SUPPLIER MANAGEMENT EXCELLENCE

DELIVERING VALUE THROUGH COLLABORATIVE RELATIONSHIPS

MARCH 2015

This document is the result of primary research performed by SCM World. SCM World’s methodologies provide for

objective, fact-based research and represent the best analysis available at the time of publication. Unless otherwise

noted, the entire contents of this publication are copyrighted by SCM World and may not be reproduced, distributed,

archived or transmitted in any form or by any means without prior written consent by SCM World.

© 2015 SCM World. All rights reserved.

Geraint leads the sourcing, supplier management and supply chain risk management research and content streams at SCM World. He provides insights, learning & development and advisory support to leading global companies and manages a team producing a steady flow of practitioner-led webinars, best-practice insights, data snapshots and live events. He is based in London.

AuthorGeraint JohnSenior Vice President, Research, SCM World

CONTENTS

EXECUTIVE SUMMARY

INTRODUCTION

BENEFITS OF STRATEGIC SUPPLIER ENGAGEMENT

BUILDING THE FOUNDATIONS FOR SUPPLIER MANAGEMENT EXCELLENCE

ORGANISATIONAL AND PROCESS ENABLERS

BUSINESS AND BEHAVIOURAL ENABLERS

CONCLUSIONS & RECOMMENDATIONS

REFERENCES

5

6

8

12

15

21

24

25

March 2015 5

EXECUTIVE SUMMARY

Supply chain professionals are convinced that collaboration with strategic suppliers is a good thing. Data collected by SCM World among more than 1,000 practitioners in 2014 shows that:

• three-quarters believe stronger relationships deliver high or very high value for their companies;

• 84% report that strategic supplier engagement is important or very important in driving competitive advantage;

• support for cost reduction efforts and getting priority when materials or production capacity are constrained are the two most prized sources of value;

• speed to market, collaboration on quality improvements and getting supplier innovations before industry rivals are also highly rated business benefits.

Other research studies show a direct link between the quality of supplier relations and customer profitability, and average annual benefits worth $300 million among the best-performing companies.

Despite the opportunities, many supplier relationship management (SRM) programmes have failed to get traction in recent years and the majority of companies are still in the relatively early stages of their journey to excellence. One reason is a lack of active support and participation from business heads and functional leaders, and the perception that it’s just the latest procurement initiative, rather than something that can help to solve real and immediate business challenges. This notion is not dispelled by the fact that some procurement organisations have opted for a process-orientated approach to SRM before having made a compelling case for change (and investment) in the way supplier relationships are managed.

Supplier management leaders are more likely to have:

• created a value proposition and/or business case and tailored it to different groups of stakeholders;

• taken a consultative stance on which suppliers to classify as “strategic” (typically less than 50), in order to target precious resources and manage time appropriately;

• implemented effective and disciplined execution through mechanisms such as governance models, joint business plans, balanced scorecards and designated supplier managers.

In the product development and innovation arena, excellence means going beyond annual supplier events and web portals, and bringing business owners and technical experts from both sides together in focused cross-functional workshops, early engagement meetings and co-located teams. Examples are included from pharmaceutical giants Roche and Novartis, food producer Mondelēz International, and a US hi-tech company.

Success in collaborating with strategic suppliers depends, to a large extent, on the level of trust present between organisations and between individuals on both sides. The consistent application of business practices such as efficient payment processes, respect for intellectual property and fair contractual terms and conditions are important foundational ingredients. But these need to be complemented by personal and behavioural characteristics, ranging from a buyer’s commercial and technical knowledge to the effectiveness of their communication skills and the way they interact with suppliers on a daily basis.

The latter includes an openness to ideas, a willingness to understand the supplier’s interests and point of view, the ability to sell their capabilities internally, and a mindset that looks for opportunities to create mutual rather than zero-sum value. Relationship management skills and attitudes are more difficult to teach than a strategic sourcing process, so procurement and supply chain leaders may need to bring new people into their organisations in order to get the right mix of competencies required to drive supplier management excellence.

6 Supplier Management Excellence Delivering Value Through Collaborative Relationships

INTRODUCTION

The notion that a buying organisation can obtain additional business value by partnering with at least some of its goods and services suppliers, rather than keeping them at arm’s length and seeking to extract price and contractual benefits through aggressive negotiation tactics, has been around for many years. But it is only in the past couple of decades that leading companies have sought to turn ad-hoc practices into formal, enterprise-wide ways of operating. Today, the majority of firms, across all industry sectors, are still in the early stages of this journey.

Pressure to develop more collaborative relationships with suppliers comes from several sources. One is buyers’ continuing focus on slashing the size of their supply bases. While this action is mostly driven by a desire to increase volume leverage and reduce transactional costs, when combined with consolidation on the sales side the net effect is to make firms increasingly dependent on an ever-smaller number of core suppliers. Another is the imperative to speed up new product development and introduction, and deliver a steady flow of innovation for customers at a time when internal R&D resources are overstretched. A third source is the fact that procurement functions that have delivered year-on-year cost savings through ever-more professional strategic sourcing and category management efforts experience diminishing returns and need to find new sources of value for their companies.

SCM World’s research data shows that the community believes strategic supplier management is both a key element of a high-performing supply chain and an important contributor to business success. In last year’s Chief Supply Chain Officer survey, just over a third of respondents said stronger supplier relationships delivered “very high value” for their companies, while a further 41% said “high value”. Only 49 practitioners out of a sample of 1,061 (less than 5%) answered “little” or “no” value.

