified the need for differentiated ‘treatment strategies’ for the supplier segments. We now know how this affects both the governance models and corresponding processes organisations should develop. In the ‘Value Added SRM’ study we recognised that SRM ‘must be part of the corporate DNA’ and the need for executive sponsorship. However, we didn’t put enough emphasis on the change management elements including using tools and techniques like ‘developing an SRM sales pitch’, how ‘voice of the supplier’ pays a key part of the change process, role definition, training, joint account planning and development of the value proposition. Each of these we covered in subsequent books including the development of the ‘six pillars of SRM’ and last year’s ‘SRM journey’ on how to embed a winning SRM approach. In this year’s study, we’re showing how leading organisations are more likely to make sustainability one of the many benefits they gain from SRM. I hope you enjoy it and we wish you all the best in your own SRM journey. Hopefully, we can play a part helping you make it a success.

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Six pillars of SRM

05 07

Supplier collaboration curbs carbon

20

01 Value

CEO view: strengthening supplier relationships helps us sustain global success

Deep roots in partnership lay foundations for sustainable success at Johnson & Johnson

08

Government calls on SRM to answer complex demands

32

02 Engagement

10

After decades adapting to changing attitudes, businesses face a post-carbon economy

Cabinet Office embraces suppliers and operations in SRM vision

12 14 16

44

Sustained success through SRM

03 Governance

About SRM, State of Flux and our research

Sellafield seeks lasting value through SRM governance

Summary of key findings

56

Sustainability

Missed opportunities to support sustainability with SRM

60

04 People

Zurich finds SRM successes amid competing procurement priorities

72

05 Technology

Contract management delivers sustainable results for Royal Mail

84

06 Collaboration

Ausgrid feels the power of sustainable supply chains

96 98 99

Summary and call to action

Our partners

About State of Flux

Alan Day Chairman & Founder State of Flux

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SUSTAINABILITY FEATURE

SUSTAINABILITY FEATURE

Sustainable SRM: how supplier relationships affect risk and growth on a global scale

Supplier collaboration curbs carbon

Whenmeasuring end-to-end environmental impact, most companies discover that their value chain carbon emissions outstrip those from their own operations. As climate action becomes more urgent, relationships between supply chain partners will need to come to the fore, says Hugh Jones, managing director of the Carbon Trust’s business services team

insurance premiums. As climate-related impacts become more obvious, the urgent need for action to reduce emissions becomes ever clearer. At the same time expectations are increasing. Investors are actively demanding improved disclosure of climate-related risks and opportunities. With the notable exception of the Trump administration, in most parts of the world climate regulation is driving up the cost of carbon. And within the business community a committed group of leading companies are acting out of enlightened self-interest and pushing hard to create a sustainable, low carbon future.

another, for more than 100 years. They may well be around for another 100 years. If they are, they must succeed in a world facing an average increase in global temperatures of 2 degrees centigrade by the end of the century. When people talk about sustainable business, they tend to focus on just a few things: businesses should seek to minimise carbon emissions and other forms of environmental damage. They should also consider ethical business practices, human rights and working conditions. Sustainability means all these things, but there is a second definition. Businesses that want to thrive and grow in the 21st century need to ask themselves: will the business be able to sustain itself in the years to come? What do we need from customers, suppliers, governments, and the third sector? How are we affected by changes in the environment? In the following pages, we discuss the impact of supply chains on the environment, the ability of the private and public sector to sustain successful SRM programmes and the changing face of ethical business. With guest contributions from a global CEO, an independent carbon emission advisory organisation, a former leader of a number of world-renowned British institutions and the UK government’s chief commercial officer, we aim to show how environmental impact and sustainable business are inextricably linked to supplier relationships.

Since we founded State of Flux in 2004, global temperatures have risen, on average, by nearly half a degree centigrade 1 . It doesn’t sound like much, but that’s just the average. Anyone experiencing record-breaking temperatures in the 2018 UK summer heatwave has a visceral sense of the extremes climate change is helping to bring. Human activities made the heatwave more than twice as likely, according to the World Weather Attribution consortium 2 . The “signal of climate change is unambiguous,” in the summer’s heat, it said. State of Flux started small and grew quickly. After 15 years of operation (and 10 years of research!) we hope to build a business that lasts. All companies do. Some of our clients are global firms which have been around, in one form or

Climate change has become an increasingly recognised risk to business in a number of ways, not least from its direct physical effects. For the financial year up to April 2018, 73 of the companies listed on the S&P 500 reported a weather-related effect on earnings. For more than 90% of those businesses this impact was negative and – where quantified – the average materiality was a significant 6%. Higher incidence of extreme weather is inevitably bad for business. Among other things these events can reduce crop yields, hamper productivity, disrupt logistics, depress consumer spending and raise

Hugh Jones Managing director, Carbon Trust

Operational energy use is only the tip ofthe iceberg... How different sectors measure up when it comes to energy consumption in the supply chain?

