SRM Roundtable: The reward for good relations

A strategic approach to supplier relationship management can bring huge benefits. But there are still many crucial issues for procurement directors to consider before embarking on an SRM programme.

The question of how to best manage suppliers has been at the heart of debate in procurement circles for as long as the function has been recognised as a distinct area of expertise. Indeed, as participants in the latest executive roundtable discussion set up by European Leaders in Procurement and chaired by its editor, Mark Perera, suggested, the concept of supplier relationship management is not new. But SRM has attracted greater interest recently, perhaps because organisations are recognising it as the next stage in the development of a procurement strategy once they have completed the selection of suppliers in a strategic sourcing exercise. It seemed, therefore, a good time to air some of the issues involved in SRM. The roundtable, held in London, began by asking what is meant by the term before going on to examine several key issues including the role played by cost-cutting, risk, how to implement an SRM strategy and what the future holds.

Mark Perera: Let’s start by asking what SRM is. What does it mean for you?

Matthias Gramolla About two-thirds of our revenues are sourced, mostly complicated structure systems and equipment. These are areas where the know-how is with the supplier, so you have mutual dependency. It’s more important than ever that we properly manage relations with the key suppliers, which means managing cost, performance and risk in the supply chain. In the past you often heard companies talking about their preferred suppliers, whereas now you hear suppliers talking about their preferred clients.

Paul Lucas Some suppliers are acting effectively as Lloyds TSB as far as their customers are concerned, so we rely on them to be our touchpoint in the marketplace. To get the best performance from them and to have them working as we would work requires close linking. In the past SRM has been about metrics and measuring the performance of suppliers and coming up with scorecards, but taking it to the next level means making sure you have a meeting of minds. SRM is also important to us because we have many major contracts in which the Financial Services Authority are interested. If we don’t manage contracts to certain standards the FSA are all over us. We can’t outsource risk. In the banking sector there’s not much innovation and it’s easy for competitors to copy us. If a supplier can bring us something new it’s a big thing.

David Marchant SRM has evolved. We operate on different levels. We are moving more and more into the ICT space so we need to be clear what we are looking for from those suppliers. You’ve then got the strategic suppliers and this needs to evolve over time. We frequently refresh the key suppliers, and that’s not just about the large providers, it’s about encouraging niche suppliers to come through.

TIM USSHER: DIRECTOR OF PROCUREMENT, BSKYB Ussher has been in procurement more than 20 years. He held CPO level positions at Dairy Crest and  Hilton Hotels and helped establish global procurement functions at BAT and Diageo as a consultant. He went on to set up and run the global procurement function at Williams PLC and joined BSkyB in 2001.

MARK SIMMONS: VP, EFFICIO Simmons has more than 17 years’ experience in consulting and industry. Before joining Efficio last year he was  lead partner of Ernst & Young’s global sourcing and supplier management practice. Specialisms include direct materials sourcing, SRM and low-cost country sourcing in the manufacturing sector.

MATTHIAS GRAMOLLA: VP, SOURCING STRATEGY, EADS Gramolla has been at EADS, the European Aeronautic Defence and Space Company in Munich  since 2004, where he has led implementation of the company’s sourcing strategy. Among other roles he was previously project leader for implementation of e-procurement at Airbus in Toulouse.

JIM ROBINSON: PROCUREMENT DIRECTOR, BAE SYSTEMS Robinson joined BAE Systems in 1990 as procurement director of its military aircraft division, later moving  into a group procurement role. He began his career at the Rover group and, in 1990, joined Toyota as director and general manager of the purchasing division at its new European site.

PHIL REEVES: DIRECTOR OF SOURCING & SUPPLY MANAGEMENT, NORWICH UNION Before joining Norwich Union Reeves held senior positions at BT and BAE Systems. He has been at Norwich  Union for 10 years and is responsible for £1.5 billion third-party expenditure. Among concerns in his current role are outsourcing and the development of best-in-class supplier management practice.

DAVID MARCHANT: VP, ICT AND CPE PROCUREMENT, BT Marchant is responsible for strategic procurement, materials planning and inventory control for BT’s ICT and CPE procurement. Supplier spend in the division is £1.1 billion, with a team of 85 procurement professionals. He has worked in a broad range of procurement areas in his 11 years at BT.

PAUL LUCAS: FORMER GROUP PROCUREMENT DIRECTOR, LLOYDS TSB Until recently Lucas was group procurement director at Lloyds TSB, leading a team of 50 and managing £2.2 billion spend. Before joining the bank he held senior procurement positions at GlaxoSmithKline, Phillips Petroleum, Cable & Wireless and Black & Decker. He has a degree in aeronautical engineering.

