The Art of Supplier Relationship Management (Part 2)

Hot Topic

Yesterday we published part 1 of an article from Paul Blake of GEP on our Hot Topic SRM. Here is part 2. For more interesting thinking on procurement, visit the GEP Knowledge Bank

Part 1 ended: "In fact, oversimplifying the measurement can lead to you assessing the wrong performance indicator entirely."

Some time ago I came across a situation where four suppliers were selling the same commodity to a large company in the financial sector. Each of the four suppliers received a nominal 25% of the business but was measured on its ability to deliver the boxed goods within a certain turnaround time from order to receipt. Any supplier missing the deadline was marked down and received a lower percentage of the orders in the following month. So far, so fair, one would think.

However, one of these suppliers was a specialist in its field, the other three more generalists, supplying other categories as well as the one in question. The Specialist was the only vendor who could supply more niche products within the category and thus their quarter of the business comprised a much higher proportion of "hard to source" items than their competitors. You can see where this is going, I suspect. The niche items were subject to longer, more variable lead times, causing that supplier to more frequently miss the delivery SLA. The result was a gradual reduction in the business put their way until they ended up receiving ONLY orders for the niche products. Ultimately that supplier withdrew from the arrangement entirely. The buying company had to then find another vendor for those items, a process that was difficult and costly.

The company maintained that the system for assessing and maintaining supplier performance was straightforward, transparent and represented a level playing field but in reality it was anything but fair. The seemingly slight differences between the suppliers and how they operated led to a disproportionate gap in their performance scores. If the system of metrics excluded items that only one supplier could provide the share of business going to each would have been more equitable and stable.

Like a policy of economic control the rules of performance measurement, once set, can be perturbed by minor fluctuations. Keeping that in mind whilst determining a strategy for supplier relationships is important.

Fundamentally, the purpose of managing the relationship with your suppliers is to maximise the results, whether they be in terms of savings, efficiency, cost reduction and so on. Fitting a layer of strict empirical measurements on top of your dealings with each supplier may lead you to make the wrong assessment as to their value to your organisation and artificially report good performance as bad or vice versa.

Consequently, your supplier performance software needs to give you the latitude to craft specific combinations of hard metrics, softer qualitative assessments and to create plans of action that can be applied to the whole supplier base or targeted right down to an individual supplier level, if required. Software, by its very nature, is extremely good at permitting you to repeat the same tasks identically over and over, and to apply the same rules to many cases, but ensuring you can be flexible and allow for exceptions requires a practice of using the software in the right way.

So, the Art of supplier relationship management is in ensuring that the software can let you take into account the diversity within your supplier base, take advantage of your suppliers' strengths whilst giving you the freedom to act to improve things where needed. Yes, you want a clear view of how your suppliers are performing. However having a one-size-fits-all solution, with too hard and fast a set of KPIs and too scientific a methodology for performance analysis can lead to a distortion of that view.

By combining appropriate quantitative and qualitative measures, and by implementing action plans for improvements in a smart and collaborative fashion with your suppliers you can create a system that will help them help you.

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