Sourcing 3.0 – Supplier Engagement

Most successful companies acknowledge the role of their suppliers in their success. This could be driving innovation, running operations, improving efficiency among many other things. If this is true, then it’s important to create supplier engagement that helps in delivering business results.

It’s our observation that supplier engagement is not paid as much attention or done in a thoughtful manner to drive business results. For example, when Dell computer started, it collaborated with suppliers to quickly bring innovation to market. I remember the days when Dell computers used to be cool and affordable. However, over time, Dell changed its focus to be more cost efficient in its supply chain and lost its focus on bringing significant innovation to market. This and other business strategies led Dell to lose its edge in the market over time, as suppliers started to take their innovation elsewhere. The products are no longer cutting edge, and Dell lost its cool image. You wonder the reasons behind such a change in supplier engagement since hi-tech products sell because of innovation and not because they are affordable. Apple continues to command a significant premium in the market because of their focus on innovation.

Did Dell suppliers meet their quality, timeliness, and other tactical metrics? I am sure they did. Then what went wrong? Well, at a fundamental level, these measures don’t connect to business goals. These measures provide confidence to plants and procurement organizations that suppliers can run their delivery process well. However, they are inadequate to measure if suppliers are being utilized by their customers in a way that will drive overall business success.

Most companies have rolled out supplier engagement/relationship management programs with their key suppliers. My biggest criticism of current programs is that they are tactically focused and are grossly inadequate in helping companies achieve their business goals. Some of the key issues with these programs are:

  1. Lack of Partnership: For most American companies, the relationship with key suppliers is somewhat adversarial. Suppliers are meant to provide service whereas the companies are clients who pay for the service. There is a mentality that suppliers are subservient to the needs of the corporation. They lack a partnership approach to focus jointly on the same goal. Imagine having a similar relationship with your significant other, how long will that relationship last.
  2. Lack of expectation setting: Most companies lack a good way of setting expectations with suppliers. The concept of Service Level Agreements (SLAs) is not widely used. When SLAs are used, they don’t tie back to the goals i.e. they focus on tasks performed by supplier instead of business objectives a company is interested in achieving. For example, most Janitorial contracts have SLAs that define the frequency of cleaning and not how the customer perceives cleanliness. If a Janitorial firm cleans at a frequency agreed in a contract but it does not achieve the right level of cleanliness as perceived by customers, then SLAs are not tying back to the goal of cleanliness.
  3. Emphasis on cost vs. service: In companies where Supplier Relationship Management programs are implemented, we found overwhelming focus is on cost and not on service. It seems the role played by business organizations in setting up these programs is minimal, mostly being designed by Procurement organizations. It may be easy to measure cost, but it does not assure that suppliers are providing the right service as desired by business organizations. You know the old saying, what gets measured gets delivered. There is a need to review the supplier metrics to ensure suppliers are focused on the right areas.
  4. Limited supplier feedback and communication: Typically, most discussions with suppliers focus on providing them with feedback on their performance and the areas they could improve. We all know companies in collaboration with suppliers can also do things at their end that can help improve the overall results. To our surprise, many managers who are involved in the supplier discussions do not actively ask suppliers for feedback and suppliers are reluctant to provide the information for fear of alienating clients. It’s a missed opportunity for collaboration and partnership that could be easily harnessed.
  5. Emphasis on penalty vs. incentive: It’s well known that positive enforcement works better than negative enforcement. Ask anyone who had to help steer their children in the right direction. So, why then do we see that most supplier contracts only contain penalties for non-performance and little to no incentives for performing above and beyond expectations? It seems the overwhelming view among procurement teams is that suppliers are incented for performance when a company provides them with additional business. This may be true. However, behavioral scientists will tell you that direct incentives work better than indirect incentives. These incentives and penalties don’t have to be material, but a token something always helps in recognizing supplier efforts at a regular frequency.

What needs to change to make supplier engagement robust?  

