Tag Archives: supplier relationship management

Supplier Conference—Success or Failure? It’s all in the planning

divorce-separation

5 tips to maximize value from supplier conferences

Do you hold supplier conferences? Did they deliver value or not? I’ve participated in many supplier conferences in my procurement and consulting career. When done well, the buying company and the supplier commit to collaboration to innovate, improve value, drive out cost and improve productivity. When done poorly, suppliers walk away viewing your firm a nuisance and commit to finding a replacement customer who is more collaborative and offers better opportunities.

The days of bringing in suppliers as a group to demand lower prices, offering nothing in return, should be long gone. Hard core tactical approaches leave a poor impression and fail to deliver any value. I wish I could say we’re all smarter than that today, but there are many procurement practitioners from Millennials through Baby Boomers who pass along advice like “always get at least three quotes, let the supplier know you’re getting quotes and will go with the lowest to get competitive pricing” and “tell the supplier that you want a very high quantity, once you get the price, ask them how much for a lower quantity and say you’re getting it cheaper from their competitor.” Sadly, many managers still see suppliers as a source of incremental profit. Among the mistakes companies make at supplier conferences are:

  • Ask for cost improvement ideas, but lack the capability to test, follow up and provide feedback to suppliers
  • Make demands on sole-source, strategic suppliers when they have no leverage
  • Fail to include suppliers in the messaging as a valuable stakeholder
  • Make commitments with no follow-through

The most effective supplier conference I’ve ever participated in was with a retail company who ran the event like a shareholder meeting. The CEO provided the state of the business and the forward strategy. The CFO made a case for while the company is profitable, the profit is significantly less than in prior years. (The company was recovering from a bankruptcy and supplier engagement and support was a critical factor.) Marketing displayed the new products and fashion trends. Procurement presented the need for innovation and cost savings with a plan to work with each supplier that included a follow-up process. The suppliers were energized, focused and, over the next year, delivered on agreed goals to increase value delivery. Unfortunately, this is the exception to the way most supplier conferences are conducted.

5 Tips for Maximizing Value from Supplier Conferences

  1. Define the cost, innovation and value requirements during the event planning
  2. Include a company Sr. Management and a business overview
  3. Create 2 events
    1. One for tactical/leverage suppliers
    2. One for more strategic suppliers
  4. Assure that your firm can handle suggestions and have a quick feedback mechanism
  5. Follow up with every supplier to assure compliance

If done well, the meetings are well-planned and create an inclusive, collaborative environment that will drive your firm to be a customer of choice.

If done poorly, your firm will likely be considered a nuisance and targeted for replacement when a better opportunity comes along.

Which customer are you—core or nuisance?

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Suppliers financing customers: where is the line drawn on Corporate Social Responsibility?

money wrestling

This week I read the New York Times news item “SYDNEY — Rio Tinto, one of the world’s  biggest miners has doubled its payment terms in a move that will force embattled suppliers to wait up to 90 days to be paid.” Can these suppliers survive? Update: On April 14 Rio Tinto announced it is dropping plans to extend supplier payment terms.

This is a great example of leveraging suppliers who, themselves, have invested in facilities, employees and inventories in the most remote corners of the globe just to support the customer. In an article The Unsuitability of Extended Payment Terms, Raz Godelink highlights that major food producers like Mondelez, Mars, Kellogg’s, Church & Dwight, Anheuser-Busch In Bev and Heinz extend payments to suppliers from 90 to 120 days. In many cases the suppliers to the food industry are agricultural industries surviving crop-year to crop-year. This industry requires capital to acquire the seed, fertilizer and equipment, which is all at risk in volatile commodity markets.

Stephanie Strom’s NYT article Big Companies Pay Later Squeezing Their Suppliers points out that companies like Mondelez are using the cash for a stock buyback initiative. Kellogg’s is financing a restructuring project and P&G has added significantly to its cash flow. The end result is a cash poor supply chain that cannot withstand interest rate hikes or another financial crisis. We have been fortunate the past few years that money has been virtually free, enabling this practice. In the long term, I believe it’s not sustainable and many of the smaller suppliers in many supply chains will be in trouble should conditions change.

I have to admit, reading those articles caused me to flash back to that July day during the last recession when I was on the phone with a Fortune 500 customer who hadn’t paid invoices dating as far back as November for work done according to the contract. I couldn’t tell my employees that they I couldn’t pay them because the customer hadn’t paid, so I maxed out the business line of credit and borrowed the max on my house to pay salaries and bills for the business. On that July day, the customer’s project manager was telling me that I would be paid the following week if I would discount the fees owed. I had little choice but grant a discount at the time—credit was extremely tight and we were owed a lot of money. By the way, the payment terms for this client were 90 days, plus I had 3 other clients who had moved to 90 day terms, so having a customer stretch payments as much as 180 days was a true crisis. I’ve never forgotten this $1 billion+ company using my small business as the bank.