The same annual study also found that 41% believe strategic supplier engagement is “very important” to their organisation’s competitive advantage, with an additional 43% saying “important”. Again, fewer than 50 supply chain professionals took the opposing view. When we break these results down by industry sector, we find that aerospace, hi-tech, energy, CPG and logistics firms are even more convinced of suppliers’ importance. Even in apparel, which had the lowest combined tally, almost three-quarters (72%) of respondents say that supplier engagement is important from a business strategy perspective (see Figure 1).

However, achieving supplier management excellence in practice is easier said than done. It requires the co-operation and active participation of stakeholders in many functions and business divisions; it involves a different set of tools and processes to those found in standard procurement manuals; and, perhaps most important of all, it demands a philosophical shift in the way managers think about and deal with their suppliers, and a broader set of skills and competencies among those responsible for managing key trading relationships.

The aim of this report is to set out the main ingredients of supplier management excellence, from business ownership and organisational processes to the cultural and behavioural practices that build trust individually and collectively. But first, a look at why companies should invest in collaboration and the business value that deeper supplier engagement can deliver.

March 2015 7

Source: SCM World CSCO survey 2014 % of respondentsn=1,063

90%

100%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Aerosp

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Logisti

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Utilities

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y CPG

Indus

trial

Automoti

ve

Media

& telco

Retail

Health

care

& pharm

aFo

od &

bevera

ge

Chemica

ls

Very important Important All-sector average (very important)

All-sector average (very important/important)

Importance of strategic supplier engagement to competitive advantage1 |

8 Supplier Management Excellence Delivering Value Through Collaborative Relationships

BENEFITS OF STRATEGIC SUPPLIER ENGAGEMENT

Contracting with suppliers that offer competitive pricing, high-quality products and services, reliable delivery performance, and which have acceptable social and environmental practices is the cornerstone of modern procurement practice. But although these elements are all vitally important, they are unlikely to give a company much in the way of an advantage over its industry competitors (since all demand the same from their own suppliers). Mature sourcing organisations therefore look to suppliers – and particularly those they consider to be “strategic” – to bring other benefits to the trading relationship.

In our 2014 CSCO study, we asked those respondents who indicated that strategic supplier engagement was important to their company’s competitive advantage to specify the benefits they valued the most. Priority treatment when supply and/or production capacity is constrained and collaboration to reduce costs were the two most popular answers, with almost two-thirds of respondents saying these are “extremely relevant” enablers of business success. Collaboration on quality improvements, faster speed to market and getting innovation ahead of competitors make up the top five (see Figure 2).

Analysing these top five benefits by sector reveals some notable differences. Hi-tech firms value three of these more highly than do others: priority when supplies and production capacity are limited, faster problem solving or time to market, and collaboration to improve quality. This makes good sense, given the short lifecycles of many electronic products. CPG and industrial companies place a higher emphasis on action to take cost out of the supply chain, while those in the automotive sector stress the importance of getting ideas and innovations from suppliers first – 60% report that this is extremely relevant to their competitive advantage (Figure 3). Again, this is understandable when one considers the high percentage (typically 65-75%) of auto makers’ revenue represented by the cost of goods sold (COGS) and the OEMs’ dependence on their tier-1 suppliers for key components and technologies.

QUANTIFYING THE VALUE OF SUPPLIER RELATIONS

Although this data is interesting, it doesn’t give any indication of the value actually achieved in practice by companies from their strategic suppliers in any of these areas. Indeed, the lack of direct evidence of the impact that strong supplier relationships have in hard-

n=886

Supplier giving you priority in times of tight supply/capacity 64

Collaboration on cost efficiency of supply chain 64

Collaboration on quality improvements 54

Faster problem solving/time to market 54

Supplier giving you innovations/ideas ahead of competitors 46

Joint risk mitigation strategies 36

Co-development of new products/services 35

Collaboration on new customer propositions 30

Access to supplier’s best talent 29

How strategic supplier engagement boosts competitive advantage

2 |

% of respondents saying ‘extremely relevant’

Source: SCM World CSCO survey 2014

March 2015 9

dollar terms has been a major barrier for supply chain leaders seeking to change the way their organisations engage their supply bases. For this reason, research published last year by Michigan-based supplier relations expert Dr John Henke marks a significant milestone in the evolution of supplier management.

Henke analysed a slew of data from the North American automotive industry going back to 2001. This included his own annual study of working relations between the six leading OEMs – Ford, General Motors, Chrysler, Toyota, Honda and Nissan – and their tier-1 suppliers, along with OEM production, financial and

operational data. The result: estimated hard-dollar contributions made by suppliers to the profit per vehicle sold, in the form of both price concessions and non-price benefits. The latter include the supplier’s willingness to invest in and share new technology, assign their best people to serve the OEM, provide support that goes above and beyond that contracted for, and so on.

Figure 4 shows the breakdown for each of the six OEMs in the period 2008-2012/13 and how this compares with the profit generated through the companies’ own internal capabilities (the managerial

% of respondents saying “extremely relevant”n=632

How strategic supplier engagement boosts competitive advantage3 |Top five sources of value, selected industries

Source: SCM World CSCO survey 2014

Hi-techCPG IndustrialAutomotive RetailHealthcare & pharma

Food & beverage

Chemicals

0%

20%

40%

60%

80%

Priority on tight supply/capacity

Innovations/ideas ahead of competitors

Cost efficiency collaboration

Quality improvement collaboration

Faster problem solving/time to market

10 Supplier Management Excellence Delivering Value Through Collaborative Relationships

Supplier contribution to auto maker profitability4 |Operating income (Ebit) per vehicle in North America, OEM average 2008-13*

* Figures for Nissan, Honda and Toyota 2008-2012

Source: © 2014 Planning Perspectives, Inc.

Price concession contribution

Non-price benefits contribution

Total supplier contribution

Managerial contribution

contribution). The chart reveals the extent to which the OEMs depend on their key suppliers to add value, especially in the form of non-price benefits, as well as the superiority of the Japanese troika, led by Honda, over their US rivals.

