Supplier Energy: The Next Wave In Procurement

Supply Chain Management Review • Yves Thill, Mike Hales, John Piatek

Just as marketing leaders have tapped into "customer energy" to shape the brand promise, procurement is tapping into "supplier energy" to improve and sustain its longer-term competitive advantage.

Saying that today's business environment is increasingly complex is an understatement. People want and need more of everything-products, services, information-in faster time and through more channels than ever before. Worldwide demand for water, food, and energy is soaring, depleting natural resources are putting pressure on preservation and sustainability. Add in more financial volatility from global capital imbalances and geopolitical volatility and you're talking about real challenges.

So it is no surprise that procurement organizations are becoming more complex and difficult to manage. C-suite executives expect more from procurement. Procurement must continue to do its "day job" and drive cost reductions while simultaneously becoming more strategic by delivering value beyond cost to the organization. This value is derived from innovation and growth, risk management, capital optimization, as well as speed, agility, sustainability, quality, and service.

Just as marketing leaders have tapped into "customer energy" to help shape the brand promise, procurement is tapping into "supplier energy" to improve and sustain its longer-term competitive advantage. The key is for procurement teams to go beyond a sole focus on sourcing.

What is Supplier Energy?

Broadly defined, supplier energy is the ability to identify and access the vast resources of the supply base-resources that can be channeled for longer-term competitive advantage. It is the level of expertise, resources, and capacity that suppliers put forward to help buyers achieve their broader strategic objectives. Procurement is the interface between the organization and the outside supply base that unleashes and channels this energy potential. It augments supplier energy and energizes its internal capabilities.

For procurement organizations that want to lead the way, here are four lessons. Each moves the procurement function to the next level in order to meet its new business imperatives.

Lesson 1: Go beyond cost reduction to address a broader set of business objectives. Procurement's traditional focus on cost reduction is a barrier to unleashing supplier energy. Measuring and "incentivizing" procurement primarily on the basis of cost benefits-and particularly with a short-term horizon-undercuts the ability to engage differently with the supply base and tap into supplier energy. Why would a supplier invest resources, capital, and ideas to support a customer's agenda if the relationship is short-lived and the supplier is squeezed on margins each year?

At this point, it's important for procurement to make fact-based rather than anecdotal decisions. One way to accomplish this is by developing supply-award scenarios to assess trade-offs that are determined across a multi-dimensional, balanced scorecard. The scorecard is tailored for each company based on its competitive environment and strategic imperatives.

Lesson 2: Create an integrated operating model to unleash supplier energy. Business needs and requirements are the starting point to determine which spend categories are essential and have the biggest potential impact on your long-term competitive advantage, and which dimensions of the balanced scorecard-sustainability, supplier risk management, customer service, and costs-are essential. Within these spend categories, qualified suppliers are grouped into clusters, which helps concentrate scarce resources on those with the highest value potential. Most suppliers are competed, while prioritized suppliers receive tailored treatment, with the aim of building relationships based on trust as the basis for generating long-term value. Performance management is employed to monitor the value delivered, minimize value leakage, and improve relationships across the entire supplier portfolio. Throughout, the supplier portfolio is actively managed to identify alternatives and discontinue poor performers as necessary.

Lesson 3; Develop SRM skill sets beyond traditional procurement skills. Unleashing supplier energy requires proficiencies and abilities beyond traditional procurement skills-from business acumen and aptitude, to problem solving. In this way, procurement is better able to collaborate with functional stakeholders and suppliers to develop new solutions. For example, engaging a brand manager to consolidate agencies often calls for the right vocabulary (to balance brand impact and efficiency) and a keen understanding of organizational dynamics and emotional intelligence. Clearly then, winning the war for talent is critical to fully leverage supplier energy. It requires taking more proactive and aggressive steps to recruit, develop and retain top talent with both left-brain and right-brain skill sets.

A typical procurement professional has most of the prerequisite left-brain skills: he or she is analytical, logical, precise and organized. A right-brain person, by contrast, is creative, imaginative, conceptual, and business savvy. These people are not typically recruited by procurement organizations. Yet, to unleash supplier energy, right-brain people have to be part of the mix. Procurement needs left-brain thinkers to deploy advanced analytics and right-brain thinkers to engage on supplier energy, effectively lead cross-functional teams, and embed communication and change management into the process.

Lesson 4: Segment suppliers based on performance and future potential. Many procurement teams fail to effectively manage their supply base because they are too broad in their definition of strategic suppliers. Our research shows that companies often take a process-based approach to supplier segmentation. This approach can take six months or longer, is usually overly complicated and results in too many "strategic" suppliers (at least one per spend category) with unclear prioritization across spend categories.

Success comes from a more focused approach- assessing suppliers based on their historic performance and future potential. This can be done through a series of working sessions with internal stakeholders supported by available supplier performance information, which can be done in weeks instead of months.

The key is to focus on the most important suppliers -- the 1 percent that fall into the critical (influence, integrate, and invest) cluster and the problem (mitigate, develop, bail out) cluster. Problem suppliers must be monitored to ensure performance, while critical suppliers require close collaboration to gain competitive advantage. Tips for successfully managing these relationships include defining expectations upfront and evaluating the opportunities thoroughly internally before approaching the supplier. When there is a compelling rationale to collaborate, engage the supplier and test their commitment. Other notable success factors include creating win-wins for both organizations, building trust through transparency, and defining gain sharing parameters so both partners understand the rules and the benefits early on.

Suppliers Are The Solution

The journey to unleash supplier energy takes time. It requires changing how procurement engages and collaborates with the functions and the business, realigning the procurement team, injecting new capabilities, and segmenting your categories and suppliers in a new way. And while everyone will need to be engaged in the effort, it is usually less complex and more self-funding than improvement efforts focused solely on internal resources. Isn't it time to view your suppliers as the solution to capturing additional, sustainable value, and unleashing their energy potential?


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