Procurative Powers

More and more companies are viewing procurement as a strategic means to gain competitive advantage. They have begun partnering with critical suppliers to jointly identify and realize new efficiencies, increase profitability and promote innovation.

Before IT was corporatized, Telstra managed procurement in the most traditional way. Purchasing officers thought short term, and notions of quality of supply and the desirability of forging long-term relationships with suppliers took a back seat to consideration of cost.

The Corporate Supply Group focused on managing contracts rather than driving value from them, and rarely questioned deals made by departments that chose to deal directly with suppliers. The Corporate Supply Group saw its role as functional and low key, not strategic. Today things are very different. Telstra has drastically transformed the culture of the group, which now operates a strictly fact-based process that takes into account considerations such as a vendor's track record, market position, product availability and Telstra's exact purchasing requirements.

"Two-thirds of the process is around establishing the facts, the stratification, what we want to do, understanding the market, understanding the plans in the market and understanding what we want to get from the relationship with those vendors," says Telstra corporate services director Tom Pearson. "Then we go through a decision-making process that's collaborative with all the key stakeholders in the company. So we have a stakeholder board process that drives involvement of the key players, and it drives a decision-making process that is quick and effective."

Through the life of a sourcing decision, that board will probably meet two or three times before any final decision is made. Pearson says adopting a strong decision-making process has significantly reduced Telstra's procurement costs and created more of a win-win position for vendors by emphasizing longer term contracts that help them to recover more easily their initial outlay and which provide them with a greater sense of security and stability.

Telstra now uses a formal vendor relationships management (VRM) toolkit that sets out the key processes and key policies and disciplines it expects in the way it manages its vendors and the relationship that it has with those vendors.

Page Break

Streamlined Suppliers

As organizations move from mere purchasing to strategic procurement or sourcing, partnering and vendor management, many are looking to vendor or supplier relationship management (SRM) to help manage interactions with the key organizations supplying their goods and services. The aim is to streamline processes between an enterprise and its suppliers, in much the way customer relationship management (CRM) does between an enterprise and its customers.

This is increasingly on organizational minds. So when Vantage Partners last year consulted executives at more than 100 companies about relationship management practices with key suppliers and service providers across six fundamental areas, it found almost 80 percent of respondents said that strong working relationships with suppliers deliver at least 25 percent greater value (in terms of cost savings, innovation, quality and the like) than poor relationships with suppliers (see chart right). Moreover, on average, sourcing professionals believed they would increase their company's bottom line by around $US43 million annually if they were to implement strategic relationship management practices with key suppliers.

"Now more than ever, managing key supplier relationships requires sourcing and procurement groups to coordinate communication and decision making across multiple internal functions and geographies," writes Vantage Partners senior consultant Jonathan Hughes.

There are plenty of case study examples to testify to the efficacy of the approach, as Vantage Partners found out.

For instance, over a long-term relationship with a transportation company it depended on to deliver supplies and people to hundreds of active sites, the vice president of procurement for a mid-sized US contracting company focused on developing personal relationships with members of the vendor's senior management team. The effort paid off big time when an important shipment of materials caught fire and was destroyed. Having long-term relationships with key senior people made it easy for the VP of procurement to call the vendor and resolve the problem immediately.

A financial services company's procurement group assigns each of their employees to be a "relationship manager" for an internal organizational group, with defined roles and responsibilities, including a requirement to conduct bi-weekly meetings with their designated internal counterparts and consistently send reports and other communications. The internal coordination and communication process keeps the entire company aligned around the company's sourcing strategy and tactical plans.

A company with multiple, highly autonomous business units has a major sourcing partner that supplies various components to the different business units. A standard management committee regularly reviews key issues and events in each part of the relationship, and tries to identify potential risks and opportunities. The company finds documenting and sharing decision-making guidelines, roles and protocols in advance lets each party know before a decision is considered whether they have decision-making power, an opportunity to provide input, or will simply be informed along the way or after final decisions are made. The two companies thus share information from different parts of their organization and balance decision-making efficiency with the need to coordinate action.

Hughes says organizations seeking to manage key supplier relationships effectively must find ways for their sourcing and procurement groups to coordinate communication and decision making across multiple internal functions and geographies, and myriad individuals in various roles.

Page Break

Decision-Making Process

According to Hughes, a well-designed decision-making process helps those parties involved in making supplier management decisions better understand organization-wide interests, objectives and constraints (both on the customer side and the supplier side), allowing them to make better decisions more efficiently. To put these three guidelines into practice, notes Hughes, some companies designate all supplier-related decision-making authority to a particular function within the organization, such as strategic sourcing or purchasing, which works with other functions and business unit end customers to understand their perspectives and requirements.