Own operations

Upstream transportation & dostribution

Tier 1 suppliers

Tier 2 + suppliers

Automotive

Aerospace

Home appliances

Constructions

Food & drink

Machinery

Electronics and ICT

Pharmaceutical

1 NASA, Global Land-Ocean Temperature Index https://climate.nasa.gov/vital-signs/global-temperature/ 2 Heatwave made more than twice as likely by climate change, scientists find https://www.theguardian.com/environment /2018/jul/27/heatwave-made-more-than-twice-as-likely-by-climate-change-scientists-find

0%

20%

40%

60%

80%

100%

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2018 GLOBAL SRM RESEARCH REPORT

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SUSTAINABILITY FEATURE

SUSTAINABILITY FEATURE

CEO view: strengthening supplier relationships helps us sustain global success

For the global premiumdomestic appliance brand Fisher & Paykel, sustainability means looking after the environment and acting responsibly. But CEO Stuart Broadhurst explains it is also about ensuring supplier relationships deliver to their leading goals.

lead in design, quality and performance we know we need to work more collaboratively with our suppliers. Like most firms, we have responded to consumer expectations and invested to deliver to our end consumers’ requirements. This is also very true though with the heavy investment made in tools and processes for the “best practise” account management of our key B2B customers. But we realised we hadn’t put anything like the same effort into managing our relationships with our suppliers. When you think of how much innovation, both in technology and process, can come when working closely with your suppliers, it’s easy to see why we need to build stronger relationships with them. We want to understand them as well as have them understand us. Fisher & Paykel was established over 80 years ago and we will continue to grow a sustainable global business. We are focusing on three things to make our company more successful: product, brand and people. The first two rely on input from suppliers, and our people will determine how we collaborate with our suppliers to ensure our business is sustainable in the decades to come.

Fisher & Paykel was established in New Zealand in 1934. In those early years New Zealand was a relatively remote part of the world, because of this remoteness the business evolved to be very vertically integrated we built components and parts because we had too, and we became great at innovation that led to many world firsts like the brushless DirectDrive motor for washing machines and DishDrawer dishwasher. This meant our engineers became experts at designing and developing complete product solutions, but the vertical integration model slowed us down. Things take longer when you design and develop complete product solutions on your own. A lot has changed since those early days. Globalisation has forced many well-known brands out of business. As we grew into the global business we are today with manufacturing and design facilities across different parts of the globe we needed to make dramatic changes in how we worked with our supply partners. As the business migrated from its New Zealand roots we have been working more collaboratively with our supplier base, sharing aspects of our technology roadmap to leverage each other’s strengths – capability, capacity and scale. To be a relevant global brand delivering products that

retail, we see great efforts to share and reward best practice across different categories of supplier. Among companies that hold our own Carbon Trust Standard for Supply Chain we have seen them secure imaginative and impactful commitments from their suppliers. These include modal shifts in transport and fleet replacement, the introduction of lower carbon technologies in construction, incentivisation of waste reduction, and even contractual commitments to reduce emissions. One area of particular success has been businesses encouraging their suppliers to switch to renewable electricity, which is becoming an increasingly compelling investment opportunity. For example, it is becoming common to see co- investment or finance facilities for generating renewable energy onsite. There is also a move towards setting objective targets on climate change, based on what will be objectively necessary to stay well below the 2 degree goal in the Paris Agreement on climate change. Hundreds of companies are now joining the movement to set science-based targets on climate change, which includes setting ambitious supply chain emissions reduction goals. This increasingly involves asking suppliers to set their own science- based targets. Ultimately, one of the greatest levers for change we have for taking action on climate change within the economy is using the power of procurement to cascade positive changes down supply chains. If big buyers with substantial purchasing muscle can flex this in a way that drives a shift towards sustainability, they will help to accelerate the shift towards a low carbon future and benefit everyone.

How successful they are in reducing carbon emissions will depend greatly on relationships up and down the value chain. Typically between 60% and 95% of the carbon emissions related to a company’s activities come from outside its operational boundaries. That could be embedded carbon in materials, supply-side processes or transportation before goods arrive on site, or downstream emissions resulting from the use of products over their lifetime. But procurement teams are not always set up for the challenge of adding sustainability into the equation. Many organisations have spent years constructing and optimising highly effective commercial machines which are focused on achieving the best quality at the lowest price. But this focus means they can find it difficult to accommodate wider definitions of value–such as sustainability or carbon intensity–when selecting and managing suppliers. The good news is that it is getting easier to measure supply chain emissions and to set meaningful targets for action. Pressure for environmental disclosure from major corporations has helped. Over 4,800 companies provided responses to the 99 member organisations of CDP’s supply chain programme in 2017, who were able to collectively leverage over US$3 trillion in annual spend to request this information. Among the best performing organisations, we see proactive supplier engagement and cooperation in the supply chain. In some sectors, such as automotive, where they share common technical know-how with suppliers, we see companies directly providing consultancy and advice based on their own experience. In other sectors, such as

Stuart Broadhurst CEO, Fisher & Paykel

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SUSTAINABILITY FEATURE

SUSTAINABILITY FEATURE

Government calls on SRM to answer complex demands Gareth RhysWilliams became Chief Commercial Officer of the UK government in 2016. He was previously CEO of PHS Group, a leading provider of outsourced workplace services, and Charter International, the FTSE 250 engineering group, until its successful sale to Colfax Corporation in 2012. He has a strong record of driving transformational change in large, complex and federated organisations. Here, he explains why SRM is now so vital in sustaining value in the public sector.

