They say that the first step is admitting you have a problem. Despite the fact that many procurement teams are waking up to the need to innovate and some are even starting to understand that this innovation could flow through from supplier initiatives, the truth is that collectively as a function, procurement has a problem in the way in it engages with its suppliers.
The very phrase we’ve coined for this process ‘supplier performance management’, highlights the issue perfectly. The challenge for businesses looking to innovate and unlock value from supplier relationships doesn’t lie in ‘managing’ suppliers, it lies is collaborating with them. The term ‘management’ implies a unidirectional hierarchy of power where the supplier is subordinate and answerable to the procurement team. A truly successful buyer/supplier relationship should comprise of two way communication. Sadly, the processes, measurement systems and arguably the mindset of corporate leaders appear to be under-equipped for this sort of engagement.
A whitepaper written by our CEO and founder, Mark Perera and Kate Vitasek of the Vested Group directly highlights the shortcomings of current supplier performance management practices. For the sake of this blog, I’ve paraphrased them below, but you can access the full paper for free by clicking here.
There are a precious few companies that claim to have made significant headway in the supplier performance management space. Those that do, tend to do little more than track transactional performance against contracted rates. While this is a vital first step, it represents only a fraction of the value that can be driven from supplier/buyer relationships. Measuring transactions does not give a full picture of the relationship between the buyer and the supplier and it certainly doesn’t provide a definitive view of supplier performance. The whitepaper suggests that measuring supplier transactions as a means to understanding supplier performance is akin to judging a theatre company’s performance of Shakespeare’s Hamlet by simply reading the script.
For too long we’ve viewed supplier performance in a vacuum. Now is the time to view these relationships in a new light. Rather than micro manage performance against contracted metrics, we need to establish a system that allows both the supplier and the buyer to achieve their respective corporate objectives. To achieve this requires a complete reevaluation of the buyer/supplier relationship. Critical relationships should be governed by a shared vision that is created and agreed upon with the objectives of both businesses in mind.
If you’ve the read course materials for your MBA or even seen the latest LinkedIn meme, you know that ‘you can’t manage what you don’t measure’. Welcome to the 1990’s. While metrics are important to business relationships, we have to understand that they aren’t everything. What’s more, if you are measuring the wrong metrics, which I believe many procurement teams are, you are in fact hindering your progress. New business relationships should focus on other softer skills that previously haven’t been measured by traditional business metrics. The way buyers and suppliers work together on collaborative issues and problem solving goes a long way toward a successful relationship and measuring traditional business metrics tends to miss this fact.
Current supplier performance practices are great for uncovering what has happened in the past. There is undoubtedly some benefit in doing this. By understanding past poor performance, we can make changes to ensure the likelihood of it happening again is reduced. Truly innovative supplier relationships however, take a future focus. By promoting two-way idea sharing and not beating your suppliers up over performance metrics, you create an environment of collaboration where suppliers are more likely to share their industry, product and market knowledge. It’s important to understand that your suppliers can educate you by making you aware of events, issues and developments before they actually take place rather than forcing to you manage them after the fact.
Published December 2015.