State of Flux 2021 Global Supplier Relationship Management Research Report focuses on Growing and Protecting Value. Nearly 500 Supply Management professionals have contributed to this year's research. Its free to download but provides incredible insights into the SRM market right now.
CONTENTS
INTRODUCTION / FOREWORD
VALUE, MONEY AND BEYOND
with a client about their business case for supplier management, I downloaded their organisation’s annual report and investor release. This showed that the corporate objective was to focus on small businesses (from a customer-target perspective). Our discussion then shifted to why their case concentrated on strategic suppliers, instead of enabling smaller providers. After making small and medium-sized suppliers the focal point of their SRM strategy, they are now moving forward with their company’s full endorsement. To further augment the argument in favour of what supplier management can do to help you protect and increase value, we hear from a variety of experts on a spread of subjects. These include how to generate innovation through supplier management (page 14); how to boost the value of your entire enterprise by raising resilience and reducing risk (page 10); how to harness the value that comes from having great people with the right skills in place – both internally and with suppliers (page 58); and how to better keep and grow the value you have already generated (page 4). We hope the combined weight of the statistical evidence presented here, together with advice and anecdotes from experts and peers, will help you enlighten stakeholders to the full extent of the value that supplier management can bring. Finally, thank you once again to all who took part in this year’s research. We appreciate the time you took out of increasingly weighty workloads to share your experiences. Your input enables us to continue to monitor progress in this vital field and we hope it helps you to assess your progress against that of your peers. Now is the time to keep up the momentum you’ve already gained and adopt a new set of goals to grow and protect value, in all its various forms.
CONTENTS
24 Value
Financial rewards are just one of many reasons to set up, expand or improve a supplier management programme.
03
Foreword: Facilitate supplier management's full potential
38 Engagement
04
Growing and protecting value
R ECOGNITION OF supplier chains and shone an uncomfortable light on those that lack solid supplier management. We could already see from last year’s case studies and feedback that it was the companies that had good links with their key partners who had priority access to vital goods and services. It management’s value is on the rise. Covid-19 has accentuated the vulnerability of supply was those who knew who their strategic providers were and had taken the time to form meaningful, mutually beneficial connections with them who, together, triumphed. This year a majority of you tell us quite plainly that as a result of the pandemic, the profile of supplier management has risen sharply up the list of focus areas. Increased attention on its importance provides an opportunity for procurement to set up, expand or improve existing programmes for the good of their organisations. Previously, businesses have been predominately focused on money as a reason for carrying out these activities. They wanted to ‘extract cost’ from relationships – but that’s not how successful collaborations work.
Throughout this year’s State of Flux report, the 13th we have published, we hear from individuals and organisations who tell us about the opportunities and value supplier management affords them beyond the financial. Find out what Electrolux, Skanska, AMP Capital, New Zealand’s Ministry of Business, Innovation & Employment, Intuit, Kelly, Yondr and AIB plan to or already have achieved as a result of their programmes. It is those who aim for more than simply a saving here or a discount there that attain success far beyond the bottomline. As we report here, not only can the strongest performers cite increased supply chain resilience, innovation improvements and reduced risk among their accomplishments – they can quantify them. But many struggle to explain and measure these ‘beyond commercial’ benefits. See advice on how to overcome this challenge in our business case article on page 8 and throughout the features, analysis, case studies and interviews in this year’s book. Sometimes, it is simply a question of looking at a problem from another perspective. Prior to a recent meeting
08
How to make a business case
10
T he value of resilience and risk mitigation
14
Creating new value through innovation
18
About Supplier Management, State of Flux and our research
48 Governance
20
The Six Pillars of Supplier Management
22
Summary of key findings
30
Ministry of Business, Innovation and Employment: Tackling social and climate change
34
Intuit: Internal and external partnering provides impact
62 People
44
Electrolux: Disciplined supplier management delivers strong performance
54
AMP Capital: Showing leadership on modern slavery
58
Maximise the value of your human resources
68
S kanska: The success of strong supplier collaboration
74 Technology
80
AIB: Technology-enabled supplier management
90
Kelly: Elevate suppliers to evolve
94
Covid-19: Supplier management in the spotlight
NOT ONLY CAN THE STRONGEST PERFORMERS CITE INCREASED SUPPLY CHAIN RESILIENCE, INNOVATION IMPROVEMENTS AND REDUCED RISK AMONG THEIR ACCOMPLISHMENTS − THEY CAN QUANTIFY THEM.