In government, we procure a bewildering array of goods and services. Some are relatively straightforward, like office stationery, electricity and IT hardware. But some are very complex, such as naval submarines, or the housing of asylum seekers. When you contract for asylum seeker accommodation, you realise there are all kinds of events that may influence demands on the supplier. They include such random factors as the weather in the Mediterranean and the escalation or de-escalation of global conflicts, such as the war in South Sudan. They affect not only the total demand for the service but also the type of demand: whether the supplier must house single young men or families with children, for example. These demands are difficult for both suppliers and the government to anticipate when tendering and negotiating contracts. For a long time, the government had the attitude that you sign a contract and step back expecting the supplier to tackle the issues as and when they occur and still deliver the required outcome. But it is not like that. You can’t just sign a deal and only intervene to punish the supplier for some perceived failure. You must develop a relationship with the supplier based on trust and openness that allows you both to adapt, as and when circumstances change. In some ways government’s experience in working with suppliers echoes that of the automotive industry, where I spent some time in management at Lucas Industries. More than 20 years ago, the industry went through a phase during which original equipment manufacturers would beat up the tier-one suppliers on price, so the tier one suppliers would beat up the next tier down the chain and so on. It meant profit moved up to the OEMs – for a while – but then came a period of parts shortages and disruption to the supply

chain. At the same time, we saw the threat from Japanese manufacturers and their just-in-time processes, which rely on co-operation with suppliers. The industry and in particular the senior customers realised it and needed to get everyone around the same side of the table to work together, which, over time, it did. We are in a similar moment in government. The period of austerity that has now been with us for almost ten years has resulted in huge pressure on the public sector to reduce supply-side costs and make every tax payers pound go further. Meanwhile, demands on services are increasing. We are faced with an aging population and higher life expectancy putting pressure on health and social services, a transport infrastructure that needs to be fit for the 21st century and geopolitics that mean our security and armed forces need to be equipped for almost any eventuality. At the same time, there has been some introspection over some suppliers’ behaviour in recent years. While it’s very important to hold suppliers to account when things go wrong, we also need to consider what role we might have played and how we both could have done things better. As part of this process, we are considering how well qualified our commercial teams are to deal with these suppliers, and we are investing in training as well as new pay structures to retain and recruit the right staff. We are also striving to become much more joined up across government where many departments use the same suppliers and where much more strategic relationships are necessary. The combined pressure of unpredictable and complex demands on services and the limits on

Gareth Rhys Williams

Chief commercial officer of the UK government

public sector spending is creating the impetus for our Strategic Supplier Relationship Management (SSRM) programme, which we are rolling out as fast as possible (see page 18 for details). We are moving away from the old style, arm’s length and sometimes adversarial relationships with suppliers to a much more collaborative model. We are working with them on a range of initiatives that not only focus on optimising the value from existing contracts but also seek to identify and deliver additional value to both parties. We recognise that to achieve every department’s strategic objectives and continue delivering vital services we must develop improved and sustainable relationships with our key supply side partners. Ministers are buying into the SSRM agenda. They understand why we now need to find win-win outcomes for the supplier and the government. With this, and broader backing across government we can ensure SSRM is not an optional extra. It is crucial to how we engage with suppliers to move forward as a government and ensure the products and services we procure represent long term sustainable value for the public.

While it’s very important to hold suppliers to account when things go wrong, we also need to consider what role we might have played and howwe both could have done things better.

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SUSTAINABILITY FEATURE

Life of Baroness Cohen of Pimlico

Professional Life

Public Life

2007

Chancellor BPP University College

2000 to present Labour Peer House of Lords

2001 - 2013

Non-Executive Director London Stock Exchange Group

1999 - 2005

Non-Executive Director Defence Logistics Organisation (Ministry of Defence)

After decades adapting to changing attitudes, businesses face a post-carbon economy In a career spanning 50 years, Baroness Cohen of Pimlico has enjoyed spells as deputy chairman of the Yorkshire Building Society, a non-executive director of the London Stock Exchange and a governor of the BBC. Here, she describes how business attitudes to ethical trading have changed, and why organisations will have to adapt to renewable energy sources.

