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Got Strategy? — How to Create a Strategic Supplier Relationship Model

Author(s):

Kevin Williams, C.P.M.
Kevin Williams, C.P.M., Manager - Account Development, American Express Corporate Services (www.americanexpress.com), P.O. Box 364, Hebron, CT  06248,  860/228-6705, kevin.j.williams@aexp.com

86th Annual International Conference Proceedings - 2001 

"Strategic planning for the future is the most hopeful indication of our increasing social intelligence" — William Hastie (US Judge, Politician)

Abstract. This paper supports a workshop to be held at the 86th Annual N.A.P.M. International Purchasing Conference to be held in Orlando, Florida from April 29 through May 2, 2001. This presentation will look at key elements of customer and supplier relationships in the Strategic Sourcing process. A methodology based on an actual implementation will be provided.

Does Strategic Sourcing make sense? It may not seem like it at times, but there is a flow to Sourcing. The process described in this presentation uses a series of "building blocks". Each stage must be completed before the next stage can begin. There are also three critical elements to the success of any Strategic Sourcing initiative. First, completion of the process will require participation of the entire organization. Second, the process MUST be supported by senior management to achieve any level of success. And third, the process must be based on a sourcing spending and procedure analysis at each commodity level.

As has been emphasized in numerous presentations at this conference during the 1990's, Purchasing's role has been making a gradual transition from manual transaction based processes to a consulting and management function. Processes like Match Audit, Filing and Expediting have, over time, been replaced by skills such as Contract Administration, Supplier Relationship Management and Business Process Improvement.

The importance of the Strategic Sourcing process was highlighted by Michael Eisner, CEO of The Walt Disney Company, at their February, 2000 Shareholders Meeting in Chicago, IL. Mr. Eisner stated, "Another effort underway to optimize our company's performance is our Strategic Sourcing initiative, a top-to-bottom review of our purchasing practices. Within five years, we expect to be saving more than $300 million annually from Strategic Sourcing. Since we'd all rather I talk about movies, let's put this in terms of movies: $300 million is the equivalent of earning the combined ultimate profits of "The Rock," "Ransom" and "The Waterboy" each and every year."

Core Skills — The foundation of sourcing. Without skilled professionals leading the sourcing process, it's impossible to achieve the levels of success expected by the senior leaders of our organizations. But what skills will get us there?

Mission/vision writing — Sourcing professionals must not only be able to see a "big picture" regarding their organization's procurement needs, but they must also be able to articulate that picture into a written vision and mission.

Process mapping — Sourcing professionals must be able to evaluate each individual step in a sourcing process (from identification of need to payment for goods and services received), and must be able to document each stage.

Surveying — Buy-in by all stakeholders is critical to the success of any Strategic Sourcing effort. In order to ensure their support, the Sourcing professional must be able to ask the right questions and gain a complete understanding of what each participant needs from the process.

Benchmarking and Data Analysis — The only way to achieve best practice results is to be able to determine what metrics and best practices are for any given industry. Having the ability to interpret measurement and benchmarking data (such as those produces by CAPS) is a required skill for any Sourcing professional.

Proposal writing — Once making a proper determination, the Sourcing professional must be able to document proposed solutions in a way that they will "sell themselves" to all participants.

Selling — In addition to documenting the proposed solutions, the Sourcing professional must be able to persuade all stakeholders that the solutions are the right decision for the company.

Implementing — Once the proposals for changes to the Sourcing process are documented and "sold", the Sourcing professional has to know how to convert the theory on paper into action.

Measuring — Once implemented, the Sourcing professional needs to know how to effectively measure the organization's progress against the original goals of the project.

Each of these skills is needed to have your Strategic Sourcing effort achieve success. Organizations can acquire these skills through hiring people who have already demonstrated these skills, through providing training in any areas of weakness and through providing on the job development opportunities.

Can you recognize Value Added? For the purposes of this discussion, a task or service is only value added when the person receiving the result indicates a need for the task or service. Far too many times, we continue to perform tasks and do work because we have always traditionally done things that way. Yet when we look at the results, we find that the person we thought we were helping has no need for the work we did. Today's sourcing professional must apply their skills in process mapping, surveying and data analysis to determine what work is necessary to meet the needs of their key stakeholders. They must also apply their measurement knowledge to determine how they will measure value in the eyes of their key stakeholders.

