The true cost of one-way Supplier Relationship Management
90% of Supplier Relationship Management programmes fail, either because of poor performance, limited scope, a price-related focus, or lack of visible results. But could the true cost of SRM be more than just programme failures? In this article we investigate what happens when large organisations fail to embrace a collaborative approach towards their supplier relationships, and where procurement technology can help.
What is Supplier Relationship Management?
Supplier Relationship Management (SRM) is an approach to aligning and managing the performance of suppliers in order to drive down risk, find cost and quality efficiencies, and ensure supply of materials and services. It is a critical discipline in procurement and supply chain management, and is a crucial contributor to business success when deployed effectively.
However, despite the potential importance of SRM to the business at large, many procurement teams frequently lack the information and processes required to put together a lasting programme - and so, the actual relationship between buyer and supplier becomes simplistic, one-directional, and ultimately something that doesn’t benefit either side.
This kind of basic SRM programme involves the procurement team managing all suppliers the same way: by focusing purely on realising ‘performance to contract’, and then renegotiating the terms of said contract on an annual basis.
This approach reduces the relationship to a one-directional affair, with the buyer making simple demands of their supplier, rather than strengthening the relationship by making the communication go both ways and enabling collaboration and innovation between the two organisations.
Thinking beyond SRM
On the other hand, responsible procurement, which includes more holistic and synergetic elements like Supplier Sustainability, or Supplier Collaboration and Innovation, is about much more than just yearly directives.
“It’s exploitation vs exploration,” says Jim Massey, Chief Sustainability Officer at Zai Lab and former VP of ESG Sustainability, Ethics and Compliance at AstraZeneca. “To me, those two words are the difference between what procurement often is, and what responsible procurement could be.
“Ultimately, big buying companies have all the power in these situations. They’ll say, ‘if you want to work with us, you’ll do what we say. If you don't, we’ll cut you.’ That is the exploitation of the system. And that's what we as humans have been doing to both each other and the planet, ironically enough.
“The thing that excites me is what procurement can be. They can be the ‘floodgates out’, enabling the organisation to explore what's possible in supplier partnerships and collaborations, with innovation and sustainability programmes – learning that it's not just about them as an organisation. It's moving away from the zero sum game of exploitation and towards the exploration of asking what's possible if we truly work together.”
The cost of driving down costs
Moving away from looking at SRM as a price-based, operational performance, cost/benefit model is not just good for the buying organisation, though. The truth is that the potential impacts of simply driving down suppliers on price every year goes far beyond spoiling relationships or making only small, short-term financial improvements to your bottom line. There could be situations within your supplier base where the ‘true cost’ of taking this approach will only reveal itself once it’s too late – and end up damaging your brand reputation or exposing you to huge regulatory risks that it may be difficult to recover from. This would certainly negate any small savings a basic SRM programme might have made.
As an example, the garment industry has been created almost entirely by large buying companies driving down supplier costs to the point of exploitation. “Fast fashion” is a phrase that’s known to most people around the world, but what does this really mean in terms of supplier relationship management?
"The garment industry, not only the fast fashion industry, is built on poverty wages and sweatshop conditions. The awkward truth is that, as long as this dynamic is not addressed, scandals about working conditions in factories will continue to resurface from time to time. “As long as brands respond by cutting and running or just addressing conditions in a single factory, the overall level of exploitation will not change. Only if brands change their purchasing practices for the better, can the workers stitching their clothes start to receive decent wages and better conditions.”
The garment industry is a good example of this article’s subject, because while driving down costs and lead times in the supply chain might well save money in the short to medium term, the moment anyone investigates those practices, there’s a chance that huge brand, reputation and regulatory risks will quite rightly open up. Happily, fast fashion is experiencing some early suggestions of a cultural decline in 2022, with Love Island notably moving away from fast fashion brands like Missguided, Nasty Gal, and PLT and instead signing a sponsorship deal with eBay as their ‘pre-loved’ fashion partner.
The UK Modern Slavery Act 2015 comes with the potential punishment for businesses of 4% of turnover up to £20m GBP. What’s more, leaders within that business can face up to two years in prison for failing to identify and act on instances of slavery in their operations – including amongst their suppliers. Clearly, there is grave potential of regulatory risk to not acting. In terms of reputation, consumers increasingly expect the brands they buy from to be responsible, and if they’re found not to be, they let their spending do the talking.