1993 - 2005

Chairman and NED BBP Group

1994 - 1999

Governor BBC

1991 - 1999

Deputy Chairman Yorkshire Building Society

1993 - 1997

Member Sheffield Development Corporation

1988 - 2005

Crime fiction writer

1982 - 2001

Director Charterhouse Bank

1969 - 1982

Civil Servant Department of Trade and Industry

1965 onwards

Solicitor

pressure. It is clear that they also feel some responsibility to future generations and want to see the planet in a fit state to sustain their business in the decades to come. Ten years ago, businesses did not make decisions about where to get their energy on anything other than price. The shift away from hydrocarbons will be painful, but economies have made similar transitions in the past. The law will follow behaviour, and we as private consumers and businesses may be forced to use more expensive forms of energy. Demand will become more predictable and prompt more investment in the new sources and technologies which will make energy from those sources more affordable. Combined with continual research in energy- saving technologies, investment in new sources of energy will act to mitigate the effect of price rises, but it cannot happen without some pain. Since so much of what business does is outsourced, they will expect suppliers to make these investments with them. It is going to be better to anticipate the coming changes and work with suppliers now than have to catch up once the train has left the station.

south and into affordable housing in the north, where we were not involved in business.

At the London Stock Exchange, where I was a non-executive director, we were looking to outsource our IT system – the very core of our business – to a provider in Sri Lanka and in the end, instead of just buying the trading system, we bought the company, MillenniumIT, in 2009. We all visited Sri Lanka for a Board meeting because we knew we needed to know what conditions out there were like. We already knew that we were paying our employees in Sri Lanka properly, because we had to. Most of them had degrees from places like Harvard or MIT or Imperial and if underpaid did not need to work for us. Indeed cost had not been our major consideration in moving the IT system offshore, it was the flexibility and speed of reaction we were after and the access to a large pool of highly qualified people. We were concerned about stability of the country which was just recovering from a damaging civil war and was at that stage deeply divided between the remnants of the predominantly Muslim insurgents in the north of the island and the Hindu south. In the end, we decided that while many of the problems that had caused the insurgency remained, we should believe that they could be ameliorated, and we put money into our new headquarters in the

People now talk about ethical trading, but 40 years ago, nobody really gave it much attention. People may have campaigned on ethical issues, but it was rare for anyone senior in business to be concerned. You just called up a subcontractor to tell them what you wanted or find out where it was, but a great deal has changed in the last couple of decades. Firstly, businesses are now contracting out the guts of the company. Functions that once seemed vital to the running of the organisation – HR or IT – are now carried out by third parties to the point where this is now normal for global businesses. That makes relationships with these third-party suppliers vital. And ethical trading is becoming engrained in business as the public, governments and business leaders all change their attitudes. Bringing ethics into business is really about sustainability, in the true sense. If your supplier can’t pay its workforce properly, if there is corruption in the supply chain, if you’re over - reliant on finite natural resources, then either the whole or a key part of your business is not now sustainable.

But it was a sign that trading has become completely global. When the eyes of your customers and shareholders are on you, you need to be very careful in terms of ethical sourcing and the deals you make around the world, and indeed closer to home. If you draw a lot of unwelcome attention to your business, you are not going to sustain it for long. Australian investment fund told me he was getting out of coal, despite the fact that Australia has such an abundance of cheap coal. It is however clear that both customer and governmental pressure is starting to have an effect, the transition away from coal is underway and it is a market that will struggle for investment in the future. The investment community is also taking an interest. Two years ago, a friend who runs an For now, businesses are of course largely reviewing energy supply options to save money, but the move to alternative sources recognises how shareholder value can be impacted by public

Baroness Cohen

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SUSTAINABILITY FEATURE

Sustained success through SRM

Our ability to sustain our businesses through the coming decades will depend on whether we can ensure the health of the planet and a sense of economic and social balance. We’re not just saying this because it is the right thing to do, although it is. We’re saying it because this is what will drive business success. All supply chains end with consumers, and through social media and the democratisation of information, they are driving change across the business world. As start-ups and internet-native companies enter all markets, consumers have more choice than ever before and can instantly compare firms on price, quality, environmental impact, product provenance and social responsibility. In response, businesses need to consider sustainability in its broadest meaning. Research commissioned by global FMCG giant Unilever showed one-third of consumers now choose to buy brands based on their social and environmental impact 1 . The study finds this equates to a €966 billion (£859 billion) untapped

opportunity and says the size of the market for sustainable goods is €2.5 trillion (£2.2 trillion). Never has there been more interest in where products come from, what they contain, how they affect the environment and the conditions of the people who make them. The same goes for services. Any slip-ups or shocking news can go viral in an instant, devastating brand reputation and share price. People increasingly choose to buy from and work with, brands which represent them, reflecting their lifestyle, values and ethos. Sustainability is not a nice to have: it’s a competitive advantage. And organisations cannot create that advantage without understanding and managing their suppliers. That’s where most of their carbon emissions will come from; it is where most of their environmental impact will be; and it’s the place they’re most likely to find poor working conditions and ethical malpractice. It’s also where they will find the innovation to impress and delight their customers. SRM offers organisations the tools to sustain success in a changing world.

