The Supplier Relationship Management Process RELATIONSHIP MANAGEMENT MANUFACTURING FLOW MANAGEMENT. The Critical Supply Chain Management Linkages Supply Chain Performance = …Authors:

Air Force Institute of TechnologyAir Force Institute of Technology

The Supplier Relationship The Supplier Relationship Management ProcessManagement Process

“There is a common denominator for item prices, reliability, order quantities, and lead times: suppliers. How DoD works with suppliers and how suppliers perform affect these four factors. This leads to supplier performance, management, and integration with DoD as the biggest potential opportunity to cut costs.”

Peltz et al., 2012. “Integrating the Department of Defense Supply Chain”, RAND technical report

Expected Benefits of SRMExpected Benefits of SRM

• Lower Price

• Shortened Lead Time

• Just-In-Time Resupply/Reduced Inventory

• Improved Quality/Reliability

• Access to Innovation

• Brand Recognition

• Others?

The Supply Chain The Supply Chain Management ProcessesManagement Processes

© Supply Chain Management Institute. Source: Supply Chain Management: Processes, Partnerships, Performance, p. 3.

Sup

ply

Cha

in M

anag

emen

t P

roce

sses

LogisticsMarketing

Finance

Tier 2Supplier

Consumer/End user

Manufacturer

Information Flow

Purchasing

Production

Tier 1Supplier Customer

R&D

PRODUCT FLOW

CUSTOMER RELATIONSHIP MANAGEMENT

PRODUCT DEVELOPMENT AND COMMERCIALIZATION

RETURNS MANAGEMENT

ORDER FULFILLMENT

DEMAND MANAGEMENT

CUSTOMER SERVICE MANAGEMENT

SUPPLIER RELATIONSHIP MANAGEMENT

MANUFACTURING FLOW MANAGEMENT

The Critical Supply Chain The Critical Supply Chain Management LinkagesManagement Linkages

Supply Chain Performance = Increase in Profit for A, B, C, and D

ManufacturerC

Retailer/End User

A

Wholesaler/Distributor

B

P&L forC as supplier

P&L forB as supplier

Revenue- Cost Profit


SupplierD

P&L forA as customer


P&L forB as customer


P&L forC as customer


Total Cost Reportfor D as supplier

Cost = Profit

CRM

SRMSRMSRM

CRMCRM


Relationships with major suppliers are corporately managed as partnerships while purchase order transactions become simplified and integrated with the supply process.

SRM: Required BehaviorsSRM: Required Behaviors

Product and service agreements are developed and managed with key suppliers and segments of non-key suppliers.

Teams work with suppliers to reduce costs and improve service.

Goal is to improve the profitability of both the focus firm and the suppliers.

Purchase order transactions are integrated with the supply process to improve productivity and all areas of supplier performance.

© Supply Chain Management Institute. Source: Supply Chain Management: Processes, Partnerships, Performance.

Process Interfaces

Strategic Sub-Processes Operational Sub-Processes

Supplier Relationship Supplier Relationship ManagementManagement

Customer Relationship Management

Customer Service Management

Demand Management

Order Fulfillment

Manufacturing Flow Management

Product Development & Commercialization

Returns Management

Review Corporate, Marketing, Manufacturing and Sourcing Strategies

Identify Criteriafor Segmenting Suppliers

Provide Guidelines for the Degree of Customization in the Product and Service Agreement

Develop Framework of Metrics

Develop Guidelines for Sharing Process Improvement Benefits with Suppliers

Segment Suppliers

Prepare the Supplier/Segment Management Team

Internally Review the Supplier/Supplier Segment

Identify Opportunities with the Suppliers

Develop the Product and ServiceAgreement and Communication Plan

Measure Performance and Generate Supplier Cost/Profitability Reports

Implement the Product and Service Agreement

© Supply Chain Management Institute. Source: Supply Chain Management: Processes, Partnerships, Performance, p. 56

The Strategic Supplier Relationship The Strategic Supplier Relationship Management ProcessManagement Process

