Guide to SRM

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Guide to

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understanding ‘We’ll help you find new leaner ways of working’

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Welcome contents and foreword Having the right kind of relationship with your suppliers can lead to better cost analysis and market intelligence, and a more sophisticated sourcing strategy.

Without rigorous contract management and supplier relationship management (SRM), much of the original value from sourcing activity can disappear rapidly after the letting of new contracts. Considering the effort invested in gaining benefits from sourcing, it seems strange to let this value be eroded over time, rather than reinforce it and build greater value as the contracts progress and mature.

Procurers who are leaders in their field understand that professional contract management and SRM can deliver both incremental benefits and cement those already achieved.

Clearly then, as the authors of this guide point out, SRM is a critical business practice, and one that needs to be deeply integrated into the day-to-day activities of those charged with managing procurement and contract value.

This guide sets out the key principles to achieve a successful SRM strategy. As well as suggesting which suppliers to concentrate on, it deals with the mechanisms to drive value for both buyer and supplier, enabling both to deliver innovations which give their businesses a real edge.

Andrew Pring Editor, Supply Management

Contents 4

What is SRM?

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Effective SRM in practice

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Deploying SRM – an overview

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Understanding sourcing

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Segmentation and prioritisation

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Performance management

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Continuous improvement

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Innovation

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Communication and change

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Collaboration

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Driving value

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Joint solutions

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Conclusion

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Credits

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What is SRM? Supplier Relationship Management (SRM) is seldom truly understood or appropriately deployed by organisations. This guide aims to discuss some of the basic issues to consider when implementing SRM in order to highlight how to gain the greatest value from ‘proper’ SRM within an organisation. These basics apply whether SRM is totally new to, or reasonably mature within, the business.

This guide maps out an approach from the fundamentals, through the key areas of focus, to maximising the value to be gained from good SRM, and should be considered as a primer for how to get started on the SRM journey.

What is Supplier Relationship Management (SRM)?

There are many definitions for SRM, some of which come with a selection of rules or guiding principles. However, SRM is applied very differently across different markets and sectors, so not all rules apply equally. Therefore, it is perhaps better that SRM should be encapsulated in one simple statement, to guide processes and procedures appropriate to specific sectors: ‘SRM is about the creation of the right relationship with your suppliers to ensure both parties can get the best value from that relationship.’

Supplier Relationship Continuum

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When deploying SRM, different levels of activity are required, depending on the scope, complexity and maturity of the relationship. SRM in practice can have many complicated features, however, the basic principles are illustrated below: • Systematic creation, capture and maintenance of value (specific to that relationship) • Aligning interests to manage suppliers based on ‘rules of engagement’ (i.e. done ‘with’, rather than ‘to’, suppliers) • Collaboration with strategic suppliers, which may still be adversarial, from initial engagement to contract signature, through the term and throughout exit management • Ensuring the balance of value does not dissuade either party from implementing the correct behaviours • Enable commercial opportunities for both parties to grow the value of the relationship In order to have a structured form of SRM, the implication is that you have some form of strategic sourcing approach and capability to get a contract in place, a category management process to develop demand and supply chain strategies for the categories in question.

While focus in recent years has been on the implementation of category management, it is clear that for many organisations there is still a need to embed SRM into their approach to strategic sourcing and category management in order to get better results than simply considering SRM as an afterthought once contracts are let.

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Effective SRM in practice With SRM embedded you can begin to look at the longer-term value opportunities created by having the right relationship with your supply base: • Your cost analysis will aim to incorporate the supplier’s production processes.

Gaining your suppliers’ trust is part of the process to enable you to look at wider costs in order to drive value though minimising these non value-adding costs – ‘cost to serve’ • Your market intelligence expands to include other industries and suppliers outside your normal scope, enabling you to better manage risk of failure and encourage collaboration – disruptive suppliers • Your sourcing strategy can become more sophisticated to include joint developments to take you into new markets or introduce new products quicker so you get a better market share – collaboration • Your supply structure can be leaner and more effective and you can de-risk supply when you become the ‘Customer of Choice’

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Deploying SRM an overview How much value you can gain from your suppliers and contracts depends on how you engage at both tactical and strategic levels. Failing to engage properly, and to put in place SRM and contract management processes, can impact adversely on value creation, capture and maintenance.

There are four key stages in the SRM cycle, some of which can be incorporated into the strategic sourcing process:

•

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Understanding sourcing From the point of signing a contract you can experience a wide variety of outcomes, but having a collaborative relationship with your suppliers will provide you with a platform that will allow you to derive further value beyond that outlined in the contract.

