Supply Relationship Management
16 May 2007 Roy Ayliffe FCIPS MBA
Relationships are all around us, whether they're of a personal nature or in a business context. Roy Ayliffe, director of professional practice at The Chartered Institute of Purchasing and Supply, explains how we can better manage the supply relationship.
Some of us are better at managing relationships than others (especially the personal ones) and some hold them in a higher esteem than others ‐ but the problem with relationships is that no two are the same and given that, they suddenly become much harder to manage.
In the purchasing and supply profession, creating, managing and developing relationships with suppliers is critical and can be the make or break of a good purchasing strategy.
CIPS defines supply relationship management (SRM) as 'the process for managing the interactions between two entities – one of which is supplying things to the other. SRM is a two-way process in that it should improve the performance of both the buying organisations as well as the supply organisation and hence be mutually beneficial. It involves proactively developing relationships with particular suppliers'.
SRM will depend on the inter-personal dynamics in a buyer / seller relationship.
A KEY SKILL
Increasingly, relationship management is being seen as a softer skill, after all it's about dealing with people, communication and interaction.
As a buyer, the purpose of investing time in a relationship with a supplier is to ensure the performance of that supplier always operates to the best of its ability, or perhaps if it hasn't been performing as desired, to try and improve the performance. Performance management and managing changes are therefore integral to SRM.
Just like any relationship, supplier relationships will vary in intimacy, all depending on what is deemed necessary for the relationship to work, the people involved and perhaps even the history of the relationship.
A relationship could, for example, be deliberately kept at arm's length but still remain very cordial – this could be because it is deemed that there will be no immediate business benefit for it to be any different. This may be the case when the items being supplied are relatively low value, infrequently required and pose very little risk to the organisation should the security of that supply ever break down.
Moving to the other extreme is the long-term close relationships that may be operated as a partnership. This will often be the case when items are high risk, high value and integral to organisational operation.
A WORD OF CAUTION
However, there is word of caution here for some sectors. Scarcity of some raw materials such as steel, which is currently a situation faced by many manufacturers, can potentially change the dynamics of a relationship and put the suppliers in the driving seat.
At the European Institute of Purchasing Management annual conference in Archamps, France last year, Luc Volatier, vice-president, purchasing worldwide, at Numico, a Netherlands-based maker of specialised baby food and a clinical nutrition company said "purchasers have had an easy ride for the past ten years." He went on to say that 2005 could be a make-or-break year for many purchasers whose major suppliers raise prices or even refuse to supply.
This was the situation that Japanese car manufacturer Nissan found itself in over recent years, when it had to close three of its Japanese car plants for five days because it ran out of steel. This meant Nissan, who is Japan's second largest car manufacturer, lost production of 25,000 cars.
The knock-on effect was other car manufacturers had to assure stock markets that their own production was not at risk because of the shortage of steel.
In this particular situation, the prices for steel had risen dramatically due to a massive surge in demand and therefore production was at peak capacity. Volatier states that suppliers that have a rare commodity can refuse to renew a contract because they can get a better price elsewhere.
Although this may be an extreme case, steel is a major commodity and it does highlight the need for purchasers to keep such issues at the forefront of their minds when working with suppliers – especially for high-risk items. It also highlights the need for flexibility within supplier relationships. The key issue for purchasers is to try and ensure that key suppliers don't go elsewhere.
One factor for the purchaser to consider is how much knowledge they have of the market place within which the organisation operates. Purchasers must be aware of issues that may affect their global supply chain, both on a political and an economic front.
Working with a supplier to try and mitigate these issues will become even more relevant in years to come, especially when you look at the current issues with say the price of oil, copper, cement and energy which are just some of the areas which have seen dramatic price increases in recent months. Purchasers need to assure their CEOs that the relationship with their suppliers is strong enough to secure their supply chain and not leave themselves open to any risk should key raw materials be in short supply.
A CASE IN POINT
Supplier reliability and high-quality output are crucial to any organisation operating in a competitive environment. Eliminating defects, hitting delivery deadlines, reducing lead times and cutting costs are all elements that will impact on customer satisfaction. These are some of the issue that motivated CIPS / SM award winners Gillette UK to improve the relationship it had with it core supplier Crown Cork & Seal.
Issues with the manufacturing process were leading to a decline in quality and delays in delivery which in turn was having an impact on the margins of both companies.
Following a strategic sourcing initiative, Gillette opted for one supplier (CC&S) with whom it could concentrate on fixing the problems. Through cross-functional working and a complete overhaul of current processes and practice they managed to turn around the issues. This included redefining materials, specifications and processes, design amendments and implementing a new working relationship.
With a lot of hard work and determination both organisations worked together in partnership to overcome was what was essentially a set of manufacturing problems. Quality levels improved 97% between 1999 and 2003, which has allowed for reduced inventories and has saved millions of dollars. This partnership led them to win the CIPS / SM award for the best purchaser-supplier relationship.
THE RELATIONSHIP IN PRACTICE
Getting the relationship off the ground in the first place can be a major hurdle. Especially if in the original negotiation the purchasers have used an adversarial approach. Keeping the relationship going can be a challenge and does require time and investment on behalf of the purchaser and the supplier. There are certain methods that can be employed to ease the process:
- Supplier support and development programmes – these can stress continuous improvement in the supplier's processes, product and service quality and delivery performance
- During initial meetings with suppliers, top management should attend, showing commitment to the programme
- Suppliers must also benefit from the alliance (no relationship works if it's one-sided) – the agreed benefits that the suppliers expect from the relationship need to be monitored to ensure they are met or even exceeded
- Purchasers can help suppliers improve their operations – dedicating some time to work with supplier associates at the supplier's site
- Cost savings can be shared equally after the supplier has met the purchasers target costing
- Implementing supplier performance reporting will help suppliers analyse and measure their productivity. This can track statistics on quality and delivery
SRM means managing the whole interface between the suppliers and the buying organisation. There are common skills that can be developed to enable this to happen, some of which are part of the traditional purchasing skill set and some of which are on the softer side in terms of communication, interpersonal, listening and motivational skills – to name but a few.
The difficult part however, is being flexible, this not a case of one-size-fits-all. Each relationship needs to be moulded to suit the situation, the organisation, the people and the product or service being bought or supplied.
Even the best relationship management techniques are not enough to survive in a global competitive economy alone, but they are now an integral part of the professional purchaser's toolkit.