101 Y ondr: Getting supplier management right from the start 104 Summary 105 Call to action 107 About State of Flux
84 Collaboration
Alan Day Chairman & Founder State of Flux
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2021 GLOBAL SRM RESEARCH REPORT
EXPERT VIEW / BEYOND COMMERCIAL VALUE
EXPERT VIEW
O VER THE PAST FEW YEARS we’ve seen a steady shift in the role of procurement. It is moving from a function that negotiates deals on the behalf of the business to being far more strategic. This change has been dramatically accelerated as a result of the impact of the Covid pandemic on just about every supply chain. And in these difficult times, business leaders have looked to procurement to protect and strengthen their supply chains – and procurement has stepped-up to show what it can do. We’ve seen numerous examples of teams rising to the challenge and demonstrating they have so much more to offer than simply negotiated contracts. Out of this crisis, procurement has a new mandate and a broader field of play. Now is the time to keep up that momentum and adopt a new set of goals: to find, keep, grow and protect the value inherent in sourcing decisions and supplier relationships, in whatever form they come. Procurement is well-placed to help organisations unlock value through everything it does. And adopting a ‘find, keep, grow and protect value’ mantra is an important way to work towards more strategic outcomes. While we naturally lean towards ‘financial impact’ when referring to the term ‘value' it can have a richer, far more nuanced meaning. ‘Value' can arise from a range of activities, and accordingly be measured in so many different ways. Creating value could come from anything from a simple process improvement or ground-breaking innovation; from risk mitigation or improved sustainability. These things may be harder to measure but are no less important, and play a key role in helping businesses succeed. The value of sustainability, for instance, is reinforced by how many investors now look to use ESG (environment, social and governance) as a way to evaluate potential investment decisions. Financial measures are no longer the primary unit of value, environmental impact and social contribution are equally important to the wider society in which we all belong and have
BY ALAN DAY
a responsibility toward. So as we go forward with our new agenda to ‘find, keep, grow and protect value’ it should be underpinned by wider types of value that must be considered in addition to money: to protect the environment and contribute to society. Strong strategic supplier relationships are essential to unlocking all these forms of value: they make your organisation a customer of choice and we know that chosen clients receive a range of additional benefits. These include better customer experience, increased competitiveness, boosted service levels and more constructive negotiations. More engaged suppliers – those who consider you a customer of choice – are more willing to invest time and resources in going above and beyond what is contracted, and that is important to getting beyond financial value. They are more likely to work with you on solving problems, give you priority access to the best people and proactively bring you ideas for continuous improvement. State of Flux’s ‘value’ pillar is about having a clear business case aligned to your organisation’s strategic objectives. Here we look at how to find, keep, grow and protect value to help you build the business case for investment into vital supplier management.
GROWING AND
PROTECTING VALUE
Find
Having moved on from only ‘buying stuff’ to beyond strategic sourcing, procurement is now helping to move the needle on a company’s share price. It can do this in a number of ways, such as teaming up with suppliers over a new product or service and making a joint approach to the market. And finding innovation through suppliers or trading and sharing assets with our key partners can make a material difference to the way our companies run. The first step is about examining the extent of the opportunity. During this discovery phase, procurement professionals need to establish what its organisation considers valuable beyond year-on-year growth or savings. If they care about environmental and social considerations, for instance, are those values reflected in the company strategy and culture? Is someone responsible for driving that agenda forward? Is procurement encouraged to deliver contracts that also generate social and environmental improvements? A few of the more mature organisations are embracing this, but for the majority it’s an, as yet, untapped opportunity. And the majority are not all that sophisticated at working with suppliers to find new sources of value. Some have established ‘incubators’ to work with suppliers on new ideas, but often these are uncoordinated, one-off exercises. By setting up a more formal process of generating ideas – as part of supplier management treatment strategies – procurement professionals can more effectively and regularly find →
WHILE WE NATURALLY LEAN TOWARDS FINANCIAL IMPACT WHEN REFERRING TO THE TERM ‘VALUE' IT CAN HAVE A RICHER, FAR MORE NUANCED MEANING. WIDER TYPES OF VALUE THAT MUST BE CONSIDERED INCLUDE PROTECTING THE ENVIRONMENT AND CONTRIBUTING TO SOCIETY.
Procurement must set a new agenda: to find, keep, grow and protect the value in the purchasing decisions it has made. They must go beyond focusing only on financial achievements to helping their organisations make environmental and social gains.
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EXPERT VIEW / BEYOND COMMERCIAL VALUE
EXPERT VIEW
Even just the act of engaging suppliers and asking for their input sets good behaviour and the right tone for a beneficial partnership from the start. It also means they are more likely to be aligned to your objectives and therefore easier and better to work with. And while it’s useful to have key performance indicators (KPIs), organisations must remember the value of measuring them. Most are poor at doing this and fall into the trap of applying their perception of performance rather than basing it on fact. This is generally counter-productive, typically leading to retaining under-performing suppliers or punishing good ones. It also means both the buying and supplying organisations lack vital evidence of joint success. Proven wins can drive them forward together and help to support the business case for further investment into their relationship or supplier management programme.
