Procurement’s growing remit
Between widespread supply chain disruption, governmental and regulatory intervention, increased sustainability demands from consumers and investors alike, rapid technological advancement, and the constant pressure to find new efficiencies and generate perpetual growth, businesses are facing a growing list of challenges.
In this landscape, improving the bottom line is no longer enough, and stakeholder demands are multiplying. Businesses – and enterprise organisations in particular – are now tasked with doing right by people and planet in addition to satisfying consumers, building resilience into their business practices, and frequently even overhauling their entire operating model to survive in the rapidly evolving business landscape of the 21st century.
As the list of challenges facing enterprise organisations grows, so too does the role of procurement. Though historically regarded as something of a “back office” discipline, recognition of procurement’s strategic importance has grown over recent years. As the funnel through which most of an organisation’s spend will travel, the crucial role of the buying function to deliver on these key objectives has become clear.
Procurement’s role is especially central given that many businesses are looking towards their supply base for answers to these pressing needs. They are right to do so; engaging more effectively with supplier stakeholders has the potential to bring cost and quality improvements, in addition to providing a new source of the innovation required to introduce new products and services. With most corporate impact on the environment and our communities sitting in the supply chain, suppliers also signal the route to improved sustainability performance. And by strengthening connections with stakeholders in the supply chain, businesses can safeguard their resilience and risk-prevention abilities in these times of widespread volatility.
Supplier Collaboration and Innovation becomes crucial
As businesses turn towards their supply chains for answers, it is no surprise that the function that sits at the interface between the business and its extended ecosystem has an enormous role to play. Procurement is now stepping into the role of “orchestrator” – ensuring that the business is able to more effectively leverage these supplier relationships to meet its objectives.
Maximising this value can happen at various stages of the supplier relationship, with strategic sourcing being absolutely crucial pre-contract. Yet much post-contract work that procurement has historically pursued (such as the P2P process) maximises the operational and transactional value of incumbent suppliers, whilst neglecting their strategic impact on the business.
There is enormous strategic potential in working with suppliers as the relationship develops, moving beyond transactional work in order to more effectively meet key goals.
As a result, Supplier Collaboration and Innovation (SC&I) has developed. SC&I is an approach to managing suppliers strategically post-contract, building upon the processes of Supplier Relationship Management and Supplier Performance Management to forge truly two-way, mutually valuable relationships with strategic suppliers.
You can read more about the benefits and goals of SC&I in our blog, What is Supplier Collaboration?. For our purposes here, its fundamental objective is to build “customer of choice” status with key suppliers – a dynamic where the buying organisation receives priority access to supplier capacity in times of turbulence, to preferential pricing, and to existing IP and innovation potential. These are the benefits that make supplier relationships a core part of procurement’s role delivering value back to the business. Successful Supplier Collaboration increases our chances of delivering against the strategic goals of the organisation.
Measuring successful SC&I through Active Collaborative Relationships (ACRs)
Whether it’s sustainability, growth, resilience, or transformation that’s the ultimate goal, many of the objectives the business will be working towards are broad-ranging, and success will usually be measured in what we call “lag metrics”. We covered these in more detail in our last article, but these are metrics that are retrospective, and usually measured over longer periods of time. Examples of lag metrics might be revenue from a new product introduction, or reduction in CO2e emissions.
Such metrics give us an excellent idea of historic performance. Yet these metrics lack agility and predictive capacity. By the time they have been measured, it is too late to influence the outcome.
To get a better understanding of how we will perform against key strategic lagging indicators through our Supplier Collaboration efforts (and to bolster our chances of success!), we must turn towards leading metrics instead. Namely, we need to establish how effectively we have built “customer of choice” status with key suppliers.
What are Active Collaborative Relationships?
For this, we recommend the concept of “Active, Collaborative Relationships”, or ACRs for short.
Active Collaborative Relationships are the key marker of successful Supplier Collaboration.
Simply put, they are relationships that are:
Active = where we are aligning and engaging proactively with suppliers on our objectives and results, and
Collaborative = where we are working alongside supplier stakeholders towards mutually-beneficial goals.
ACRs are made up of a combination of leading metrics which describe the state of our relationships with strategic suppliers in terms of how active, aligned, and collaborative those relationships are.
Example: using ACRs for business growth
In our article on leading vs lagging metrics we used the example of what our leading metrics might be for supply chain emissions reduction, including the number of emissions reductions projects we have with suppliers, or the number of suppliers who have set science-based emissions targets.
Here, let’s instead take the example of an organisation that is looking to introduce new, innovative products and services, and that has tasked procurement with supporting this goal. In order to effectively leverage the value of supplier innovation to support the business with its growth agenda, procurement must ensure it is engaging effectively with the supply base. To do so, they should be tracking leading metrics such as:
- Number of open supplier innovation initiatives
- Response rate to supplier innovation initiatives
- Number of suppliers with active proofs of concept
- POC to active innovation project conversion rate
- Estimated value of innovation pipeline project portfolio
Though none of these metrics flawlessly guarantee that the business will meet its NPI revenue or profit margin goals, by maximising the quality and quantity of their alignment, engagement, and collaboration with suppliers according to leading metrics such as these, the procurement team will give themselves the best chance of delivering effectively on the “lagging indicator” strategic goals of the business. What’s more, they will be able to more effectively attribute that success to their own work, and determine which factors of their work had the greatest impact on overall outcomes.
Video: ACRs explained
For more on how active collaborative relationships build momentum towards strategic goals, here’s our CEO Mark Perera with more on leading metrics:
To learn more about how procurement functions can more effectively leverage their supplier relationships to deliver on strategic goals around sustainability, resilience, growth, and transformation, check out our white paper Supply Management becomes Supplier Collaboration.