Intro to Supply Chain Management - Chapter 7: Supplier Relationship Management (SRM)

Supplier Relationship Management (SRM)

The discipline of strategically planning for, and managing, all interactions that supply goods or services to an organization, in order to maximize the value of those interactions.

Most procurement professionals view SRM as an organized approach to defining what they need and want from a select group of key suppliers.

Establishing and managing the company-to-company link to obtain those needs.

SRM is often a part of the rollout of...

Strategic Sourcing and is typically applied with suppliers:

Providing high volumes of a product/service

Providing lesser quantities of a critical product/service

That serve many business units of a company or organization

Where intensive engineering, manufacturing and/or logistics interaction is essential.

Successful Strategic Partnerships

Strong Supplier Partnerships

Important to achieving win-win competitive performance for the buyer and supplier

-These require a strategic perspective as opposed to a tactical perspective.

Involves "a mutual commitment over an extended time to work together to the mutual benefit of both parties, sharing relevant information and the risks and rewards of the relationship"

Keys to Successful Strategic Partnerships

There are 10 keys to developing successful strategic partnerships:

1. Building Trust

2. Having a Shared Vision and Objectives

3. Developing Personal Relationships

4. Establishing Mutual Benefits and Needs

5. Gaining Commitment from Top Management

6. Managing Change

7. Information Sharing and Lines of Communication

8. Understanding and Influencing Capabilities

9. Continuous Improvement

10. Measuring Performance

Building Trust

With trust, partners are more willing to work together, find compromise solutions to problems, work toward achieving long-term benefits for both parties, and go the extra mile.

Trust is earned. It is also easily lost, and almost impossible to regain once lost

Shared Vision & Objectives

Both partners must share the same vision and have objectives that are not only clear but mutually agreeable.

The focus must move beyond tactical issues and toward a more strategic path to corporate success.

Key to Successful Strategic Partnerships

Personal Relationships

Mutual Benefits and Needs

Commitment from Top Management to Support the Strategic Partnership

Managing Change

Information Sharing and Establishing Lines of Communication

Understanding Capabilities

Continuous Improvement

Measuring Performance

Personal Relationships

Strategic Partnerships begin with the development of personal relationships between key people at each company.

It is people who communicate and make things happen.

Mutual Benefits and Needs

Partnership should result in a win-win situation, which can only be achieved if both companies have compatible needs.

An alliance is much like a marriage, and if only one party is happy, then the marriage (i.e., alliance) is not likely to last.

Commitment from Top Management to Support the Strategic Partnership

Commitment must start at the highest management level.

Partnerships tend to be successful when top executives are actively supporting the partnership.

Managing Change

Companies must be prepared to manage change that comes with the formation of new partnerships.

Information Sharing and Establishing Lines of Communication

Both formal and informal lines of communication should be set up to facilitate the free flow of information.

Understanding Capabilities

Key suppliers must have the right technologies and capabilities to meet cost, quality, and delivery requirements in a timely manner (currently and in the future). (currently and in the future)

Continuous Improvement

Making a series of small improvements over time results in the elimination of waste in a system.

Buyers and suppliers must be willing to continuously improve their capabilities in meeting customer requirements.

The process commonly utilized in continuous improvement is;

Plan, Do, Check, & Act

Plan: identify each specific improvement that is needed, what change is necessary to make the improvement, and then plan for that change.

Do: Implement the change on a small scale to see if the change improves the process before moving forward with full implementation

Check: Use data to analyze the results to see if the change made a positive impact.

Act: If the change was successful, implement it on a wider scale and continuously assess your results. If the change did not work, then most likely the root cause was not identified, or the change was not the correct solution, and you may need to begin the cycle all over.

Measuring Performance

You can't improve what you don't measure

─ Measures related to quality, cost, delivery, and flexibility are used to evaluate suppliers.

─ Metrics should be: 1) understandable, 2) easy to measure, and 3) focused on real value-added results [S.M.A.R.T. objectives].