Tim Ussher Some 15 years ago we were all talking about partnership. But the retail and manufacturing sectors destroyed that because nobody was genuine about partnership – it was just a ruse to get the suppliers into another round of negotiations. Then we went through value-managed relationships and now we’ve come back to SRM and the procurement industry is taking the whole thing much more seriously.

It’s not just about sitting the supplier down and reducing cost. All the other elements such as risk and responsibility are now much more prevalent. For me it’s ultimately all about people and cultures. It’s all about getting our company closely aligned with the suppliers’ people and culture. We’re aiming to be the customer of first resort.

Jim Robinson SRM has been around a long time under different guises. Where I am now it’s a lot more equitable than in some other sectors. There’s a huge amount of knowhow and innovation in the supply base. It’s also a lot more contractual – that’s the way it is with defence products – because when you enter into a relationship it can last 40 years. So for us managing risk in the contract has always been a high priority, but managing the health of the relationships has become a bigger priority.

PL How do you write a contract that’s going to keep the relationship happy for 40 years?

JR You don’t. Contracts and arrangements change over time and they get renegotiated. But the relationship will exist for 40 years.

PL If it’s going wrong after five years what’s the process for coping with that?

JR All the normal remedies exist. Nothing is impossible to rip up. On an Astute submarine probably 70 per cent of the project cost is in the non-recurring element of it and 30 per cent is in the material at the end. So to re-engineer the systems with a supplier three years into service or halfway through a lifecycle is not necessarily undoable, but some would say unthinkable. That means making the contract and the relationship work is fairly fundamental.

Mark Simmons I don’t think SRM is new. What we see in industry is a lot of companies focused on managing their employee or customer relationships. Suppliers are an important part of the company and we see them as partners or colleagues. How do you motivate, incentivise and manage them?

Phil Reeves I don’t think it is new either, but there is more recognition of it. Our research shows that 50 per cent of a deal’s value is lost in the first two years if it’s not managed properly. What is SRM? A lot of guys in my organisation have got quite excited about some upstream activity that’s quite glamorous and strategic. But I think it’s the plethora of things within the pyramid which, at its lowest end, is just good discipline about service and performance management right through to supplier development, innovation, access to new markets and so on. It’s about getting the basics right.

MP Let’s have a look at the cost and revenue side.

MS A number of companies have gone through the sourcing process and realise there are diminishing returns. There is only so much value you gain from sourcing. The challenge now is what we do with our selected partners to create value and take cost out. So we’re increasingly seeing more collaboration, working with suppliers on total cost. On the revenue side it’s increasingly about having innovative products to which suppliers can contribute.

TU SRM delivers all the benefits that procurement seeks. It’s not just about cost. The obvious benefits procurement is after are quality of service, continuity of supply and lowest total acquisition cost. Then after that you’ve got continuous improvement, risk mitigation and so on. Cost is just one facet of the benefits.

PL Cost-cutting is almost a given if you’re going to put your effort into managing or working with suppliers. SRM is an investment in the long term, working in a consistent and planned fashion to build relationships so that when it comes to it the supplier is there for you, or vice versa.

PR For me the question is the other way round. It’s not so much what role costcutting plays in good SRM but what role good SRM can play in cost-cutting.

For long term sustainable bottom line benefits, SRM comes into play because a lot of the real costs can be delivered through process re-engineering, which you can’t often do in-house without the assistance of your supply base.

MP Is looking at risk a key part of an SRM strategy?

MG Risk management and reduction is the next element after you’ve talked about cost. We have three types of risk: risk of performance, the financial risk and risk that we want to share with the suppliers that comes to us from the end customer market. So suppliers are no longer only a source of risk to us, they are also a partner in bearing the risk. In terms of performance risk we do everything everyone else does – selection of suppliers based on qualifications, standards, audits and references.

Where possible we try not to depend on a single supplier. In our industry it is very common to have very few or single source suppliers. We prefer to have a small group of suppliers in the market so that there is some competition and continuous supplier evaluation and development.

In terms of financial risk, we monitor those suppliers that are important to us because we don’t want any surprises.

We have to bear a lot of risks that come to us from the end customer market: risks on prices, modifications, currency risk and the like. As we only have about a third of the value chain in our hands we can’t bear a lot of those risks so we have to develop cooperation with our key suppliers to cascade risks along the supply chain.

MS Is there a trade-off between companies that want a premium if they take on risk? Do you have to pay them more so that they share the winnings if they’re going to take the risk of losing?