That is how they do things at Colgate-Palmolive, where a small Strategic Purchasing Group manages the sourcing of materials and the establishment of supplier relationships, leaving planners in a number of "focused factories" to take care of ordering and inventory management. Project manager strategic purchasing Nick Berg says purchasing within Colgate-Palmolive has changed radically from bureaucratic to strategic, from vague to focused, from clerical to information management based, and from passive to innovative.

Purchasing relies on a range of processes and techniques, Berg says, including market research and benchmarking, competitive tendering (both traditional and electronic), supplier selection, supplier performance measurement, supplier partnering and relationship management, supplier management of inventory and information systems selection and development. "To deliver competitive advantage to your company via the prices you pay, you need to know your supplier market, be it local or global or both," he says.

Berg calls 2004 an exciting year to be working in purchasing, because purchasing people now have a range of skills and techniques available that were previously unheard of or little applied.

Other companies create cross-functional teams that are responsible for supplier management activities, or coordinate their procurement and sourcing groups. All of Telstra's sourcing and vendor management groups are oriented around industry groupings. Separate groups are oriented towards the IT community, network infrastructure, platforms, channels, the access industry and the other main industry groups it deals with as a company. Telstra's Pearson acknowledges involvement of stakeholders in the process is critical.

"In a large corporation there are many people affected by the decisions the sourcing group would make, if it made them in isolation," Pearson says. "Therefore that stakeholder management is a key issue for us: to get that buy-in and to get that collaboration. So it's a very positive message from [for???] stakeholder management.

"Of course it's really making sure in times of shortage - which we've had in this industry in the last few years, only for the supply base - that we understand their cost drivers, what's driving them, and we understand the need for them to make a profit and for us to have sustainability in our supply chain."

Vantage Partners notes such functions or teams often use tools to facilitate internal coordination, such as the "I-C-N" Decision-Making Matrix, a tool that specifies which decisions will have to be made, who should be involved in making the decision, and that individual or group's level of involvement.

However, Pearson points out that in some instances, a process can be better than a decision-making tool. Many of the decisions Telstra makes are probably too complex to put on a straightforward tool, he says. While Telstra certainly uses the various e-procurement tools available for some of its simpler purchasing decisions, when it comes to investments in Telstra's infrastructure of voice network a decision tool just does not cut it, he says.

Page Break

Importance of Coordination

Until Andrew Carriline took up the post as general manager strategic sourcing, Westpac had a traditional procurement area to manage general supply contracts and two separate teams to manage suppliers - a governance team to manage major outsource suppliers and a group procurement team to manage general supply contracts.

Now both are combined under the Strategic Sourcing team, with no barriers between outsource and supply, and with a supply chain relationships team explicitly responsible for SRM. "We don't draw a distinction between procurement and sourcing - it's just all strategic sourcing," Carriline says, "and it probably goes well beyond traditional procurement."

Carriline's team is established along functional lines, and can be divided effectively into a plan/change/run arrangement, with a strategy and research team, a strategy and transactions team, supply chain relationships teams with end-to-end accountability for either commodities or functions, and some supporting technology functions, for sourcing technology, measurement and finance. He is also in the process of introducing commodity management, with a commodity owner and a commodity manager.

"We don't use an externally created decision-making process," Carriline says. "The comment that I would make is that whatever process you use, I don't believe there's a silver bullet to good decision making."

He says whatever the process, what matters is to ensure very clear accountabilities between the stakeholders in that decision-making process. While these often get blurred, Westpac spends a lot of time ensuring the accountabilities between its clients and itself and within strategic sourcing are absolutely clear.

"Then I think the second piece is that from a Westpac perspective, I believe when you make decisions you need to take account both of the immediate business need and the impact on the enterprise, if any," he says.

"Coupled with that, I think you need to have a sensible approach which is not simply price driven. A good sourcing outcome, and consistently delivering better sourcing, looks at price - so you need to maintain price competitiveness. You need to look at total cost of ownership. And that's part of the equation. You then need to look at the other side, which I don't believe traditional procurement has done very well, which is the demand side. And then you look at things like innovative ways to deliver outcomes differently.

"It's a matter of moving along the maturity curve on sourcing, I think. You and your organization know that price is but one aspect of achieving good decision making in a sourcing environment."

On the CIO's role in procurement, Carriline sees himself essentially as an adviser to the CIO, but he also expects the group CIO and his CIOs to make the decisions with his support.

Six Sigma SRM

This tried and tested methodology can improve supplier relationship management processes, too!

1 2 Page 1
Page 1 of 2
6 digital transformation success stories