Companies often cite Corporate Social Responsibility as a key part of a sustainability program. I believe cash-starving the suppliers who extend a company’s capability is irresponsible. It starves investment, innovation, growth and quality; how sustainable is that?

Are you requiring suppliers to act like a bank?

Role of the CPO: Designing and implementing an integrated supply chain

boston

There is little doubt that our customers and CEOs are demanding more value from our suppliers and supply chains. Andrew Bartolini, Managing Partner and Chief Research Officer at Ardent Partners, has found “In 2016, Chief Procurement Officers (CPOs) will seek to extract and deliver more value from their departments than ever before as they attempt to stretch the limits of their organizations while also maximizing the relationships they have developed with suppliers and internal stakeholders.” It’s an understatement to say that this is a difficult challenge.

CPOs are now expected to design and build a network of suppliers that align to the company’s business objectives, provide innovation, speed to market, agility, flexibility and complexity reduction. To do this, suppliers must be open to integrate business systems with automated source to pay capability, make investments and meet robust performance standards. This is a very different relationship than the traditional model of leveraging suppliers for price. Savvy leaders know that suppliers can only impact margins for the short term. They need healthy margins to reinvest, innovate and compete. The real opportunity is to impact the hidden costs often overlooked by inefficiency, productivity, waste, which can be addressed through the supply chain integration.

Clearly, the days of managing just at the tier 1 level are over and the requirement to architect and design a lean, competitive, well-financed network of suppliers must become a core competency of CPOs today. This requires a relational skillset, strong influencing skills, trust, full transparency and the development of a strong, well-defined and coordinated supplier relationship management program.

The CPO Rising 2016 summit March 29-30 provides an excellent opportunity to network and learn more about how CPOs can deliver the value expectations they face. I hope to see you there.

Are you up to the challenge?

The Secret to Capturing a Market—How will you get there?

capture a market

With the PowerBall frenzy of a $1.5+ billion prize, many of us are thinking of what we would do with the winnings. While winning this big prize will certainly give one leverage with the swarms of financial advisors and others seeking investment, even those of us who enjoy planning our investments and playing the market will need to rely on suppliers to manage and meet our goals if we win the big prize. If you want to break into a market or develop that next “can’t live without it” product or make life better for a community, you need to rely on suppliers. The kind of customer you are determines your outcome. For businesses, regardless of size, the value you need to capture a market doesn’t just come from inside the organization.

Many of us have been exposed to a management philosophy that suppliers are a source of incremental profit. Nothing can be further from the truth; a continuous focus on reducing price gives a false sense of security as companies meet short term cost reduction goals. Many buyers are happy that their suppliers are reducing margins, but lose sight of the fact that suppliers need sustainable margins to reinvest in the business, innovate, automate and drive to be the low cost producers. The astute business person knows that the larger opportunity for their company is in the value from the suppliers.

Value can come in many forms and the opportunities that arise truly provide sourcing professionals, and the organizations they represent, competitive advantage. A few examples are:

  • Achieving Speed to Market
  • Supplier investment
  • Product improvement
  • Process improvement
  • Complexity reduction
  • Systems integration
  • Shared risk
  • Shared resources
  • Market intelligence
  • Lowest cost manufacturing
  • Financing Capital
  • Innovation
  • Market exclusivity
  • Joint design

The skillset required to capture the value opportunity goes far beyond the tactical skills required when applying competitive leverage and price pressure. It requires strategic thinking, planning and execution skills. It also requires team members who are trustworthy, reliable and analytical with strong influencing skills.

Whether your organization is first in a market or captures a market with innovation and exclusive rights to technology, these benefits far outweigh the few dollars captured in the short term with price reduction. Steve Jobs understood the value proposition when Apple launched the first smart phone; do you think suppliers viewed Apple as a good customer?

Price or value? How you reach new heights is your choice!

What is the Right Supplier Relationship?

AngerConflict

I’m asked often to identify the correct relationship that companies should have with suppliers. Many clients are surprised at the answer, which is the minimum relationship that will enable you to meet your business objectives. If you’ve read my blogs or heard me speak, you may now be asking “is this the same Bill Michels who says companies need suppliers for innovation and that the best customers get the best ideas?”

