Among the trendier three-letter acronyms at present is SRM – supplier relationship management. But what exactly is it? How can it add value? And why should we invest in another complex IT solution that, as its vendors admit, largely uses data that already exists elsewhere in our systems?
And those questions beg another – why would we want to have ‘relationships’ with most of our suppliers at all? The trend in recent years has been largely the other way – to configure as much of the supply chain as possible into commodities, and then attack cost through, for example, e-auctions or even by outsourcing their procurement entirely. The conventional wisdom has been that this approach is required to release the resources of hard-pressed procurement departments to manage ‘relationships’ or ‘partnerships’ with ‘strategic’ suppliers, which may be only a few per cent of the total supplier base.
‘Relationship’ approach
But almost all supply arrangements, strategic or tactical, would benefit from more of a ‘relationship’ approach in terms of flexibility, responsiveness, enhanced service levels and greater added value for both parties – if this could be managed within necessarily finite resources. By pulling together all the data on supply arrangements, requirements and supplier performance, and as far as possible automating the processes involved in sourcing, placing contracts and then managing them, this is what the SRM vendors promise to do.
As Ron Kubera, senior vp Northern Europe for Manugistics, puts it: ‘All partnerships are not created equal – but any supplier collaboration can benefit from the ability to share relevant information in a timely manner’. As he points out, ‘Many organisations have a fairly consistent supplier base. If you are dealing with the same people for 15 or 20 years, then by definition there is a relationship based on quality, cost, responsiveness and so on. These systems look to maximise on that’.
SRM is not usually a single product, but a collection of tools to address different aspects of the supplier relationship. Kieran O’Doherty, who is head of mySAP SRM at SAP UK, splits the functionality into four areas – data quality, strategic purchasing, operational or execution, and review or analysis.
Other vendors divide the functions a little differently: Epicor, for example, splits its SRM suite into five: Sourcing, Contract Management, Procurement, Invoicing and Payment, and Spend Analysis.
‘Quality data is the key – if customers have a focus on good data, a number of things such as spend analysis become possible so that is where we focus internally with our customers. I get nervy when customers don’t want to talk about data quality!’, says O’Doherty.
‘But given good data, you can start to think about strategic purchasing.’ (Note here that when O’Doherty and other interviewees talk about strategic purchasing or strategic sourcing they mean the strategy of the process, not that every purchase is necessarily of strategic importance in itself.)
‘You can do proper analysis of your needs, you can use the data to understand what the appropriate sourcing processes should be. You can open up communications between buyer and supplier, forcing buyers to detail what they really want, and giving everyone involved access to the information they need.
‘Operationally, you can get sight of all the procurement platforms and places where purchase orders are generated. You can start to eliminate vices like off-contract purchasing. And then proper performance review becomes possible, to close the cycle. Lots of proactive things become possible, and buyers get to deliver more and raise their profile at the CEO’s table.’
‘Managed’ relationships
But what’s in SRM for the supplier? Most suppliers’ experiences of having their relationships ‘managed’ by the customer are not ones of unalloyed joy. Paul Hampton, product marketing manager at Ariba, concedes that when his firm first introduced supplier performance management, they expected this to be seen and feared as another stick with which to beat suppliers. In fact, he claims ‘the feedback from suppliers is that they love it’, and he explains why. ‘Our customers want to be a bit more intelligent in their purchasing than simply putting everything out to a reverse auction to drive down cost – they are looking to build longer term relationships. Typically there is a multi-stage process of RFx (Request for Information/Quotation/Tender), shortlisting, and then negotiating on price.
‘With a Supplier Performance Management capability, customers can define the KPIs for a particular supply or contract, and tell suppliers that this is how their performance is going to be measured going forward, whether it be on quality or on-time delivery or whatever. The system automatically pulls in the performance data (which may exist on many different platforms across a large company with many users of that supply) to the appropriate template or scorecard’.
As with many other vendor solutions, Ariba’s offering is web-enabled so suppliers can see the parameters of their performance at any time. ‘It allows them to understand what is important to a customer, gives them visibility of how they are doing, what issues they need to address and where they can offer an improvement. It changes the way the relationship works and allows suppliers to come back to the customer with added value’.
And there are other benefits, too. It creates a commonality across an organisation of how a particular supplier is viewed and rated – buyers, users or business units can base decisions on the real current performance of the supplier, not on rumour, prejudice, or the experience of years ago. Customers have an objective view of past performance that they can take into new negotiations (informing, for example, the question of the cost of changing a supplier).