This needs to start with a detailed understanding of your business to ensure you start by engaging the right suppliers. Typically, suppliers are split into the following types, depending on their relative importance and levels of spend:

Strategic sourcing

To be able to do this, you need to: • Understand the buying habits of your organisation (what, where, when, how much, etc.)

• Assess the supply market for suitability (who, when, what price / quality, etc.)

• Understand what you need now, what you are likely to need in the future, and any timescales over which such changes are likely to occur • Allocate each service / supply area to the relevant segment, and create a sourcing plan as appropriate (demand / supply considerations, geographical, political, and economic factors, etc.)

• Negotiate with the appropriate suppliers to come to an agreed contract (price, quality, terms, mutually-beneficial commercial models, etc.)

• Implement client-side process / controls (e.g. catalogue management, buying rights, sourcing triggers – JIT, capacity management, etc.)

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• Become the customer of choice, because you are a ‘good’ customer with whom to do business

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Segmentation and prioritisation Consider the factors that are most important for your business to use in segmentation.

supplier performance

supplier capacity supplier fit

cost to change

supply risk

category priority

service levels

innovation, joint design supplier capability

product complexity

There will inevitably be a small number of critical suppliers for your business. It is imperative to understand the high risk, high value suppliers (those who are typically less than 1 per cent of your total supply base) and strongly consider them for more strategic partnership arrangements. Getting this step right will ensure that you spend time with the right suppliers, the ones who understand your business and the importance of creating value together. Equally, it means you do not waste precious resource on non value-adding activity.

Drawing the correct understanding from the business requires engaging the right stakeholders. This needs to cut across both technical experts and commercial functions. Doing this properly will identify the top suppliers by value, and focus effort on these. The remaining suppliers by value (the ‘tail’ of supply) can be dealt with separately (perhaps even by external parties who specialise in this field).

When identifying the value, ensure your stakeholders can identify those relatively small cost, but high-worth elements – just because a supplier is small / niche, doesn’t mean they don’t have high value. Equally, where there is senior, and/or long-term, interest – ensure the value from these suppliers is not lost through size / spend considerations.

Focus effort on those suppliers who can really drive value to your organisation.

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Segmentation and prioritisation It is critical to get the right stakeholders together to generate the best possible output. Preparation is key. Consider using an internal survey prior to the workshop.

Considerations prior to the segmentation workshop: • What is the likelihood of a significant change in the supplier’s finances?

• How many disruptions has the supplier caused in the last 12 months?

• Are there any geopolitical considerations for this supplier?

• What is its CSR policy or any adverse press?

• What is unique about the supplier and do you have preferred access to it?

• Do you trust the supplier enough to share your IP or commercial data?

• What are the OTIF and quality metrics for the supplier?

• What impact can the supplier have on your customer?

Complete a Kraljic Matrix on spend versus criticality – this will enable you to prioritise based on risk.

Standardise your approach – be consistent in criteria, assure with appropriate governance, engage widely and deeply, and prepare fully.

However, don’t be too specific, include too many suppliers, over-analyse, or spread resource too thinly.

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Preparation for the segmentation workshop should be thorough.

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Performance management Measurement drives behaviour – what gets measured, gets managed.

Develop a strategy for your scorecard based on where you want to be not just for the basic quality, cost and delivery parameters. Include softer attributes to align organisational behaviours and close working relationships.

To leverage the most value from your contracts you must evaluate the supplier’s performance relative to other suppliers. Similar to the segmentation process, develop a set of criteria that is important to your business.

Consider reactive or proactive risks and threats.

Weight each area according to your business requirements.

Consider each data source or, if there is no systematic data source, how could you collect the raw data / proxy data?

Cost • Actual cost • Cost reduction activities • Actual vs Should cost

Delivery and Support • Reliability / OTIF • Flexibilty • Response time

Flexibility • Accurate invoicing • Last minute orders • Stock holding • JIT / To the line

Quality • Right first time • Reliability • Quality of personnel

For each metric develop a KPI. For each KPI, ask yourself the following questions: • Does this KPI align with the overall business objectives?

• Can this KPI be actioned in some way, i.e. can we influence the process to get the desired response?

• Is it written down, documented and communicated so everyone understands the criteria?

• Will it drive the desired behaviours?

• Could there be any unintended consequences?

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Continuous improvement There needs to be a balance between the rigour of total quality and driving breakthrough innovation.

Getting this balance right with your suppliers will create significant value.

