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Part Two: SRM is Real

In my last blog “ Do we really understand SRM ( Supplier Relationship Mgmt)?” we defined Supplier Relationship Management" as a collaborative win-win business discipline of strategically managing the supplier engagement process to maximize the potential value of those relationships by providing seamless integration capabilities for smooth harmonized operations and aligned business goals with the partner supplier community”.

We had some valid questions coming up from the readers of how to address SRM in a bilateral relationship where the supplier is also a customer , how do we define a metrics model to track we are realizing what we planned etc but there were some very fundamental questions that needed answers to ensure the rubber meets the road. I have put my thoughts here to a couple of them for I believe this is essential to get to a solution which addresses this vision

Q.1. How SRM, typically considered a noncore process till now, helps business advantage to organizations?

Ans 1. We have to raise our expectations of the SRM organization. SRM is not about raising purchase orders. It is about creating an image of the organization – in goals and performance in every business community that it works with in furthering its business objectives. In other words replicating organizational values and capabilities in every of your supplier community, in some cases up to 40000 partners, often distanced by even geographies, cultures and continents.  This is a pretty daunting task by all standards considering that one is not directly controlling the management of these organizations.

Effective supplier relationship management can really contribute to overall organizations growth.

  1. Drive competitiveness: 50-60% of the costs of the product in most organizations are the cost of material. Buying better and using this material better (in terms of better productivity in manufacturing) is all that drives product competitiveness. Better quality product at lower costs is definitely impacted by the SRM process.
  2. Enable scale and growth: as majority of the value chain managed by the supplier community is outside the organization, better managing the external partner operations can help organizations be nimble and enable business growth rapidly without self investment and efforts.
  3. Better brand positioning: The supplier community from 200 to as huge as 75,000 suppliers constantly engage with the buyer organization and are really brand ambassadors for the buyer organization. Better relationship and engagement with this supplier community creates a better market value for the organization. In this world of business interdependencies, it is not uncommon to have your suppliers as your customers as well.
  4. Essential statutory compliance requirements: SRM enables organizations in complying to statutory requirements like SOX compliance and HSSE 

Q.2. Procure to Pay and other typical SRM processes are very internally focused. How can these internal processes enable the collaborative goals of as above mentioned by you?

Ans 2. Friend, this is the paradigm shift in perceptions we need to manage/ change. We have always looked at sourcing, contracting and procurement functions as internal transactional and operational functions internal to the organization, things that keep the day running.  We need to make a start of looking at this process from an external collaborative mission and we will start seeing a different image

Let us take a process scenario and explore the effects of effective SRM processes  based on supplier relationships ( Help Me Help u) and how that leads to the parent organization benefits.

 Scenario 1Scenario 2
Requisition to PaymentTraditional purchasing organization, multi-location buying organization, for PO creating and paymentMulti location buying organization has standardized the practices and policies and have automated self service catalog for their indirect material procurement
Results
  • Many buyers having a high number of suppliers
  • Buyers from different locations do not have consolidated visibility with whom they are buying similar items
  • Multiple PO ‘s for same item at the supplier from the same organization but different buyers
  • Paper based transactions is the norm - reconciliation of payments is a major accounting task
  • Self service ensures that there is little need to buyers for consolidation efforts ( taken care automatically)
  • Buyers raise consolidated requirement across the organizations
  • Automatic reconciliation of receipts and payment
Effects for supplier
  • Different feeling of engagement with the organization – very person dependent
  • High cost of fulfilling individual transactions ( freight costs can be significant at time ) for different buyers , passing this on to the client or affects his bottom-line, making him less competitive
  • Non standardization of requirements making it difficult for the supplier to leverage economies of scale
  • Supplier is able to leverage the economies of scale and lower fulfillment costs and make him competitive , enables him to scale and grow
  • Has a unified engagement process which is standard and does not vary with each buyer
  • Faster payments helps his Cash flow and makes his operations agile
  • Higher sense of satisfaction and supplier (SSAT) with a feel to continue the relationship, they will as long as they are growing.
  • Higher interests to satisfy buyer performance metrics
Leading to Effects for the organization
  • Due to lack of visibility and standards not able to consolidate procurement requirements and buy at better prices
  • Suppliers higher costs means higher TCO for cost of material for the OEM making them less competitive
  • Lower cost of material procured leading to highly competitive products in the market
  • Higher collective bandwidth for both buyer and supplier in collaborative improvement and strategic processes leading to better quality of products and faster launches
  • Better Brand equity in the supplier community creating more supplier interests to work for you and hence increasing your buying power
  • Strategic relationships and partnerships

Table 1 : SRM Scenarios

Comments

Hi Pradeep
Nice one, I wanted to share my experience on something that would be another bullet point to strengthen your views in your Q.2 section.
In the days during my SRM domain stint with a Big 2 automotive major, we beleived in a term called "Early involvement of Supplier", typically in nPDI initiatives for fixing the sources of supply for a newly rolloed out BOM, by involving the suppliers early into the process, we not only realized bottomline savings, but also got such a stong commitment from the finalised supply base resulting in them translating as Green-channel vendors pumping supplies direclty into the assembly line...it is definately worth an effort to treat them as your trusted people to drive strategic goals, than to just simply push them to the limits "in the bare price game"....does this resonate to your thoughts?