together to eliminate use of paper or plastics, or cut carbon, make sure you don't treat it simply as a flavour of the month. If you’ve moved the needle to a new place try to keep it there. Brand value can be significantly enhanced by being known for a product or service that is not only excellent but also environmentally and socially responsible. Brand value can also be boosted by your very treatment of suppliers. For example, by increasing diversity, the use of small businesses, veteran companies, start-ups and more or through the social value delivered to a community. However, it can equally be lost – and lost overnight – through poor behaviour. An example of this is when, in 2013, some suppliers to Premier Foods complained to The Grocer magazine that the company had written to suppliers asking them to invest in a ‘mutual investment programme’. Premier Foods said as they gained so too would suppliers. But the story later hit the national press. Premier Foods was accused of effectively demanding suppliers ‘pay to stay’ and the resulting publicity hit the company’s share price. It was the first high profile example of a supplier management strategy directly damaging the company’s overall value. Companies should never forget to be good corporate citizens. And this applies not only to how well they treat suppliers, but also how they support them when they uncover problems. In the past, if modern slavery or child labour was discovered, for instance, most companies would walk away from the supplier perpetrating it. Now, best practice is to instead work with them, educate and support them to make changes, such as setting up a school for workers’ children. Just identifying the risk – or pleading ignorance – is not the answer. Protecting brand, reputational and shareholder value no longer means dumping problem suppliers, but enabling them to be better. And this means businesses need to look at the ‘protect’ part not as a cost to their business but instead as a way of shielding corporate value.
Grow
Now that you and your key suppliers have chosen some social and environmental goals to work on together to generate broader value, and set KPIs to motivate success, you can move to value delivery that goes above and beyond the contract because you both believe in the greater good. Successful continuous improvement requires a joint process between the company and their key supplier. Performance should be about ongoing improvement and using data to both retain and grow value. You should be constantly reviewing the facts to find ways to do things better. In a successful partnership data is shared and examined together and both parties consider how they can improve. Conducting 360-degree relationship reviews is an excellent way to help grow value together. It leads to clear, honest and open communication that can remove bottlenecks on either side and generate further ideas. Real value comes when both measure performance or agree upon a method and manner for doing so, and review it together with a view to being better. The relationships you have with your key partners are vital throughout all three stages of discovering, retaining and expanding value. Examine the reality of your achievements together and continuing to build on your success with joint business and collaborative working plans and through a thorough supplier management programme.
sources of value. Businesses strengthen their brand value by aligning with the right supplier partners and carrying out focused activities (see diagram on page 19). Not every activity will impact revenue, some will be about pleasing employees or helping your company to tell a good brand story – perhaps about partnering with a charity, boosting diversity and inclusion, or generating social value. These are all growth areas for businesses because we’re now in the age of giving back and all of these value-add activities sit within procurement’s purview.
and harness innovation. The classic model of supplier segmentation is a triangular structure that has the smallest number of key partners at its peak. The largest chunk of the wedge contains typically the more transactional who can be managed with the greatest degree of automation. Supplier treatment strategies work in reverse, with the largest amount of time, attention and resource dedicated to the few at the top. ‘Incubation’ should be incorporated as one of the treatment strategies. It could be a formal process to collect and evaluate new ideas from key partners. Or, it could be about protecting small but important suppliers by giving them the support they need – for instance around payment terms or a less arduous on- boarding process – to allow them to focus on growth. The process of finding new sources of value needs to be much more coordinated than it typically is. If you want innovative ideas from your suppliers, you need to communicate what you mean by ‘innovation’ or other types of value you care about. You next need to set up a process to capture good ideas, evaluate them and feed back. Part of this process, which helps procurement departments to measure and report to their business on the value they bring beyond financial, is collecting data. For example, how many good ideas were generated per quarter, what number came to fruition and what was the material impact? These metrics are vital to demonstrate the impact of work done and support a business case for further investment – time and money – into finding new
Keep
Once you’ve identified what’s important to your organisation beyond only financial value, you need to work to keep a focus on it. Too often people concentrate purely on contract management, which is an administrative process. They can get into a very granular level of detail when it comes to reviewing service level agreements (SLAs) and claiming back service credits if a supplier slips up. Good supplier management is about collaborating with partners, not extracting financial penalties from them. Instead of signing up to SLAs that apply the threat of punishment, why not set a list of joint behaviours that will help to generate value for you both? Ask suppliers what goals you can sign up to together that will help you both to attain environmental and social goals. Success in these wider areas can add value to both your businesses – as well as wider society and the planet as a whole.
In conclusion
The best supplier management programmes achieve not only direct financial benefits for both parties, but ensure longer-term value creation in myriad ways. Capturing those added advantages is challenging but not impossible. For those that take the time, recording and reporting on these measurements to internal leaders not only makes procurement look good, it can materially impact the value of the company to its customers, staff and shareholders. By working with your suppliers to examine the opportunity for additional forms of value; keeping focused on them; ensuring they get delivered; and protecting any gains you make, you can achieve impact that goes well beyond simply making or saving money.
