The Essentials of Supplier Relationship Management

Supplier relationship management is the best investment a company can make in design and procurement. Here's what you need to know before you invest.

In virtually every industry, the role of the supplier has radically expanded over the past decade. Today there are cases where almost every aspect of product development and operations has been outsourced to a new breed of suppliers. Suppliers have gone from simply being invited to the design team meetings to becoming the design team.


The role of the supplier has also been changed by the need for assured supply. Greater outsourcing, supply chain management and vendor-managed inventories have all increased the risk that a critical component may not be available when it comes time to make an original equipment manufacturer's (OEM) shipment. When this happens to a major product line at the end of a quarter, we often read about it in the newspapers, as the supplier-short shipment is cited as the reason the company missed its quarter.


The result is a fundamental power shift in the world of manufacturing. Suppliers are no longer simply supplying, they are critical players in the success of the business. For a growing list of features in OEM products, suppliers now own the intellectual capital that goes into creating the products. A few examples of this are computer monitors, automotive braking systems and passenger seating. If a supplier fails to develop and deliver competitive features, the OEM product is no longer competitive. If the supplier doesn't allocate adequate supply, OEMs can't ship and take revenue for their products.


The traditional systems that have been used for product development and procurement don't work anymore. Meanwhile, the potential downside cost and risk associated with managing supplier relationships has skyrocketed. These factors fuel the requirements for a fresh approach to managing relationships with suppliers.


This trend toward more outsourcing and greater supplier value has also changed the economics of today's corporation. More and more companies have purchase spend exceeding 50 percent of their top-line revenue. There are also growing concerns over the increased risk associated with aggressive outsourcing. In the old days, supply risk could be offset through split awards and effective management of second sources, but the trend toward suppliers designing, building and even directly shipping complete subsystems has nearly eliminated the second source option. Any time a supplier falls short on delivery or doesn't get a critical subsystem developed in time for a new product's launch, the top line suffers. This makes supplier relationship management, or SRM, the best investment a company can make in design and procurement. It is the only system that can simultaneously reduce cost and risk.


The Challenge of Strategic Sourcing


As the role of the supplier has expanded, a new business vocation has emerged: strategic sourcing. The wizards of strategic sourcing are the commodity managers who must make a plethora of supply decisions every day - as well as rethink all of the supply decisions that have been made in the past - and immediately act on these new decisions. Unfortunately, the facts associated with strategic sourcing have historically been impossible to collect on a timely basis.


The following is a list of essential pieces in the strategic sourcing pie and why not aggregating and analyzing them can become costly:


·        Spend Aggregation - Where is spend going across the entire enterprise, what is being spent with each supplier and how much is being spent on each commodity? Although these are often the most fundamental facts a company uses for strategic sourcing, they're seldom easy to collect. Companies have multiple procurement systems (or instances of the same system), multiple supplier masters and inconsistent commodity coding schemes. Spend aggregation facts are often the most powerful negotiating tool a buyer can have. Buyers can knock 15 percent off the cost of purchases simply by understanding their true overall spend on a given commodity and using that information to cut a better contract with a preferred supplier.


·        Material Consolidation - How many 3-inch blue widgets do we buy, and do we need all of these varieties? What if we selected a preferred 3-inch blue widget and found a way to use it for all 3-inch blue widget requirements? The challenge is to establish clean, rich content about what a company buys and then analyze functional equivalents to determine preferred varieties. Studies have shown that duplicate parts cost at least $10,000 a year to maintain. One major computer company successfully reduced the variety of parts it purchased from 540,000 to 280,000 through this kind of material consolidation program, saving hundreds of millions of dollars in the process.


·        Demand and Forecast Deviation - From a negotiation perspective, it's useful to understand where you've been spending your money in the past, but the real key is to understand where you'll be spending your money in the future, because it is never the same. The more variability exists in your business, the less likely it is that you will buy the same things from the same suppliers in the future. When this happens, you invariably pay more for the volumes that increased and you fail to live up to your commitments for the volumes that decrease, missing out on the lower unit prices you negotiated in the past.


·        New Product Design Changes - Product design teams regularly come up with something new that must be sourced before a new product can go into production. That often means introducing a new supplier. If the sourcing team identifies these new requirements in time, they can identify potential sources, negotiate contracts and secure volume materials. If they find out too late, the new product can't ship and everyone scrambles to rush in high-priced materials or design out the hard-to-source parts.


