Designing and Implementing a Supplier Relationship Management Program
After reaching a point of diminishing returns from strategic sourcing efforts, a Fortune 500 consumer products company undertook a major initiative to analyze its total supply chain to identify opportunities to drive additional savings, as well as quality improvements, innovation, and top-line growth. The assessment showed significant gaps in the management of interactions with suppliers post contract award, and a need to significantly increase the breadth and depth of collaboration with key suppliers. Leadership decided that they needed to fundamentally transform the way the company interacted with its supply base.
The Chief Procurement Officer, and the newly-appointed Director of Supplier Relationship Management (SRM), turned to Vantage Partners to help the company develop and implement a supplier relationship management program to more effectively leverage supplier assets, expertise, and capabilities to meet the company’s strategic goals. A transformational project was undertaken in three phases: blueprinting and building the SRM program, piloting new SRM processes and tools, and ensuring acceptance and implementation of SRM throughout the company.
Through external benchmarking and internal assessment, the study identified and diagnosed several critical gaps, including:
- Ad hoc ways of measuring supplier performance which were not linked to strategic goals
- Limited supplier involvement in research and product development due to a risk-averse culture characterized by a fear of sharing proprietary information and a pervasive “not-invented-here” mindset
- A dysfunctional focus on short-term price reduction (with little ability to measure or manage total cost of ownership), and no systematic effort to leverage suppliers to support aggressive innovation and revenue growth goals
- No systematic efforts to capture and utilize supplier knowledge of customers and the consumer market
- Internal inefficiency, confusion, and conflict among business units, procurement, and other functions over responsibility for managing relationships with suppliers
Blueprinting and Building the SRM Program
Vantage worked closely with the Director of SRM to define a new SRM organization within Global Procurement. Together, Vantage Partners and the new SRM group conducted interviews, focus groups, and town-hall style meetings with Product groups and key functions outside of procurement to obtain their input, and to begin to gain their support for SRM. In addition, a cross-functional team was chartered to work on the design of new policies, processes, and tools for working with suppliers and systematically managing relationships with them. This team was led by Vantage consultants and included representation from all major Product Divisions, as well as Research & Development, Quality Assurance, Supply Chain, Logistics, Finance, and Marketing.
The team began by developing a supplier segmentation model to enable various business units and functions within the company (often with different or conflicting priorities and perspectives) to analyze opportunities and risks posed by different suppliers, and to align around the optimal type of business relationship to have with each. A key objective of this effort was to identify those suppliers where a clear business case could be made to justify investment in increased relationship management resource. Using a range of criteria, from innovation potential, to supply continuity and competitive risk, to strategic and cultural fit, the model was used to assign each supplier to one of three relationship types.
The cross-functional team also mapped out key business processes for managing each of three basic supplier relationship profiles, including two-way performance measurement and management, joint strategic planning, and issue escalation and resolution. For strategic suppliers, emphasis was placed on conducting joint business planning on a 3-5 year time-horizon, and establishing a framework to enable investments by both sides that would yield significant long-term benefits.
In addition to clearly defining process steps and workflows, the team developed clear governance structures for each type of supplier relationship, assigning roles and responsibilities for new SRM activities, as well as for standard interactions with suppliers. Executive sponsors from outside procurement were assigned to strategic or critical suppliers, and a full-time relationship manager role was created to coordinate internal and external interactions with key suppliers and to take on responsibility for overall supplier performance. Reciprocal commitments and investments were required of key suppliers. In addition to the creation of new roles and responsibilities, redundant positions and activities were eliminated, as were role and responsibility overlaps. As a result, the company was able to ensure alignment of supplier management with strategic objectives across multiple supplier touch-points, and significantly improve predictability and consistency in its interactions with suppliers (thereby enhancing trust, and increasing the willingness of suppliers to share information and invest in their relationships with the company).
To support new ways of managing supplier relationships, the Vantage-led team also developed a series of tools and job aids, including a decision-making matrix to enable ongoing segmentation of suppliers; standard agenda templates for key internal and joint supplier meetings; opportunity identification and business planning tools; and a new scorecard framework for measuring supplier performance and enabling two-way feedback between the company and its suppliers. In addition to a scorecard template with standard measurement categories and sub-categories, a library of specific metrics for different types of suppliers was also created. A third-party software application was selected and configured to support data gathering and reporting against the scorecard for individual suppliers. Finally, an enterprise dashboard was designed to enable aggregation of data about supplier performance and total value delivered, and to track progress in the implementation of the SRM program.
Piloting the New SRM Program
Once key elements of the new SRM program had been designed and built, select individuals from the cross-functional team joined the new SRM Office in permanent positions. This group is now responsible for supporting individual relationship managers (who are generally selected from the business units and continue to report there), and for coordinating major quality, cost, or innovation initiatives involving multiple suppliers. The SRM Office also organizes supplier summits, provides training to procurement and the rest of the company, and facilitates key SRM activities across the supply base. Such activities include rationalizing the results of segmentation analysis across all suppliers, and ensuring alignment between category sourcing strategies and the management of key supplier relationships (many of which cut across multiple purchasing categories).
Initially, this group was also especially active in piloting new business processes and tools on several critical supplier relationships to validate and refine new approaches and to support change by delivering “quick-wins” through enhanced supplier collaboration. Throughout these pilot efforts, Vantage provided coaching and support to the SRM Office with the aim of developing them into a self-sufficient center of expertise within the company.
Embedding and Extending the SRM Program Across the Enterprise
At the outset of the initiative, Vantage and the SRM Office developed a comprehensive change management plan, including necessary leadership activities, training, and communication efforts in order to embed SRM in the way the entire company conducted business and interacted with suppliers. Once development of new processes, policies, and tools was complete, and SRM pilots were underway, focus increasingly shifted to design and delivery of training for everyone in the company who had significant interaction with suppliers. Various levels of training were provided to different populations depending on their roles. Training ranged from basic orientation to core SRM principles and approaches, to advanced behavioral training on SRM skills such as joint strategic planning, collaborative problem-solving and decision-making, advanced communication, and conflict management.
In addition, Vantage worked with the SRM Office to launch an SRM community of practice, with a mission to enable ongoing learning and sharing related to SRM across product and functional groups. Vantage also provided guidance to the company’s senior executives on key messages to deliver about the importance of SRM and new ways of working with suppliers (e.g., why it makes good business sense to be concerned about supplier success, the importance of being open to supplier suggestions, etc.) and various mechanisms by which to send and reinforce such messages. Finally, to ensure durable changes in behavior at both the organizational and the individual level, incentive structures and performance reviews were reviewed and revised in accordance with the goals and principles of the new SRM program.
Results
- Realized cost savings of more than ten million dollars in year one through supply chain and manufacturing collaboration (e.g., increased supplier managed inventory, joint purchasing of raw materials, and joint investment in new facilities) with a small number of pilot strategic suppliers
- Within three years, measurable financial benefits of tens of millions of dollars per year were being tracked as a direct result of the SRM program, in the form of both incremental savings and revenue gains
- Approval of multiple patents and multiple new products brought to market through joint development efforts with suppliers
- Successful cost reduction and revenue enhancement projects with suppliers in multiple categories including: Packaging, Transportation, Advanced Technology, Energy, and Raw Commodities
- Reduction in cost and risk of entering new markets, including China, Russia, and Mexico, through joint development of strategic entry plans and sharing of capital expenditure with select supplier partners
- Streamlined supply negotiations and increased innovation through development of simplified contracts and two-way confidentiality agreements with suppliers