─ A multi-criteria approach is best [i.e., a SCORECARD].Keys to Successful Strategic Partnerships (continued)(continued)

Total Cost of Ownership, is made up of all costs associated with the acquisition, use, and maintenance of a good or service.

S.M.A.R.T.

Specific, Measurable, Attainable, Relevant, Time-oriented

Benefits of Strategic Partnerships with Suppliers

Benefits for Buyers:

-Preferred access to the supplier's best people

-Increased operating efficiencies

-Lower costs

-Improved quality

-Enhanced service

-Influence over supplier investments and technology

-Increased innovation from and with suppliers, leading to lower costs and incremental revenue

-Sustainable competitive advantage

Benefits for Suppliers:

-Greater visibility into buyer's purchasing plans

-Increased operating efficiencies

-Longer term buyer commitments; predictability of future business

-Increased scope of business and revenue

-Lower costs of sales; increased margins

-Opportunities to develop, pilot, and showcase innovative solutions

-Sustainable competitive advantage

Supplier Evaluation

A process to identify the best and most reliable suppliers

Sourcing decisions are made on facts and not on perception (through the use of defined criteria)

Frequent feedback can help avoid surprises and maintain good relationships. (Hold regular review meetings)

Suppliers should be allowed to provide constructive feedback to the customer

Supplier Evaluation: Performance

It is important to actively monitor a supplier's performance and provide visibility and feedback on supplier performance at each stage of the evaluation process.

Some relevant metrics include:

Price and cost performance

Product quality

Delivery performance

Contractual compliance

Participation in product development initiatives

Cooperativeness in third-party production management

Support of ethics and sustainable practices

Evaluating and Selecting Key Suppliers

With a robust Supplier Evaluation process to select key suppliers with whom to develop a collaborative relationship, purchase cost becomes relatively less important.

The assumption is that excellent suppliers will be able to drive costs out.

"Squeezing" suppliers to generate a lower annual purchasing spend hurts strategic relationships! But, unfortunately, it is often still done! [Profit Leverage Effect] (mentioned in Chapter 6)

Key Supplier Selection is typically conducted by a cross functional team using evaluation forms or scorecards.

Weighting techniques are often used.

Supplier Evaluation: Weighted-Criteria

The Weighted-Criteria Evaluation System

1. Select the key dimensions of performance mutually acceptable to both buyer and supplier.

2. Monitor and collect performance data.

3. Assign weights to each of the dimensions.

4. Evaluate performance measures between 0 and 100.

5. Multiply dimension rating by weight and sum of overall score.

6. Classify suppliers based on their overall score, e.g., Certified, Preferred, Acceptable, Conditional, Developmental, Unacceptable, etc.

7. Audit and perform ongoing certification review.

Weighted-Criteria Evaluation System Example

Overall Point Score:

Preferred: 90 to 100

Acceptable: 70 to 89

Developmental: 0 to 69

Preferred

work with these suppliers in maintaining a competitive position and on new product development

Acceptable

require a plan from these suppliers outlining how they will achieve preferred status

Developmental

require corrective actions from these suppliers on how they will achieve acceptable level. Look for alternative suppliers if these do not achieve acceptability within a fixed period of time, e.g., 3 months.

Supplier Certification Programs

One of the elements for building a strong strategic supplier partnership is having a well-defined and established Supplier Certification Program

A certified supplier is a source that through prior experience and qualification can provide material of such quality that it needs little if any receiving inspection or testing before going into approved stock or into the product process.

Administration of a Certified Supplier Program requires planning and long-term attention.

Benefits of Supplier Certification Programs

1. Reducing the amount of time and labor necessary for the buyer to conduct incoming inspection of products and materials from certified suppliers, creates cost savings.

- Buyer trains supplier on approved test methods so that supplier can test product before shipment, and provide a Certificate of Analysis (COA)

- Buyers may then opt to only test items periodically on incoming inspection rather than with each delivery or lot, providing that the periodic testing confirms the supplier's results.