The more you hardwire a company on total quality management, [the more] it is going to hurt breakthrough innovation. The mindset that is needed, the capabilities that are needed, the metrics that are needed, the whole culture that is needed for discontinuous innovation, are fundamentally different.

– Vijay Govindarajan

Getting this balance right with your suppliers will create significant value.

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Innovation Peter Drucker defines innovation as “change that creates a new dimension of performance.” A step change or disruptive change can give you a larger market share.

Innovations can be derived from outside your industry so it is critical to actively look for potential innovations from the supply base. No one has the monopoly on good ideas, and having a fresh pair of eyes can make a big difference.

S

S

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The law of diminishing returns (top diagram) suggests that value can be driven only up to a point, with any incremental value through ‘doing more of the same’ taking far more resource to generate fractional extra value on a reducing scale.

It is at that level of diminishing returns that ‘doing things differently’ becomes the more favoured option. To make such changes, both parties have to have trust in each other, and work for mutual gain, whilst sharing any pain. In order to reach this point, you have to challenge both parties, reduce costs for both parties, and improve outcomes for both parties.

Key indicators to achieve this are: • Establish trust and open communication with key suppliers • Provide clear and unambiguous incentives and rewards to suppliers for their innovations • Develop a robust process to engage with suppliers, source new ideas, segment them and drive supplier innovation • Different approaches work across industries, evaluate different approaches for the type of supplier and potential opportunities • Include supplier innovation metrics in the scorecard to track engagement and quality of ideas. It shouldn’t just be a numbers game • Consider introducing a separate team for supplier innovation • Integrate the process within existing frameworks

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Communication and change Why communicate? Based on the vast research in this field, it is clear that the majority of senior procurement leaders rate communication skills as a number one competence for SRM, in order to: • Enable all stakeholders to develop a full understanding of the SRM programme, it’s approach and the implications on the business • Regularly update stakeholders on progress and achievements of the programme • Gain support from both internal and external stakeholders for process deployment and solicit feedback from everyone • Involve stakeholders in the programme to enhance ability to meet SRM objectives • Ensure integration of SRM into both strategic sourcing and the culture of the business It is important to ensure the appropriate channels are used for communications – this is all about having the right messages, at the right time, in the right language, to the right audience.

Examples of usage include ‘formal’ channels to communicate and ‘informal’ channels to support formal channels and solicit feedback.

Formal channels

Informal channels

Progress / status updates Strategies and implications

Drive communications through programme resources but avoid duplication of messages and effort

Implementation issues / concerns

Leverage top-down to ensure formal channels span the business and penetrate effectively

General information

Build in feedback mechanisms to measure the effectiveness of communications process Communications flow in multiple dimensions

Put simply, different people, in different roles, will require the messages shaped according to their priorities and needs:

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Collaboration It is clear from salespeople that customers of choice are more likely to gain more than other customers. This includes access to capacity or reduced time to market alongside improved cost reductions and productivity gains.

During your supplier reviews include questions to test the nature of your relationship including: • Are your needs met before your competitors?

• Do you get access to critical materials or shortened lead times?

• Does the supplier regularly provide cost or productivity improvements without being prompted?

• Does the supplier constantly provide innovations that have potential for implementation?

As a procurement professional it is important to put a lot of effort into managing relationships with a number of suppliers and a good starting point is continuous improvement. For me this starts with communicating to both the suppliers and within our own business, the strategy, which is not just how we move from a price focus to a cost focus but options on how we can improve our service levels, health and safety, introduction of investment and technology on areas such as payload or volumetric improvement, road versus rail, aerodynamics or even alternative fuels.

This gives everyone the same vision of where I want us to be and highlights some of the steps necessary to get there.

Building long-term credibility and trust with key suppliers allows them to feel confident to invest in processes and technology. Driving continuous improvement is fine but I always keep an open mind to ideas and as an example, a few years ago, whilst at Lafarge I was instrumental in the introduction and development of the ‘Teardrop’ trailer concept with a supplier into the South Africa market.

It was a completely revolutionary concept within this continent and for this type of vehicle configuration and application. It wasn’t an overnight thing and I had to put in a lot of effort to sell the idea both internally and externally. The outcome though was quite significant, we improved health and safety, improved payload by six tons and reduced fuel consumption by circa 12 per cent not to mention the environmental benefits.

Ian Ford, group procurement director – Transport & Logistics, DS Smith PLC Understand what you want before you ask. Failure to clearly define the needs during the idea generation stage will result in too many proposals. This noise consumes valuable time and effort when filtering for the next stage. This can result in frustrating both suppliers and the internal teams.

