The business battles of this century will be won by harnessing the power of suppliers. Leading organizations recognize that the procurement playground is no longer one of lowest cost or best value, but one of highly collaborative relationships with suppliers that can help drive transformation and innovation. This change is driven by changes in the business environment, including:
- gglobalization, which accelerates the interconnection of markets and creates a network of highly integrated organizations;
- Iincreased volatility and risk, including international terrorism, natural disasters, port congestion and inadequate transport infrastructure;
- aan increasingly fast-paced, consumer-centric company that demands more agile and flexible supply chains; and
- the continued evolution of a service economy shifting to strategic, and not just tactical, outsourcing.
In this context of change and connectivity, Supplier Relationship Management (SRM) has steadily grown in a wide variety of organizations: APQC ‘s Current state Quick survey on supplier relationship management found that about 80 percent organizations have implemented or are at least moderately likely to implement SRM in the next two years (Figure 1).
Unfortunately, APQC Quick Survey also shows that many organizations are focusing SRM in the wrong areas and therefore not delivering value. For example, APQC found that 72% of organizations benefit from SRM because they expect it to help monitor contract compliance and service levels. This is not where SRM has the most impact on bottom lines. In fact, this focus on micromanaging contract terms is counterproductive. Only a minority of organizations (38%) use SRM to drive innovation or provide a competitive advantage (45%).
One of the most common pitfalls of traditional SRM approaches is that they often focus on teaching purchasing organizations that there is one and only one supplier relationship “good practices.“What companies don’t realize is that this rigid thinking doesn’t work because every business partnership is unique. Supplier relationships exist on a continuum, with purely transactional relationships on one side and investment-worthy equity partnerships on the other. Understanding the purpose of the business relationship along this continuum helps determine the appropriate scope of work, performance management approach, pricing approach, and governance structure.
In their book Strategic sourcing in the new economy, APQC Research Advisors and SRM Experts Bonnie Keith and Kate Vitasek (with their co-authors) argue that when organizations treat every business relationship the same, they are missing out on the essential concept of using design principles to create an interconnected system or sourcing business model. Next Generation SRM takes into account the full range of possible buyer-supplier relationships and follows these five essential design principles to ensure that an organization gets the most out of its supplier relationships.
Five Essential Next Generation SRM Design Principles For The Most Strategic Relationships
For the most strategic relationships, switch to a results-based business model–Rather than contracting for operations, organizations should spell their desired results. This requires the right sourcing business model to ensure a best fit approach (for relevance), a shared vision statement (for perspective) and a statement of intent (for behaviors). These efforts align the buyer and supplier with the underlying constructions and ground rules of the contract.
Focus on goals, not how work is done in strategic relationships–Suppliers are empowered by a jointly developed goal statement to determine how to achieve desired results. Supplier can make significant changes to improve processes, but the statement clarifies who does what and help to build formal taxonomy and workflows that promote clarity and alignment. Through this effort, the buyer and supplier understand the end-to-end process, the delineation of responsibilities and shared goals to collaborateion.
Clearly define and measure desired outcomes for strategic relationships—Pperformance measures should be developed in conjunction with a plan that accurately gauges achieving the desired results, identifying which party is responsible for which elements of the process. The two partners should agree on how the performance results will be communicated and implemented. Each partner can then conduct and internally scrutinize aall measures at the activity level.
Optimize pricing model incentives for strategic relationships– Procurement functions will end up hitting a wall by flexing muscles for the lowest cost of suppliers, often end up with lower service levels and diminishing quality from suppliers looking to protect their margins and profits. Rather than focusing on the lowest possible transaction price, organizations are better served by creating a pricing model that prompts the vendor to innovate and improve efficiency to achieve the desired outcome. The incentive pricing model should be collaborative, transparent and flexible so that both parties are empowered to invest in target processes and are rewarded for the success of the partnership.
Establish an insightful governance structure for strategic relationships– Governance must go beyond surveillance to generate information. A strong structure must provide coherent policies, processes and decision-making rights that enable a symbiotic relationship. It requires relationship management (which involves establishing common policies and mechanisms), transformation management (which provides a framework for the evolution of processes in a controlled manner and adapt to market conditions as required) and exit management (which defines a credible and transparent plan to unravel the relationship).
Next Generation SRM embodies these design principles and is supported by an appropriate procurement business model for each key supplier relationship. This enables suppliers as well as buyers to drive innovation and provide competitive advantage through a shared sense of risk and reward. Less than half of organizations are currently leveraging SRM with these benefits in mind, and these organizations will find themselves leading the pack in an increasingly interconnected and rapidly changing business environment.
APQC helps organizations work smarter, faster, and with confidence. It is the world’s leading authority on benchmarking, best practices, process and performance improvement, and knowledge management. APQC’s unique structure as a non-profit association makes it a differentiator in the market. APQC is a partner of more than 500 member organizations around the world in all sectors. With over 40 years of experience, APQC remains the world leader in organizational transformation.