Spend Matters welcomes another guest post from Jim Kiser of GEP.
Procurement, when tasked to uncover new suppliers or develop current supplier capabilities, must work hard to identify and develop the best suppliers, negotiate the deal, and create contracts with real value. What is next? Procurement hopes that the suppliers will adhere to the contractual obligations, and the suppliers, out of the goodness of their hearts and dollars paid, provide outstanding service? How should we maximize the true value of the relationship? Often, in the end Procurement does not manage the relationship correctly, performance declines, and the category must be re-sourced.
For the most part, how do procurement departments plan and prepare for supplier relationships? Simple – they place the minimum required to meet the business needs at the time. If we are honest, as we integrate suppliers, develop/correct their performance, invest business dollars and sweat time, the business relationship becomes more challenging. Many of these relationships require more time and effort. Procurement – with the assistance of other departments – needs to identify and select suppliers carefully in the front end of the commercial engagement. As time goes on, certain selected relationships need to be cultivated and managed carefully.
Here are four categories. Organizations can define the types and the criteria of those relationships:
Short Term Leverage Suppliers
In this definition, many suppliers exists in the market and the competition among them is strong. Procurement should recognize that these types of suppliers are of relatively same capability and service offerings, so in this case many of them need to meet your minimum performance requirements and provide exceptional pricing impact in order to have the opportunity to serve your business.
- Maintain the relationship from a distance, not close and integrated
- Allow the markets to drive pricing down and performance.
- Create competition through the use of RFPs, RFQs, e-procurement, and reverse auctions.
Mid-Level Contribution Suppliers
In this instance, these suppliers, who may be incumbents, have shown they can provide some consistency in their performance and have proven themselves as well by correcting problems. Procurement needs to value this and try to develop a framework for a future performance-backed relationship.
- Alongside internal stakeholders, develop performance metrics around price, delivery, quality, and service improvement with fees or other incentives for non-performance. Define and implement performance meeting schedules with suppliers within the year.
- Benchmark the supplier capabilities and performance against other suppliers in the same market or with buying organizations similar or dissimilar that develop this type of relationship.
These suppliers are those who almost always deliver performance and even innovative ideas to procurement. The goal is one of creating competitive advantage through innovative practices between procurement and supplier. If both the procurement team and the supplier can maintain this relationship, then the likelihood of a single source arrangement existing is highly probable.
- Exhaustive performance management with metrics such as SLAs and KPIs need to be jointly developed and agreed upon. Close review of performance and validated value delivery assures high quality response, pliability, and access to innovation.
Relationships rarely reach this category, which involves cross control/joint ownership between procurement and supplier, interdependency, and sharing of resources and revenue. Pinnacle alliances are rare in many sectors due to the fact that shorter term relationships are the norm.
More importantly, the identification and participation of the most optimal type of supplier relationship do not fall solely on the supplier. It’s Procurement’s job to take accountability and responsibility for the outcome of that commercial relationship as well.
For more interesting thinking on procurement, visit the GEP Knowledge Portal.