Dansk Indkøbs- og Logistik Forum

Indkøb, logistik, produktion og SCM

Nr. 4 | August 2011 | årgang 48

The value of value

in supplier relationships

DILForientering AUGUST 2011 ÅRGANG 48 1

6 DILForientering AUGUST 2011 ÅRGANG 48

Reframing procurement’s strategies, priorities and deliverables, part 3: the value of value in supplier relationshipsThis article is the third of an exclusive fi ve-part series of articles produced for DILForientering, running throughout 2011. It assesses the options for building different types of value from supplier relationships, and positions them in relation to ten levers which minimise cost, balance risk and reward, and position procurement as a driver of relational value creation in both the private and public sector. It follows on from the second article highlighting a range of approaches to accelerate a cost down initiative.

photo: istocKphoto

månedens artikel

BY PROFESSOR MARC DAY, HENLEY BUSINESS

SCHOOL, UNIVERSITY OF READING; MARK WEBB,

MANAGING DIRECTOR OF FUTURE PURCHASING

LTD, AND JONATHAN HUGHES, PARTNER AT

VANTAGE PARTNERS INC.

Recent publicly announced initia-tives from a range of organisati-ons suggest that procurement’s

value creating role in further leveraging non-fi nancial value from supplier relati-onships is being merited with some sy-stematic treatment. At Diageo, the global drinks manufacturer, importance is being placed on appreciating the impact of supply management on end consumers.

O2, the telecoms company, mandates that their supply chain will be expected to share the critical business task of shrin-king the time it takes to get new products and services to market. Finally, the coffee company Starbucks reports that an initia-tive to increase the sustainable sourcing of coffee has signifi cantly impacted cur-rent suppliers by requiring them to shift their patterns of sourcing to meet stricter LLC

DILForientering AUGUST 2011 ÅRGANG 4827 DILForientering AUGUST 2011 ÅRGANG 48

ethical trading targets and supply chain transparency. These selective cases con-trast with the results of an SRM research project we led in 2010. It confirmed the reality across all sectors that unlocking major value from supplier relationships is still in its infancy. Organisations in par-ticular are still finding it difficult to build the business case for more systematic relationship building with suppliers.

Organisations like Diageo, O2 and Starbucks have already begun to focus on the delivery of more than just shorter term cost down outcomes from supplier relationships. But, many organisations are struggling with initiatives similar to these which face difficult challenges throughout their lifecycle from set up, through to operation, and finally to dis-solution. Aspirations for achieving more than short term tactical price down can take longer than first expected, and in-volve more money and team effort with few initial rewards as a demonstrable pay-back. It is still a leap of faith to choose who to work with because of the inexact science of calculating the value creation potential from relationships. This critical

challenge of valuing the value from sup-plier relationships requires measuring the payback from intangibles such as trust, commitment, enabling transparency, new market access and leveraged co-de-pendency. This is a critical first step in building a business case to convince oth-ers that the value co-creation route is worth following, and that zero-sum price negotiation games can be transformed into mutually beneficial exchanges.

It is much easier to follow a path where value is reduced into basic finan-cial outcomes using data sources which vary little in scope from simple calcula-tions of negotiated cost reduction. After all, this is the default expectation for what the wider business will assume of procurement as their major delivery ef-fort. We believe this procurement man-date is narrow, and foregoes the chance of a much more stretching agenda with suppliers to leverage better cash flows, enable greater customer responsiveness and build a richer innovation pipeline. These are key features of relational lever-age, and contrast with the over-use of competitive leverage associated with in-

appropriate bidding rounds, tendering, and poorly designed RFP/auctioning tools.

Embracing this wider scope of pro-curement value delivery is required to achieve much more demanding business expectations of procurement. Relational leverage requires the re-framing of what the value of a supplier relationship means, which connects to a more pur-poseful picture of organisational business benefits. The important first step is to split out value drivers (a mixture of hard and soft factors) from the levers of deliv-ery (operational practices which unlock the value from relationships). These prac-tices need to be matched with clear ways to measure follow-on outcomes in terms of business benefits. Relationships should result in reduced costs, increased reve-nues or mitigated risk.