This, Henke argues, is no accident. Overlaying his Working Relations Index (WRI) – a 500-point scale derived from a detailed annual field survey of tier-1 supplier personnel – on to this profitability data reveals a close correlation between the quality of supplier relations and profit per vehicle. Henke concludes that 60% of an OEM’s gross profit and 50% of its operating income can be attributed to supplier relations. This is true for both Japanese and US auto makers, although

the absolute profit made by the Japanese is higher than for Ford, General Motors and Chrysler (see Figure 5) because the working relations they have with their suppliers are generally better1.

While the picture in other manufacturing industries may be less dramatic, partly because of a lower COGS-to-revenue ratio, Henke argues that it is reasonable to assume that the quality of supplier relations typically impacts 30% of a company’s gross profit and half of its operating profit on an Ebit basis. While the scale of non-price benefits is likely to be lower than in the case of automotive manufacturers, these still exceed price concessions by a decent margin.

$0

$1,000

$2,000

$3,000

March 2015 11

* Financial data corrected for inflation relative to 2012

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lier a

nnua

l fina

ncia

l con

tribu

tion/

vehi

cle

Working Relations Index®

Source: © 2014 Planning Perspectives, Inc.

2001 2005 20092002 2006 20102003 2007 20112004 2008 2012 2013

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000 300

100

200

Supplier piece price concession contribution

Supplier non-price benefits contribution

OEM profitability and supplier relations5 |Average operating income (Ebit)/vehicle* for Ford, General Motors and Chrysler in North America

Moreover, Henke’s analysis gives the lie to the idea that aggressive buyers who care little for the impact of their actions on supplier relationships get better pricing. In fact, he found the opposite to be true: in the US automotive industry during 2010-12, for example, for each $1 of price reduction asked for by buyers who had poor or very poor relations with their suppliers, as measured by the WRI, 46 cents was given. While those with good or very good relations did request smaller price cuts (86 cents on average), they actually received a greater discount of 54 cents. This finding corroborates anecdotal evidence within the supply chain community that suppliers with whom a company has strong, long-term relationships are more willing to support such a customer in the form of preferential pricing.

The benefits can add up to sizeable sums. As yet-unpublished data from a survey of more than 500 companies conducted by Vantage Partners, a Boston-based consulting firm, shows that the top 10% of performers reported over $300 million worth of annual cost savings and other benefits from their supplier management programmes – almost 10 times the average for all companies.

Working Relations Index

12 Supplier Management Excellence Delivering Value Through Collaborative Relationships

BUILDING THE FOUNDATIONS FOR SUPPLIER MANAGEMENT EXCELLENCE

Despite the value to be gained from strategic supplier engagement, and the consensus among supply chain practitioners that this is an imperative for their companies, many SRM initiatives have failed to get real traction during the past decade or so. “There have been a lot of misfires,” says Remko Van Hoek, Senior Vice President, Sourcing & Procurement at The Walt Disney Company. “Organisations have pulled the trigger too soon when they weren’t in range of the target.”

The main reason for this is a lack of buy-in and active participation from business leaders and key stakeholders in functions like engineering, marketing and R&D. Their support is essential, particularly when it comes to involving suppliers earlier in the product design, development and innovation process – areas outside the procurement organisation’s control. By the same token, one of the things suppliers value most about being included in a supplier management programme is the access they get to the customer’s senior executives. If this isn’t sustained after the initial flurry of summits and presentations, and if agreed actions and projects aren’t progressed because procurement lacks the internal influence to push them through, supplier trust and enthusiasm can quickly wane.

While it’s fine for an SRM initiative to be driven and orchestrated by procurement, it must not be perceived as a procurement agenda, says Laurent-David Charbit, Director of Unilever’s Partner to Win programme. Having CEO and board-level sponsorship is crucial, as is a vision that stakeholders can rally around. Comprehensive toolkits and processes are necessary for the successful implementation of supplier management, but putting all your effort into designing these at the outset is a mistake. “You are not going to inspire anyone with tools and process,” he says. “You can’t use those to initiate a change.”

The best way to get stakeholders engaged is to create a value proposition and business case for supplier management that aligns with their objectives, argues Mel Shutes, a former Toyota purchasing executive who leads the SRM practice at consultancy State of Flux. This includes not only the company’s strategic priorities, but also those specific to their business area or function and themselves personally. Many will need convincing that suppliers – even critical ones – can help them to solve the problems they face and deliver value that stretches beyond the usual contractual boundaries.

State of Flux’s latest annual survey of SRM practices reveals that 70% of companies with well-established supplier management programmes have a documented value proposition and/or business case, compared with just 32% of those that have yet to get traction. This should include a statement of value/benefits, risks, resources required and expected return on investment. Skilful communication of this pitch to different sets of stakeholders is also a differentiator between the leaders and the laggards, notes Shutes. “It’s vital that the value proposition resonates with all those likely to be involved.”

SEGMENTING THE SUPPLY BASE

Stakeholder involvement can also be important in another foundational aspect of supplier management excellence: deciding how to classify suppliers and which to engage in a deeper and potentially more collaborative way. Large companies typically have thousands, if not tens of thousands, of suppliers, and the time, effort and resources required means that only a fraction of those relationships can be – or need to be – managed more intensively. Figure 6 illustrates a standard segmentation model and the numbers of suppliers and selection criteria typically associated with each tier.