Where can you turn for help? There are a number of available tools to assist the sourcing professional in their efforts. These include resources such as:

References — Textbooks, magazines and other industry specific publications still provide a much needed resource in researching solutions. The N.A.P.M. Professional Development series is a great example of this type of tool.

People — Never underestimate the power of your network. You can save dozens of hours "reinventing the wheel" by simply calling or meeting with colleagues who may have tackled the same process you are about to undertake.

Technology — For research, the Internet is quickly becoming the best place to turn for information, statistics, articles and other key data. Internal systems like Intranets and email will help communications to ensure your process has the full support of all stakeholders.

Education — As mentioned earlier, there are a number of critical skills a sourcing professional must master in order to succeed in Strategic Sourcing. If you don't have those skills already mastered, look to professional organizations (like N.A.P.M.) to gain the knowledge and expertise you need to succeed.

Benchmarking — It's been quoted numerous times...you can't manage what you don't measure. There is now a wealth of information through non-profit groups (such as CAPS) and consulting agencies (such as American Express Consulting Services) that can help you determine what best practices are for the strategic commodities you are looking to address.

Time — The most underestimated resource in the list, but also the most limiting. While addressing the process, you must be able to acknowledge the time required by each party and how much time can be devoted to your project.

OK, I said I would talk about an actual process. What is it? Like all business processes, there is no one perfect, right or wrong solution. This presentation simply outlines one angle used in actual practice. First, let's look at some overarching principles of the process. No matter how you establish your Strategic Sourcing plan, the process must be taken in stages. In addition, the process must be documented. Without written tracking, you will likely start to see things stagnate and you desired goal will not be reached. The process must have measurable deliverables. Remember, you can manage what you don't measure. The process must have a time line. Without putting a schedule to each task, it is far too easy to let things slide in lieu of day to day tasks. The process must be realistic. Setting unattainable goals will only serve to frustrate people and bring out all those people who told you "I knew it wouldn't work!". The process must NOT include every contingency. The resulting "paralysis by analysis" will leave you wondering if you will ever get your sourcing effort off the ground. Lastly, and most importantly, understand that your key stakeholders include not only your internal customers, but your suppliers as well.

Now for the actual steps:

Step 1: Obtain backing and announce the effort. I mentioned the need for senior management support. Now is the time (before you invest your efforts) to obtain the support you need to complete the process. You should also, once support is obtained, communicate the effort to all stakeholders (internal and external) for the commodities you are considering.

Step 2: Feasibility. The starting point is to gather as much data as possible about each commodity you are considering as a target for Strategic Sourcing. You gather this data in the following areas:

Define your current requirements. To successfully complete this stage, you must examine each commodity individually. You need to determine, for that commodity, what your requirements are at the Corporate, Business Unit, Individual and Supplier levels. Your requirements will not only include the need for the specific product or service, but also what supplemental reports are needed, what type of payment process works best, and all other ancillary functions that support that commodity. Interviews with all key stakeholders are a must at this stage.

Define the current market. Again, this is a commodity by commodity review. How large is the marketplace for this item? For example, just about every company worldwide needs office equipment (copiers, fax machines, etc.), but only a small subset require tree logging machinery. This dictates how large the demand market for the commodity will be. What is the competition level? Is the market wide open (such as in office supplies), or is there a very small number of firms that have set the standard for that commodity group (such as Microsoft and Netscape with web browsers). What relationships do you currently have with existing suppliers? Are any of these relationships critical to the success of your company?

Define your future requirements. This is probably the hardest step in the whole process. You need to look at the historical variance within each commodity group. Is your activity for the commodity seasonal (such as landscaping services)? What is your company vision? What is your key suppliers' vision? Do they match? How will the changes your enterprise makes to its products and services affect the items you need to procure? What is the general business climate for your industry? Are you growing rapidly like bio-medical firms, or are you in a unstable environment like the technology sector? Are you viewed by a supplier as a stable customer or a potential business risk? Where is your opportunity for improvement? What is the ease of implementation if you change the way you handle a specific commodity?