Customer Relationship Management

Strategic Sub-ProcessesProcess Interfaces Activities

Customer Service Management

Demand Management

Order Fulfillment

Manufacturing Flow Management

Product Development & Commercialization

Returns Management

Review Corporate, Marketing, Manufacturing and Sourcing Strategies

Identify Criteria for Segmenting Suppliers

Provide Guidelines for the Degree of Customization in the Product and Service Agreement

Develop Framework of Metrics

Develop Guidelines for Sharing Process Improvement Benefits with Suppliers

Outline metrics of interest Relate metrics to the supplier’s impact on

profitability and the profitability for the supplier

Identify product & service components that are key to the organization’s success now and in the future

Profitability / Growth / Stability Technology Capacity Innovation Quality Volume purchased Criticality / service level required Sophistication / Compatibility

Consider quality/cost implications of various differentiation alternatives

Select boundaries for degree of differentiation

Outline options for sharing the benefits of process improvements


Strategic Sub-Process #1Strategic Sub-Process #1

Review Corporate, Marketing, Manufacturing Review Corporate, Marketing, Manufacturing and Sourcing Strategiesand Sourcing Strategies

• Identify product and service components that are key to the organization’s success now and in the future.



Identify Criteria for Segmenting SuppliersIdentify Criteria for Segmenting Suppliers

Potential criteria include:• Profitability/growth/stability• Technology• Capacity• Innovation • Quality• Volume purchased • Criticality/service level required • Sophistication/compatibility


Comparing SuppliersComparing Suppliers

Bottlenecks

Cooking Oil

Strategic

ChickenBeefPromotional Sauces

Non-Critical

Straws

Leverage

CupsNapkins

Low Volume of Spend High

Low

C

ompl

exity

for

Wen

dy’s

H

igh

© Supply Chain Management Institute. Source: Wendy’s International, as reported in Supply Chain Management: Processes, Partnerships, Performance, p. 60.

Supplier Segmentation MatrixSupplier Segmentation Matrix

Factors to consider:

• Product• Service• Quality• Continuity• Capacity• Complexity of

specifications• Social responsibility• Supplier’s relationship

with competitors• Financial stability• Industry dynamics• Environmental issues• Availability of suitable

suppliers• Supplier also a customer

Factors to consider:• Innovation and technology• Intellectual property• Supply chain process integration• Minority/women-owned business

• Global presence• Competitive pricing• Cost management• Volume/spend

• Compatibility / strategic alignment• Access to assets and capabilities• Impact to cost, quality, delivery, profitability• Our attractiveness as a customer

Sup

ply

Ris

k

Potential to Add Value

Lo

w

Low High

Hig

h StrategicBottleneck

LeverageRoutineCharacteristics• Best value providers• Respond to price movement• Several suppliers• Potential disruption in replacement• Some differentiation in specifications

Characteristics• Low potential to add value• Many suppliers• Standard specifications• Ease of replacement• Competitive pressure• Simple market management

Characteristics• Low potential to add value• Few suppliers• Quality, service issues• Regulatory requirements• Non-standard specifications• Likely to stop production if not

available

Characteristics• Long-term profitable growth• Critical to competitive advantage• Small number of suppliers• Difficulty of replacement• Unique specifications• Focus on development• Leading edge processes used

© Supply Chain Management Institute. Source: The Coca-Cola Company, as reported in Supply Chain Management: Processes, Partnerships, Performance, p. 61.

Business ObjectivesBusiness Objectives by Segment by Segment

StrategicBottleneck

LeverageRoutine

Potential to Add ValueLow High

Sup

ply

Ris

kLo

wH

igh

Business Objectives

• Remove risk and vulnerability

• Ensure supply security and quality

• Avoid any potential disruptions

Business Objectives

• Manage risk and vulnerability

• Maximize supply performance

• Develop preferential relationships

• Have close supplier management

Business Objectives

• Remove unnecessary complexity

• Free up time for other work

Business Objectives

• Obtain major cost savings

• Maximize value

• Create and harness market competition

Result: Supply quality and continuity

Result: Profitable long-term growth for both parties

Result: Simplicity and efficiency Result: Cost savings and value maximization


Relationship Implication Relationship Implication Guidelines by SegmentGuidelines by Segment

