You’ve tied the knot; is it effective?
Today, procurement and supply chain managers focus more time and energy on managing sole source suppliers than I’ve ever seen in my 30+ years in the profession. Typically these suppliers provide a technological edge, are locked in by regulatory requirements or are the sole survivor of a massive industry consolidation. Many supply chain practitioners aren’t effectively managing these supplier relationships that are so critical to their business’ success. As a result of the mismanagement, the supplier exercises a strong influence on the business as a whole, has a tremendous amount of power in the business, maximizes revenue and profit and takes advantage of the fragmentation of procurement and supply chain managers across a global business. The key to survival is effective supplier relationship management; as Joe Payne, in his MyPurchasingCenter.com post last month says “the future of procurement is SRM.”
Many clients have asked me to develop development programs for their teams to better manage sole sources of supply. During my 23 year consulting career, I have recorded a commonality among the companies managing sole sources of supply, which I’ve listed below.
Characteristics of Ineffective Sole Source Supplier Management
- No formal rigid performance metrics to drive continuous improvement that have been agreed by the business
- Fear of upsetting the supplier
- Fragmented management among the technical, executive, marketing, operations and supply teams with limited leadership
- No defined process, defined leader or coordinated cross-functional approach
- Supplier holds the power in the business relationship and defines the value delivered to the customer
- Rarely budget or dedicate teams to focus on generating cost and value opportunities with the sole source suppliers
- Typically the relationship with the sole source has tension and is somewhat adversarial
- Create a vacuum of leadership, causing the relationship to be technically driven verses commercially driven
- Focus on price rather than value extraction
- Develop tactical contracts with remedies for failure, rather than a principle-based agreement focusing on the relationship and formulas for success
While there is a great deal of challenge managing sole source suppliers, companies can go a long way to extend value delivery through strategic rather than tactical relationship management. It would take a tremendous cost and effort to strategically manage all suppliers; the more strategic a supplier is, the more of a company’s resource it will consume. Therefore, it’s critical that a company focus its efforts on the highly strategic suppliers.
To become effective with strategic supplier relationship management:
- Renegotiate using the principles that will drive the relationship in the future. (My wife, @SourcingChick, uses this tip: contracts tend to contain penalties for non-compliance, while principles provide the framework for success. Maybe that’s why we’re still married after working together for so many years.) Some examples are:
- Speed to market
- Speed of response
- Joint customer and supply chain integration
- Principles around cost transparency, margins, and investments
- Nominate a relationship leader and build a cross functional team that accommodates the technical, commercial and supply chain integration processes.
- Create joint value targets and incentives for both sides.
- Develop closer business integration.
With the amount of acquisitions and mergers, companies exiting from products and markets and the continuation of true globalization, supplier relationships will require close management and integration. Training and development programs have moved from functional training to cross-business training. I am hoping by sharing my thoughts on sole source management that companies will start to get a vision for the future and think about how to prepare their teams.
The Future is Now