Figure 1 shows the linkages between the value drivers, value levers and the business benefits from leading-edge pro-curement. We show how ten value levers (the operational mechanisms of delivery) can be selected to realize a range of busi-ness benefits after the drivers of value in

relationship value drivers impact business value delivery using different value levers

Figure 1. Source: Marc Day, Mark Webb, and Jonathan Hughes, 2011.

DILForientering AUGUST 2011 ÅRGANG 48 3

8 DILForientering AUGUST 2011 ÅRGANG 48

the relationship have been evaluated. It shows how the narrow operating model of volume consolidation and competitive leverage misses much bigger value gener-ating opportunities. It ultimately stems from not being able to see the complete role that value drivers play in determin-ing the range of value levers open for use. It is an artificial limit on the options for leveraging co-created value when it comes to procurement reform that may place a cap on the value that can be lever-aged from relationships.

A richer picture of value drivers is necessaryOur extensive work with clients globally,

along with three significant research pro-jects undertaken over the last five years leads us to assert that a black hole exists in many procurement strategies when it comes to calculating the potential for un-locking value in a relationship. A lack of clarity exists about what causes a rela-tionship to deliver value, with many re-source commitment decisions focusing on the wrong value lever.

Figure 2 provides a straightforward benchmarking mechanism which uses bundles of relevant metrics to assess the scope of value drivers impacting a rela-tionship. It gives a much more accurate assessment of a relationship’s value po-tential. This example scorecard uses four drivers. They are selected on the premise that we need to know what future goals we expect to achieve along with progress to date, and whether a relationship has enough value growth remaining to meet future expectations. This value driver dashboard has follow-on implications for a variety of more operational, day-to-day issues:

❙ Purposeful, evidence-based seg-

mentation, based on current and fu-ture performance rather than skewing a segmentation process based on vo-lume, spend, or criticality which may downplay a supplier’s innovation im-pact.

❙ Pre-determining performance ex-

pectations by selectively choosing a particular value lever, such as innova-tion-driving, process excellence, out-sourcing provision, specific capability building, or de-risking through com-modity hedging. This will cascade into the selection of the right rela-tional behaviours, team competencies and organisational structures.

❙ Prescribing advanced limits on re-

sourcing for relationship so capabili-ties are co-developed within limits in those relationships with the best achievable future value potential, with the right capacity in the pro-curement team built before initiatives take place.

❙ Profiting from differences in per-

ception between procurement, wider business stakeholders and the sup-plier so that new markets, alternative cultures, special know-how and other process design options can be learned.

❙ Protecting the buying organisa-

tion’s value share from a relation-ship when the right structure and in-novation sharing agenda is deployed.

❙ Profiling how conflict might occur, so the nature of the differences with a supplier can be understood and those behaviours associated with value de-struction can be eliminated. Working early to constructively address con-flict will also feature as a benefit from the scorecard because it will prevent an impact on future operational per-formance.

❙ Prudently using open innovation,

so the balance of internally incubated creativity can be complimented with co-created products and services that share resource intensity with a collab-orator, which may give reach into new markets currently closed off to the organisation.

