Buyers and Suppliers don’t have to do battle – why SRM and long term relationships matter
Filed Under Blog
Lets face it – the key result that most procurement professionals are still attempting to get is leverage on price. Cost down is still the top draw for many senior executives and decision makers and for many, the primary reason for the procurement team to exist. Developing relationships is often the last consideration and where it is considered the “how to implement part” is glossed over.
The standard relationship can place buyers and suppliers in gladiatorial combat at different ends of the arena with each focusing on their own primary targets (cost/margin) and failing to capitalize on any benefits that might be obtained through closer collaboration. Such a method relies on adversarial positions and relationships that foster competition (either squeezing or retaining margin).
Procurement executives should consider that there is more than one method that can be used to generate benefit and that the procurement task does not stop at contract sign off but involves close scrutiny of requirements AND the development of post contract opportunities which can both generate significant benefit.
Companies must consider appropriate mechanisms or incentives that foster this approach.
The contract is still one of the best weapons in the procurement executives’ arsenal. However, all to often the approach is not robust and focus on the initial contract phase is weak – all too often one of two things happen –
1/ The contract requirements are ill thought through focusing on short term goals overcoming long term aspirations and while today’s requirements (often current target price or crazy lead times) are met tomorrows (stability, efficiency, capability) are not.
2/ The contract is generated outside of the procurement team with often little focus on long term requirements (e.g. sustainability or compliancy). These contracts get thrown “over the fence” and the procurement team is left to pick up the pieces.
One key issue that businesses need to address is that to foster success, the contracting phase and relationship management need to be closely coupled and embedded within the same process.
If the contract is constructed correctly then everyone benefits. Total requirements are met, long term efficiencies targeted and mutually beneficial relationships developed.
When you think about it a robust approach to mutually beneficial supplier relationships makes sense – suppliers are looking to develop long term revenue streams and stable margins whilst buyers are looking to manage cost and consistency of supply whilst mitigating potential future issues – these requirements are far better suited to collaboration than fighting over a $10 dollar reduction in the price of the piece part.
Significantly a key issue of this approach is that it requires a greater perspective than merely Cost, Quality and Delivery (QCD). Businesses must consider how innovation and collaboration are included and measured. Both organizations MUST consider total acquisition cost rather than purely the initial purchase price. This is especially true for those organizations that maybe faced with increasing compliancy issues (sustainability) or other issues such as high levels of obsolescence.
Summary
Close relationships between buyers and suppliers does bring its own challenges (for example differing cultures, well established supplier networks). Companies must ask themselves how easy is it to revisit existing supplier contracts. Perhaps the key issue is that SRM must be approached from both perspectives. It is no good if the supplier retains an adversarial position focused purely on protecting margin where the buyer may want to form closer working ties. The skill is of course spotting and developing the opportunities and developing back office processes including sourcing and contract negotiation and ownership that compliment the strategy.