Larger suppliers don’t have exclusivity on good innovations; smaller more agile businesses often have the capability to develop faster reducing time to market.

Ensure you get a balance in the pool of suppliers to find those that are passionate about innovation.

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Driving value One of the key areas of benefit from strong collaboration is the reduction in the ‘cost to serve’. If we take a simple view of ‘cost’ we can break down the base cost into: Negotiated discounts from base price: • This is the effect of strategic sourcing on the base price • Includes volume discounts and rebates Cost of Goods Sold (CoGS): • Fixed and variable costs ‘Cost to serve’: • Late orders / changes to order • Non-standard requests • Admin errors If you are a large customer to your supplier you may have imposed special terms, unusual shipping conditions, or other ‘below the radar’ idiosyncrasies that erode supplier profitability. These are the areas that need to be addressed in a collaborative way. A detailed breakdown of ‘costs to serve’ can help identify opportunities to improve supplier profits by changing your buying behaviour. Find elements that are relatively unimportant to you, but drive large ‘cost to serve’ savings for the supplier. Ask the supplier to make concessions on price or other factors to gain your acceptance for such changes.

Negotiate with your supplier on those elements which cost you little, but carry large value to them. Reciprocate this behaviour to arrive at a mutually beneficial and valuable set of outcomes.

Questions to consider: • What elements comprise the total price?

• How can these be reduced to focus on the end outcome (goods / services)?

• Are your buying behaviours driving up the price?

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Joint solutions Multiple supplier workshops can be a powerful tool to drive further collaboration in your supply chain, however trust needs to be prevalent throughout the process.

What should be considered as part of this process?

• Do invite teams from the suppliers • Do engage prior to the workshop • Do select complementary suppliers • Do gain clarity through focussing on a specific objective from the end user’s perspective However: • Don’t invite competitors • Don’t encourage suppliers to ‘sell’ from existing product lines

“To get to where we are today in our SRM programme there has been a lot of effort, not just from the category leads but from R&D, technical support and the individual sites. Having said that, we are now seeing some great ideas not just direct to us in BDR but with the suppliers starting to work closer together.

We have had a lot of one-to-one meetings with suppliers and technical workshops, all of our products require technical input, so it was important to make sure we engaged early with engineering. The benefits are flowing through and we will see a step change in some of the areas we have focussed on. This has only been realised through having a good structured programme in place and driving it through consistently.”

Terry Tilford, group procurement excellence manager BDR Thermea.

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Conclusion As with most things, planning and preparation make achieving your outcomes significantly easier. SRM as a toolset, methodology and approach can be very powerful for any business, but to get the best results it needs to be woven into the day-to-day activities of the business.

Before you start, think about the journey you will need to undertake to successfully deploy SRM. This will mean reflecting on the following elements: • Where are we now?

• Where do we want / need to be?

• How do we bridge the gap?

• How will we know when we have arrived?

The answer to the first question is critical to being able to successfully undertake segmentation, while the answer to the second question will drive the various levels of activity within your supply chain tiers. Bridging the gap will require analysis, prioritisation, communication, innovation and continuous improvement, and collaboration. Finally, measurement will be critical to gauging success and value creation from the efforts expended.

Whoever you work with long term, and whatever your scorecard or measures look like, so long as you apply the fundamental principles appropriately, SRM should not be too onerous (focus on value creation) and will pay dividends in return.

Collaborating with the right suppliers and reducing the ‘cost to serve’ will ensure you become their customer of choice. This privileged position means you are more likely to receive valuable supplier resources before other non-preferred customers.

measurement

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Credits Guide to Supplier Relationship Management Authors Terry Tilford, group procurement excellence manager, BDR Thermea David Atkinson, managing director, Four Pillars Ian Ford, group procurement director - Transport & Logistics Category, DS Smith PLC David Eadie, procurement director, Anite Telecoms Procurement and Commissioning Practice, Capita Redactive Publishing Limited 17 Britton Street, London, EC1M 5TP Tel: 020 7880 6200 Editorial Editor Andrew Pring Special projects editor Anna Scott Advertising Sales manager Rav Kang Sales executive Norbert Camenzuli Š 2013 Redactive Publishing Ltd. All rights reserved. This publication (and any part thereof) may not be reproduced, transmitted or stored in any print or electronic format (including but not limited to any online service, any database or any part of the internet) or in any other format in any media whatsoever, without the prior written permission of the publisher. Redactive Publishing Ltd accepts no liability for the accuracy of the contents or any opinions expressed herein.

Printed by The Henna Press.

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