Strategic SRM Programs Can Save Millions
By: Michele Flynn, President, EMS Printed in: Women’s Business Boston
If someone told you that you could recapture 20 – 30% of what you spend on outside contracts annually, would you be interested to know how? For the last twenty years organizations have focused on the processes, tools, and philosophy of procuring goods and services needed by their companies at the best total delivered cost. This process, called “sourcing,” has been refined to the point of a well-understood science. Successful sourcing efforts, which predict savings of hundreds of thousands or even millions of dollars, fail to deliver as promised because organizations do not manage the relationships with their suppliers effectively over the life of the contract. Supplier Relationship Management (SRM) is a crucial part of realizing the full value of supplier contracts.
Is this a big deal? In a 2004 survey of the most frequent causes of outsourcing failures conducted by the Outsourcing Center, sixty-two percent of all outsourcing failures were attributed to poor relationship management. Only eight percent of failures were attributed to poor performance by the supplier. In 2006 Expense Management Solutions conducted a survey to quantify the impact of SRM strategies and tools. Respondents cited losing an average of 20% to 30% of the value of their outsourcing contracts because of inconsistent or ineffective supplier management. Given the total value of goods and services that are provided by third parties today, this translates to a loss of billions of dollars. How can you ensure that you capture the value of your relationships? Implement an effective SRM strategy.
An SRM program ensures alignment of supplier performance with organizational goals, and continuously improves the value of supplier relationships. SRM enables both organizations to strategically plan for the future and handle changing requirements, effectively communicate, mitigate risks, and promote transparency. The contract, which documents your expectations through detailed specifications and service level agreements, is the foundation for your program upon which you can build the various layers of management tools and processes to ensure success.
It is essential to develop a framework to support ongoing management - a series of performance measures and reporting requirements that will address the monthly, quarterly and annual activities to track in order to assess performance. This framework will be supported by specific procedures and methodologies to ensure the data is available, timely and accurate. A good SRM framework includes supplier segmentation, demand management, market management, and performance management, and a good place to begin is with an internal assessment of your SRM capabilities in each of these areas.
Supplier Segmentation:
Supplier segmentation aligns allocation of limited resources with the strategic goals of your organization. There are a variety of time-tested approaches to SRM. An excellent process for one relationship may be completely wrong for another. Companies that try to apply a consistent approach across their entire spectrum of procurement activities often find that this “one size fits all” approach can be the source of significant problems. For example, management of a critical supplier for drug testing services requires a focus on quality, consistency, and accountability. You may want to negotiate a joint customer-supplier oversight board and assign a dedicated relationship manager to oversee the contract. However, the same attention to managing a supplier of standard medical equipment results in a misalignment of strategic goals and corporate resources.
Moving beyond a process-oriented approach to a strategically aligned procurement strategy, you begin to develop relationships that make sense. You create a roadmap for the client/supplier relationship that clarifies roles, responsibilities, actions and expectations at every point of contact.
Demand Management:
Effective management of suppliers requires a solid understanding of the needs that the supplier is expected to fulfill and their ability to manage those “demands”. What have historical buying patterns been? How much volume is purchased over a given timeframe? What are the drivers for the ebbs and flows of that volume? What have you historically paid for the activity? And, what are the pricing triggers, drivers and breakpoints?
Demand management also involves internal customer management. Are there behaviors that occur within the buying organization that drive unit costs higher and could be mitigated? How do your clients perceive the supplier? what is driving those perceptions? What are the client’s hot points that need resolution?
Market Management:
Market management is about “proactively” managing supplier relationships. An in-depth understanding of the marketplace enables you to establish aggressive yet achievable performance goals. Solid market knowledge includes an understanding of the supplier’s competition, the supplier’s financial composition, the market’s pricing structure, the desired products and services and the ability to continuously stay on top of trends and changes in the market.
A supplier manager can serve as a conduit for market information - a qualified translator of business needs to the supplier, and manager of expectations to ensure the client is reasonable relative to the realities of the market and the client’s own limitations. Often the most valuable supplier managers have had experience on the supplier’s side of the table and can apply that experience to developing win/win relationships long-term.
Performance Management:
Performance management is a set of processes and tools used to track and measure supplier performance against agreed upon service levels. A strong performance management program should include:
- Clear, measurable service expectations that articulate the expected results.
- Key Performance Indicators (KPIs) that define how you will measure performance.
- A schedule for ongoing management and oversight.
- A compensation-at-risk component that ties the supplier’s compensation to their performance.
- A weighted scorecard that defines how the at-risk-fee will be calculated.
All aspects of the program should link together so there is no question about what service levels are expected, how and when they will be measured, or what their financial impact will be. One of the most common pitfalls of performance management programs is that they are not executed!
The supplier is not the only party who needs to be held accountable. Measure your company’s performance as well. Are you holding up your end of the deal? Do you pay on time? Do you cancel orders last minute? Are you accessible to the supplier? Do you ding them unnecessarily on scorecards? If the supplier lives up to their end of the agreement and your company does not, you risk negatively impacting a substantial portion of the deal.
Supplier management does not have to be complex. It does need to be formalized. You and your supplier will have a much easier time determining the success of the relationship if “success” is clearly defined. A strong supplier relationship management program is proactive, collaborative, consistent and powerful. Implemented effectively it strengthens the relationship and ensures achievement of originally defined objectives.
To access our FREE SRM Self Assessment, click here. You will receive instant feedback and advice on how to begin to improve your SRM capabilities.