MG Absolutely. When they have to manage the risk it is at a cost and we want to see what that cost is. You have to have a clear view of the trade-off.

JR That terrible phrase “business continuity planning” has entered the arena in the past two or three years. I would be interested to know to what degree people are pursuing that in earnest with each of their vendors in a structured way. Because it’s quite a challenge, and very resource intensive. My view is that there should be an industry standard assessment to confirm that you have continuity plans in place.

PL As part of our SRM programme I set up meetings between our MD of operations and our top 20 suppliers. The suppliers expected it to be a friendly chat, but the first question they were asked was “what is your business continuity plan for bird flu?” They were completely floored. So they’ve all gone back to their companies and suddenly we have 20 BCPs coming through.

PR In retail financial services the area of growth has been in offshoring service provision to India and to some extent Sri Lanka. That brings inherent risks from nuclear war to natural disaster. In selecting our suppliers both disaster business continuity and CSR are involved. There isn’t a risk-free option out there.

MP You’ve mentioned the idea of being the “customer of choice” and the importance of suppliers to your business.

JR In times of slack demand our behaviour can be quite tactical. Nobody wants to spend a lot of time talking about the medium-to-long-term requirement when they’re in a trough. When you are in a peak, suddenly it’s about long-term requirements and “why can’t we get our hands on supply?” It really depends where the balance is. At those times when supply becomes tight, the relationship and how you work that relationship to your advantage comes into its own. Many suppliers don’t have a relationship just with you but with other similar customers. If you behave in an unbecoming fashion you’ll get the reaction you deserve when the dynamics change.

MP Let’s look at innovation. Is it a key driver in your SRM strategy and in your business as a whole?

PR We’ve come out with a couple of things such as digital flood mapping and telematics, the pay-as-you-drive approach based on global positioning and metered insurance. We took a piece of IPR that was developed in the States but which they couldn’t get to work. We bought the European rights and worked with selected technology partners to make it work. So there was some supplier innovation. But in this case it was us coming to the party with an idea and using some long established relationships.

It’s an interesting story about how we used tried and trusted folks who were prepared to put some money and risk into it because they could see opportunities in European markets. DM In the services sector copying is a problem. If we launched a new mortgage or a lower interest rate, someone else could do the same thing tomorrow. In the engineering sector it’s different. If you get an idea from a supplier you can patent it.

JR Our main customers are the MoD in the UK and the DoD in the US, who have a very clear view of what they want in a specification. We’re learning how to stimulate innovation as affordability becomes more important and governments want better capability at lower cost.

PR Would you say your customers drive out innovation by over-specification?

JR I class ourselves as the Formula One of industry. Making jets is a very technically innovative activity. The question is how do you do that and get a bigger bang for your buck? If you put a very tight ring around what you are asking the supplier to provide, they don’t think out of the box.

TU The whole innovation topic comes under the banner of continuous improvement which is one of the SRM goals. We’re trying to be leading edge and come out with new products and services for our subscribers, and part of that is developing a culture with our suppliers that allows them to innovate. But it’s very much a two-way process. We’ve got to be there to support them, reward them and share costs.

MS Typically suppliers try to innovate and then sell the idea to the customer. But the customer should be demanding innovation.

You still see suppliers coming up with inventions and pitching ideas, but it’s a very costly hit-and-miss process because the likelihood of getting a hit is lower than if they were working together with the purchaser to create innovation.

PL One question is how you incentivise innovation. We’re getting into gainshare contracts. That’s where we outsource a service and we don’t know exactly where we’re heading but we want a share of the benefits when we get there. Outsourcing is a place where you can take a leap in the dark. MG Innovation through suppliers is key for us. We focus on the overall design and integration of products. In between, a lot of the know-how is with the supplier. The magic words for us are early supplier involvement. We have to work with the supplier to understand what the market may expect or need in the future and build on the best ideas.

MP Has anyone launched an SRM strategy recently or tried to tackle the issues of upskilling and change management?

PL We recently broadened it to be a company-wide initiative, to get the buy-in and a consistent message across the company. So we had to find out who was talking to suppliers, and try to channel it and make sure they were fully briefed. We’ve developed a briefing process which has been quite successful. Now when people are about to meet a supplier they call us and ask what they should be saying. It’s about making sure the company as a whole is on message, not just the procurement department.

MG We’re not talking about implementing an SRM strategy when there was nothing in the past. It grows and develops and expands. It’s about changing behaviour from the traditional role between client and supplier to a partnership approach. We have many thousands of suppliers so we can’t take intensive care of them all. The more key they are for our future the more attention they get and the more tools we apply in terms of SRM.

