12 July 2011 | Lindsay Clark
Buyers are finding more ways to help suppliers improve performance. But picking the right vendors to work with requires careful consideration, says Lindsay Clark.
When you become really good at something, it’s a problem. The problem is, what do you do next?
Business leaders will always want their top teams to continually improve performance, so once you excel at what you already do, you cannot meet that expectation. You’ve hit diminishing returns.
This is where procurement departments can find themselves after several rounds of contract negotiations and supplier rationalisation. More savings can always be found, but they are nothing like those achieved in the past.
The answer, AstraZeneca found, is to add a new approach. Around three years ago, it began work on a programme to improve how it worked with key suppliers and develop their capabilities. It was the logical next step, after traditional procurement methods lose their potency.
Donald Ferguson, head of procurement operational excellence at AstraZeneca, said: “You can always get more, but from experience, it definitely reaches a plateau in terms of the return you can repeatedly get out of that area, and that made us think, what next?
“Supplier development gave us the impetus and encouragement to think and do things differently,” he told SM. “We realised we had to put in place a more structured and well-thought-out set of tools and capabilities, and build a team around that.
“The focus has tended to be on price negotiation, total cost and benchmarking activity, which we do continue to do and it does drive value, but in a strategic sense it’s moving beyond total cost into total value management and our ability to reach into different parts of where the business operates,” he said.
AstraZeneca approached supplier development by putting together a core team of existing procurement staff, plus some new recruits from outside. Others were seconded from category teams, with the hope they would take supplier development skills back with them.
Then the drug firm worked through four stages – or filters – to identify suppliers with which it could start to develop a closer relationship. First, it scanned its supplier database for its largest and most critical vendors, then it looked at the importance of those suppliers to AstraZeneca’s business objectives. It then examined the maturity of the supplier – how ready was it for a different kind of relationship? Finally, it looked at the opportunities and how they might be ordered to find a practical programme with the supplier.
“Sometimes we might start with a small project with a company, which doesn’t have huge value, but can build understanding, the relationship and some trust. This is so we don’t pick off something too big to start with and fail – we build the experience bottom up.”
If these initial, small programmes are successful, the procurement team and supplier move into more complex and higher value programmes of work, he says.
By the time AstraZeneca got down to the final assessment stage, it had the capacity to work with about 40 suppliers globally across direct and indirect spend. “The intention is to keep growing that, and the more the capability builds the more that people can use it outside of the formal process,” Ferguson says.
It is essential to resolve any commercial discussion over price or margin before embarking on a supplier development programme, he says. “If you haven’t dealt with it, you can get embroiled in it later.”
The process has proved valuable to the business. In one case, joint working to remove inefficiency in the transfer of research data from an external supplier helped it reduce the time to market by around 70 per cent for a particular drug development programme. “We’re taking weeks out of processes,” Ferguson told a London conference earlier this year.
A formalised programme is essential for supplier development to work. Otherwise, different business units could send mixed messages to the supplier, says Robert Derocher, a principal with Archstone Consulting, a procurement specialist.
“One of the biggest challenges that our customers have is that they say they want a strategic relationship with a supplier, but then you’ll see them do some tactical things like start to beat [the supplier] up for price,” he says. “You’ve got to be careful about that. You can’t tell a supplier you’re going to operate differently and say, ‘here is what the value proposition is for you,’ then treat them like they are a tactical supplier next month. The supplier starts to think it’s not real.”
Len Prokopets, also a principal with Archstone, says executive sponsorship is another key factor in successful projects and can ensure supplier engagement. “Having a clearly communicated and defined programme that says how procurement and internal customers are involved is key,” he says.
Leaders in this field have been the automotive (see box) and aerospace sectors, although there are pockets of excellence across the economy, he says.
Andrew Christophers, an interim procurement specialist currently working for Thames Water, has used the technique to improve procurement performance at other firms he has worked with.
“The concept is ‘we can work with you to help improve your process and reduce your cost structure and then share the benefits’,” he says.
Although the supplier would have to hand over some of the efficiency gains to the buying organisation leading the development, it could keep the margin with other customers, adding to the incentive to engage with the procurement team, Christophers says.
Organisations should not implement supplier development with a vendor that has just won a competitive tender based on price. “It needs to be the right organisation with the right relationship,” he says.
The approach can work well with suppliers tied in to the buying firm, for reasons of technical specification or product design, when price negotiation is difficult. “The best way to extract some value out of that relationship once you’re in it is to improve how it operates,” Christophers says.
This makes recruitment and retention another reason for introducing innovative procurement programmes, says AstraZeneca’s Ferguson. “It has allowed us to attract people from [leading] industries into pharmaceuticals, which is a really good plus for us because we then bring in people with 10 or 15 years’ experience of supplier development,” he says.
“Internally, people see that they can learn from the people that have come in and it’s a new skill they can develop,” Ferguson says.
Archstone’s Derocher says that getting into a supplier development project is crucial in a procurement career. “If you’re just another negotiator, I would argue you are leaving something off your resume.”
Carmakers reap rewards of good working relationship with suppliers
Automotive research firm Planning Perspectives has shown that carmakers with better working relationship with their suppliers achieve greater benefits, such as higher quality, lower prices and more technology sharing, compared with those whose relationships are not so good.
The annual Planning Perspectives’ study – the latest of which was out in May – has shown that automakers with the best rankings for trust among suppliers receive the greatest benefit from their suppliers in a variety of areas including supplier innovation.
“Suppliers act toward their customers as they perceive their customers are acting toward them,” says John Henke, Planning Perspectives’ CEO.