Mutual gain and less pain

When Japanese electronics company Canon started exporting photocopiers to the US in the late-1970s, incumbent producers, such as Xerox and Kodak, were taken by surprise. Not only was the quality of the products from the newcomers extremely high, but they were able to sell them for less than it cost the former market leaders to make them. If the established producers did not adapt – and quickly – they would soon be history.

One of the keys to the efficient production practices pioneered by companies like Canon was the way in which they worked co-operatively with key suppliers to ensure that costs were competitive without compromising standards. Since then, many of the practices that were revolutionary outside Japan back then have become standard practice across the world today.

According to Greg Cudahy, managing director of Accenture’s operational strategy practice, supplier relationship management (SRM) focuses on developing highly effective and mutually beneficial relationships with just a handful of a company’s main suppliers.

“It is very strategic,” he says. “It looks at more than just total cost of ownership, but the total value impact of your decisions across the extended supply chain. That can be commodity by commodity, but it can also be across vendors,” he says.

Joint management of risk is a pretty critical element of relationship management

There are, says David Atkinson, founder of Four Pillars Consulting and former procurement director at aero-engine maker Rolls-Royce, three main levels of SRM. At the bottom is performance management, which means making sure that the supplier provides exactly what was contracted for at the agreed price.

The next level includes performance management, but will also involve a degree of collaboration. “In automotive, that’s been known as supplier development for many years,” says Mr Atkinson. “But the focus of supplier development and performance management is typically around driving down cost and risk to get assurance of supply.”

The third level is strategic SRM, where the organisation is confident that costs are under control, but concedes that a small number of suppliers are genuinely critical to business success. “You are working on cost and top-line revenue development,” he says. “Indeed, you’re almost bordering on joint-venture territory.” In short, he adds, it’s all about “post-contract value management”, with the emphasis on value.

A prime example would be computer maker Apple’s relationship with ARM, the provider of the core microprocessor technology behind its hugely successful iPhone and iPad products. If Apple had to shift to an alternative microprocessor architecture, it would be hugely disruptive for the company and may have an impact on the performance of its products.

According to Bill Tribe, a principal at consultancy AT Kearney, the one element of operations that no company can ever outsource is risk. For example, Amstrad’s PC business was almost completely undone in the early-1990s by a batch of faulty hard disk drives. It may not have been Amstrad’s fault, but it paid the commercial price for a supplier’s faulty products.

“Joint management of risk and how you make sure that you are appropriately covered is a pretty critical element of a relationship management process,” says Dr Tribe. “That means identifying what is important to your company and what is important to your partner, and jointly managing that so you are collectively covered.”

It is not just in manufacturing that SRM is important. “In financial services, IT suppliers are typically outsourced, as well as call centres and other operations, and it’s an area in which regulators are involved too,” says Nick Wildgoose, global supply chain product manager at insurer Zurich, and former procurement director at Zurich and Virgin Group. Such relationships are fundamental to an organisation’s ability to function and, therefore, cannot be solely cost-focused.

The practice of SRM provides a strategic framework in mature procurement functions, says Richard Nixon, a partner at KPMG, but it has not yet become a universal corporate practice. “Outside of manufacturing and fast-moving consumer goods industries, our research indicates that only half of all procurement functions currently meet the SRM process,” he says.

However, while SRM is supposed to be all about co-operative working with suppliers, it is all too easy for an organisation to fall back on cost as the main measure by which suppliers are evaluated, warns Carlos Mena, senior lecturer at Cranfield University’s School of Management. “Value in most situations is more important than cost,” says Dr Mena. “But getting the right materials, delivering them on time and building closer relationships with suppliers is less tangible and more difficult to measure, and therefore often take second place behind cost.”