1 Report shows a third of consumers prefer sustainable brands https: //www.unilever.com/news/press-releases/2017/report-shows-a-third-of-consumers-prefer-sustainable-brands.html

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ABOUT SRM, STATE OF FLUX AND OUR RESEARCH

ABOUT SRM, STATE OF FLUX AND OUR RESEARCH

About SRM, State of Flux and our research

2018 SRM Global Maturity

Leader 19 Companies (6%)

Fast follower 63 Companies (21%)

Follower 73 Companies (73%)

Advanced

Established Developing Undeveloped

Value

Engagement

Governance

People

Technology

Collaboration

About SRM

About our research This global SRM research has reached a landmark 10th year. Over ten years we have gathered and analysed more data about global SRM practice and experience than anybody else in the field. It includes feedback from over 5,000 contributors from more than 2,000 companies, with an estimated turnover in excess of £250 billion, over 1 million data points and 1,250 pages of detailed analysis and commentary. This year we have analysed data collected from 517 respondents representing 303 global companies across more than 25 industry sectors. In addition to this we have collated interesting and informative case studies from pharmaceutical giant Johnson & Johnson, the UK Government's Cabinet Office, nuclear fuel re-processor and decommissioning site Sellafield, global insurer Zurich, Royal Mail and Australian electricity distributor Ausgrid. Maturity and benchmark analysis Ten years of research has enabled State of Flux to develop a benchmarking methodology that measures SRM maturity at four levels across the six pillars of SRM. We also differentiate between leaders – those companies that we believe have developed more mature and successful SRM programmes. Fast followers, who show strong evidence of SRM development, and followers – companies ranging from those where their SRM ambition is limited and reflects mostly contract and performance management to those with genuine SRM ambition but are at the start of their journey. State of Flux SRM index The State of Flux SRM index is designed to make it easier for businesses to establish a baseline for their SRM performance and set targets for improvement. The index score is calculated based on the responses received to specific questions within our 2018 SRM survey. These questions are selected to reflect what organisations are actually doing and experiencing, and are weighted to reflect their importance to an effective overall approach to SRM. The index is based on a range of 0 to 6 and this year the average SRM index achieved by leaders is 4.3 and for fast followers 3.2.

SRM is a very simple concept – it says all suppliers are important to an organisation, but some are more important than others. By identifying the more important suppliers, understanding their viewpoints, and working with them more effectively, organisations will achieve benefits beyond the limits of the contract. In some cases, the relationship with a supplier is nurtured to foster innovation in collaborative projects which grow value for both parties. That is SRM. It’s simple on paper, but difficult in practice as it needs to be embraced by the whole organisation. Organisations are wrestling with both tactical and strategic challenges as digitisation creates new business models and transforms markets. Meanwhile, the geopolitical world is changing at a pace never experienced before. On the business radar, SRM is too often swamped by the noise of competing priorities. Advocates of SRM must be proactive and resilient and trust that they are on the right path. This research shows that SRM reduces reputational, operational and legal risk, and it creates opportunities for sustainable growth. About State of Flux State of Flux has been working globally with clients from our offices in the UK, Europe, USA and Australasia since 2004. As a specialist procurement and supply chain business, we have developed a comprehensive range of consulting support, supplier management technology and a training curriculum. These all draw on our SRM research findings and practical experience to support both private and public sector organisations to extract maximum value from their supplier management capability. This experience and deep understanding of SRM has enabled us to develop a model for best practice based on six pillars of SRM capability that when implemented effectively and with determination will propel organisations on a journey to world class SRM.

The global reach of this research enables us provide a view of maturity across the three main regions that contribute to our research. This chart shows the relative strengths of each region by pillar.

Global perspective

Europe

Asia

North America

Advanced

Established Developing Undeveloped

Value

Engagement

Governance

People

Technology

Collaboration

Over the years we have often been asked which industry sectors are best at SRM. As with the same question about companies there is no easy answer. Our definition of excellence requires strong capability and results to be demonstrated across all six pillars. The following chart demonstrates that across the industry sectors represented by responses to our survey, even those companies regarded as leaders or fast followers produce a picture of inconsistency. Overall it’s the telecoms sector that seems to be getting quite a lot right and doing it more consistently across the pillars. The sector reporting both very strong attributes while at the same time having significant challenges elsewhere is the IT/high tech sector.

Industry sector perspective

Financial services

FMCG

IT / high tech

Oil & gas

Telecomms

Utilities

Public sector

Advanced

Established Developing Undeveloped

Value

Engagement

Governance

People

Technology

Collaboration

Chart is based on leaders and fast followers from the top seven industry sectors (by number of responses) in our research. The public sector while well represented in the survey have only one fast follower. Therefore this analysis is based on their ten strongest performers

Participants of our SRM research are able to request a complimentary benchmark and index score which will benchmark your organisations SRM activities against best practice and your industry peer group.

