Supplier Relationship Management (SRM) and innovation are two words frequently used in the same sentence. SRM has long been touted as the next step for many procurement departments looking to bring about a step change.
The reason for this is simple. In many industries, suppliers are coming under increasing cost pressure and are simply unable to reduce costs alone. By working closely with suppliers and investing in these relationships, businesses are able to deliver mutual benefits. These could include traditional procurement savings, but also increased efficiency, leaner supply chains and other innovation driven benefits.
SRM also yields rewards in industries dominated by volatile demand. Take the food and drink sector, or even the retail industry. Both are largely at the mercy of consumers’ ever changing tastes and strong relationships with key suppliers can help businesses manage these complexities.
In the run up to Christmas, for example, retailers need to work with suppliers to deal with a surge in demand. The unforeseen popularity of an item, can also be remedied thanks to flexible working practices. This type of relationship can make businesses millions in sales or savings, at the time of year when they make most of their profit.
British Telecoms and supplier innovation
BT’s Better Supplier Forum (BSF) is an initiative aimed at getting suppliers to design and deliver their own innovations for the benefit of both companies. The scheme is divided into two parts, the first is based on implementing best practice across BT’s supply base. This consists in BT carrying out an audit of any new supplier and identifying any strengths and weaknesses. Any opportunities to improve are highlighted and BT then provides training and support to ensure suppliers are able to make the necessary changes.
The second part of the process is focussed on supplier innovation. The initial benefits uncovered by BT in the first phase are expected to encourage the supplier to seek more opportunities of its own. Suppliers can then pitch ideas to BT, which will decide if they are worth investing in. Other incentives include the awarding of ‘sustainable supplier status’, something which can help suppliers secure other clients. In terms of results, BT has managed to cut its carbon emissions by 250,000 tonnes in under four years.
There are plenty of other examples of supplier innovation yielding returns. Unilever estimates that 70% of their innovations are directly linked to their work with key suppliers and Ford’s supplier BASF, saved the manufacturer significant amounts of money by developing a new resin. At 4C Associates, we often find that our cross-sector supplier knowledge means we are very well placed to develop and implement tried and tested SRM strategies.
A blend of SRM and traditional tactics
There are of course occasions when businesses revert to a more ‘traditional’ approach. Last year food giant Premier Foods announced that it would be reducing its suppliers by close to 50% and looking to secure better deals from those it kept on. The objective was to reduce complexity in its supply chain and develop deeper relationships, whilst cutting approximately £10 million in costs.
The tactics Premier Foods employed to achieve this were heavily criticised by many in the industry. The company asked suppliers to commit to the relationship by contributing to a programme entitled ‘invest for growth’. In return, suppliers are put in a position where they are more likely to secure more business from Premier Foods, but also create a stronger relationship.
The initiative has been hailed as a success by Premier Foods, which has reported good progress in terms of supplier consolidation and cost cutting. Some suppliers, however, have complained that the project amounts to little more than paying Premier Foods for the privilege of supplying them. The tactics have been described as unfair and cynical, with several commentators pointing out that suppliers in the food and drink industry are under particularly intense price pressure.
In its defence, Premier Foods has pointed out that the programme will not automatically exclude suppliers who do not invest in the scheme. A spokesperson for the company added that “Price, quality, reliability and service are also all important criteria.” Whereas it is difficult to commend the company’s request for suppliers to pay, the idea behind the initiative is an interesting combination of new and old practices.
You might be thinking that the above are fairly isolated examples and that many businesses continue to rely purely on traditional negotiations and other tactics. Well you would be wrong. The recent IBM 2014 CPO Study, which surveyed 1,023 CPOs, found that 38% of the most successful CPOs prioritise working with suppliers to drive innovation, as a means to reach their objectives.
If it is not already, SRM will play a key role in the procurement departments of the future. In many cases margins have become too tight for suppliers to continue to cut costs. SRM opens up a huge number of possibilities for both companies and suppliers to realise mutual benefits. In this context, innovation, be it mutual or supplier driven, represents a vital ingredient of future procurement success.