March 2015 13

Supplier segmentation – a typical model6 |

When determining their most important relationships, supplier management leaders consider not only the annual volume of business placed with a supplier and the criticality of the goods or services it provides, but also factors such as its business strategy and direction, technological and innovation capabilities, willingness to invest (whether to support growth or continuously improve quality, cost and efficiency) and appetite for collaboration. One large food company, whose history with SRM stretches back more than a decade, looks to its strategic suppliers to help deliver a multi-billion dollar savings target, but also to support the company’s growth objectives by harnessing supplier innovation more effectively than its competitors.

At present, its programme includes 14 strategic suppliers, with another dozen in the evaluation process (a majority in direct materials but a handful in indirects and logistics too). To qualify for inclusion, each supplier must convince top executives of the strength of its innovation capabilities and R&D pipeline, its willingness to invest for the long term, and a commitment to work collaboratively to lean out processes and reduce supply chain costs. “There is very little weight on existing business,” says the senior procurement director who leads the SRM programme.

While it may be tempting for procurement to conduct its own standalone analysis, using a Kraljic-style

Value

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s req

uired

Typically fewer than 50 suppliers• Collaborative relationships with long-term contracts• Focus on joint value creation and mutual benefits• Senior executive sponsorship & involvement on both sides• Business & cultural alignment, innovation capabilities, and willingness

to invest to support growth/share resources among key selection criteria

Typically 100-500 suppliers• Co-operative relationships with medium to long-term

contracts• Focus on quality/service and continuous improvement• Performance scorecards/KPIs reviewed on a regular basis• Criticality of products/services, annual spend, riskiness,

dependency & switching costs among key selection criteria

Typically 000s of suppliers• Tactical relationships with short -term

contracts• Standard terms & conditions• Competitive pricing and delivery reliability

among key selection criteria

STRATEGIC

PREFERRED

TRANSACTIONAL

14 Supplier Management Excellence Delivering Value Through Collaborative Relationships

Five essentials for tier-1 supplier account management7 |

portfolio matrix, and then issue a list of strategic and preferred suppliers, the risk is that if stakeholders disagree they will withhold their active support. This is particularly true in the case of suppliers like marketing agencies and IT providers where procurement is not the budget holder and does not serve as the supplier’s primary contact.

At the pharmaceutical giant Novartis, where 70% of the annual $20 billion spend managed by procurement is indirect, getting stakeholder engagement and

sponsorship for tier-1 supplier relationships is one of five essential ingredients identified by Supplier Performance & Innovation (SP&I), a small team within the group procurement function set up at the beginning of 2013. The others are culture and mindset, shared vision, performance management and transformation management, as described in Figure 7. All five components need to be in place for strategic supplier management to be successful, argues Chris Holmes, Global Head of Procurement Strategy & Transformation at Novartis2.

1 Culture & mindset... in order to create a favourable and collaborative partnership climate through clearly defined guiding principles, supported by the right behaviours

2 Shared vision... in order to build perspectives and allow both parties to focus and align on jointly agreed desired outcomes that will benefit both organisations

3 Performance management... in order to monitor operational excellence against agreed targets, assess the overall performance of the partnership, proactively bridge gaps and solve issues

4 Transformation management... in order to document the process used to transform ideas into business value, clarify the way value is recognised by both parties and how value gets shared

5 Governance & sponsorship... in order to engage key stakeholders, receive executive sponsorship, obtain commitment from all associates involved and maintain continuity of resources

Source: Novartis Business Services

March 2015 15

ORGANISATIONAL AND PROCESS ENABLERS

Adopting a process-first approach to supplier management is a trap that many procurement functions, keen to make progress in newer areas of value generation, have fallen into in recent years. As a broader business change programme in the way key trading relationships are viewed and managed, rather than a bolt-on to strategic sourcing, SRM requires more than detailed slide decks, playbooks and toolkits if it is to gather momentum. Figure 8 shows how the food company mentioned above illustrates the scope of its SRM programme.

At the same time, as the Novartis model illustrates, process and governance is needed to ensure that there is regular dialogue between the two parties, ideas are generated, decisions taken, and actions are assigned and implemented. Vantage Partners’ research shows that top SRM performers are distinguished by “effective and disciplined execution” and are far more likely than other companies to have strong governance mechanisms in place to make this happen, explains Jonathan Hughes, who leads its sourcing and supplier management practice. Key elements include the following:

Supplier management key components8 |

Source: Major food company

Joint business planning

Collaboration

Balanced scorecard

metrics

Embedded resourcesMutual

value delivery

Product and

package innovation

Top-to-top relationships

Cost and information

transparency

Sharin

g of

approp

riate

inform

ation

freely

Early supplier

involvement in Lean

Six Sigma work

Inputs to KPIs

Supplie

rs in

faciliti

es

as ex

tended

team

members

A win-win mindset

Collaborative

development and

implementation

Critical sponsor

engagement

Supplier engagement in company’s strategy

Supplier

relationship

components

16 Supplier Management Excellence Delivering Value Through Collaborative Relationships

• Clear governance structure. A cadence of regular meetings during the course of the year involving stakeholders at varying levels of seniority from both customer and supplier, and with different agendas for each. Figure 9 shows a simplified example. At the centre of this model is the quarterly business review (QBR), but this is fed by more frequent operational performance meetings and annual or biannual strategic reviews led by senior executives up to and including the CEO. The governance model also includes defined roles and responsibilities for each stakeholder, including the executive sponsor for the relationship, and a clear escalation path for issues that cannot be resolved by lower-level managers. At German industrial powerhouse Siemens, which launched a new supplier relationship management programme last year, business unit CEOs sponsor relationships with the company’s top direct materials suppliers, explains Tomas Van den Abeele, Vice President, Global Procurement. The governance model is vital to ensure that there is business ownership and frequent cross-functional dialogue with these suppliers, and that actions are followed through on successfully. The food company uses twice-yearly top-to-top meetings between its business leaders and CFO, and

their counterparts at suppliers, along with quarterly business reviews. Key roles include the executive sponsor, who could be the CPO, a BU president or a VP of R&D, and dual relationship managers with procurement and technical expertise. The latter work closely with the supplier’s lead manager, who sits in the customer’s office and takes part in marketing meetings and ideation sessions, and mobilises its resources as required.