Other Benefits of Supplier Certification

2. Building long-term relationships

3. Recognizing excellence

4. Decreasing the supplier base

Certified suppliers are more reliable and therefore, you don't need as many suppliers.

Supplier Certification

Supplier Certification programs are also used as verification that select suppliers operate, maintain, improve, and document effect procedures that relate to the buyer's requirements for supply elements such as cost, quality, delivery, flexibility, etc.

These programs can be used to help differentiate one supplier from another, and may be used to identify strategic supplier alliance candidates.

As part of their overall certification process, companies may develop internal certification programs, and/or require external certifications from an organization such as the International Organization for Standardization (known as ISO)

Internal Certification Programs

Example of Criteria used for an internal Certification Program

Supplier has no incoming product rejections for a specified time period.

Supplier has no incoming late deliveries for a specified time period

Supplier has no significant negative quality related incidents for a specified time period

Supplier is ISO 9000 certified or has successfully passed a recent on-site quality system evaluation

Supplier consistently meets a mutually agreed-upon set of clearly specified quality performance measures

Supplier has a fully documented process and quality system with cost controls and continuous improvement capabilities

Supplier's processes are determined to be stable and in control

External Certification

International Organization for Standardization (known as ISO) is the world's largest developer of voluntary international standards.

Founded in 1947, today ISO has members from 163 countries and about 150 people working full time for the Central Secretariat in Geneva, Switzerland.

ISO certification is highly sought after as it represents achieving and maintaining a standard of excellence verified by an independent third party organization.

Benefits of ISO Certification:

Greater market potential

Compliance to procurement bids

Improved efficiency and cost savings

Higher level of customer service

Heightened staff moral and motivation

Two ISO standards commonly used for supplier certification are:

ISO 9000

ISO 14000

There are more than 21,000 ISO standards, however, ISO 9000 and ISO 14000 are by far the most widely used and can be applicable to any type of business.

ISO 9000

A series of management and quality standards in design, development, production, installation, and service.

Companies wanting to sell in the global market seek ISO 9000 certification.

There are 8 quality management principles on which the ISO 9000 series quality management system standards are based:

1. Customer focus - understand current and future customer needs

2. Leadership - establish unity of purpose and direction of the organization

3. Involvement of people - people are the essence of an organization

4. Process approach - a desired result is achieved through a managed process

5. Systems approach to management - managing interrelated processes

6. Continual improvement - performance improvement is a permanent objective

7. Factual approach to decision making - decision are based on facts and data

8. Mutually beneficial supplier relationship - interdependent benefits create value for both an organization and its suppliers.

ISO 14000

A family of standards for environmental management.

The benefits include reduced energy consumption, environmental liability, waste and pollution, and improved community goodwill.

ISO certified suppliers are preferred by procurement departments because . . .

They have to conform to an externally defined set of standards for quality and delivery of service

They are easier for procurement to initially qualify and periodically audit

They are usually more open to sharing supply chain information

They welcome building relationships with their customers

They have formal processes in place for continuous improvement of their products, services, and processes Certification is done by an independent third-party agency

Firms have to be re-certified every three years

Supplier Development

the technical and financial assistance given to existing and potential suppliers to improve quality and/or delivery performance.

In simpler terms, it can be described as a buyer's activities to improve a supplier's capabilities.

A supplier's knowledge and the technology that they use to produce the commodity they supply, can be leveraged through supplier development.

Supplier development programs should be designed to achieve:

Lower supply chain total cost

Increased profitability for all supply chain participants

Increased product quality

Near-perfect on-time-delivery at each point in the supply chain

A supplier development program must be aimed at improving suppliers performance,

not bullying them into charging less or simply auditing and rewarding them.

Supplier development is all about providing suppliers with what they need to be successful in the supply chain. Two of the most important functions of a supplier development program are:

Providing information about products, expected sales growth, etc. Suppliers need to become extensions of their customers.

Training suppliers in the application of lean and six sigma / quality tools.

- Asking suppliers to lower their price without giving them the knowledge on how to lower their costs is not sustainable in the long-term.

