Perfecting Retailer-Supplier Execution Journal of Trading Partner Practices January February March 2008 What is SRM and Why Does it Matter to the Retail Industry? Reprinted with permisson Journal of Trading Partner Practices 2008 January February March 1
What is SRM and Why Does it Matter to the Retail Industry? By Jonathan Hughes & David Chapnick Based on ideas laid out in greater detail in the white paper What is SRM and Why Does It Matter? by Jonathan Hughes. As strategic sourcing efforts mature at many companies, the pressure on procurement organizations to deliver new value, including, but not limited to, incremental cost savings, is increasing. In practice, most strategic sourcing initiatives have focused, (as the term suggests) on improving the way goods and materials are acquired. Not surprisingly, with a fi nd it and buy it mindset, efforts have been oriented largely around leverage and the use of competitive pressure to motivate suppliers to reduce costs and deliver better performance. While the discipline of strategic sourcing has yielded signifi cant value (in particular, cost reduction), it has also revealed itself as insuffi cient. During the past five years, the discipline of supplier relationship management (SRM) has emerged as a natural compliment to strategic sourcing. SRM can be defined as the systematic, enterprise-level analysis of supplier assets and capabilities to determine how different suppliers can contribute to competitive advantage and the alignment of policies, resources, and business processes (internally and with suppliers) to maximize the value realized from suppliers. Table 1: Distinguishing Between SRM and Strategic Sourcing in Theory Strategic Sourcing Emphasis on cost savings Suppliers are segmented hierarchically as more or less important, based on amount of spend and switching costs Emphasis on leverage over suppliers Focus on activities up to the point of signing the contract Strategic Sourcing Systematic, enterprise-level analysis...of what to buy......and from whom to buy it... Supplier Relationship Management Emphasis on total value and contribution to competitive advantage Suppliers are segmented based on amount, and type of value that can be realized Emphasis on collaboration with suppliers Focus on activities after the contract is signed Table 2: Distinguishing Between SRM and Strategic Sourcing in Practice...and coordinated negotiation of contracts with suppliers based on such analysis. Supplier Relationship Management Systematic, enterprise-level analysis......of supplier assets and capabilities......to determine how different suppliers can contribute to competitive advantage......and the alignment of policies, resources, and business processes (internally and with suppliers)...to maximize the value realized from suppliers. Reprinted with permisson Journal of Trading Partner Practices 2008 January February March 1
Leading companies in many industries from consumer products, to oil and gas, to pharmaceuticals have increasingly recognized that SRM is essential to remaining competitive. Currently, the retail sector lags behind most others in implementing supplier relationship management programs. However, the industry faces a host of challenges (protect eroding margins, increase insight into market trends, reverse declining customer loyalty, ensure quality, penetrate new markets, achieve sustainable growth, increase the rate of innovation in response to compressed product lifecycles, etc.) that can only be overcome if customers and suppliers work to address them together. Adopting SRM as a discipline requires two major changes in the way companies have historically interacted with their suppliers: Changing (specifically, broadening) the scope of interactions with key suppliers (i.e., what interactions occur), and; Transforming the manner in which customers and their key suppliers interact (i.e., how customers and suppliers deal with one another). Rather than focusing primarily (or exclusively) on achieving cost savings through competitive bidding, sourcing and procurement, groups need to work closely with other functions (product development and design, marketing, inventory management, quality assurance, etc.) to ensure that the full range of opportunities to reduce costs and accelerate revenue growth with help from suppliers is explored and exploited. The vast majority of companies still interact with suppliers through multiple organizational silos. Procurement handles negotiations and contracting with suppliers. QA and logistics groups handle issues related to quality and shipping. Various business units and product lines often handle their own day-to-day interactions around ordering and delivery with suppliers. These interactions are rarely well-coordinated. As a result, suppliers are routinely frustrated by mixed messages and inconsistent and unpredictable customer behavior. They also incur significant costs Figure 3: Illustrative SRM Value Map by virtue of being subjected to multiple inconsistent policies and practices across multiple groups within customer organizations costs that inevitably are passed back to the customer. In many cases, suppliers respond by playing various groups in their customer accounts against one another. Both sides fail to share critical information that could be used to jointly identify more effective ways of working together. The end-result is tremendous inefficiency (read: unnecessary cost), consistently missed opportunities to innovate, and diminished trust. Low levels of trust in turn impede the kind of open communication and joint investment that would enable both sides to create and capture more value through their relationships. Unfortunately, most companies interactions with suppliers are guided by an implicit theory that building (or preserving) a good relationship requires making substantive concessions: not aggressively negotiating for the best price, not holding suppliers rigorously accountable for commitments made around project scope or delivery schedules, Reprinted with permisson Journal of Trading Partner Practices 2008 January February March 2