There’s a wide range of relationships. I classify suppliers as competitive market, proven suppliers, performance driven suppliers and strategic alliance partners. As a supplier moves up the relationship curve, the intensity of resources required to manage the relationship significantly increases. Logically, it’s impossible to drive all of your supplier relationships into the strategic alliance classification. Strategic alliances normally involve shared capital, objectives, resources, business information and equity. The partners are interdependent and have significant synergy which enables them to achieve competitive market advantage by the strategic linkage. The strategic alliance is a rare relationship for many companies and one that is not easy to achieve. Although many companies believe they operate with strategic alliances and refer to their suppliers as partners, they actually have competitive market and proven relationships.

The second part of the supplier relationship question posed to me is “how can I operate with both a business and personal relationship?” The business commercial relationship must always be the dominant relationship. The personal relationship is helpful in achieving preferential treatment as the customer of choice.

SRM

The key to developing the right supplier relationship is to move beyond a price focus to a value focus. Value can be defined as:

  • Speed to market
  • Innovation
  • Investment
  • Product improvement
  • Process improvement
  • Complexity reduction
  • Systems integration
  • Shared risk
  • Shared rewards
  • Aligned business objectives
  • Shared resources
  • Market intelligence
  • Finance
  • Performance
  • Waste reduction
  • Redesigned products and specifications
  • Lowest cost producer

While it is unfortunate that some companies and industries remain focused on tactical strategies which are short term price-based. To survive in the future, supplier relationships must be mapped, managed and optimized for value delivery.

What is the minimum relationship that will enable you to meet your business objectives?
Sometimes it’s a true strategic alliance, but sometimes it should be arm’s length.

What gets measured, gets managed

 

Gas full meter

Value

How do you measure supplier performance?

I’m often asked to talk about key performance metrics for supplier relationship management. Many key executives want supplier metrics to focus on value contribution like flexibility, continuous improvement, speed to market, innovation and organizational alignment, but most supplier metrics are still focused on price, delivery and quality, since they’re easy to measure. However, once margins are reduced to levels that sustain the supplier, quality reaches the capability of the supplier and deliveries are consistent, there’s not much improvement to single-dimension metrics without significant investment.

SingleSlider-supplier-dashboard-large

When we think about metrics, they need to be culturally acceptable to both organizations, timely, compatible with other metrics, simple and responsibility-linked. They should also be cost-effective, balanced, customer-focused and meaningful. After all, the objective is to indicate the degree of progress being made and confirm whether actions being taken are effective.

When I speak to groups about key performance metrics, I like to define what they are and what they are not. Key performance indicators (KPI’s) are always quantifiable, measurable and actionable. They measure factors critical to the success of the joint organizations and are tied to business goal alignment and screech targets. No more than 5 to 8 key metrics should be considered when looking both procurement and supplier performance and they must be consistent throughout the companies. Unfortunately, many metrics are vague and unclear, nice-to-know information, but not actionable, are refutable and are exhaustive sets of metrics. Many procurement teams create KPIs without organizational alignment or stakeholder engagement, because they feel they’re in a powerful position to drive supplier compliance. In reality, these metrics and relationships eventually fail.

When developing key metrics, they should be mutual for buyer and supplier, have a cause and effect relationship, targets should be set by priority and integrate with strategic long-term agreements. Measurements in world-class companies are linked to value optimization: is the company achieving a value shift with the supplier and is new value being created?

It is likely that metrics will fail if they are not a collaboration between your stakeholders and the supplier. They will also fail if they are a wish-list of criteria that is difficult to achieve. If your business is not a learning culture, desiring to continuously improve, metrics will just be numbers.

Do your supplier metrics improve the product, supply chain and company?

Sole Source Suppliers? Your Future Depends on Supplier Relationship Management

SRM maize blue

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

  1. No formal rigid performance metrics to drive continuous improvement that have been agreed by the business
  2. Fear of upsetting the supplier
  3. Fragmented management among the technical, executive, marketing, operations and supply teams with limited leadership
  4. No defined process, defined leader or coordinated cross-functional approach
  5. Supplier holds the power in the business relationship and defines the value delivered to the customer
  6. Rarely budget or dedicate teams to focus on generating cost and value opportunities with the sole source suppliers
  7. Typically the relationship with the sole source has tension and is somewhat adversarial
  8. Create a vacuum of leadership, causing the relationship to be technically driven verses commercially driven
  9. Focus on price rather than value extraction
  10. 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
    • Exclusivity
    • Innovation
    • 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