Supplier Development: Process Steps

The typical approach to supplier development is based on the following process steps:

1. Identify critical products and services

2. Identify the suppliers of those critical products and services

3. Form a cross-functional team internally to work with the supplier

4. Identify what issues or gaps exist and what specific improvements need to be made

5. Meet with the top management at the supplier to get their support and involvement

6. Define details of the agreement and the action plan

7. Monitor the status of the projects / action plan and modify strategies as necessary

Tapping into Strategic Supplier's Knowledge

Strategic Sourcing partners offer the opportunity for a company to extend their intellectual capabilities by involving their external partner base in product development.

Early Supplier Involvement (ESI) - Key suppliers become more involved in the internal operations of the buyer's company, particularly with respect to new product and process design, concurrent engineering, and design for manufacturability.

- Strategic Suppliers are asked to add their knowledge and expertise to the company's new product development process.

Value Engineering activities help the buyer's company to reduce cost, improve quality and reduce new product development time beginning with the initial design

Supplier Recognition Programs

A program to recognize suppliers who achieve the high-performance standards necessary to meet customer expectations.

The success of the business can depend on the quality and performance of the company's suppliers.

It is always a good practice for a company to have innovative supplier recognition programs in order to recognize their achievements and reward them for their exceptional performance and services.

Three Attributes to Supplier Recognition Programs

1. Companies should recognize and celebrate the achievements of their best suppliers.

2. Award winners exemplify true partnerships, continuous improvement, organizational commitment, and excellence.

3. Award-winning suppliers serve as role models for other suppliers.

Benefits of Supplier Recognition Programs

A properly developed and led Supplier Recognition Program will make major contributions to the organization, its suppliers, and to its customers and stakeholders. There are several key benefits of these programs that make them valuable for a business organization.

1. Motivate Suppliers - A Supplier Recognition Program can motivate suppliers to excel in terms of their quality, pricing and delivery commitments. If a company wants to retain and drive a supplier to excel, there should be a motivation plan designed to reach them.

2. Improve Supplier Loyalty- Supplier support is important to ensure that customer delivery commitments are maintained.

Benefits of Supplier Recognition Programs continued

3. Encourage Suppliers to adapt to the company's culture- If the company treats its suppliers as a part of the family and engages in supplier recognition programs periodically, it can help to bring the suppliers closer to the corporate values, ethics and principles of the company.

4. Helps to Create Entry Barriers for Competitors- If the suppliers trust the company, they may be more inclined to sign deals of exclusivity with the company for certain crucial components.

5. Encourages Supplier Participation in Product Innovation- Recognition to suppliers also brings about their enthusiasm to work closely with the company on new product development.

Supplier Relationship Management System

When considering a SRM program there are several technologies available to support development.

The reason for a system is to provide a more comprehensive and objective view of a supplier(s) performance

A system will help in identifying and addressing supplier performance issues.

A system can also be used to help make sourcing decisions.

It is important to recognize that an SRM system can only be implemented in line with the associated business process changes.

The SRM system is part of the process, not the whole process by itself.

The following are five (5) key characteristics to consider in the development and implementation of an SRM system:

1. Automation is meant to handle routine transactions

2. Integration spans multiple departments, processes, and software applications

3. Visibility of information and clear and concise process flows

4. Collaboration through information sharing

5. Optimization of processes and decision making

Trends in Supplier Relationship Management

1. Alignment Supplier Relationship Management with Strategic Sourcing Many companies are determining their negotiation strategies by tying them to their category management strategy, and to their supplier relationship goals.

2. Focus on cross-functional engagement - A best practice for strategic supplier relationships involves SRM teams at both the company and at the supplier, each led by a relationship manager, who form a steering committee to lead the process.

3. Focus on innovation - Companies that engage in more innovation with suppliers, report higher ROI.

4. Investment in people & "soft skills" - Treat suppliers with courtesy and respect. Be candid, and able to disagree without being disagreeable. Hold both sides to the same standards