• Supplier advisory councils. To complement governance at the individual relationship level and larger annual supplier events, companies like Delphi Automotive and Harley-Davidson use supplier advisory councils made up of 10-20 suppliers. These comprise supplier representatives who meet to discuss ideas and issues of strategic importance and provide feedback to their customer on opportunities for improvement and ways that relationships can be strengthened. Designated supplier managers. In most manufacturing companies, responsibility for individual relationships with direct materials suppliers lies with procurement or category/commodity managers. The advantage of this is that they own the full commercial relationship and hence are seen as a key stakeholder

Example governance model and meeting structure9 |

ISSU

E ES

CAL

ATIO

N

LEVEL FREQUENCY AGENDA ATTENDEES

STRATEGIC

Annual

Biannual

Strategy, performance & risk

• Customer & supplier strategic direction

• Overall performance, commercial issues, risks and issue resolution

• New market/value creation opportunities, innovation pipeline, project progress

• Customer: CEO/C-level executives, business head(s),

executive sponsor

• Supplier: CEO/senior executives

RELATIONSHIPQuarterly

Monthly

Relationship, performance & risk

• Aggregated performance metrics & trends, contract milestones/compliance, risk issues

• Relationship status and development plans

• Joint projects/activities, innovation pipeline

• Customer: CPO/sourcing VP, supplier/category lead, senior functional managers

• Supplier: key account and senior functional managers

OPERATIONALMonthly

Weekly

Performance & risk

• Scorecard KPIs/SLAs

• BU-level contract milestones/compliance, risk

• Payment performance & pricing

• Improvement opportunities

• Customer: BU supplier lead, project/functional managers

• Supplier: delivery, key account & functional managers

March 2015 17

by the supplier, rather than a go-between. The downside is that they may not be able to dedicate the time required for large and complex relationships. Some companies therefore choose to make this a full-time role. Shell, for example, created 15 supplier managers, each responsible for between one and three of its most critical supply partners.

• Joint business plans. In successful collaborative customer-supplier relationships, business objectives, improvement and risk mitigation plans, and investment priorities are agreed jointly between the two companies and span a multi-year time period – typically 2-3 years. Because of Unilever’s four businesses, its global footprint and the fact that its SRM programme covers all spend categories, including ingredients, chemicals, packaging, services and logistics, it has signed joint business development plans (JBDPs) with around half of its 200 Partner to Win suppliers. These encompass five key pillars at the heart of Partner to Win: quality and service, responsible and sustainable living, innovation, value and capacity/capability.

• Balanced scorecards. Measuring the value delivered from collaboration with strategic suppliers is one of the biggest challenges faced by practitioners. None of the executives interviewed for this report claimed to have a foolproof way of doing it, but there is agreement on the need for a balanced, two-way scorecard made up of both tangible KPIs and qualitative information (an example is shown in Figure 10). The former typically include KPIs on cost, quality, service, risk, compliance to sustainability and other policies, as well as metrics that suppliers care about, such as forecast accuracy and the customer’s performance in paying its invoices on time. Leading companies also include measures designed to track the quality of the trading relationship, as well as specific metrics around innovation, although in practice this is more difficult to quantify. At flavours and fragrances specialist Firmenich, the quarterly scorecard used with its top 35 suppliers includes three quantifiable metrics for innovation – the number of projects identified, the number of new products delivered during the previous 12 months, and the percentage of turnover spent on R&D – as well as a qualitative measure of the supplier’s “commitment to innovate”, says Sylvain Lacraz, Director of Global Perfumery Purchasing.

Deciding whether cost savings and other value derived from suppliers is the result of pre-contract strategic sourcing and category management work or post-contract supplier management activity is a common problem, explains State of Flux’s Mel Shutes. He advises companies to take a pragmatic approach, drawing a line in the sand and then counting financial benefits delivered subsequently under the SRM heading. “Non-financial benefits should be captured in short, concise case studies validated by the impacted business area,” he says.

• Information systems. Software applications don’t make the difference between success and failure in collaborative supplier relationships. But they can be an important enabler, whether in terms of facilitating joint design through product lifecycle management tools3 or making a raft of contractual, performance, project and contact information visible to both customer and supplier stakeholders. The major ERP and procurement systems vendors have been relatively slow to offer a comprehensive suite of web-based tools that can be used to manage supplier relationships in a strategic and collaborative rather than purely transactional way. It’s been left to niche players like Statess to develop solutions that actively support the type of governance models and processes outlined above.

HARNESSING SUPPLIER IDEAS AND INNOVATIONS

The desire to bring innovation in from outside the organisation and make product development faster and more cost-effective are major reasons for companies to develop more collaborative relationships with their strategic suppliers. And yet, the gap between aspiration and reality is arguably greater here than in any other area of supplier management. New research to be published by SCM World next month shows that less than a fifth of companies have suppliers engaged in open innovation programmes today. Just over a quarter say they are piloting such initiatives, while 21% plan to adopt them in the future.

