Let’s go back in time. A year or so ago, Vizibl spoke with John Dickson, a former CPO of beverage giant Diageo, to get his thoughts on ‘Extended SRM’.
In this blog, I’m going to step aside and allow John to eloquently explain importance and opportunities that await business that can effectively collaborate with their suppliers.
First and foremost you have to make that distinction between basic supplier performance management and an extended SRM programme – that’s critical. Procurement spends a lot of time segmenting suppliers into the top of the pyramid and focusing on four, five, six, maybe 10, relationships that you as a procurement organisation would define as strategic. You’re distinguishing between those supplier relationships and others – that’s the typical way that procurement would segment their supply base.
Procurement does, though, face one key problem. Once you’ve segmented those suppliers into the top part of that pyramid, you really need to define how you’re going to manage that relationship differently. Because of the way procurement is measured as a function, what tends to happen is that you then end up focusing on price with those suppliers in exactly the same way you do with the others.
The reason this happens is because what drives them to the top of the pyramid, and what makes them distinct is often the scale and the size of that relationship – the more you spend, the more you drive them to the top of that pyramid.
As a result of that, the more you spend with a supplier, the more it’s seen as an opportunity to drive 1% of a bigger relationship – and that means you’ll drive more savings. It’s that age old challenge of the way that procurement is measured with bottom line savings seen as being more important than the innovative side of the supplier relationship.
When I was at Diageo we spent a lot of time creating a supplier innovation programme. We would invite those suppliers that were innovative and creative to join that programme. That was part of our SRM programme – the best suppliers were the ones who came up with the most creative and innovative ideas. They were measured in a different way, not just on how much money you could save by working more closely with them.
We tried to repeat that in the Heinz organisation in North America. By focusing on those suppliers – not necessarily that we spent more money with – but those suppliers who brought creative ideas to the table while sustaining their delivery performance. It’s all about shifting the focus away purely from savings.
The crucial thing is to really stand-up for what you’re preaching. You preach win-win relationships and you preach strategic relationships. You have a four box quadrants that say a portfolio matrix drives this particular category into the strategic quadrant and therefore we have to have relationships with those suppliers that are of a strategic nature. That’s all well and good from a conceptual point of view but if you talk to the suppliers that are in that quadrant and ask them if they’re being treated as a strategic partner they would probably say ‘no’ because every year when the contract is up for renewal you simply go to that supplier and demand greater savings.
That makes measurements of strategic relationships so important. You have to see the whites of the eyes of the suppliers and you have to jointly decide a programme so that you can jointly define success.
If I’m the procurement company and I just go to the supplier and say we’re awarding you by driving the relationship and you have to tick these boxes to satisfy us then that’s clearly not meeting the strategic objectives – there has to be a quid pro quo, there has to be something on the table for both parties.
The only way you can do that is by having a conversation with the top of the house, the CEO, the COO or the CFO and find out what the relationship means to them. That can be separate to the contract that’s being negotiated. You can’t put a value on the benefits that can come from a truly strategic relationship – but the supplier has to have the chance to bring the innovation and creativity to you.
Extended SRM is not a term that we use a lot anymore here at Vizibl, we prefer supplier collaboration and innovation these days, but the premise, practice and insights provided by John hold true regardless of how you’d like to title the initiative. A rose by any other name would smell as sweet etc.
If this article is up your alley, you can find similar interviews from leaders at AstraZeneca, Novartis and Rutgers Business School, by downloading our white paper on Extended SRM.