Separate the realized outcomes of value from future expectationsWhen evaluating the future value deliv-ery from a relationship, we need to sepa-rate expectation-based measures from what outcomes-based value is already be-ing achieved. It is important to differenti-ate between leading and lagging indica-tors, and to be clear about the cause and effect relationship between them. Our latest SRM research indicates that the bulk of measurement used in practice in-volves collecting data for two outcome-based measures of relationships: the fi-

About the Authors

Marc Dayprofessor of strategy and operations management at henley business school, university of reading, uK. for-mer chairman of ipsera and visiting professor at seattle university. 15 years’ experience of consulting, researching and teaching supply management at mba and doctoral level. phd in manu-facturing strategy from Keele university.email: marc.day@henley.reading.ac.ukWeb: www.henley.reading.ac.uk

Mark Webb16 years’ procurement experience in line and consultancy roles up to direc-tor level. last 5 years spent managing global initiatives in manufacturing, banking and telecoms sectors. experi-ence has ranged from accelerated savings delivery to change program-mes impacting organisation structures, process design and skills capability.email: mwebb@futurepurchasing.com Web: www.futurepurchasing.com

Jonathan Hughesan expert in supply chain manage-ment, strategic alliances, and change management, he has worked with lea-ding companies across a range of indu-stries to develop and implement new supply chain and go-to-market strate-gies leveraging internal and external collaboration, implement formal alli-ance programs, and develop and im-plement negotiation strategies for complex, high-stakes deals.email: jhughes@vantagepartners.comWeb: www.vantagepartners.com

WorldWide CollAborAtion ProjeCt on VAlue MAxiMisAtion

– A five article series in DILForientering, 2011five organisations, well known to many of the readers of dilforientering, are working together on a practitioner- focused project to understand, audit and transform the sources of supplier value. there will be an opportunity to discuss it through a worldwide web cast in Q4, 2011 and/or Q1, 2012.

DILForientering AUGUST 2011 ÅRGANG 4849 DILForientering AUGUST 2011 ÅRGANG 48

nancial value delivered by procurement to the business, and operational measures of business performance. This is often at the expense of those measures which as-sess the future value creation likely to be achieved from a relationship. This type of assessment also goes beyond the transfor-

mation of outcomes into good practice case studies of success, which should compliment more quantitative perfor-mance results.

Leading measures, those that give in-sight into the future potential for value generation in a relationship appear less

prominently when it comes to measure-ment. This can result from a misguided assumption that the less tangible a meas-ure becomes the less important they are to consider, and consequently the less prominent their impact becomes. Put simply: if measures don’t get reduced to

accelerating delivery from strategic relationships using tWelve benchmarK indicators

Figure 2. Source: Marc Day, Mark Webb, and Jonathan Hughes, 2011.

Little evidence

Embryonic value driver evidence Intensified value driver evidence Accelerated value driver evidence