Resistance from R&D departments to external ideas and expertise is certainly still a barrier; a lack of integration between supply chain and engineering/technology functions another. But most companies today also don’t have well-defined and managed

18 Supplier Management Excellence Delivering Value Through Collaborative Relationships

Scorecard and KPIs for strategic suppliers

QUARTERLY CYCLE

10 |

Business unit, supply chain, R&D and other key functional goals

COMPANY GOALS AND OBJECTIVES

Source: Major food company

Corporate programme KPIs

• Ethical supply chain progress• Progress audit• Food defence• Food safety certification• Supplier diversity

Overall relationship KPIs

• Flexibility and ease of doing business• Partnership and innovation• Resource effectiveness

• Quality and reliable supply• Productivity• Innovation• Cash flow• Material/specification simplification

Business/category plan KPIs

Operational KPIs

• Safety• Quality• Delivery• Service• Financial

mechanisms for engaging suppliers in the new product development and innovation process. SCM World’s data indicates that hi-tech and consumer products firms are further ahead here than those in other industry sectors.

A US-based hi-tech company has focused its efforts during the past two years on bringing key suppliers of electrical, mechanical and other major components in at the concept stage of product design – six months earlier than before. Using design for manufacturing and design for cost tools, the aim is to take out unnecessary cost and optimise processes, including those used by the supplier to make the parts. Commodity councils liaise with the company’s design centres to identify potential options; senior engineering and other executives meet with suppliers to share information and understand their capabilities; and a supplier engineering team works with product developers to execute agreed-upon

ideas. Taken together, it’s a much more cross-functional process than the company used in the past, says its director of supply chain.

On the innovation side, two of the most commonly used methods are supplier innovation fairs and web portals, designed to solicit ideas from both existing and potential suppliers. HP now takes a “concerted and very deliberate approach” to supplier innovation, explains Kee Chang, Senior Director, Strategic Procurement. Since early 2013, it has held more than 25 innovation fairs – large and small – at which key decision makers from engineering, quality, R&D, marketing and elsewhere are brought together with representatives from a core group of suppliers in specific categories such as LCD displays. Ideas generated from these events are followed up through a strenuous cross-functional review process to quantify the likely return on

March 2015 19

0% 20% 40% 60%

Hi-tech

CPG

Industrial

Healthcare & pharma

Effectiveness of methods in delivering business value from service providers*

11 |

% of respondents saying ‘extremely’ or ‘very’ effective, selected industries

n=223Source: SCM World Managing Service Providers survey

* Logistics specialists, contract manufacturers, software developers and consultants

Governance structure (eg, active executive sponsorship, regular business review meetings, clear escalation paths)

Qualitative relationship tracking (eg, 360-degree feedback, “voice of supplier” surveys)

Strategy/innovation workshops

investment and make recommendations about which technologies to adopt, both in the short term and 3-5 years out. This approach is costly and time consuming, says Chang, but is critical given the speed of change in the PC industry and significant consolidation in HP’s supply base.

Since 2008, snack-food maker Mondelēz International has used the role of procurement innovation manager (PIM) in its European operations to bridge the gap between R&D, category teams and suppliers. These individuals – of which there are now four globally, covering chocolate, biscuits, candy/chewing gum and beverages – translate business needs into briefs for its buyers to source against and guide suppliers so that they can target their innovation investments and proposals more effectively. PIMs meet on a quarterly basis with R&D leadership for their product category to assess new supplier technologies and capabilities, and for successful business cases help to negotiate the legal framework covering intellectual property and commercial terms – an issue that is notoriously tricky to manage, particularly when co-development is involved.

Among various methods used at Novartis is the “innovation factory” – 1-2 day workshops that bring internal and supplier experts together in person to brainstorm ideas and define projects that both parties agree are worth pursuing. These sessions are highly intensive and require a lot of upfront work on all sides. Previous research by SCM World found that only a minority of companies use innovation workshops to drive value with key suppliers and they are rated as less effective than governance models in generating business benefits (see Figure 11). Nevertheless, for companies that see capturing supplier innovation ahead of their competitors as a source of competitive advantage, focused workshops that bring together business and technical experts from different functions are an important dimension of supplier management programmes. CO-LOCATED VALUE IMPROVEMENT

One of the most radical recent initiatives in this area is the co-innovation model developed at another Swiss pharmaceutical company, Roche. Its purpose-built Innovation Centre of Excellence (originally called the

Supplier Relationship Centre) is home to matched pairs of “value creation agents” drawn from within Roche and key suppliers, who work with one another and with subject matter experts from both companies. A highly structured workshop-based process is used to generate and evaluate hundreds of potential value-improvement and innovation ideas (see company spotlight for more details). The best are developed into tangible, mutually beneficial business cases, signed off by senior managers and then handed over to the relevant stakeholders as projects for implementation.To justify the substantial upfront investment, explains Clive Heal, who heads up the centre, early projects were required to deliver value equivalent to 7.5% of annual spend with the supplier each year for a period of five years. Now that the model has been proven, more flexible “value statements” are used as part of each business case. As long as stakeholders actively support the proposal and the benefits can be validated by finance, this is sufficient for them to progress4.

20 Supplier Management Excellence Delivering Value Through Collaborative Relationships

COMPANY SPOTLIGHT

How Roche generates joint value improvement ideas with key suppliers

In June 2012, pharmaceutical giant Roche opened a purpose-built Supplier Relationship Centre (SRC) on its campus south of San Francisco. The building initially housed five Roche employees and their matched pairs from five strategic manufacturing partners, and the role of these value creation agents (VCAs) was to come up with new ideas that could create benefits for both parties in the trading relationship.

A highly structured process adapted from Disney’s creativity strategy is used to generate ideas and take the best of them through to implementation. This consists of six steps, as follows:

1a: In the Research stage, the VCAs interview stakeholders in both firms to understand business needs and opportunities in the relationship over the next 2-3 years.

1b: The Creation phase sees subject matter experts from each company come together in a 90-minute workshop. A cool blue colour scheme is used in the SRC room, which helps participants to generate a total of 130-150 ideas in an unconstrained session facilitated by the VCAs. A Brightidea iPad/iPhone app enables them to post further ideas in the hours and days following the workshop.

