Leverage, Leverage, Leverage Networks — What Comes After Supplier Relationship Management

Spend Matters would like to welcome a guest post from Michael Eckstut of Archstone Consulting.

Over the last five years there has been a sea change in how buyers treat suppliers. Not long ago, the standard practice was for buyers to simply beat them up, with techniques that included "Dear Preferred Supplier" letters describing "partnerships" with veiled threats to bring about desired price reductions. Today, buyers are more likely trying to become a supplier's favorite customer, trying to work with them, learn from them, invest in them, get them to invest in and use good relationships with them to generate ideas that lead to tangible benefits. SRM programs now abound, and most world-class procurement organizations that are tasking their senior leaders to be Category Managers are also asking them to manage their strategic suppliers in those key categories. Managing suppliers is becoming embedded in the DNA of everyday procurement organization management.

As a result, we are also seeing a clear tendency in world-class companies toward greater internal alignment, greater external collaboration and real partnership with suppliers. And all of this SRM activity is now properly focused. At The Hackett Group, our research shows that, among other things, world-class procurement organizations do the following well:

  1. Leverage the full capabilities of its supply markets
  2. Protect the business from supply risk and from itself
  3. Measure suppliers, but also taps their hearts, minds, and budgets

But interestingly, even as we see all of this activity, we also observe that these same world-class procurement organizations asking a new question -- "What's next?" What do we do after we have implemented SRM, after we have built stronger relationships with our suppliers? How do we continue gaining value?

The surprising answer from our research and conversations with Global 1000 companies is to go beyond managing a relationship with a single supplier and maybe to even go beyond suppliers completely and look to obtain these same from a Network. No, this is not your father's old ATT network, but a network of suppliers and others driven by the benefits of improving knowledge and understanding.

Using networks, companies can turn individual partnerships or relationships into broader and more cohesive relationships that go beyond leverage the capabilities of individual members and produce tangible benefits. SRM evolved out of the need to generate more than simple purchased cost savings. The focus on networks evolves out of the need to build greater value from multiple relationships. Think of supplier linkages as a chess game -- and think of network relationships as a multi-dimensional chess game.

The creation and management of external networks utilizes principles, processes and tools similar to those used in SRM. But networks provide numerous value opportunities with potentially far greater benefits. Some of these are:

  1. Access to multiple sources of innovation, often faster than internal generation
  2. Increased alignment with the overall marketplace
  3. Visibility to potential new business models
  4. Introduction to new sources of knowledge and to a broader talent pool

The basic value proposition with suppliers is about dollars and cents. But in a network, value is all about trading information and knowledge. It's an evolutionary process.

The shared goals and objectives involved in networks are much more complex than those of SRM (buy-sell relationship). While SRM relationships evolve, their evolution often remains rooted in the buyer-supplier relationship. In contrast, network relationships are highly dynamic, just like social networks such as Facebook and LinkedIn – the network changes, evolves and grows extremely rapidly. The speed with which connections are made and problems solved in a network is truly astounding.

As an example, some companies on the cutting edge are already establishing networks with universities for a number of reasons -- research, collaborative problem solving, talent access and recruiting, emerging trend identification, target market development and more. Both the universities and the companies participating benefit.

Emerging Best Practices for Network Management

  1. External Network Creation
    • Create multiple focus areas and establish partnerships based on each
    • Create centers of excellence which includes multiple partners
    • Clearly identify and understand various roles within the network and tailor interactions based on these roles (such as customer, competitor, influencer, supplier...)
  2. Record Keeping
    • Network capabilities and participants and their contribution must be tracked
  3. Network Management
    • Partners should be carefully selected, engaged, developed, supported and evaluated
    • The network should be stimulated through connecting the various individual partners, continually searching for potential synergies and identifying business opportunities
    • With an effective network, partners will continue to support long-term collaboration
  4. Network Sustainability
    • Common values/goals understood and clearly identified
    • Roles of various members within the Network clearly defined
    • Sustainable networks continuously create value from both the interactions among members, and their ability to convert intangible value into more tangible and actionable assets (e.g. utilizing intellectual capital to create revenue)

Procurement's experience and expertise in managing supplier relationships puts them at the focal point for managing networks. Procurement is uniquely qualified to manage networks for an organization -- they have the connections and presence throughout the organization which uniquely enables them to effectively create and manage networks.

-- Michael Eckstut, Partner, Archstone Consulting

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