Define your future market. For each commodity assess the product evolution and/or obsolescence. Will your suppliers be able to provide you with what you need not only next week, but in three to five years from now? Are there any mergers or acquisitions occurring which will affect the number and experience of suppliers you rely upon? Are there new metrics for the commodity, reflecting a fundamental shift in how the commodity is viewed by the general buying public?

Step 3: Establish your requirements. Once you have determined a commodity is a probable target for Strategic Sourcing, you need to define what your requirements are for that commodity. This includes what products and services you need, how you need the pricing structure to work, how you need to be billed or invoiced, what order system you need to interface with, etc. With this information, you should be able to build a complete and accurate Scope of Work.

Step 4: Issue the RFI. Be sure to invite responses from all parties you learned about in Step 2 (defining the market). Let the supplier's responses confirm any suspicions of not being able to meet your needs. Don't make assumptions in advance. The process must be an open and honest sourcing effort (even for private sector companies). If it is not, even the supplier you end up choosing may be concerned about how close the relationship can develop.

Step 5: Narrow the field. Evaluate all responses to your RFI, looking for possible improvements to your system that were voluntarily offered by the respondents. Narrow your "short list" down to the two or three best responses received. Make sure that key stakeholders have a chance to evaluate the results as well. There may be response information that they would place a higher emphasis on than you did. Communicate openly and honestly with the suppliers that do not make your short list. Make sure they understand (without revealing proprietary information from their competitors) why they are not being considered in future stages. Educate them on the areas they may want to consider enhancing so that they will be more competitive in the next bid opportunity. This will hopefully leave the supplier with information that can lead to increased competition in the future.

Step 6: Issue the RFP/RFQ. Incorporate any newly learned best practices and suggestions that were well received by your key stakeholders into your new Scope of Work. Make sure that all suppliers invited understand that their response is to be their "Best and Final" offer (this will ensure the lead-time to complete the bidding process is shortened).

Step 7: Summarize the information. In the first six steps, you have gathered a number of pieces of key data needed to establish your sourcing direction. You now need to sort out that information, using your benchmarking and data analysis skills, to determine what the best practices are for that commodity. The results then need to be assembled, using your proposal writing skills, into a clear and concise plan of attack for that commodity group. This includes preferred supplier selection, order process, payment process, and all other components that support the commodity involved.

Step 8: Create Supplier Management Plan. Now you're ready to attack the commodities you have selected. First, obtain key stakeholder buy-in to your proposal. This should not be difficult, as you have kept them involved from the start of the process. Next, negotiate and obtain key supplier buy-in. Make sure that you can reach an agreement that both sides agree is a win/win solution. Create key documentation. Establish any required contracts, update existing policy and procedures and create any possible internal communications you need to make sure all parties understand the changes. Make sure your supply base agrees to all appropriate written documentation to ensure the relationship will be positive moving forward. Develop key systems integration. Make sure that all required automation (e-procurement system, Corporate Purchasing Card mechanisms, etc.) are in place and ready to be used.

Step 6: Implement and Monitor. Execute your plan as proposed. Using the metrics you developed during steps 2, 5 and 7, check to see if desired results are being realized. Is your commodity spend being channeled to the preferred suppliers you have selected? Are orders being processed in a quick and timely manner? Is payment being handled easily? Adjust your plan as needed. If you find out that certain options you thought were good did not produce the results you wanted, change or eliminate them. If you find that your metrics are not properly reflecting the success of the program, work with your preferred supplier to establish new, more accurate metrics. Restart the cycle from the beginning. Establish a new "wave" of commodities to be reviewed for potential changes.

Summary. The Strategic Sourcing process will not necessarily work for all commodities. You will find some that will not make it past the Feasibility stage, as they are already being sourced in the best manner possible (or the company culture is not ready to embrace the change). But for a large number of high profile, high spend areas, the process will yield better results. The key is to attack your spend by commodity, ensure that all key stakeholders agree to the sourcing process and the results, and to effectively measure the results for further enhancement and improvement. You need your daily allowance of savings, efficiency and satisfied customers and suppliers...got Strategy?


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