Effective Supplier Engagement
Most successful companies acknowledge the importance of their suppliers in their achievement. This could be driving innovation, running operations, improving efficiency among other things. If this is true, then it’s essential to have supplier engagement that delivers business results. We have observed that most supplier management programs don’t get enough attention or designed to drive business results. For instance, when Dell computer began, it collaborated with suppliers to quickly bring innovation to market. However, with time, Dell changed its focus to be cost efficient and dropped its focus on bringing innovation to market. It pressured suppliers to reduce prices. This along with other steps led Dell to lose its edge over time, as suppliers started to take their invention elsewhere. Dell’s products were no longer cutting edge, and Dell lost its image of being cool. You wonder what motived the change in supplier engagement since hi-tech products sell because they are cool and not because they are cheap. Apple continues to command a substantial premium in the market because of their focus on innovation. Did Dell providers meet quality, timeliness, and other tactical metrics? I am confident that they did. Then what went wrong? Well, at a fundamental level, these steps don’t connect to business goals. These measures offer assurance to procurement and manufacturing organizations that suppliers can run their delivery procedure well. But they are inadequate to measure whether suppliers are driving overall company success. Most firms have rolled out supplier relationship management programs with their key suppliers. My biggest gripe against current programs is that they are tactically focused and are grossly insufficient in helping companies achieve their business objectives. Some of those critical problems with these programs are:
- Lack of Partnership: For most American companies, the relationship with suppliers is somewhat adversarial. Providers are supposed to give service whereas the firms are clients who pay for them. There’s a mindset that suppliers are subservient to the needs of their corporation. They lack a partnership approach and a collective focus collectively on the same goal. Imagine having a similar relationship with your significant other, how long will that relationship last.
- Insufficient expectation setting: Most businesses lack a good way of setting expectations with providers. The idea of Service Level Agreements (SLAs) is not widely used. When SLAs are used, they do not tie back to the business goals, i.e., they concentrate on jobs performed by supplier instead of business objectives a business is interested in attaining. For example, most Janitorial contracts have SLAs that specify the frequency of cleaning and not the way the customer perceives cleanliness. If a Janitorial company cleans at a rate agreed in the However it doesn’t achieve the cleanliness as perceived by customers, then SLAs aren’t linking back to the objective of cleanliness.
- Emphasis on price vs. service: In companies where supplier relationship management programs are employed, we found overwhelming focus is on price and not on service. It seems the role played by business organizations in setting up these programs is minimal, mainly being driven by procurement organizations. It may be easy to measure price, but it doesn’t assure that suppliers are providing the right service as desired by the business organizations. There is a need to review the supplier metrics to ensure providers are focused on the right areas.
- Limited supplier feedback and communication: Generally, most discussions with suppliers concentrate on providing them with feedback on their performance and the areas they can improve. We all know companies can also do things at their end that can help improve the overall outcomes. To our surprise, many managers who take part in the supplier discussions don’t knowingly ask suppliers for feedback and providers are hesitant to provide the information for fear of alienating clients. It’s a missed opportunity for cooperation and partnership that might be readily exploited.
- Emphasis on punishment vs. incentive: It’s well known that positive enforcement works better than negative enforcement. Ask anyone who needed to help steer their kids in the right direction. So, why then do we see that most supplier contracts only contain penalties for non-performance and no incentives for doing above and beyond expectations? It appears the overwhelming view among procurement teams is that providers 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. The incentives and penalties do not have to be material, but a token something always aids in recognizing supplier efforts at a regular frequency.
What needs to change to create supplier engagement strong?A partnership approach. It starts with accepting the fact that suppliers bring value to the table. This is the reason why companies employ them in the first place. They are capable of providing excellent results in their particular area of expertise. The aim of supplier engagement should be to enable suppliers to perform and hold them accountable but not to micromanage. Below are steps we found useful in holding suppliers accountable.
- Clearly defined business aims: It is essential to think beyond the product or service a supplier is providing and understand the underlying business goals to get much better value from supplier engagement. For instance, one of our financial services customers offers free bus service to its employees to transfer them from New York to their offices in Connecticut. The business goal, in this situation, is more than merely providing safe transportation to the employee. The company wants its employees to be productive while traveling, a trip that requires an hour or two each way. A transportation provider will need to have the ability to address these high-level needs in addition to supplying safe bus rides.
- Tie SLAs / KPIs to company goals: There’s usually confusion between Service Level Agreements (SLAs) and Key Performance Indicators (KPIs). For instance: to provide excellent transportation service to the financial services client, an SLA for the transportation provider is going to be drivers that are exceptional in customer service along with the safe driving record. Drivers are the first and last person to interact with employees daily. To measure how well transportation provider is doing in this respect, KPIs might incorporate worker feedback on driver behavior, how well they kept the employees informed during the drive, their helpfulness and others. These metrics will be in addition to driver’s driving and accident records.
- Provide both incentives and penalties: Link penalties and incentive to the KPIs upper and lower limits. Providing small financial benefits/pain guarantees focus from the leadership of both companies on these metrics. But it is critical that these penalties and incentives aren’t material since there’s a risk of diverting supplier attention away from the job at hand. Also, I like to provide incentives to softer measure like customer support/feedback and penalties to hard measures (such as timeliness, quality,) which are in supplier’s control. For example: In Pharma, particulate contamination (microscopic dirt) is now becoming a real problem for medical devices companies. This type of contamination is hard to control. In a situation like this, Pharma companies can consider providing incentives for medical devices firms to decrease particulate contamination (not completely under their control) whereas penalties around product performance / dimensional accuracy, etc.
- Use fact/data for performance measurement: Opinions are easy to get whereas facts are difficult to collect. An engagement works better if it’s based on facts and data rather than swayed by subjective perceptions. Facts/data enable providers to concentrate on tasks and having productive discussions without emotions. I occasionally get pushback for focus on facts as managers believe not everything could be captured with data. This could be accurate, nevertheless, developing the right KPIs will help in devising proper methods for information capture. The facts could be collected via surveys, feedback on performance from key It helps to be transparent with providers on when and how data will be captured so there’s no concern on how their performance will be measured.
- Be open to two-way feedback: Though the focus of the supplier engagement is to ensure supplier is providing the agreed level of support, it always helps to be open to feedback from providers. I’ve received outstanding ideas from suppliers on improvements. Missing out on chances to acquire supplier feedback is plain unwise.
- Establish regular cadence: Establishing a regular cadence to measure and communicate supplier performance is good. This avoids surprises and allows for the timely repairing of any difficulties. The most significant advantage is that providers realize that somebody is reviewing their performance and publishing it to stakeholders. This is the best way to hold suppliers and internal organizations accountable.