News Focus: Yes, that's close enough

10 January 2012

11 January 2012 | Angeline Albert

The Supply Management 2011 Reader Research, completed this month, shows supplier relationship management (SRM) as the second most important focus for buyers in 2012, after cost cutting. More than 3,000 purchasers took part and told us that was the case.

Further, late last year Rosslyn Analytics said purchasing would be moving away from transactional work to focus on more strategic subjects like SRM.

Many organisations are already looking to SRM as a means of creating value – from pricing or process improvements, as well as to secure supply and innovation – while others are just starting out or looking to 
build on work that’s just getting 
under way. But how close is too 
close when it comes to supplier relationships? What information should you share and what should you hold back on?

David Loseby, director of procurement consultancy Vault Harrogate, says: “For SRM to work effectively, expectations on both sides have to be managed. Make sure confidentiality agreements are in place to ensure good governance.”

He stressed this would enable a clear understanding of what is an acceptable exchange of information and what can’t be shared.

Without this, problems may 
be ahead.

“On the whole, procurement does this, but there are some buyers that don’t. They put both businesses at risk if a relationship is dissolved,” 
says Loseby.

Buyers told SM absolute financial details and internal costs should not be shared. However some hold back on research and development information as well.

“Some R&D insight could help suppliers provide a better service to the purchasing organisation. This shouldn’t be automatically ruled out,” says Loseby.

Another purchasing professional, who asked not to be named, says 
it’s a very difficult balance to be struck. “There are no right 
answers. The closer you get to a supplier, the more risk you get in terms of corruption and collusion.

“Equally if you really want to drive money out and improve quality in the supply chain, you need to work closely to do that. “By sharing R&D, suppliers can benefit and even become more competitive. It’s a board-level decision whether such information is shared.”


Element of competition

Rachel Lee, procurement director at facilities management firm Norland Managed Services, knows a thing or two about close supplier relations. Since early 2011, she has had an account manager from a strategic preferred supplier located for one day a week in each of her firm’s 
eight offices.

She says: “This really helps to develop the relationship and means we have someone close to resolve any operational problems. They meet the local purchasing staff and internal stakeholders and so it naturally channels expenditure to a preferred supplier and reduces maverick spend.”

One of those with a seat on-site is Norland’s electrical wholesaler, which supplies lamp fittings and bulbs to customers’ premises. Out of the 
£3.7 million Norland spends annually on this category, 40 per cent is now with the on-location supplier. Norland has been able to pass on the benefits of preferential pricing to customers.

While this is an SRM success story, Lee warns: “Purchasers still need to keep a competitive element. If they get too close, when it comes to benchmarking the price, it is harder to say no to the supplier if they are no longer the best value. Keep in mind the company objectives in the context of SRM.”

Good SRM requires investment and trust from both sides, but 
many buyers say they are entering into SRM when in fact they are seeking to squeeze more savings 
from suppliers.

“A true professional should understand this is not what SRM is about,” says Loseby. “The forum for price reductions from suppliers should be raised by procurement staff, but not the SRM manager.”


Worth the effort

An annual global survey, published by consultancy State of Flux at the end of last year, quizzed professionals on their views of all things supplier relationship management.

That research concluded that an SRM programme is more likely to be effective if it’s been under way for three years or more – the longer it’s been running the more benefits will be seen. By collaborating more closely with key suppliers, mature SRM programmes benefit from tangible cost avoidance, risk reduction and supply chain efficiency. They also benefit from advantages surrounding ‘customer of choice’, which includes: access to a supplier’s best people, priority allocation of scarce materials or production capacity and first refusal on innovations.

Complementing this, purchasers say the required characteristics of an SRM manager are experience, maturity and seniority.

When it comes to buyers at smaller businesses, it’s harder for them to win over suppliers, but there are things they can do.

John Witkowski, purchasing manager for kitchen worktop distributor Plasman, says: “Suppliers call the shots. We can negotiate to our heart’s content, but many are fixed on certain areas and won’t budge. Our relationship with suppliers is on the day-to-day level. We can rarely negotiate price reductions. We do not get the full choice of colours for the laminate worktops, for example – they decide which customers get the best colours. The main tool we use is key performance indicators [KPIs] to get improved services. We also help reduce the suppliers’ costs, but there has been mixed success in this area.”

There are multiple benefits to be gained from good bonds with key suppliers – price reductions, process improvements and innovations to name but three. To avoid moving beyond good SRM to a ‘too close for comfort’ relationship, buyers must keep aligned to their own company’s objectives and ensure the expectations of both parties are managed.


For a successful supplier relationship...

● Question your motivation. What is the reason for wanting to get closer to your suppliers? Do you want a supplier to sit in your office, or someone easily accessible to fix issues or keep an eye on their performance?

● Choose the right partner. Research suggests that US and European manufacturers plan to deal with a greater number of suppliers in 2012, to drive competition. Close relationships with numerous vendors with limited time and resources is impractical. Understand how ‘key’ vendors will be identified.

● How attractive are you? Even if a supplier is key to you, you might not be a key account for them. Relationships should be mutually beneficial. How will you sell your value to your partner?

● Become a supplier facilitator. Do your suppliers talk to each other? Collaboration between vendors can make your life better, so enable them to. Encourage and enable your suppliers to build relationships, either in real life or virtually.

● Prepare for the worst. Whatever relationship you embark on, ensure your company’s IP and rights are protected. Nobody likes to discuss the end, but it happens to all relationships, so ensure exit arrangements are clear so animosity is avoided.


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