Spend Matters welcomes this guest post from Dr. Muddassir Ahmed, divisional supply chain manager at Eaton.
Buyer and supplier relationships can only occur if both sides obtain some gain from trade that occurs between the supply of goods or services and their exchange for money. Isn’t this a good enough reason for to emphasize supplier relationship management? Probably yes, because no one would trade with anyone else if both sides did not gain something that they valued from the exchange relationship.
Whether we like it or not, whether we want to say that out loud or not, buyers and suppliers primarily indulge in exchange relationships in order to satisfy their desire for money and to benefit their businesses or organizations. So when buyers and suppliers think about supplier relationship management or ways in which they conduct exchange relationships, they must focus on a share of value appropriated by both sides in the relationship.
What is Supplier Relationship Management?
Over the years effective management of supplier relationships has emerged as an essential organizational competence, and should be used to identify the right projects and the right supplier to maximize output from the available resource. Supplier relationship management can be described as the systematic management of post-contract value from relationships with suppliers over the life of selected key relationships.
Supplier relationship management may become one of the few real core organizational competencies. Practitioners and supplier relationship management leaders potentially become true “custodians of value,” systematically capturing value and innovation in working with key suppliers. As pointed out by Watts and Hahn1,
“In the final analysis, a firm’s ability to produce a quality product at a reasonable cost, and in a timely manner, is heavily influenced by its supplier’s capabilities. Consequently, without a competent supplier network, a firm’s ability to compete in the market can be hampered significantly.”
To get the incremental value of supplier relationship management, buyers should proactively seek to integrate the supplier’s processes into its own and the customers’, thus minimizing waste and moving cost out. There has been a great deal of research done on the subject of supplier relationship management in operations management; however, in my view, there are two strategic ways companies can improve supplier relationship management.
1. Category or Commodity Strategy
Krause2 has suggested the identification of critical commodities for development as a first key step of a strategic supplier development process. The Chartered Institute of Purchasing and Supply (CIPS) has defined category management as:
“Organizing the resources of the procurement team in such a way as to focus externally onto the supply markets of an organization (as against having a focus on the internal customers or on internal procurement departmental functions) in order to fully leverage purchasing decisions.”
CIPS also outline key features of a structured category management approach as:
- Developing a thorough understanding of supplier spend and future demand
- Segmenting spend into market sectors
- Developing market division sourcing strategies
- Supplier selection and segmentation
- Supplier performance management, including strategic supplier partnering
Krause suggested many companies used a “purchasing portfolio analysis” while pursuing strategic supplier development, similar to Kraljic’s classification matrix for commodities as shown in Figure 1 (below), which separates low-risk from high-risk commodities and low-volume from high-volume purchases. After classifying all commodities into each category, the resulting portfolio discriminates between non-critical commodities and strategic commodities.
Figure 1: Classification matrix for commodities (source: Kraljic3)
Krause also argued that companies generally skip this step when efforts were driven at the individual supplier level, and where the situation is “fire fighting” in nature, to correct specific supplier deficiencies. Therefore, if companies use proper commodity strategy, then they can focus resources on what is important for them and drive many improvements.
2. Selecting Suppliers for Development
During my doctoral research in supplier development, I have found that the need for a supplier development program must first be recognized by top management as a desire to improve the firm’s competitive position or specific competitive challenges. Either the top management or a small group in a purchasing and supply chain organization translate this recognition of the need into a set of objectives dealing with various performance measures such as cost, quality, delivery performance or strategic objectives. The main input to formulate these objectives comes from technical capability, costs, quality and delivery performance from existing and new suppliers, customer requirements and competitive challenges in the marketplace. Moreover, organizations need to ensure these objectives are aligned with their category or commodity strategy and supplier relationship management initiatives.
The main output of this strategic initiative is to select suppliers for development. Krause suggests companies should have formal supplier performance measurement (i.e., a supplier rating system in place to formally assess suppliers’ cost, quality, service, delivery, technology, and environmental performance.) For example, at Eaton we use a supplier dashboard to understand cost, quality and delivery performance as the key agenda items in our quarterly or annual business reviews with suppliers. These supplier dashboards also serve the basis for supplier negotiation in terms of pricing.
The research also emphasized that supplier development is a process where one partner in a relationship modifies or otherwise influences the behavior of the other partner with a view toward mutual benefit. Therefore, the subject of supplier development is closely associated with supplier relationship management and partnering.
At Eaton, we use both supplier development and category management to drive our corporate strategic agenda upstream in the supply chain with suppliers. We also use these two strategic approaches to set annual targets for employees and suppliers for cost, quality and delivery performance.
In nutshell, the ability and competence for buyers and suppliers must reside in their respective ability to make appropriate choices about how they conduct themselves in exchange relationships. Buyers and suppliers often face difficult choices about how to conduct their relationships in circumstances of uncertainty. These decisions can be helped by formulating solid commodity strategies and engaging key strategic suppliers for development to build a mutually beneficial relationship.
- Watts, C.A. and Hahn, C.K. (1993), “Supplier Development programs: an empirical analysis”, International Journal of Purchasing and Materials Management, Vol. 29 No. 2, pp. 11-17.
- Krause, D.R., Handfield, R.B. and Scannell, T.V. (1998), “An empirical investigation of supplier development: reactive and strategic processes”, Journal of Operations Management, Vol. 17 No. 1, pp. 39-58.
- Kraljic, P., 1983. Purchasing must become supply management. Harvard Business Review. Vol. 61 No. 5, pp. 109-117