Your SRM benchmark and index

Leaders

Fast followers

If you would like to obtain a benchmark and index score, please contact: enquiries@stateofflux.co.uk

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SUMMARY OF KEY FINDINGS

SUMMARY OF KEY FINDINGS

Summary of key findings

Each pillar reveals 3 big numbers that tell a story about SRMmaturity in 2018, showing that a lot of work remains to be done tomaximise value fromsupplier relationships.

Value

People

43% OF ORGANISATIONS SEE SUPPLIERS AS A VEHICLE TO DELIVER MORE INNOVATION AND IDENTIFY INNOVATION AS ONE OF THEIR TOP THREE BUSINESS DRIVERS.

6% APPRECIATION THAT IMPROVING SUSTAINABILITY IS A VALUE THAT SRM CAN HELP DELIVER IS LACKING: ONLY 6% OF COMPANIES RANKING IT AS ONE OF THEIR TOP THREE BUSINESS DRIVERS FOR SRM.

46% FINANCIAL GAINS FROM SRM ARE SIGNIFICANT WITH 46% OF LEADERS ACHIEVING BENEFITS OF MORE THAN 4% POST-CONTRACT.

43% ONLY 43% OF FIRMS WHO PARTICIPATED IN OUR RESEARCH HAVE IMPLEMENTED ANY SRM TRAINING.

15% THE SKILLS AND COMPETENCIES THAT COMPANIES HAVE IN PLACE ARE NOT FULLY UNDERSTOOD. WE FOUND ONLY 15% OF ORGANISATIONS CARRY OUT SKILLS AND COMPETENCY ASSESSMENTS.

27% OF FOLLOWERS HAVE DONE NOTHING TO PREPARE THEIR PEOPLE FOR THE INTRODUCTION OF SRM.

Technology 8% SUPPLIER INNOVATION IS AT THE BOTTOM OF THE LIST FOR TECHNOLOGY ENABLEMENT WITH JUST 8% OF ORGANISATIONS USING TECHNOLOGY TO TRACK AND NURTURE SUPPLIER INNOVATION.

Engagement

68% LEADERS HAVE MORE SUPPORT FROM SENIOR

50% ENGAGEMENT AND SUPPORT FROM SUPPLIERS REMAIN HIGH FOR LEADERS. WE FIND 50% DESCRIBE IT AS STRONG AND ACTIVE.

22% THE VALUE PROPOSITION IS

71% OF FIRMS FIND THE ENTERPRISE SYSTEMS THEY ATTEMPT TO USE IN THE SUPPLIER MANAGEMENT LIFECYCLE ARE DISPARATE AND NOT INTEGRATED. 55% SUPPLIER INITIATED INNOVATION IS GAINING GROUND, 55% OF SRM LEADERS NOW SEE IT AS AN INCREASING ELEMENT OF THEIR GROWTH STRATEGY.

7% THERIGHTTECHNOLOGYSOLUTION REMAINSACHALLENGEFORTHEVAST MAJORITYOFFIRMS.WEFOUNDONLY 7% OFCOMPANIESEXPRESSEDTOTAL SATISFACTIONWITHTHEWAYTHEIR IT SYSTEMSANDTECHNOLOGYSUPPORTTHE SUPPLIERMANAGEMENTLIFECYCLE. 3% FOLLOWERS HAVE YET TO ‘GET’ SUPPLIER INNOVATIONWITH ONLY 3% OF FOLLOWERS SEEING IT AS A KEY COMPONENT OF THEIR GROWTH STRATEGY.

IMPORTANT TO ENGAGEMENT: 22% OF SRM FOLLOWERS SAY THE VALUE PROPOSITION (OR A LACK OF ONE) HOLDS BACK ENGAGEMENT.

MANAGERS AND EXECUTIVES WITH 68% ENJOYING STRONG AND ACTIVE SUPPORT.

Governance

Collaboration

64% THE IMPORTANT ROLE OF GOOD GOVERNANCE IN SRM IS NOT FULLY

55% OF SRM LEADERS USE BUSINESS GROWTH CRITERIA SUCH AS SUPPLIER INNOVATION CAPABILITY TO SEGMENT SUPPLIERS.

62% AS A FOUNDATION FOR SRM RISK MANAGEMENT REMAINS AN AREA OF CONCERN: 62% OF SRM FOLLOWERS REPORT THEY DON’T YET HAVE IT EFFECTIVELY ESTABLISHED FOR THE MAJORITY OF THEIR KEY SUPPLIERS.

92% WEFOUND 92% OFFOLLOWERSDONOTHAVE JOINTACCOUNTPLANSFORMORETHANHALF THEIRCRITICALSUPPLIERS.

APPRECIATED BY 64% OF SRM FOLLOWERS WHO DO NOT HAVE IT IN PLACE FOR THE MAJORITY OF THEIR MOST CRITICAL AND STRATEGIC SUPPLIERS.