Let me share couple of examples of managing supplier relationships. During my MBA stint 7 years back, my Professor shared with us how one of the biggest and fastest growing Pharmaceutical company managed its relationship with its suppliers:
1. When a new plant was to be setup, the company wanted to its "best" suppliers to be based out in and around the new location and they knew getting government approvals etc. will be a challenge for these small suppliers.So what they did was they got all the approvals and all the supplier need to do was to setup the plant.
2. They encouraged visit of suppliers to their plant and trained them on the best practices and in some cases learned some best practices from the suppliers.
3. They encouraged their suppliers to hire the pharma company's retired specialists as consultants so that the good business processes could be passed on to the supplier community.

One more recent example I can think of supplier collaboration is what went behind Nano Car Project.This is a classic case of supplier collaboration right from the begining of the design phase and when due to reasons outside the company's control, they had to shift their manufacturing base, most of the suppliers were compensated for the losses incurred.

What I can conclude from the above examples is that "Trust, Transparency and Speed of decision making" are the key factors enriching supplier relationships and that is where information technology plays a key role complimenting sound and robust business processes.At the end of the day it is the vision of the organization on how they want to treat their suppliers that really matters.

Tridip , Sathya – you have opened some great thinking points . They say 80 % of the costs get frozen in NPDI stage and becomes very inflexible for improvement later. The suppliers are often the best experts of their product and processes. It would be criminal not to involve them in the design processes.

Sathya – you have hit the nail on the head when you said –“"Trust, Transparency and Speed of decision making" are the key factors enriching supplier relationships and that is where information technology plays a key role complimenting sound and robust business processes. “ . With a clear understand of SRM business goals and principles, there is a need to map these to specific technology initiatives .

Do clients and consultants implementing SRM products have a clear view of this ( including the points you have made of NPDI collaboration and supplier satisfaction ) when blueprinting their To-be processes ?

Would like to hear on what it takes to have this very business objective focused implementation approach so that the organization finds more value in the implementations over the manual transaction reduction achievements

Sathya
Completely agree with you, manufacturing companies typically the ones that are the hard core discrete ones are these days getting out of the traditional way of doing things, Supplier is no more a term, its now rebranded "Business Partner", and trust me I had this challenge when I was doing the PPAP (Production part approval Process), whilst getting a Supplier's Supplier into the value scenario, it is like a fission reaction that goes a long way, belive me, the approach made the in-house manufacturing almost null, containers with JIT delivery schedules hit the production lines as RTA(Ready to assemble) than repetitive core manufacturing in-house. The organization and the SRM goals could be more strategic on core initiatives.

Pradeep, we need to come out with an understanding of how the SRM definition need to be framed around these discussion lines

Tridip , Good suggestion ,

While I see that we are all agreeing to win win collaborative business discipline as a principle , I read that we are suggesting that we look at all the strategic "design to fulfil" processes in scope of SRM to include NPDI, Supplier development , PPAP, JIT etc . Is this right?

Some questions

What are clients expecting in this holistic SRM transformation journey beyond transactional automation?

Do we have an application / product that can address thi end to end holistic scope?

How would SRM approach differ by industry?

Pradeep - answers
Q) What are clients expecting in this holistic SRM transformation journey beyond transactional automation?
In addition to the approach that you already have laid out in the blog and also what we’ve discussed, we can keep the transformational road-map aligned to the processes we discussed so far, lets quickly build the metrics for that cross-industry end to end scope
The idea for us is to come out quickly with the metrics to capture the efficiency of SRM processes and how & with

Q) what percentage they impact P&L
Do we have an application / product that can address this end to end holistic scope?
Pradeep – I won’t be biased towards SAP SRM here, but needless to say, it has the end to end offering
Even Ariba is capable of doing all this end to end
SAP SRM, Ariba, Oracle iProc are the three frontline application offerings we have in our procurement packaged offering. Don’t know if we have added more to this list

Q) How would SRM approach differ by industry?
In addition….
In the Oil and Gas industry we have the RNIF (Rosattanet standards) PIDX standards for the Data interchange for supplier collaboration (B2B)
Check the following link to understand more on the integration objects specific to the PIDX standard
http://committees.api.org/business/pidx/standards/index.html
How should we take this forward?

True , It's for sure that for true SRM , we will need to go beyond conventional SRM product boundaries and measure all collaborative capabilities with the supplier partnerships with the right KPI's .

How about jointly penning down the discussions for a next blog on the solution to address this SRM landscape?

Tridip, to getting the right metrics

Free cash flow is a widely accepted measure of organizations value . However for a collaborative contract value , we will need to be breaking some boundaries . Any thoughts on this would be great.

Liked some of the stuff posted on Wikipedia as well

http://en.wikipedia.org/wiki/Supplier_relationship_management

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