There has been a growing trend in recent years for companies to rely on third parties for important and sometimes business critical activity. This allows businesses to focus on the activities and services that are truly core to their value proposition – and helps them to be the best at what they do.
In truth, in today’s tough economic climate, businesses rely on suppliers more than ever to keep up with customers, provide the best services, remain competitive, and grow.
However, the challenge is that managing these important suppliers can become overwhelming and complicated. There is also a lot of cost pressure as businesses need to balance investing in the right suppliers while also doing so cost-effectively to maximise growth.
Procurement’s role encompasses selecting and engaging with these partners and suppliers and providing the critical link between them and the businesses they serve. But how can the procurement function ensure that it is getting the most out of these suppliers? How can it collaborate effectively and develop a relationship that will enable success?
Defining your suppliers
Strategic suppliers are those that provide their clients with a competitive advantage in their markets. They provide products and services in a way that directly impacts their clients’ ability to be better than the competition, whether that is by breaking into new markets or geographies, increasing the share of an existing market, improving customer satisfaction, or reducing risk. With so much riding on these suppliers and the individual relationships a company has with them, it is clear just what an important issue this is for businesses and, by extension, procurement. But how do you define a strategic supplier and ensure you are thinking about these relationships in the right way?
First, let’s consider the more traditional method of defining your strategic suppliers and conducting supplier management activities. You’d segment your suppliers by plotting them on a matrix with spend volume on one axis and criticality of supply (sometimes referred to as risk) on the other – or some variation of these criteria. The way suppliers are placed on the matrix is not always scientific and is often impacted by people’s opinions on the importance of certain suppliers. Although, it provides some logic as to how to segment your suppliers into different categories, depending on their relative scores against these criteria.
However, this method does have some fundamental flaws then it comes to nurturing those relationships and getting the most out of your strategic suppliers. For starters, it doesn’t properly identify who these strategic suppliers are or should be. It assumes that strategic suppliers are only those suppliers for which the volume of business is high. However, this doesn’t always translate into the supplier being able to offer a competitive advantage.
Additionally, this picture is only a snapshot in time. It describes the situation today and does not consider the future. What about that small supplier that has the potential to give us a competitive advantage in the future, if only we nurture the relationship?
And thirdly, by treating true strategic supplier management only in terms of a process, it doesn’t allow you to build relationships with suppliers that give you a competitive advantage in your market.
For example, many companies establish a quarterly business meeting with individual strategic suppliers. One point on the agenda is often be innovation. Sounds exciting and forward thinking, but once that meeting starts, no one really knows what to talk about or how to approach that part of meeting. How do you suddenly innovate for that section of a meeting that happens once a quarter?
Innovation is something that needs to happen through a way of working, at all the different levels of the relationship, and certainly not just in the middle part of a three-hour business review with only senior people present. As a result, these meetings tend to resemble the performance and risk management meetings of the medium importance suppliers, which means you end up treating your strategic suppliers simply as medium importance suppliers. You are not going to get a competitive advantage from your strategic suppliers that way.
While taking this traditional approach is helpful in documenting and standardising a company’s approach to different types of suppliers and for defining roles and responsibilities in the company, it only really achieves something for the suppliers that aren’t the most strategic.
Shifting the mindset
So, what are the ways of working that give rise to these types of relationships and provide both sides an advantage over their respective competition?
Early engagement: Early engagement with the supplier means exactly what it says. It requires clients to accept that as soon as they start defining a solution without input from their strategic suppliers, or the wider market if appropriate, they are foregoing all the innovation and problem-solving potential that those suppliers could bring to the party.
Some organisations are very good at early supplier engagement, but many are not. Procurement has a habit of wanting to define requirements to a detailed and granular level before engaging the market. In some instances, that is appropriate; but for goods and services that come from your most strategic suppliers, that is almost always a mistake. Having the confidence to have your solution shaped by your most strategic partners from the beginning is much more likely to bring you a competitive advantage.
Visibility of future plans: How many companies out there really share the entirety of their plans with their strategic suppliers? Again, it’s something that requires high levels of trust in a relationship but, by sharing that detailed vision, suppliers themselves can set themselves up and have their own roadmap to specifically support those plans and not those of your competitors. And that is what gives you a competitive advantage.
Aligned incentives: This is fundamental to any strategic relationship. But it’s interesting how hard this can be in practice, and it can only really happen with your most strategic suppliers. Having truly aligned incentives means being all in, and that means being prepared to sign up to things over which you have less or, in some cases, no control.
A long-term commitment doesn’t just mean a long-term contract: It is a mindset that means both parties put aside short-term pain for long-term gain. This is very difficult to do in practice because it requires trust and a shared vision. For example, if there is a lag in business or change in cost, the long-term vision of both parties easily outweighs the temporary pain.
Ban the RFP: What procurement functions should be doing is treating future suppliers with an investor mindset. Having an investor mindset means wanting the supplier to succeed and lowering the barriers to collaboration as much as possible. It means, for example, involving them in the evaluation process before deciding to invest in them. This could be getting them to shape an RFP, if you really are intent on running an RFP. But it also means doing away with the notion that a contract is the only way that describes how the parties are going to work together in future. A lot of buying organisations think like this and treat the contract as such. That’s the equivalent of getting to the end of a sourcing process and assuming the savings you got signed off at that point with finance are going to be 100% realised, with no further intervention or work required.
Currently the procurement function often has too much of an arms-length approach to suppliers, whether strategic or otherwise. This is an outdated approach and will not allow you to get the best service from your suppliers, and much less, that competitive advantage from strategic partners.
What is required is a new mindset, one that seeks to nurture partnerships, wish success for the other party as much as your own, and develop a truly collaborative approach to problem solving at all levels of the relationship.