Figure 4 and the like. The common view that good relationships must be bought produces an irresolvable paradox at the heart of supplier relationship management: either sacrifice substantive business value today in the hope of getting greater value tomorrow (thus teaching your suppliers to extort value from you), or focus on maximizing value today (often at the expense of suppliers), recognizing that the tactics employed to do so will likely damage relationships, and hence reduce opportunities to realize value over the longer term. Small wonder that there is so much more talk about supplier relationship management than there is effective action. Figure 4 depicts a more enlightened and accurate way of thinking about business relationships between customers and suppliers. Companies that have implemented successful SRM programs focus on systematically managing all three dimensions of their supplier relationships since all are intimately related. Collaborating with suppliers may sound like a warm and fuzzy idea but it pays. In a recent study 1 we conducted across several hundred companies, customers reported realizing an average of 40 percent more value from their most collaborative key suppliers compared to their least collaborative key suppliers (See Figures 5a and 5b.) (Likewise, suppliers reported delivering an average of 49 percent more value to their most collaborative key customers compared to their least collaborative key customers.) Based on our research and our experience working closely with dozens of companies to improve customer-supplier collaboration, implement SRM programs, and enhance supply chain effectiveness, the following is a summary of the most critical elements of a successful SRM program. Supplier Segmentation Define a framework and implement a process for regularly segmenting suppliers based on the size and nature of opportunities to generate value through your relationships with them, and on the risks posed by those relationships. Focus 90 percent of limited SRM resources on the 10 percent of suppliers that represent the greatest opportunity and risk. Joint Business Planning Define and implement an annual process by which executives representing different functional and business areas at both customer and supplier jointly exchange information about business plans, priorities, capabilities, and marketplace trends and opportunities, and analyze where and how to collaborate in order to create value for both sides. Two-way balanced scorecards Work with suppliers to define appropriate metrics to measure and manage performance and the value delivered to both sides. Define a scorecarding process that not only produces scorecards, but also enables data-driven conversations about problem diagnoses and solutions. Invite suppliers to provide feedback don t simply evaluate them. Ensure a balance of relevant outcome-oriented Figure 5a Reprinted with permisson Journal of Trading Partner Practices 2008 January February March 3
Attributes of least collaborative relationships Low level of trust; significant fear of opportunistic behavior by partner Relatively little information (about plans, priorities, capabilities, etc.) is shared Focus (as evidenced by metrics, decision-making, etc.) is on maximizing short term, unilateral value Differences (in goals, expertise, strategies, etc.) produce friction and undermine trust Conflicts are resolved on the basis of who has most leverage at any given point in time Figure 5b Attributes of most collaborative relationships High level of trust; confidence that a company s actions will be fair and take partner interests into account High degree of transparency about plans, priorities, capabilities, etc. Focus is on maximizing longterm value, and ensuring success of partner Differences are respected and leveraged as a source of innovation and value creation Conflicts are resolved on the merits; partners search out (or create) and apply objective criteria aimed at producing fair and reasonable outcomes Ask for supplier input in doing all the above, and require them to undertake symmetrical efforts in their organizations. L.L. Bean, the Maine-based retailer of outdoor products, has implemented many of the practices above to dramatically improve the way it does business with its suppliers. 2 For example, the company has begun sharing its long-term productpositioning vision with suppliers. Such joint strategy sharing has enabled suppliers to suggest numerous product improvement ideas that have enabled L.L. Bean to offer its customers new and improved outdoor products for lower prices than it had in the past. The retailer also invites feedback from suppliers on how it can make itself easier to do business with, thus driving down costs while still maintaining supplier margins and at the same time solidifying supplier commitment to its success. As a result, L.L. Bean expects to reduce its supply base by 50 percent by the end of 2008, is already exceeding its goal of reducing COGS by 10 percent, and has dramatically decreased product-defect levels. metrics (e.g., cost savings, incremental revenue contribution), and leading indicators that enable proactive management of the relationship. Issue Escalation and Resolution Define a clear process by which important business issues and conflicts with suppliers are escalated and jointly resolved at the proper organizational level (based on a clear articulation of escalation paths and which stakeholders at each company will be involved in what ways), thereby ensuring timely and effective resolution, and minimizing the risk of disruption to operations or the working relationship. Supplier Relationship Managers Assign experienced supplier relationship managers to key supplier relationships. Make it their job to maintain strong relationships and open lines of communication with all key groups and individuals at the supplier (and with internal stakeholders), and to match evolving business plans and needs in your company with plans, assets, and capabilities at suppliers. Critical SRM Success Factors Ensure a balance of dependency in supplier relationships (neither seeking to minimize dependency - and thus missing opportunities to collaborate - nor inviting suppliers to take advantage of you). Realign the incentives of those who make decisions about, or interact with, suppliers so they are aligned with the goals and drivers of enhanced collaboration. Invest in developing technical and soft skills required for supplier collaboration for individuals both inside and outside Procurement. Implement long-term contracts with key suppliers that encourage mutual investment, clarify rights and obligations associated with close collaboration (e.g., ownership and use of jointly developed IP), and incorporate risk and reward sharing mechanisms. Clarify roles and define or adjust processes and policies to increase internal coordination with respect to all activities that involve or affect suppliers. Vantage Partners, a spin-off of the Harvard Negotiation Project, is a management consulting firm that specializes in helping Global 2000 companies improve the way they negotiate, and manage relationships, with key business partners. Jonathan Hughes is a partner and head of the firm s Sourcing and Supplier Management practice and David Chapnick is a consultant at Vantage. You can reach Jon by email at jhughes@vantagepartners. com or David at dchapnick@ vantagepartners.com or either of them by phone 617-354-6090. Visit www.vantagepartners.com for more information. 1. 2. According to the Transforming Trading Relationships into Partnerships: A Cross- Industry Study of Customer-Supplier Collaboration by Vantage Partners, LLC. For more information, see Franks, Brian. Supply Chain Management Review. The Building Blocks of Peak Performance. July 1, 2006. Reprinted with permisson Journal of Trading Partner Practices 2008 January February March 4