2a: Next comes a Planning workshop, set in a green-coloured environment, in which each idea generated in 1b is discussed for one minute to ascertain how it could be made a reality.

2b: As its name implies, the Challenging workshop adopts a more critical tone. Orange lighting, less comfortable furniture and a warmer temperature encourages participants to say why each idea won’t work in practice, whether for contractual, legal, IP or other reasons.

2c: In the Evaluating stage, ideas that have high value potential to both companies are investigated thoroughly and a detailed business

case is prepared over a period of up to one month. This case has to be compelling enough for business owners to pull their people off other projects.

3: Finally, Implementation of an idea takes place within Roche and its strategic supplier. Some projects are led by the VCAs, while others are handed over to staff such as category managers.

In its first 18 months of operation, the SRC generated more than 2,000 ideas and 42 specific proposals. A total of 34 improvement projects were taken through to implementation. Last year the SRC was renamed to Innovation Centre of Excellence, its scope was expanded to include suppliers from a wider range of categories, and a three-month fast-track process was introduced in which supplier representatives don’t have to be physically co-located on the Roche campus.

Source: Roche

Process used to generate an select value-adding ideas

12 |

1a RESEARCH

needsDefi ne Roche/partner business

Identify potential areasof opportunity

and weaknesses of ideasQuantify potential risks

Hard probing of strengths 2b CHALLENGING

Quanti

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im

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ting

all n

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Develop

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1b CREATION

of innovative ideas

Early collaborative development

business needs and deliver

high net valueIdentify ideas that meet

2c EVALUATING

3 IM

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Com

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andard

Appr

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March 2015 21

BUSINESS AND BEHAVIOURAL ENABLERS

Obtaining active business support and participation, targeting time and resources at a limited number of strategic partners, and designing appropriate governance models and processes that translate good intentions into sustainable results are all key success factors for collaborative supplier management. But excellence also requires the consistent application of business and behavioural practices that encourage openness and build trust between organisations and personnel on both sides of the relationship.

This is important because, just as customers segment their supply bases into different tiers, smart suppliers use strategic/key account management methodologies to rank their customers and make decisions about resource allocation and service. Customers that are difficult to work with and costly to serve are less likely to get preferential treatment when the supplier faces supply and production constraints, when they are deciding where to take their latest product development and innovation ideas, or when they are asked to invest in cost-reduction or quality improvement programmes.

At Johnson Controls (JCI), a tier-1 manufacturer of car seats and interiors, collaboration with preferred suppliers to improve processes and reduce costs is absolutely critical, explains Kelly Bysouth, Group Vice President, Global Procurement. The company has detailed should-cost models for all of the major commodities it buys, which means that suppliers have to be willing to work closely with JCI’s engineers, invest to close any gaps in raw material and labour costs, and fine-tune manufacturing techniques. This requires a high level of transparency and trust, and a long-term commitment to the relationship from both companies. “If you treat suppliers fairly, they’re going to want to do business with you,” Bysouth says.

‘CUSTOMER OF CHOICE’ CHARACTERISTICS

An SCM World report published last year identified 10 practices and behaviours that companies seeking to position themselves as a “customer of choice” for key suppliers should adopt5. They include:

• sharing information about business strategies, product and technology roadmaps, customer requirements and growth plans;

• delivering on promises and commitments made during negotiations and in post-contract discussions;

• aligning internal objectives and operating principles so that staff across different functions and business units are consistent in their dealings with a supplier;

• spending face time with supplier executives and other personnel to develop a better understanding of each other’s businesses and build stronger working relationships.

John Henke argues that it’s important for companies to understand the difference between “foundational” and “relational” characteristics. The former include practices like the timely settlement of invoices, efficient handling of payment issues, respect for suppliers’ confidential IP and the fair application of contractual terms and conditions. These are important issues that strategic suppliers expect to be handled well, but they don’t have anywhere near as great an impact on trust and collaboration as do relational characteristics.

22 Supplier Management Excellence Delivering Value Through Collaborative Relationships

Source: Planning Perspectives, Inc.

Factors that determine suppliers’ assessment of their business relationship with customers13 |

Supplier trust of buyer

Supplier perception of overall working relations with buyer

Buyer open and honest communication

Buyer communicates timely information

Buyer communicates adequate amounts of information

Buyer help to suppliers to reduce costs

Buyer help to suppliers to improve quality

Conflicting objectives across buyer functional areas (reverse measure)

Buyer late/excessive engineering changes (reverse measure)

Supplier involvement in buyer product development process

Supplier given flexibility to meet cost objectives

Buyer shares savings from supplier cost reduction proposals

Buyer rewards high-performing suppliers with new/cont’d business

Buyer concern for supplier profits when asking price reductions

Buyer covers sunk costs on cancelled or delayed programmes

Supplier opportunity to make acceptable return over long term

Working Relations

Index®

Buyer-supplier

relationship

Buyer

communication

Buyer help

Buyer

hindrance

Supplier

profit

opportunity

In his annual surveys of suppliers in the automotive industry and in other sectors, Henke asks managers directly involved in servicing customer relationships to rank them across 16 variables, ranging from the way buyers communicate, to their willingness to reward suppliers with new business or a share of cost savings from efficiency efforts (see Figure 13). These variables are aggregated to provide a measure of the quality of the working relations suppliers believe they have with particular customers.

Taking this a stage further, down to the individual purchasing agent the supplier deals with, Henke argues that there are 29 factors that influence the level of trust that exists in the relationship. These are divided into three groups: the buyer’s subject and commercial knowledge, their communication of key business information, and their personal working characteristics (see Figure 14 for the full list). Research shows a clear correlation between how well buyers are scored on these variables and how much the supplier trusts their company and, in turn, is willing to offer price concessions, a first look at technological advancements, and other benefits that go above and beyond their contractual obligations6.

