I was sitting with one of my former clients recently and we were talking about his procurement journey which encompassed a 14-month strategic sourcing engagement. During this project, we were able to right-size the supply base, drive procurement efficiencies, and realize incredible financial results. As we continued to reflect on what was accomplished we discussed what happens next and the “so now what” question was raised. Although we had created incredible value for this client through strategic sourcing, he was not sure how to continue to create value to this organization with the supply base. As I started racing through all the various components of procurement transformation the resounding next step was the establishment of a supplier management program.
The idea of a supplier management is very simply defined as a program that promotes collaboration with your supply base to optimize the maximum value out of the mutual relationship and to foster that relationship. The benefits of such a program are vast and quantifiable, based on improved lead times in the supply chain. For instance, the Just in Time programs of Toyota and its suppliers aimed at reducing quality defects or the rollout of Six Sigma processes with aircraft engine suppliers of GE to suppliers assisting with product innovation as described by my colleague’s post “Leveraging Supplier for Growth – not just cost savings (March 2011).” All of these areas of value creation to a company can be realized through a sound supplier management program. This is the first of many other posts in which we would like to share some of the tools and processes that can be used to establish a high performing supplier management program.
Relationship Segmentation Plan
The first process we would like to share is putting in place a supplier relationship management program based on a prescribed segmentation plan. Similar to an inventory segmentation plan, a company should look to segment their supplier relationships into “A, B, C” relationships so to optimize the work based relationships. A relationship with a supplier runs the gambit between transactional vendors to a strategic supplier. The segmentation plan needs to be created based on a set of criteria that is established by a highly cross functional team. Team members should represent stakeholders from functional areas such as product design/engineering, finance, marketing and procurement but could include a broader stakeholder team as well.
Common segmentation criteria could be the company’s ability to operate one’s business in relation to the supplier or supplier’s impact to the companies end customer or the supplier’s current long lead times. Based on these criteria the supply base should be broken into segments such as “Segment A” or the top 20%, “Segment B” or the next 30% and “Segment C” the bottom 50% of supplier criticality to the business. Once the segments are created, establishing the operating parameter in regards to how the supplier relationships will be managed based on the segment will be important. Some leading practices for “Segment A” suppliers would include quarterly relationship meetings, formalized communication and escalation plans and sharing future business and sales plans. On the other end of the spectrum, “Segment C” suppliers require less involvement and the relationship would entail minimal contract management, performance data compilation and minimal formalization of issue resolution processes.
In my next post, I look forward to sharing some of the other components of a well-established supplier management program including tools and processes around performance management and supplier development.