A case study for change: H&M
I don’t need to dwell on those brands who have been investigated for allowing modern slavery, child labour, and rampant poverty to continue in their pursuit of profits, as they are easy to find online. Some companies have even had exploited people who are “employed” by them sew messages asking for help into the clothes they make, such is their desperation at their circumstances. Focusing rather on the positives of taking a better approach, we can look at H&M, a high street brand committed to moving beyond basic operational performance from a supplier relationship management point of view, and into a system of true collaboration and responsibility.
In fact, H&M are an excellent example of the way the system could work when moving to a model of true supplier sustainability, collaboration, and innovation. Project Just, a platform dedicated to helping consumers shop better by providing transparent ESG information on garment brands, identifies specifically that H&M is moving away from a compliance model and towards a partnership approach that encourages transparency, enables the company to capture performance beyond compliance level, and therefore measure the real impact of their business on the world around them.
H&M has also developed a new program called the Sustainable Impact Partnership Programme (SIPP), which assesses sustainability performance throughout its supplier base and takes steps to help improvements over time.
“The H&M Group is a design and fashion company. Our widespread supply chain reaches beyond our direct control because we work with suppliers who produce our designs. It’s therefore essential we and our suppliers have the same ambitions and mindset to ensure compliance with our standards, drive performance and achieve impact.” - H&M Group statement on sustainability
As a result of taking a Supplier Collaboration and Innovation approach and doing away with simplistic operational SRM, in 2021 H&M put SEK 180.4m (USD $16.3m, GBP £14.3m) into community investment initiatives, put out a substantial modern slavery statement that includes details of places they won’t buy materials from due to the risk of child or forced labour, and were amongst the highest scoring brands in the 2021 Fashion Transparency Index – all while increasing sales by 6% and operating margin by 7.7% over the previous year. If that isn’t a ringing endorsement for engaging fully on supply chain sustainability through Supplier Collaboration and Innovation, I don’t know what is.
To make it clear: Supplier Relationship Management can be – and, in fact, should be – the core component in efforts to align and manage supplier performance. It’s the foundation on which everything we’ve been talking about here is built. However, when it’s not done properly (and most of the time, it isn’t), the risks not only to corporate performance, but also to people and the planet, can be huge.
Why programmes fail
A key reason that procurement functions are struggling so much to put these admittedly complex programmes in place is a lack of good technology solutions that can do the job – although recent Gartner research shows that this isn’t because the software isn’t out there. It’s because procurement leaders aren’t asking for it.
In August 2022’s report Why It’s So Hard for Procurement to Get the Tech It Wants, Gartner surveyed 106 global procurement leaders, establishing that 99% think that “the procurement function having up-to-date technology now would make a positive difference in overall organization performance over the next one to two years”. This included 59% who said they thought it would make a “major difference”.
You’d think the business case for getting the right software for the job would be iron-clad - but Gartner continues: Global procurement leaders tell Gartner they get the technology they want only 17% of the time. The other 83% consists of partial investments or lesser technologies (34%), or, the most likely outcome, no investment at all (49%; see figure below).
Knowing that they are unlikely to get the technology they really want, procurement asks for tech that does not meet their full set of needs. As a result, programmes fail, value cannot be realised, and their ability to invest in enabling technologies in the future is curbed.
Asking for exactly what you need is never easy, and with 2022’s fragmented procurement technology landscape that includes suite providers and best of breed solutions alike, it can even be difficult to know what will meet your needs. Once you’ve narrowed down your list of vendors, however, building a robust business case is a key step in ensuring procurement receives the enabling technology it requires for Supplier Collaboration and Innovation programmes to succeed.
Vizibl’s leading Supplier Collaboration and Innovation platform
At Vizibl, we have built the leading Supplier Collaboration and Innovation solution, a best-of-breed procurement technology platform that enables enterprise organisations to achieve their most ambitious goals, through truly valuable supplier relationships. By combining the features required to lay the foundations for collaborative relationships with key suppliers through our Supplier Relationship Management module, Vizibl ensures all your key stakeholders are aligned, while our Collaboration Workspace, Innovation Hub, and Supplier Sustainability Management functionalities enable you to work closely with suppliers and partners on the programmes that will deliver real value back to your business, allowing you to move beyond one-sided, operational SRM.
To learn more about how the Vizibl platform is supporting some of the world’s largest enterprise companies in their Supplier Collaboration and Innovation efforts, visit www.vizibl.co/platform