Protect
Protecting value is about sustaining what you’ve already achieved. It is both about risk management – protecting the hard-won value that comes from building a strong reputation, brand and healthy share price – and ensuring any improvements become business as usual. For example, if you and your suppliers have worked
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ADVERT / SUPPLIERBASE
HOW TO CREATE A BUSINESS CASE
BY ALAN DAY
And more than two-thirds said the pandemic has increased their organisation’s focus on supplier management. In other words, those who fail to seize this opportunity, will only fall further behind the curve. Covid aside, there have long been numerous advantages gained by organisations who adopt the discipline. After presenting – and winning – the initial case, many organisations fail to capture the benefits they actually achieve. And it is this information – both hard data and anecdotal feedback – which helps to secure further support. Yet the quantification and reporting of material benefits should be quite straightforward; anything achieved post-contract should count towards the programme’s success (page 29). Some results are simpler to record than others, but procurement professionals are all-too-aware that what gets measured gets done, so recording successes should form part of any programme. More than three- quarters of Leaders, for example, are able to quantify the financial benefits derived from their supplier management arrangements. It’s also important to link your proposition directly to the way your organisation defines value. Financial success is just one element. As Craig Jones from Shell says (page 61): “Nothing is as powerful as real examples. Fundamentally, it boils down to a belief of the executives. For them it’s about the times when they’ve seen something get solved or answered quickly.” So make sure you are capturing those moments, recording and sharing them. Ideally your stakeholders will too and word will spread. Successful supplier management can also boost collaboration with key suppliers, increase trust, improve understanding of mutuality and put a greater focus on innovation (page 86). The most mature programmes can also quantify benefits such as risk reduction, innovation and other efficiencies. Consider this: Have you received increased commitment and support from your suppliers? Record it. Have you seen an improvement in the performance of your key partners? Report it. Has supplier collaboration gone up? Log it. Has risk been reduced or resilience increased? Document it. Have you been able to boost sustainability or social value as a result of your relationships? Own it. Ultimately, if tracking and measuring success gets lumped into a ‘not enough time’ or ‘too difficult’ pile, you shouldn’t be surprised when it’s hard to make the case for it to continue or expand. If the business has backed you in establishing a programme to deliver value through key supplier relationships, ensure that support is rewarded with clear and recorded results. Contact enquiries@stateofflux.com for help to make your case.
OPEN AND SHUT CASE
The multiple array of benefits delivered by successful supplier management should make it easy to justify investment.
for the job? right tools Do you have the
I N THE AGE OF COVID-19 it should be simpler for businesses to make a case for time and money to be invested into supplier management programmes. There is suddenly widespread appreciation of the benefits of knowing who your key suppliers are, where they are based, and having a good relationship. We already know – from more than 13 years of annual research and 17 years of practice – that those with such programmes achieve higher profits, lower costs, more innovation and improved competitiveness. Covid has shown that it is also key to reducing risk and boosting resilience. Without a formal approach that includes segmenting your supply base, keeping in regular touch with vital contacts and working collaboratively to deliver joint goals – you could be left without essential supplies when shortages strike. Relationship management was the most effective tool in mitigating the situation caused by Covid-19, this year’s respondents said (see page 96).
Leaders group highlights 2021 Here are some key figures from those with the most mature programmes to draw on when building your business case: 85% report improved risk management or risk reduction as a result of the work of their supplier management programme 73% reduced costs 64% benefited from supplier innovation 64% achieved cost avoidance
Manual supplier management processes result in an inconsistent supplier experience and processes that can’t be measured mean opportunities to unlock value are missed. SupplierBase is an award-winning platform that helps to maximise value and transparency across the supply chain, providing a single interface that reveals all supplier-related information both as a primary data source and connected with third party data sources. Ensuring your supplier management is repeatable, scalable and consistently applied across the business.
52% improved the efficiency of their supply chain 48% report better end-customer experience 30% improved speed to market 28% boosted profitability 21% grew sales and revenue
enquiries@stateofflux.co.uk srm.stateofflux.co.uk/2021-report
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INTERVIEW / EXPERT VIEW – ENTERPRISE-WIDE VALUE
INTERVIEW
Procurement’s problem
So what's the issue? The challenge, says Clements, is too often procurement is being asked to cut back. To cut costs, reduce inventory and provide more ‘just-in-time’. While it may help the balance sheet temporarily and free-up working capital, it very often leaves businesses with little back-up as warehouses are emptied of inventory and cheaper sources of supply are found further afield. In addition to that, continually renegotiating with existing suppliers is neither sustainable nor sensible – especially if what they provide is essential to your business and its standing. “Traditionally the boss goes to procurement and says: ‘I need you to cut costs’. If I’m the head of purchasing, I can get a really cheap product from a third-world country where the price is okay but socially and environmentally it may not be.” Considerations should not only be financial. The value of well-advised procurement can be supported by maintenance, operations, quality and many other departmental leaders. The alternative is to go to a supplier who is doing things right and focused on quality and ethics. It may cost more but it’s less likely to fail or cause irreparable harm to the company’s reputation, balance sheet or share price. “The problem is, where can you put that value on your financial statements?" Traditionally, he says, companies value projects based on their EBITDA – Earnings Before Interest, Taxes, Depreciation, and Amortisation. This metric, which is used to evaluate a company's operating performance, doesn't include environmental and social considerations. “Short-term people want to cut costs, but sustainable impacts are measured in years, not financial quarters. The world is being torn apart by these opposing forces.” His business advises companies to consider longer- term outcomes and value the less tangible results of their procurement decisions, not at an EBITDA level but at an enterprise level. “These things may be intangible, but they are where and how you will keep your customers and suppliers. Your image and reputation will improve and people will be willing to pay more for your products.” By working with an industrial accounting department a management bridge – as opposed to the traditional financial bridge – can be developed that clearly highlights the value being created and provides insight into decision making. The graphic depicting the typical stakeholder value tree (see image) highlights the fact that through the current focus on ESG, CSR and non-tangible assets of a company’s strength are captured at a higher level than the purely financial. “Procurement's performance and value-creation strength also needs to be measured in a more modern way. More attuned to the new purpose given to procurement through this modern trend: That of enterprise value.” →
IF EVERYONE HAS THE SAME CONTINGENCIES, YOU NO LONGER HAVE A CONTINUITY PLAN, YOU JUST HAVE ANOTHER DISASTER WAITING TO HAPPEN.
