Generating value from suppliers
Organizations continue to disaggregate. The traditional ‘integrated enterprise’ has eroded and current thinking is that organizations are more agile, more efficient and more creative if they use external suppliers and contractors, rather than invest in large-scale ‘owned’ resources.
We know this change is happening because the data shows increasing volumes of purchasing spend. Indeed, data from Proxima (a consultancy) has suggested that almost 70% of the average company’s revenue is now expended on external suppliers.
But are the assumed benefits occurring? It is hard to find data that answers this question. Traditional procurement measures focus on negotiated savings, rather than broader business benefits of cost over time, impacts on efficiency, speed or value. There is growing realization that disaggregation does not mean abandoning responsibility: in other words, you can eliminate resources, but you still have to engage and manage your new source of supply.
This pattern of change is leading to rather more fundamental impacts on business thinking. Management is awakening to the need for increased collaboration with its ‘outsourced’ resources. Relationships that are based solely on measures of input cost and compliance may appeal to the Finance department, but do not create a high-performing organization. This means also that greater care must be taken in the selection of suppliers and in the subsequent management of interactions. Hence we are seeing new measures introduced – often more qualitative in nature – and a major focus on broader skills of relationship management and contract management.
The implications of this change are significant. For one thing, it transforms traditional thinking that ‘contracting’ and ‘relationship management’ are separate activities. Increasingly, they are integrated and interdependent. Secondly, it also challenges the old view that contracts and relationships are a sub-element of procurement or sourcing. Today, contract and relationship management are the life-cycle activities which generate value; procurement and sourcing are sub-elements of them.
In the background, we see a growing amount of data illustrating the need for – and consequences of – change. But as a recent study from Vantage Partners shows, there is still a long way to go. Their survey of supplier relationship management (SRM) shows that almost two-thirds of participants don’t know how to measure the value achieved from their SRM investments. Over half indicate that their organization needs to execute a ‘major change of attitude’ if it is to generate greater value from its supply relationships.
For those who are interested in SRM, there is another major study currently underway. State of Flux is undertaking its annual survey, probably the most comprehensive in the industry. It can be reviewed and completed at https://www.surveymonkey.com/s/state-of-flux-2015-srm-survey