·        Contract Performance - Every good-sized company has hundreds to thousands of contracts in place with its suppliers. Occasionally, companies actually buy according to their contracts. Most of the time they do not. Demand changes, engineering changes and supplier short shipments often result in contracts failing to meet negotiated volumes. The actual transactions that are booked against a contract must then be monitored and alerts must be established to flag significant anomalies. This becomes very difficult when companies have thousands of contracts and dozens of procurement systems with inconsistent content, item and supplier masters. (For more information on contract performance, see "Digging Out from the Contract Clutter",


·        Supplier Performance - Even when all of the right contracts are in place and demand forecasts are accurate, suppliers can still fail to deliver, severely damaging your business. When it happens frequently, you have a bad supplier and you need to demand improvement or move your business to a higher performing supplier. The same is true for quality. You also need to identify the suppliers who are providing more than just on-time delivery and steer more business their way.


·        Supplier Market Opportunities - To understand alternate sourcing opportunities in the outside market, you need to be able to quickly prepare a request for information (RFI) package and test the supply markets. It often requires sophisticated what-if analysis to understand the total cost of switching your spend from an existing (underperforming) supplier to a new source.


The basic facts required to source strategically are diverse and often difficult to collect in a large, multi-division enterprise. Because of this, they are seldom available and never current. Armed with fragmented and out-of-date information, buyers must strive to negotiate the right contracts at the best terms possible and hope nothing goes wrong.


The Power of a Single View

As SRM solutions were developed, it became clear that the workflows that create, execute and sustain optimal supplier relationships are integrally related to one another. They cross the traditional boundaries of design, procurement and manufacturing and extend out into the supplier's environment. They also cross the physical barriers of multiple divisions, plants, purchasing and design centers. In the existing systems that managed all of the supplier information and transactions, there were a very large number of disparate systems that did not talk to one another. There was also duplicate and inconsistent data across these systems. Getting a complete view of a part, a supplier, or a bill of material for outsourced parts required sifting through fragmented data in a number of different types of legacy systems.


What is needed is a single view of all of the processes that face the supplier. This single view must be able to cut across functional disciplines and cross physical barriers, as well. At the same time, any new solution has to leverage all of the legacy systems that are already in place.


But are SRM systems really worth investing in? Well, there are some significant benefits. First, SRM provides the ability to strategically manage all aspects of the supplier relationship to reduce the cost and risk associated with the kind of outsourcing practices seen today. SRM tools help companies create, execute and sustain their sourcing strategy.


The Supplier Must Win, Too!


SRM solutions can also help create incentives for your suppliers. A number of OEM-centric initiatives designed to support extended outsourcing have failed for a very simple reason - there was no win for suppliers. Suppliers often operate on narrow margins and face fierce competition. They struggle to differentiate themselves and are unwilling to invest in something that commoditizes their offerings, such as auctioning.


Looking at SRM from the supplier perspective, there are three areas where SRM could provide benefits:


 ·        Forward Visibility - When the forecast they've been building against is no longer valid, suppliers are often the last to know. Typically, the lag time between the OEM knowing the real demand and the supplier being notified is 60 to 70 days. During this lag time, two very bad things are happening. First, the supplier is building things the OEM doesn't need and probably won't take delivery on. The cost of erroneous production will have to be eaten by someone. The other bad thing that happens is that the supplier is probably not building what the OEM needs to capture demand for truly hot sellers. This will cost revenue and market share.


·        Design Wins - In the world of direct material, a supplier's sales success is often determined by the OEM's design team - long before a contract is negotiated. This happens when a supplier's parts, materials or subsystems get designed into a new product. By guiding an OEM design team to use preferred parts from preferred suppliers, SRM closes the loop with the suppliers who provide the most value.


·        Content Syndication - One of the lessons learned during the B2B exchange craze was that suppliers cannot publish custom catalogs for every customer or exchange that they do business with. All but the very largest suppliers lack the resources and technical know-how to pull it off. What suppliers need is the ability to publish once and syndicate their catalog across all of their trading parties. They can still provide key customers with filtered catalogs and private pricing, but the basic content is only published and maintained once.


SRM is Here to Stay


Supplier relationships have become just as critical as customer relationships, but they are often far more complex. The nature of the cross-functional, cross-divisional, cross-company workflows involved in SRM requires a new architecture built from the ground up and focused on SRM.