QUICK FACT: THE 120-MILE SUEZ CANAL TURNS A 6,000-MILE 12-DAY JOURNEY AROUND AFRICA INTO A 12-HOUR TRANSIT.
So why did it cause so much trouble? The canal is one of around 10 maritime bottlenecks and the potential for it to become blocked is a known hazard. Too few companies, however, have contingencies in place to mitigate or manage the ramifications of this, as well as many other risks. “We know from what happened in the Suez Canal, and in response to Covid, that only about 10% of companies are getting this right,” says risk expert Adrian Clements. “And it is these one in 10 that had no problems. The rest were either unaware or not tackling it correctly – they single-sourced or had no back-up plan. Why? Because it was only costs that were being reviewed rather than potential opportunities. The full cost benefit of these opportunities and their consequences were not assessed. If the full, non tangible value of risks and opportunities of each action had been considered, a different set of decisions would have been reached.” The president of the AT-IPIC Group, whose past roles include 15 years of managing risk at steel and mining company ArcelorMittal, now advises firms on performance transformation and risk management. In his view, procurement is often hampered by a lack of budget and support to ensure their businesses have the right type and mix of suppliers in place. He believes they should partner with internal stakeholders to argue for increased expenditure for suitable suppliers and contingencies. This requires companies to shift their perspective. Instead of focusing on what things cost upfront, they should think about the financial impact of failing to manage the risks. And not only is there the share price and reputation to consider, but the enterprise-wide value to be gained from getting it right. This additional value can come from greater access to investment, talent, enhanced prestige, a bigger customer base and even the potential to charge more for products or services.
THE BENEFIT OF A GOOD BACK-UP PLAN I N MARCH THIS YEAR, the Suez Canal was obstructed for six days after one of the world’s largest container ships ran aground and drifted diagonally across it. Backing up behind the Ever
Through partnering with internal stakeholders procurement professionals can help their businesses to invest in the right type and mix of suppliers and offer sustainable solutions to customers that don't only focus on cost.
Given – which was itself loaded with 18,300 containers – were more than 360 other ships. The Egypt cut- through is quicker than the alternative sea route and cheaper than airfreight, making it a popular shipping channel. Roughly 12% of global trade passes through it each day. The huge traffic jam put already stretched supply chains under additional strain, impacting whole industries and many thousands of businesses. Yet, it was a predictable risk.
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INTERVIEW / EXPERT VIEW – ENTERPRISE-WIDE VALUE
INTERVIEW
1. Clearly define procurement’s purpose, ie. reducing costs, increasing innovation, risk mitigation and opportunity capture, business continuity, productivity increase and so on 2. Partner with internal functions to differentiate between savings and opportunities 3. Monitor tolerance ranges for different risk types and categories – particularly for markets that change rapidly 4. Design the procurement system with a view of the long-term business objective in addition to procurement efficiency – put a value on the risks taken through cost cutting 5. Run scenarios – suppliers and customers can be impacted by similar events. Carry out a 360° analysis and challenge traditional responses 6. Regularly reassess your risk landscape depending on business needs, ie. new risks due to new supplier operating models CAN YOU TAKE THE HIT? SIX STEPS TO MODEL, MONITOR AND MITIGATE RISK credit rating agencies, to identify and report potential problems. “Be aware that even if you have good suppliers they may be supplying your competitors and you may not be the customer of choice. If they’re in short supply they won’t be coming to you. You need another source of supply in case something goes wrong – and for that you need support from stakeholders to argue for extra budget.” Procurement needs to be clear. Is its mission only to cut costs or to help boost the enterprise-wide value of its organisation through good purchasing and supplier decisions? “If you do things right upfront everyone’s happy – your company’s image and reputation is improved and it will attract more customers." As new products enter the market and new competitors change the game it’s vital to have a management system that is flexible and able to be dynamic while remaining focused. “The kinds of risks and disruption we’ve been facing over the past 18 months will become the norm – so companies have to step up and make the change.”