Resources Director or senior level leadership Non-dedicated relationship manager Semi-annual business review meetings Dedicated quality or technical resources

Strategic Planning

Semi-annual business planning Share forecasts and demand plans

Customer / Market

Effort to change specifications or develop substitutes to reduce supply risk

Measurement / Knowledge

Standard supplier metrics (one-way)

Some strategic information sharing

Resources Tactical management resources

Strategic Planning

Transactional focus to planning

Customer / Market

May or may not be opportunities for product or service development


Transactional supplier metrics Commercial information sharing

Resources VP up to Executive level leadership Dedicated relationship manager Quarterly reviews; top-to-top meetings On-site or dedicated supplier resources

Strategic Planning

Extensive business planning Direct linkage to S&OP process

Customer / Market

Involvement in new product development Knowledge of our business strategy


Customized supplier metrics (two-way) Use Partnership Model to align strategies

Resources Director level leadership Non-dedicated relationship manager Use cross-functional commodity councils Annual business review meetings

Strategic Planning

Annual business planning Standard volume forecasts

Customer / Market

May or may not be opportunities for product development


Standard supplier metrics (one-way) Some strategic information sharing

StrategicBottleneck

LeverageTactical

Potential to Add ValueLow High

Sup

ply

Ris

kL

ow

Hig

h



Provide Guidelines for the DegreeProvide Guidelines for the Degree of Customization in of Customization in

the Product and Service Agreementthe Product and Service Agreement

• Consider quality/cost implications of various differentiation alternatives.

• Select boundaries for degree of differentiation.



Develop Framework of Metrics Develop Framework of Metrics

• Outline metrics of interest.

• Relate metrics to the supplier’s impact on profitability and the profitability for the supplier.


Improve manufacturing processes

%

Net Profit

Profit from Operations

Taxes

TotalExpenses

Gross Margin

Cost ofCapital

Inventory

TotalAssets

CurrentAssets

FixedAssets

OtherCurrent Assets

–

–

+

+

Sales

EconomicValueAdded

=

COGS

–

–

Capital Charge


How SRM Affects EVAHow SRM Affects EVA®®

Increase product quality

Improved order fill rates

Reduce cost of direct materialImprove plant productivity

Reduce purchased goods inventories Reduce work in process inventories

Reduce finished goods inventories

Improve asset utilization and rationalization

Improve investment planning and deployment

Increase productivityReduce freight and indirect labor/warehousing costs

Optimize physical network/facilitiesReduce order management costs

Reduce overhead/management/admin. costsReduce HR costs/improve effectiveness

Reduce information systems costs

SRM Value DriversSRM Value Drivers

• Complete receipts

• Damage

• Late delivery

• Mislabeling

• Invoice errors

• Packaging problems

• Material specifications not met

• Lack of information from vendor—shipment date

• Buyer productivity

• Percent certified suppliers

• Percent of suppliers in long-term relationships

• Quantity errors

• Backorders

• Order cycle time

• Pricing errors

• Wrong item received

• Price and quality

© Supply Chain Management Institute.

Components of Total CostsComponents of Total Costs

• Acquisition Costs• Purchasing price

• Quality costs

• Financing costs

• Ownership Costs• Downtime costs

• Cycle time costs

• Post-Ownership Costs• Environmental costs

• Product liability costs

• Planning costs

• Taxes

• Transportation costs

• Inventory carrying costs

• Conversion costs

• Warehousing costs

• Returns and warranty costs

• Customer dissatisfaction costs

© Supply Chain Management Institute.


Develop Guidelines for Sharing Process Develop Guidelines for Sharing Process Improvement Benefits with SuppliersImprovement Benefits with Suppliers

• Outline options for sharing the benefits of process improvements.


ConclusionsConclusions

• SRM provides the structure for how relationships with suppliers are developed and maintained.

• The PSA provides the “rules of engagement” and sets expectations for both sides of the relationship.

• Relationship performance should be measured by the impact it has on each firm’s profitability.


Documents

The Supplier Relationship Management Process RELATIONSHIP MANAGEMENT MANUFACTURING FLOW MANAGEMENT. The Critical Supply Chain Management Linkages Supply Chain Performance = …Authors: