About Michel Philippart:
Michel is a world wide known expert and thought leader on strategic supplier relationship management. He has over 30+ years of experience in the space having worked at McKinsey, Booz Allen Hamilton, PepsiCo Frito-Lay and GSK. Michel is currently a Professor of Supply Strategies at EDHEC Business School.
Let’s now rewind and go back to the end of the last century when the idea of collaboration emerged. We cannot do that without providing a bit of history about the purchasing function. Initially, purchasing was about administration and procedures, making sure that goods were available in due time to feed production lines. Outside production, it was non-existent. When global trade became the norm, Western firms, under cost pressure from Far East competitors, began to use purchasing as a tool to close the cost gap, pushing local suppliers to align to low cost countries prices, typically by forcing them to setup operations in those countries. The SRM concept was viewed as a strong oversight of suppliers, forcing them to open their doors and their books to constrain them to lower their margin to the lowest possible level. The idea of collaboration, to develop “win-win” relations was a good communication buzz word, but hardly a practice in the rank and file purchasing organizations. The norm was to apply pressure by consolidation and standardization to force the suppliers to lower their price. This approach had been proposed by Michael Porter in the early 80’s when the 90’s executives were obtaining their MBA. The concept of SRM, and the culture of purchasing was much more combative than collaborative.
But in the 90’s a few observers noticed the difference between standard practices in the West and those of Japanese manufacturers, primarily Toyota. The notion of “extended enterprise” also emerged. But this was considered as an academic curiosity rather than an example for the business world. Few noticed that in 1996, the same Michael Porter wrote in the Harvard Business Review that all the strategies developed to increase the efficiency of supply chains delivered lower costs but that did not result in higher benefits for the firms that had implemented them. As all competitors were using the same approaches, hiring the same consultants and recruiting the same managers, their strategies led to a commoditization of their own offer, with only one argument, price, to secure their own sales, so they were not able to retain their margin. A handful of companies, like Toyota, but also Frito-Lay had adopted the extended enterprise concept, defined as a system composed of a client and its suppliers who strongly collaborate in order to maximize the benefits of each partner. For Frito-Lay, all the functions had to focus on beating the competition, rather than looking at the rear- view mirror to improve on historical basis. Indeed, what good does a 3% cost improvement do if the competitors obtain the same, sourcing from the same suppliers, and if our own sales price follows the same trend. This is perfectly illustrated by the PC industry. Their sourcing teams delivered continuous price reductions, but none was able to deliver significant “rent” to use the language of economists, except for Apple, because Apple has pricing power as it does not have to fend off competitors like the other PC makers. At Frito-Lay International, in 1995, the objective of purchasing was “to leverage Purchasing as a significant source of Sustainable Cost Advantage and Proprietary Barrier to Entry, whilst delivering 100 % Consumer preferred specifications to every plant, every day”. You see that the focus is on deliver a cost advantage rather than a cost reduction, and to deliver it in a proprietary way to prevent competitor’s imitation. Traditional approaches, relying on standardization and volume driven efficiency gain force suppliers to consolidate and increase volume by selling the same solution to all.
The valorisation of purchasing from a competitive point of view emerged at the beginning of this century, with a British academic, John Ramsay, who stated that purchasing was driving itself to strategic irrelevance. The business visibility was limited, like with most academic work. Another scholar, John Henke, in Michigan, created more impact by publishing his annual “Working Relation Index” in the US automotive industry. Every year, new data confirmed on a very factual basis that the Japanese automotive firms established in the USA had a much better relationship with their suppliers than their American counterparts. John Henke also showed that this was driving the R&D budget allocation of the suppliers on projects for their American or Japanese clients, for instance.
After the crisis of 2008, which drove GM to bankruptcy, the American began to see the benefits of this collaborative approach. The gap in WRI performance for Japanese and American automotive OEM narrowed significantly. The merits of a more balanced collaboration were making inroads in the purchasing culture. Progressively the objectives assigned to the purchasing department included more than “Cost Quality and Service” to consider more intangible assets. But old reflexes remain. Surveys of the objectives assigned to purchasing department are still showing “cost reduction” as the primary objective.
Another challenge is to change the perception of value creation. This is the purchasing dilemma: how to balance initiatives that appear to deliver value, transactional, focusing on price indexes but that rarely improve firm’s benefits in the long term, versus competitive moves that have potential to create sustainable advantages, but will not deliver a result easily assignable to the purchasing department, and that will only trickle slowly to the bottom line as products need to be developed and market positions built before the full scale of the benefits appear clearly to all.
Today, many firms have adopted sound SRM practices, although there is a constant battle between the strategic perspective with a long-term vision and the financial perspective focusing on quarterly improvements. Even in firms that are known for sound relations with their suppliers does the pressure for short term impact at the expense of long-term effectiveness often prevails. Purchasing is not to blame, but rather the other functions that have failed to understand the true value of a soundly managed supplier network, and not only in time of crisis like the one we are seeing now. I met purchasing managers explaining to me that the financial department was asking them to extract payment term concessions from suppliers even if their cost of capital was significantly lower than their supplier’s. In other interviews, purchasing leaders were telling me how they had to mediate between marketing teams or construction project leaders who had overspend their budgets on projects and wanted purchasing to solve “magically” the problem by negotiating additional concessions from suppliers.
The is also a perception that SRM should focus on suppliers deemed strategic? SRM can be applied to help a supplier target its development efforts on the priorities of a client, creating a better alignment and strengthening the relation between the two parties.
• Without entering in a debate on what is a strategic supplier, a loose definition with many variations according to corporate culture, we can say that more SRM efforts will apply on suppliers that contribute to the competitive differentiation of the firm’s offer. We can label this “strategic SRM”, that will have primarily a long-term impact on the bottom line.
• SRM can bring benefits to the relation with a much broader set of suppliers. Any relation creates somewhat hidden cost, either on the vendor side or on its client. SRM allows for an intelligent approach to addressing those hidden costs associated with administration, production lot size, shipping, and many other points deemed tactical. This is the sound “tactical SRM”. Tactical does not mean of lower priority. Nimble, creative companies that excel at this level of SRM can create sustainable advantages as they seize faster and better opportunities to improve they extended enterprise incrementally and stay ahead of their competitors. This can have a short term impact on the bottom line.
• Finally, SRM can be of great help to solve burning issues like quality problems or cash flow crises. While blaming the supplier can be cultural in some organizations, switching suppliers also represent hidden costs. SRM can be used to solve a supplier issue with resources from its client. This is the “firefighting SRM” to help a supplier solve critical issues, adapt instead of perish.
SRM: The Present coming next week! Stay tuned.