Looking outside in
Stakeholder value driver tree
Another oversight by many, says Clements, is that they only look at the risks from an inside-out point of view without ever looking ‘outside in’. This means creating an extended strategy map through which the procurement function can include value generated through targeted decisions as opposed to reacting to the pressure of cutting costs. Yet the extent of globalisation now means whole sectors and industries can be affected by the same problem. Too few have, however, thought of this when crafting their business continuity plans. “When you take an isolated view of your own risk you may come up with a solution or create a continuity plan. But, if you discover your whole sector or industry is doing the same thing as you, that it has the same back up plan, then what you have is no longer a continuity plan, it's just another disaster waiting to happen.” He cites numerous examples of hot spots for this, including pharmaceutical production and call centres in India, cheap labour and supply from China, silicon chips from Asia and automotive components from Germany and the UK and challenges with internet bandwidth. “These zones have aggregated risk. A lot of companies are not looking at what’s happening in the wider sector and elsewhere in the world. They also need to look outside in and consider all kinds of other scenarios. If the whole world has gone to China and India and they both have problems, the whole world is hurting.” One tsunami in the computer chip hotspot of Taiwan, Korea and Japan could “cause hell” for those dependent on this component, which is why the smart companies are using venture capital to fund an alternative. The pandemic has highlighted the issue of these production hubs – like vaccines manufactured in India and the potential unreliability of back-up plans – such as businesses and academic institutions switching to home-working and schooling at the same time. “A lot of people were told to stay at home, so most companies switched to video conferencing tools. The problem is everyone did that at the same time. More than that, it wasn’t only businesses, but children who were homeschooling or watching streaming services. Internet providers and TV channels had to reduce the bandwidth, which in turn affected service and quality. This happened because everyone had the same solution. When you all run to the same safe harbour it actually becomes one of your biggest risks.” And it's not only these massive events that companies should consider. Disruptions could be caused by a fault at one supplier, much of which could be prevented through proper assessments and verification. “You need to consider the maturity of your supplier and your risk management of them. This requires you to have a risk management system that analyses risks and opportunities and measures them.” He recommends visits to suppliers and using third-party agencies, like
Potential Risks
Value Drivers
Profitability Breakdown
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VULNERABILITY
RELIABILITY
COMMODITY PRICE
MARKET STRUCTURE
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EBITDA Earnings Before Interest Tax Depreciation and Amortization ROIC Return on Invested Capital EVA Economic Value Added or Enterprise Value WACC Weighted Average Cost of Capital SG&A Selling and General and Administrative Expenses P&IDs Process and Instrument Diagrams
At ArcelorMittal, his team enabled the head of purchasing to be able to defend a request for additional funds. “By saying ‘look, no matter what happens in the world – a pandemic, heavy snows in Poland that cause trains and trucks to stop, a blockage in the Suez Canal – we can still deliver our product to the customer. It may be a bit more expensive but we’re getting the quality and service, our reputation is good and we have the trust of our ultimate client.’ This is creating intangible, long-term and sustainable value. There are too many companies focused on EBITDA reduction and compliance. “Companies too often focus on things that should simply be the consequence of good management. Safety, quality, sustainability should all be outputs of the way the business is run, not the focus of it. By changing your perspective, you start to invest in a different way." Things are, however, slowly changing. “Some stock markets are starting to look at stakeholder instead of shareholder value. A number of financial institutions are establishing ESG indices (environmental, social and governance) and if you need a loan, some banks will not be willing unless you demonstrate you conduct business in an environmental and socially responsible way. The world is changing, but it’s taking time.”
Partner up
Clements says procurement professionals need to be able to request additional investment to buy better quality materials, keep additional stock or dual source to mitigate a potential problem that could halt production, but they typically have a hard time doing so. Instead, that additional investment is frequently given to other departments that can more readily demonstrate value from this expenditure, he says. To successfully argue for appropriate budgets, they need the support of the relevant internal stakeholder to persuade the business it shouldn’t be viewed as an additional cost but a means of achieving greater value. Buying better quality materials, sourcing from more than one supplier or paying slightly more in exchange for stronger supplier relations, a closer source of supply or similar, can actually add long-term value. “If they can partner with the head of operations, HR, environment, marketing – whomever works in the relevant department – they should find the purchasing budget goes up and together they can demonstrate where the value is created for that extra investment.”