TU When you set about improving supplier relationships it is an evolutionary process. It’s very hard to measure tangible benefits. There is a huge commitment to resource and energy when you say you’re going to start improving relationships with suppliers. A bunch of ingredients have to be in place. You need management support. The management of the supplier has also got to be receptive. For a smaller procurement organisation, if you haven’t got the resources for day-to-day operational stuff it’s tough to do loads of SRM because there are other things higher up the priority list.

DM It’s about managing the supplier and developing the supply base but sometimes even more critical is internal stakeholder engagement, and that’s where the role has evolved recently. If you take the attitude that the internal stakeholder could be divisive in terms of the negotiations you’re involved in, it isn’t going to get you where you want to be as a business. You’ve got to work with them. It isn’t easy to do but you come out with a much stronger result. JR Many years ago someone pointed out to me that quite often a relatively inexperienced buyer would find themselves trying to negotiate with the managing director or chief executive of a mediumsized company who has lived and breathed that company for 20 years. You need to understand who you are facing, and it’s a much more intellectual than transactional activity. So we have to invest heavily in educating people in how to look at business rather than just procurement.

PL I was that buyer a few years ago – who was I to tell the head of quite a large machine company how to take costs out of his business? I came out of engineering and I found it quite hard to get to the depths of the financial services industry and to be able converse with suppliers to the point where I could get to the heart of their offering and translate it into something my company might want. You have to bring along the technical experts who can talk that language because buyers generally can’t.

MP Do you find you’re bringing in people from other parts of the business to look at SRM?

JR There’s a technical skill set about being data rational and so on. But the SRM arena takes you into thinking about interpersonal and leadership skills much more than was expected in the past. That’s quite a transition for purchasing professionals who have never been asked to do it. The best people at SRM activity aren’t necessarily the best buyers, but those with a stronger suit in the way they deal with other people.

MG When we talk about implementation of SRM, how do you know when you are doing well? If you want to manage something it helps if you can measure it. So what are the indicators you can use in assessing your own SRM?

TU There are many answers to that but as an example, when we have supplier reviews with our rather more treasured companies that we are building relationships with, we go through a very open process of putting slides up saying what we think of you guys and we strongly encourage them to do the same. It’s a secure environment and we don’t feel threatened. We want them to put the problems on the table and then we can deal with them.

MS SRM can be seen as a warm and fuzzy thing. But the relationship needs an objective focus so that the roles and responsibilities are clear and it is measurable, otherwise you don’t know whether you have success or not. A lot of companies see it as a kind of general effort, but it needs to be focused and defined. PL For the top suppliers I mentioned earlier that the FSA are interested in, we have an annual report for each one with a number of measures, some performance based, others asking whether they have a business continuity plan in place and a CSR policy and so on. They are as objective as they can be. We have a red, amber and green system, and our task is to move the reds towards the greens. It seems to work because it creates a focal point and has weight.

MP What is the future of SRM? Do you see any particular areas becoming more important?

TU I think the whole SRM topic will raise its profile over the next few years and will become something that procurement functions will devote more time and resource to. I don’t think we’re there yet as an industry but it’s definitely on the agenda.

PR I think there’s a way to go towards codification of what we’re talking about with this subject. It means a lot of things to different people. That’s okay because you can cherry pick a part of the subject, but I don’t see a body of work and research that defines the tools and process and organisation.

If we don’t get smart in the way we sell this, other people will take it from us. In my business 50 per cent of our total UK expense base is third-party spending. Going back 10 years, that would probably have been 15 per cent to 20 per cent. So the big jobs in my company are not about operations management any more, they’re about managing suppliers.

DM With more niche suppliers coming through, we have to differentiate the approach a lot more. That’s the biggest challenge we face.

MS SRM is part of the evolution of procurement as a profession. It’s only just now being highlighted, but I see it as a longterm initiative.

JR It’s sort of always been there and it completely depends where you are on the maturity curve. If you’ve historically been largely a transactional function, the first bang for your buck is strategic sourcing, understanding the markets you’re buying from. But there’s only so far you can push that and eventually you have to say that without being complacent, I now have the supply base I’m comfortable with, how do I get them to help me get to the next step and the step after that? That’s the hard bit. We have to become not just procurement people but business people.

PL I really hope SRM doesn’t just become a software solution. It’s bespoke to your business. There will be a trail of software salesmen coming to our door with SRM packages, but it’s something we have to do for ourselves.