A partnership approach while engaging with suppliers. It starts with accepting the fact that suppliers bring value to the table. This is why companies hire them in the first place. They are capable of delivering good outcomes in their specific area of expertise. The objective of supplier engagement should be to enable suppliers and hold them accountable for doing their job well. If suppliers don’t perform consistently, then disengage but resist the urge to micro-manage. Below are steps we found useful in holding suppliers accountable.

  1. Clearly defined business goals: It’s critically important to think beyond the obvious service or product a supplier is providing and understand the business goals to get better value from supplier engagement. For example, one of our financial services clients provides free bus service to its employees to transport them from New York to client’s offices in Connecticut. The business goal, in this case, is more than just providing safe transportation to the employee. It is to incent employees to make the trip every day, so it’s a both recruitment and retention tool. Also, it ensures that employees are productive while traveling, a trip that takes an hour or two each way. A transportation provider will have to be able to address these higher level needs in addition to providing safe bus rides.
  2. Tie SLAs / KPIs to business goals: There is usually confusion between Service Level Agreements (SLAs) and Key Performance Indicators (KPIs). The way I like to explain the concept is that SLAs are a simple way of translating your needs to someone and KPIs are metrics that help you measure how well these needs are being met. For example: in order to provide great transportation service to the financial services client, an SLA for the transportation provider will be to provide drivers that are excellent in customer service in addition to safe driving. Drivers are the first and last person to engage with employees every day. To measure how well transportation provider is doing in this respect, KPIs may include employee feedback on driver conduct, how well they kept the employees informed during the trip, their helpfulness, These metrics are in addition to driver’s driving and accident records.
  3. Provide both incentives and penalties: Link incentive and penalties to the KPIs upper and lower limits. It will help you recognize both what supplier should improve and what they are doing well. Providing small monetary benefits / pain ensures attention from the leadership of both company and supplier on these metrics. However, it’s critical that these incentives and metrics are not material as there is a risk of taking supplier focus away from the work at hand. Also, I like to provide incentives for a softer measure such as customer service / feedback and penalties to harder measure (such as timeliness, quality,) that are more in supplier control. For example: In Pharma world, particulate contamination (microscopic dirt) is becoming a real issue for medical devices companies as they tend to get the drug products, and there is additional scrutiny from FDA. This contamination is difficult to control due to its very nature. In a situation like this, Pharma companies can consider providing incentives to medical devices companies to reduce particulate contamination (not completely under their control) whereas penalties around product performance / dimensional accuracy, etc.
  4. Use fact/data based performance measurement instead of perception: Opinions are easy to get whereas facts are difficult to collect. An engagement works better if it’s based on data and facts and not swayed by subjective perceptions. Facts / data allow suppliers to focus on tasks and having productive discussions without emotions. Also, it’s easy to plot trends whether performance is improving or not. I sometimes get pushback for focus on facts because managers feel that not everything can be captured with data. This may be true, however, thinking through the right KPIs can help in devising good methods for data capture. It could be surveys, feedback on performance from key stakeholders during certain milestones, It helps to be transparent with suppliers on when and how data will be captured so there is no supplier concern on how their performance will be measured.
  5. Be open to two way feedback: Though the focus of the supplier engagement is to ensure supplier is providing the right level of service, it always helps to be open to ideas / feedback from suppliers. I have received excellent ideas from suppliers on improvements. They are closer to the work, and they have experience doing similar work for other companies. Missing out on opportunities to get supplier feedback is just plain unwise.
  6. Establish regular cadence: Setting up a regular cadence to measure and communicate supplier performance is always good. This avoids surprises and allows for the timely fixing of any issues. The biggest benefit is that suppliers understand that someone is reviewing their performance and publishing it to their stakeholders. This is the best way to hold suppliers and internal organizations accountable.

Most supplier engagement/relationship management programs are tactical and punitive in nature and don’t help in building a longer term relationship with suppliers.  A thoughtful design for a supplier engagement model will allow companies to drive better business results and value from their supplier base.  A greater effort in finding common objectives and innovative solution with suppliers can help in driving long term profitability and success in the market for both parties.

About Author: Suman is a Partner with Three S Consulting. The firm drives value for clients through Strategy, Supply Chain, and Sourcing.

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