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INTERVIEW / INNOVATION Q&A
INTERVIEW
V ALUE DOESN’T ONLY COME during the company, who has implemented supplier relationship management in a number of organisations, says most companies focus only on driving value through the initial deal – largely through strategic sourcing. They then often make two mistakes. First, they may fail to actually protect the value gained through the sourcing exercise once the deal is signed. Second, by taking no other steps to manage their suppliers, they lose the opportunity to generate new value. For many, switching from traditional supplier management to a meaningful partnership that supports and encourages innovation will require a huge shift. Parva, echoes the State of Flux view of the importance of collaborating with your most strategic suppliers and capitalising on innovation. Here we ask him to explain his approach to generating value by encouraging, capturing and actioning good ideas. procurement cycle, it can also be generated throughout the life of the contract, says Nikhil Parva. The executive from a global technology Q. How do you make the business case for supplier relationship management? Procurement helps internal business partners to choose the right vendors. The procurement cycle is designed to drive value for those partners in three areas – scope, pricing and legal considerations. In most situations, the scope and legal aspects are the table stakes – the minimum entry requirement for a business arrangement – the variability comes on price. On average, we assume 5-8% of savings are standard through a procurement process for a product or service, depending on when the sourcing exercise was last done. Once the contract is agreed, it is handed over to the business partners who focus on the scope. The problem is, if no-one is properly managing these contracts once they are signed – particularly the strategic ones – that 5-8% of value can potentially get lost. This is because on the supplier’s side you have account managers who have the remit to ensure that the 5-8% of value is levelled off during the term of the contract. Those forces, if not counteracted equally by the business through SRM at a strategic level, will lead to that value – or a substantial part of it – disappearing.
For Fortune 100 companies, indirect spend alone runs into billions of dollars, so the value at stake is significant and must be looked into. It requires a unit of SRM experts to counteract those forces from the supplier to maintain that 5-8% value. I call them the ‘Net value protectors’ and this is one of the key reasons why companies need supplier relationship management (SRM). Q. How can companies who already do SRM achieve more value from it? The primary focus of an SRM organisation is protecting the value of strategic relationships. To do that, SRM staff typically become entrenched in the business units. They collaborate and drive partnerships with their internal customers and use centralised frameworks and structures to help to protect that 5-8% of value. But as SRM matures the focus is on 'what else?’, ‘what more?’. That’s where the idea of the innovation framework comes in. It is where procurement and their internal stakeholders try to maximise the value of that relationship throughout the duration of the contract for the benefit of all and manage to bring in new value. The innovation framework is not only about capturing ideas, its essence is how to drive ideation to capture value from the suppliers that can be quantified in financial terms.
HOW TO CREATE NEW VALUE
Q. What’s the process for the ‘Innovation Framework’?
This is a structured means of moving ideas through an ideation pipeline, where each idea is vetted and reviewed. It has four stages: 1. Envision: Where anyone who has an idea they feel passionate about is able to put it in the pipeline. It can come from the supplier or the customer. 2. Engage: This is about the engagement between suppliers and customers, through bi-weekly meetings, weekly calls – any governance arrangements. 3. Evaluate: The assessment of the idea. 4. Execute: Where the supplier puts the idea into action. Evaluation happens on a two-by-two matrix to assess the idea’s level of impact and the amount of effort involved. Priority is given to those that lead to maximum impact for minimum input. Ideas are split into two buckets: those that achieve value from cost and those that secure value beyond cost. The first is ‘can I drive cost savings and cost avoidance during the contract?’ →
APPLYING THE INNOVATION FRAMEWORK GENERATES AN AVERAGE 2% OF HARD FINANCIAL VALUE ABOVE CONTRACTUAL OBLIGATIONS.
To persuade top tier suppliers to share their best ideas, you need to take a systematic approach to assessing innovation.
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2021 GLOBAL SRM RESEARCH REPORT
INTERVIEW / INNOVATION Q&A
INTERVIEW
somewhere to share it. And every idea in the pipeline gets vetted, reviewed and revised. It could be that 99% are rejected, but the 1% that hits could change the face of your relationship with your supplier. Q. Why aren’t more organisations acting on innovation from suppliers? The problem is very few organisations have any kind of structured approach to generating, reviewing and actioning innovation from suppliers. Many organisations are yet to even focus on supplier relationship management activities. Of those that do have supplier management in place, only a fraction have any means of collecting ideas with a majority of them still lacking a formal framework for innovation. The number of businesses capitalising on this opportunity is limited which only makes the potential all the more substantial.
Q. How do you decide which suppliers to work with?
For instance, the business asks for 100 more resources (people) to work on a project. If the innovation framework is up and running the business and the supplier have a means to suggest an idea – such as, can it be automated instead? If you have a relationship with that supplier you can have that conversation. If they have a solution you can use, that’s a cost saving that resulted from an idea and structured process of discussing it. The second is value beyond cost – this can cover any number of areas, such as efficiency, risk, product development, joint go-to-market activities and so on. It’s not based on the 5-8% that affects the bottomline, but could impact revenue. The very nature of having a pipeline of ideas creates a juggernaut that can be very impactful to your business. Q. How do you use this to build on the business case for investment into SRM and innovation? Let's apply what we have learned here to three different possible outcomes. Scenario 1: In this scenario there is no SRM organisation. Typically the business loses the 5-8% savings it thought it had gained through the strategic sourcing process because there was no management of the supplier during the life of the contract. Scenario 2: The customer has an SRM organisation but they do not have an innovation framework. In this case, the business may manage to keep the 5-8%, but then at the end of the contract term the procurement department may ask if they can achieve a further 5-8% saving by taking the business scope back to the market. Scenario 3: In this instance, the customer has an internal SRM organisation and applies the innovation framework. This produces the best case scenario. Now they are generating an average 2% of hard financial value above contractual obligations. Applied and compounded across the full duration of say a $10 million-a-year contract, the business can achieve far greater value.