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SIX PILLARS OF SRM

SIX PILLARS OF SRM

What are your strategic objectives? To what extent are you dependent on the contribution of third party suppliers to achieve them? What more could you be doing with your most important and strategic suppliers to help achieve those goals? That’s the SRM value proposition. Then it’s a question of working with the supplier to understand exactly what you can to do, together, both within existing contracts and beyond. Read more on page 20 Is your SRM programme a business change programme with a large footprint outside procurement? How engaged and supportive of SRM is the C-level team? How do you get buy-in from business and operational managers who deal with suppliers day-to-day? How will you engage suppliers more in the process? The answer to all three questions lies in a strategy for stakeholder engagement and support. Read more on page 32

Six pillars of SRM

1. Value

How do you decide which suppliers are truly strategic? What decision making criteria should you be using? What are the best process, governance and engagement models to apply? Are roles and responsibilities properly defined? Is contract, performance and risk management sufficiently robust? Read more on page 44

2. Engagement

3. Governance

4. People

Is the SRM role properly defined? Is SRM reflected in the role profiles of others in the organisation? Do you understand what skills and competencies the role requires? Have your evaluated current skills and competencies and developed training and personal development solutions? Is SRM part of performance objectives and measurement? Read more on page 60

5. Technology

6. Collaboration

Are you able to manage and share supplier related information? Can you extract data from all relevant enterprise software including ERP, finance, procure-to-pay, and contract management systems? Are all aspects of the supplier management lifecycle sufficiently enabled by technology? Read more on page 72

The State of Flux six pillarsmodel for SRM excellence is based on a deep understanding of the key elements that need to be combined to develop and sustain an effective approach tomanaging supplier relationships. Developed and refined over the past 14 years, it is now used by leading global businesses as the blueprint for their SRM programmes. Within each pillar there are a number of critical elements to fully enable SRM and these are described here. Closer examination of the links and dependencies between these activities reveal the holistic nature of SRM and the need to design a programme accordingly. Companies leading in SRM are developing strong and consistent practices and behaviours across all the pillars.

Are you collaborating sufficiently with your strategic and most important suppliers? Are you developing joint plans that deliver the strategic objectives of both organisations? Are your relationships sufficiently open and transparent and based on trust? Are you benefitting from supplier innovation? Are you a customer of choice? Read more on page 84

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VALUE

VALUE

Value

Companies that want to thrive and grow in the 21st century need to recognise that collaboration with suppliers to make all supply chain operations more sustainable will no longer be a ‘nice to have’, it will be an imperative to create business value.

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VALUE

VALUE

43% OF ORGANISATIONS SEE SUPPLIERS AS THE VEHICLE TO DELIVER MORE INNOVATION

6% OF COMPANIES PLACED HELPING ACHIEVE SUSTAINABILITY GOALS IN THEIR TOP THREE BUSINESS DRIVERS FOR SRM

46% OF LEADERS ACHIEVED FINANCIAL BENEFITS OF MORE THAN 4% AFTER SIGNING SUPPLIER CONTRACTS

Summary

SNAPSHOT ANALYSIS

A value proposition can demonstrate not just the saving in supply-side costs, but also broader benefits including innovation, product development and customer retention.

In our introduction, the Carbon Trust, a body which certifies programmes to reduce greenhouse gases, pointed out that 60% and 95% of CO2 emissions come from the value chain, either upstreamwith suppliers or downstreamwith customers. Organisations who succeed inmeeting ambitious carbon-reduction targets will do so in conjunction with suppliers, but only if relationships with them are managed accordingly.

In 2018, we’ve seen a big leap forward in attracting business confidence inmanaging supplier relationships. Half of organisations have now secured a value proposition for SRMwhile last year only a third of businesses did the same. While reducing risks and costs are the greatest drivers for SRM, access to innovation now ranks third, another milestone in maturity. But elsewhere there is cause for concern. Sustainability is not seen as a key business driver for SRM: only 6% of organisations rank it in their top three, while just 5% of respondents see sustainability as a non-financial benefit of SRM. However, leaders in SRM continue to demonstrate its financial value: 46% of them achieved financial benefits of more than 4% after signing supplier contracts.

Companies building a value proposition for SRM are in themajority for the first time. Fig. 1. Have you developed and documented a clear value proposition and/or business case for SRM?

Fewer than half respondents see sustainability as part of the SRM value proposition Fig. 2. Does your value proposition specifically mention sustainability?