March 2015 23

Knowledge

• Commercial knowledge

• Product/service technical knowledge

• Knowledge of application of product supplied

• Manufacturing process knowledge

• Knowledge of supplier products/services

• Knowledge of supplier capabilities

Communication

• Our strategic direction

• Our strategy for supplied products

• Our long-term overall purchasing strategy

• Importance of bringing innovation to us

• Supplier suggestion programme

• Contractual agreements with supplier

• Quality performance targets for products/services

• Delivery performance targets for products/services

• Cost performance targets for products/services

Working characteristics

• Accessibility

• Trustworthiness

• Integrity

• Timely resolution of issues

• Effective resolution of issues

• Working collaboratively with our internal stakeholders

• Concerned supplier’s business is successful

• Considers supplier’s commercial and financial interests

• Makes reliable commitments

• Respectful of salesperson and supplier

• Strives to reach equitable resolutions when differences arise

• Open and honest when communicating

• Open and transparent in sharing sufficient internal company information

• Shares information needed by supplier to meet our expectations

in a timely manner

Primary drivers of purchasing agent’s impact on supplier trust14 |

Source: Planning Perspectives, Inc.

COLLABORATIVE COMPETENCIES These personal qualities and practices are essential for strategic supplier management, confirms Bibiana Agostini, Global Flavours Procurement Lead at Mondelēz International. They are particularly important for the small number of suppliers involved in its STAR (Sustainable Transformational Advantaged Relationships) programme – a super-collaborative initiative aimed at driving competitive advantage through innovation and mutual growth. STAR was launched in Europe in 2014 with two packaging companies and a chocolate partner, and is in the process of being rolled out globally, with a further six suppliers presently under consideration for inclusion.

Openness to ideas, putting yourself in a supplier’s shoes and understanding its point of view, an ability to sell particular supplier capabilities internally, and always looking for ways to create mutual value are

characteristics of “the new generation of buyers”, says Agostini, who led the STAR programme last year and had previously been the first person to hold the procurement innovation manager role for the chocolate category at Mondelēz. Disney CPO Remko Van Hoek agrees, but notes that it’s much harder to train people to manage relationships than it is to teach them to run a rigorous strategic sourcing process. So developing and bringing people with the right mix of competencies into the procurement organisation may be necessary to develop supplier management excellence capabilities. Disney is currently focused on taking the many good examples it has of supplier collaboration and advancing and developing the key ingredients into a standard operating model across the company.

24 Supplier Management Excellence Delivering Value Through Collaborative Relationships

CONCLUSIONS & RECOMMENDATIONS

In the past, supplier management and SRM initiatives have often suffered from being seen, at best, as a “nice to have” add-on to standard sourcing methods; at worst, a naïve and irrelevant distraction that is quickly dropped when trading conditions get tougher and the pressure on procurement organisations to take out cost intensifies. This is unfortunate, because collaboration and strong working relationships with suppliers can actually deliver substantial cost benefits, as described at the beginning of this report.

However, as supply bases continue to consolidate and the pressure on companies to differentiate the capabilities of their entire supply networks, not just their own operations, increases, so their ability to get the very best from their suppliers will become paramount. Being perceived as a “customer of choice” by strategic supply partners will be a critical success factor in ensuring that a company consistently receives superior value compared to its competitors, whether in terms of day-to-day service or industry-defining innovations. This means that organisations need to strive for supplier management excellence. Those with class-leading positions today do a number of things to build their internal capabilities, foster trust and ensure that they are positioned as a customer of choice with their most important suppliers. They include the following:

• A clear and compelling value proposition and/or business case for SRM that is aligned with business and stakeholder objectives.

• Strong executive and functional engagement for what is regarded as an important business programme, not simply the latest procurement agenda.

• Governance mechanisms and processes that drive effective implementation, including designated relationship managers responsible for one or a small number of key suppliers.

• Balanced, two-way scorecards that track not only the supplier’s performance, but also whether the customer is living up to its own commitments. Data-rich KPIs are complemented by qualitative measures of relationship health.

• An explicit belief in mutual value creation and sharing of rewards over the long term, along with respect for the supplier’s cost to serve.

• Recognition that personal relationships and behaviours are critical for building and maintaining trust. Transparency, openness, honesty and communication skills are highly prized.

This is unquestionably a more time and resource-intensive method of engaging suppliers, and one that requires a broader set of competencies in the procurement organisation. Collaboration inevitably throws up plenty of challenges, and selection of the right partners is essential. But for companies that are able to navigate successfully to this new way of doing business, the benefits promise to be substantial.

March 2015 25

1 For a more detailed explanation of the findings, see the SCM World webinar “How strong supplier relations boost company profitability – the evidence”, Dr John Henke, Oakland University, 29 August 2014.

2 For further details, see the SCM World webinar “Sourcing innovation from suppliers”, Chris Holmes and Emmanuel Cambresy, Novartis, 28 November 2014.

3 An assessment of PLM tools for design collaboration can be found in the report Design for Profitability: Integrating Supply Chain and Product Development, SCM World, April 2014, pp23-25.

4 For more on this approach, see the SCM World webinar “Creating value collaboratively with suppliers”, Clive Heal, Roche, 22 July 2014.

5 Supplier Engagement in Innovation: Becoming the Customer of Choice, SCM World, February 2014.

6 SCM World webinar “The factors that determine supplier trust and relationship quality”, Dr John Henke, Oakland University, 26 January 2015.

REFERENCES

26 Supplier Management Excellence Delivering Value Through Collaborative Relationships

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