Not every relationship is suitable to apply this method and even those that are – the most strategic partnerships – could still take some time to prepare. Over a substantial five-year deal with a new supplier, you may spend the first two to three years stabilising the contractual relationship. You have to wait until that relationship is steady to apply the framework. By stabilised I mean you are achieving the minimum and expected levels across your service level agreements (SLAs). It is because it can take time to reach this point that I suggest strategic partnerships are set up for closer to five years. This makes years four and five your ‘golden years’ in which you can generate that additional value. If the relationship is mature, it can lead to an average of 2% more value for your business. And if you renegotiate and then renew with that supplier, the compounding starts from year one, not year three as it typically does for an engagement with a new supplier. It’s a very powerful concept that can drive substantial return in value for organisations.
INNOVATION AND IDEATION: HOW STATE OF FLUX CAN HELP
For many organisations, supplier-enabled innovation remains a prized yet elusive goal. The commercial rewards are clear: research shows that firms who collaborate systematically with suppliers record an EBIT (earnings before interest and taxes) growth rate that is double that of their peers. In 2018, for the first time in a decade, innovation was cited in our report as one of the top three drivers for more strategic and collaborative supplier management. So an increasing number of businesses recognise its value. Acting on this is the next step. There are various approaches companies can take to generating ideas from in-house to open innovation. State of Flux has a diagnostic tool, inside its Innovation Engine, that can help you to determine the approach best suited to your organisation’s goals. It does this by assessing eight key dimensions including the leadership and management your business has, its partners, the availability of data, how results are tracked and what support and incentives there are. Once this is done, State of Flux can help your business establish a process for generating and capturing innovation that overcomes common challenges. This process helps you to segment ideas as they come in to evaluate which are ‘breakthrough’ or ‘radical’ and which can make ‘incremental’ changes. We can also provide the technology, training and a systematic method you need to help funnel ideas through a pipeline. This helps you collect, assess and then act on the best of the ideas put forward. It provides a structured and transparent process, has key decision points to control the time, effort and investment allocated to ideas, and enables ideas to be easily tracked and reported on with metrics that show capture rate and conversion. To find out more about how State of Flux can help your organisation generate, capture and act on great ideas, email enquiries@stateofflux.co.uk
Q. If the advantages are clear, why are too few organisations doing this?
One issue is the difficulty many have in making a powerful business case for SRM. It has to be explained in business terms and most focus on the 5-8% they plan to protect. Often these percentages are not strong enough to convince the business that you need a whole organisation set up to do the work. But the opportunity is far greater than that, which is what needs to be conveyed. If procurement could instead make the case that their SRM department will focus on being net generators of value, instead of protectors of it, and concentrate on the value they can achieve beyond cost, they may have a much more convincing case.
Q. What’s in it for suppliers?
At the end of a contract the business has three choices – the 3Rs. It can renew without even having a conversation; it can renegotiate with the supplier but change some of the scope, financials or legal requirements; or it could do an RFx (such as a request for information, quote or proposal) and go back to the market. The likelihood that it would jump to renew or renegotiate will depend upon how much value the business has generated from the relationship over the past few years. If the supplier has delivered compounding value over and above its contractual obligations, it has a good story to tell. It becomes easier for them to prove they've benefitted the organisation and it is a clear win-win for both sides.
Q. What else is holding people back?
Another mistake many make is thinking the SRM department has to own all the relationships with suppliers. They don’t. That can make their department too big and costly, which diminishes the value they achieve. Supplier relationships have to be owned by the business, supported by a centre-enabled model where the SRM experts provide the framework and tools. They influence, they have access to the technology, they can oversee conversations and activity and they step in as and when they are required. They have to release the control when it’s working and get more involved when it’s not. At the point that it is working like a well-oiled machine, SRM professionals can focus on the outcome, outputs and deliverables. They can show the additional value the process has achieved and go on to find yet more of it.
Q. Where do the savings come from?
They can be achieved in any or all three areas of people, process or technology. The sky's the limit. Some savings, for instance, could come from driving efficiency in operations or within the contract itself by increasing automation. Or they could even come from joint go-to-market activities. Everyone should have access to the idea pipeline – where if they see something, they say something. Whether you’re the supplier, SRM professional, procurement professional or internal customer, if you get up in the morning and have an idea, you have
IN FORTUNE 100 COMPANIES, INDIRECT SPEND RUNS INTO BILLIONS OF DOLLARS, SO THE VALUE AT STAKE IS SIGNIFICANT.
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