In particular, says Hampton, ‘This ability to monitor performance, and make the monitoring visible to suppliers, is accepted by suppliers because it gives good firms a chance to differentiate themselves from lowcost low service suppliers and because they know that any extra value they bring is taken into account in the sourcing and purchasing criteria.’
Different flavoured solutions
Although the principles of SRM are common, solutions come in different flavours reflecting the sectoral interests of the vendors. i2, for example, has a backhistory largely in the manufacturing sector, and its SRM offering reflects that although Nick Ford, i2’s vp EMEA, says that other sectors such as utilities and financial institutions are showing increasing interest.
As Ford points out, all the consultancies and gurus have defined ‘best steps’ approaches to sourcing strategy: ‘What SRM does is to enable each of these steps. It speeds up the time taken for each part of the process so that a sourcing exercise which might have been done once a year can now be done, say, once a month or whenever the market appears to have changed. In the same way it allows the strategic sourcing approach to be extended to a lot more items. The commodity manager can apply strategic sourcing more often to more commodities, and work with up to the minute purchasing and contract information. SRM is a bunch of enabling tools that work quicker, better and faster across more of the spend: not exactly rocket science’.
i2’s approach to SRM comprises three distinct but interrelated sets of tools. Strtategic Sourcing tools are applied to the whole process from understanding what is being spent, through market research, defining and promulgating the sourcing strategy, putting contracts in place, monitoring contract use through call-offs and so on, integrating with the Purchase Order systems and managing the contracts ‘by exception’.
A powerful effect
That much is common to most SRM systems. From its manufacturing/engineering experience, i2 then has a suite of Product Sourcing (as opposed to Strategic Sourcing) tools which, says Ford ‘take an “engineering” Bill of Materials and by enabling collaboration with Procurement, convert this into a “preferred source” BoM, using components and suppliers that the business is happy with.’ (This can have a powerful effect – BAe Systems, one of i2’s customers, is reckoned to have halved the number of part numbers on its engineering systems through the new-found ability of engineers to talk to purchasers, consolidating and standardising on preferred parts and sources.)
Finally, and holding all this together, is a central procurement database and what i2 calls Component and Supplier Management, which co-ordinates data from what may in a large company be literally hundreds of discrete ERP, development, purchasing and other systems.
Transport procurement
Coming at SRM from a different, but specialised, angle, is Manhattan Associates, who are focusing the SRM approach narrowly on transport and logistics through their Transportation Procurement tool. Manhattan’s director of product management Russ McGregor explains: ‘The Transportation Procurement tool is designed to handle the strategic and tactical decisions of “who do I want to work with?” and the output is a “routeing guide” – ie if I am moving commodity x from A to B, I want to use this carrier’.
Combined with other tools for execution and performance monitoring, this produces a procurement/execution/analysis cycle similar in outline to the other SRM/Strategic Sourcing systems described here.
But why a specialist tool just for transport? Says McGregor: ‘The relationships in buying transportation are different from when you are buying office supplies, for instance. Transport is a perishable asset – if you don’t buy nuts and bolts on Monday they will likely still be on the shelf Tuesday; if you don’t use the truck on Monday, its gone!
And transport can be complex – a large retailer or manufacturer may have literally thousands of lanes to manage with a lot of individual constraints and linkages.’
Nonetheless, the principles and justifications are the same. McGregor says: ‘Providing good visibility to your network helps carriers. The better they feel, the more they can refine their rates because they don’t have to hedge anymore. And for the customer, one of the biggest savings lies in matching the Routeing guide to actual performance: This is what I wanted to do, this is what I actually did. Why. This is what I asked the carrier to do, this is what they actually did. Why?’
SRM solutions are being successfully used, by organisations of all sizes (hosted, web-based systems are making the technology affordable to even small firms) in many sectors and across both direct supplies (goods for production/resale) and the indirect/ MRO spend.
There must be some doubt as to whether any one system or vendor can deal effectively across the whole range of a customers’ supplier relationships – transport is far from being the only area with rather special requirements – but the principles must be of general applicability: that, always given that you have accurate and timely data to start with, you can give yourself and your supplier far greater visibility of requirements and performance, which will prompt and stimulate greater value creation by both parties and which will feed into more informed sourcing strategies without significantly increasing the burden on the procurement function.
Known benefits
The known benefits of deeper supplier relationships can be extended from those few critical supplies to a much wider range of contracts and purchases.
This does, though, challenge some aspects of the current purchasing paradigm. As Manhattan’s McGregor says ‘There is a core philosophical argument here. Am I procuring a commodity, or something that would benefit from a strategic focus?
‘A lot of people are trying to commoditise all sorts of purchases including aspects of transport: the SRM approach shifts the emphasis the other way’.