Sometimes business value is purely a numbers game. Costs and sales are easy to count, so they can become de facto definitions of value. But other measures are also important, especially if an organisation is looking to its long-term sustainability. Intellectual capital, brand reputation and goodwill are all very valuable to business, but much more difficult to define and measure than costs and sales. Procurement teams must understand which value or values they hope to influence when proposing, planning, executing and assessing SRM. In this area, we have seen progress in the last year. Globally just over half of organisations now report having documented an SRM value proposition; a significant increase on last year when the figure was just 33%. A geographic trend has been driving increasing popularity of the value proposition: in Europe, the number of organisations developing and documenting a clear value proposition leapt from 31% to 49% between 2017 and 2018. In North America, the figure is up from 38% to 62% over the same period, while in Australasia it moved from 33% to 44%. While it is encouraging to see the development of a value proposition become a greater priority in SRM projects, there is room for improvement. There is a strong correlation between leaders in SRM and those underpinning SRM investment with a value proposition. Nine out of ten leaders have an SRM value proposition, while only 43% of followers can say the same. Where a value proposition is in place, almost all respondents say sustainability is part of it [see Fig. 2]. However, the result may offer a false sense of the prominence of sustainability in SRM investment decisions. In Fig. 4, we see only 6% of respondents regard it as one of their top three reasons for SRM investment. But the value proposition should cover all potential value. It is an expression of all the areas in which SRM could improve outcomes. A value proposition can demonstrate not just the saving in supply-side costs, but also broader benefits including innovation, sustainability and brand value. Even if respondents do not regard sustainability as a specific driver for SRM investment they still think it is worth mentioning in the value proposition.

50% Yes 40% No 10% Don’t know

47% Yes 46% No 6% Don’t know

Leaders remain far more likely to have developed an SRM value proposition.

Fig. 3. Have you developed and documented a clear value proposition and/or business case for SRM?

Leader

Fast follower

Follower

Yes

91%

65%

43%

No

5%

24%

48%

Don’t know

5%

12%

9%

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VALUE

VALUE

Innovation becomes a top-three driver for SRM for the first time Fig. 4. What are the most important business drivers for your investment in implementing/ developing SRM in the next 12 months?

Nearly a quarter of leaders accrue post-contract benefits of 6%or more fromSRM Fig. 5. What financial benefit* do you believe your SRM programme is delivering? *average post-contract signature benefit

Riskmanagement is the greatest non financial benefit fromSRM

SRM leaders prioritise innovation as an SRM driver

A compelling value proposition has to be clearly linked to the company’s most important business drivers. Over the last five years, the top two drivers have not changed. Cost reduction/avoidance and risk management/reduction remain the overriding business drivers for investing in SRM and are among the top three business drivers for 54% and 52% of respondents respectively. But elsewhere we do see significant changes. More companies than ever before see SRM as the vehicle to deliver more innovation to the organisation. The pattern of business drivers is consistent across all benchmark groups except for SRM leaders, who prioritised innovation more than any other group.

Fig. 6. Apart from financial benefits, what other benefits have been delivered as a result of your SRM programme?

Risk management

Cost reduction/avoidance

Leader

Fast follower

Follower

42%

54%

Service level improvement

Risk management / reduction

More than 6% per annum

36%

52%

23%

Supplier innovation

14%

More supplier innovation

27%

4%

43%

Improved account management

Organisations who lead in SRM benefit most from it

Improving your internal / end customer experience

4% to 6% per annum

25%

37%

23%

Procurement professionals build their credibility on a track- record in achieving tangible, measurable outcomes. It is the key that will open doors to better and bigger projects, as well as more influence in the business. SRM can deliver results, and SRM leaders prove it: 46% of them report achieving financial benefits of more than 4% after signing supplier contracts. Only 24% of fast followers can demonstrate this level of return while only 8% of followers can. The industry sector delivering the best financial return from SRM is the IT/high tech sector: 26% of its respondents reported benefits more than 4%. Being able to quantify SRM related financial benefits remains a challenge: more than half of respondents are still unable to do so. But the benefits of SRM are not only financial. Effectively managing relationships with suppliers can achieve all sorts of non-financial returns. Chief among them is better risk management, cited by 42% of survey respondents. Service level improvements were achieved by 36% of businesses, closely followed by supplier innovation at 27%. But the picture changes when we look at SRM leaders: the greatest non-financial benefit they achieved was in innovation.

Internal or end customer experience

10%

Improving supply chain efficiency

23%

4%

28%

Proactive ideas for continuous improvement

Service level improvement

2% to 4% per annum

21%

27%

36%

Regulatory compliance

21%

Regulatory compliance

21%

15%

18%

General increased commitment (‘going the extra mile’)

Quality improvement

Up to 2%

20%

13%

9%

Quality improvement

11%

Improving speed to market

16%

17%

11%

Preferential pricing

Helping achieve your sustainability goals

Don’t know

13%

6%

9%

Secured the best supplier resource

44%

9%

60%

Suppliers more willing to accept and manage risk

8%

Speed to market

8%

Help achieving your sustainability goals

5%

More than half of respondents are still unable to quantify financial benefits fromSRM.

SNAPSHOT ANALYSIS

Priority access to access to scarce materials and / or manufacturing capacity

Only 5% of respondents see sustainability as a non-financial benefit of SRM. It is a surprising result given the opportunities to reduce environmental impact and risk of unethical trading that suppliers, managed in the right way, can offer. Companies that want to thrive and grow in the 21st century need to recognise that collaboration with suppliers to make all supply chain operations more sustainable will no longer be a ‘nice to have’, it will be an imperative to creating business value.

4%

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