Planning horizon

1 2 3 4 5 6 7 8 9 10

littleevidence

❙ insight into supplier’s future plans up to 1 year ahead

❙ lack of engagement to share our plans with this supplier

❙ awareness of the supplier’s strategic aims greater than 1 year

❙ We feature mutally in each other’s strate-gic plans

❙ clear awareness of the supplier’s strategic plan 2 year’s ahead

❙ supplier’s plan integrated into our strategy with little conflict

Business case definition

1 2 3 4 5 6 7 8 9 10

littleevidence

❙ basic business case built primarily on contract performance

❙ limited definition of options for systematic joint working

❙ price and cost feature as part of a relationship business case

❙ clear working commitments written down and agreed

❙ fully developed business case integrating price, cost and value

❙ Jointly agreed and mutually signed off business case operating

Top teamsponsorship

1 2 3 4 5 6 7 8 9 10

littleevidence

❙ top team sponsorship agreed in principle but not operational

❙ procurement leadership needs support and strengthening

❙ top team are aware and openly support the relationship aims

❙ clear awareness inside the relationship of top team support

❙ periodic board-to-board review processes for the relationship

❙ internal and inter-firm awareness of top management support

Governance and

mandate

1 2 3 4 5 6 7 8 9 10

littleevidence

❙ emergent process predominates for managing relationships

❙ relationship agenda driven by incremental problem solving

❙ mandated relationship leaders beginning to plan work streams

❙ mixture of proactive and reactive relationship activity

❙ Jointly planned work streams with clear responsibilities

❙ top management review, challenge and support plans

Mutualinvestment

1 2 3 4 5 6 7 8 9 10

littleevidence

❙ limited quantified benefits or roi from the relationship

❙ stakeholders mandate staff to commit time to a relationship

❙ regular, open dialogue about future resource commitments

❙ cross-organisational teams devoted with the right budget

❙ committed budget dedicated to the relationship on both sides

❙ clear benefits and roi demonstrable from past investments

Ways of working

1 2 3 4 5 6 7 8 9 10

littleevidence

❙ few operational tools in use to solve problems proactively

❙ no defined and structured processes for dealing with conflict

❙ mixture of proactive and reactive day-to-day problem solving

❙ structured processes for dealing with conflict available

❙ six sigma, lean or process improvement initiatives deployed

❙ defined and structured processes for resolving conflict in use

Degree of trust

1 2 3 4 5 6 7 8 9 10

littleevidence

❙ current and future supplier actions somewhat unpredictable

❙ this supplier predominantly considers their own interest

❙ the supplier's actions are reasonably predictable

❙ any important requirements we have are met by the supplier

❙ this supplier can be counted on to act as we expect

❙ increasing our relinace on this supplier would not be a mistake

Extent of commitment

1 2 3 4 5 6 7 8 9 10

littleevidence

❙ no clear commitment to this relation-ship in our business

❙ some forward commitment to purchase, but nothing more

❙ We are happy to commit short-term to this relationship

❙ We would be keen to purchase from this supplier next year

❙ We have a strong sense of attachment to this relationship

❙ resources committed, people assigned and co-developed value

Satisfaction and loyalty

1 2 3 4 5 6 7 8 9 10

littleevidence

❙ out firm is not completely happy with this supplier

❙ relationship currently underperforms compared to others

❙ compared to expectations we feel satisfied with this supplier

❙ team members dedicated to develop a stronger relationship

❙ We share a strong sense of mutual loyalty with this supplier

❙ vocal and open satisfaction gets demon-strated by both sides

Joint skill building

and capabi-lity sharing

1 2 3 4 5 6 7 8 9 10

littleevidence

❙ mixed capabilities not fully leveraged in the relationship

❙ some training underway but predomi-nantly operational

❙ leadership in place to and actively direc-ting the relationship

❙ clearly focused training and develop-ment being rolled out

❙ cross-cohesive capabilities, benchmarked as ‘excellent’

❙ supplier capabilities highly regarded, key to our innovation

IP sharingarrange-ments

1 2 3 4 5 6 7 8 9 10

littleevidence

❙ non disclosure agreements signed, no ip contract in place

❙ innovation constrained by avoiding sensitive ip disclosure

❙ legal aspects of ip sharing fully agreed and in place

❙ disclosure of potentially sensitive ip shared

❙ ip, revenue sharing and licensing agree-ments operating

❙ innovation not constrained by ip owner-ship in any sense

Product/ service

innovation process

1 2 3 4 5 6 7 8 9 10

littleevidence

❙ Key relationship factors are price, service and quality

❙ no systematic effort given to product or process innovation

❙ Key supplier ‘value added’ integrated into our npd processes

❙ suppliers involved in incremental innovation and adaptation

❙ supplier is key to the products and services we will develop

❙ supplier innovations openly encouraged and co-delivered

rela

tion

ship

str

uct

ure

stra

teg

ic a

lign

men

tre

latio

nsh

ip q

ual

ityin

nov

atio

n c

apab

ility

early days

solid progress

clear results

early days

solid progress

clear results

early days

solid progress

clear results

DILForientering AUGUST 2011 ÅRGANG 48 510 DILForientering AUGUST 2011 ÅRGANG 48

financial performance or a proxy for it then they don’t merit an equivalence of attention. This is short sighted and para-doxical, as numerous studies and a great deal of practical experience demonstrate that the majority of value locked in a sup-plier relationship is because there is evi-dence of trust, satisfaction with partner performance and mutual commitment to further development. Useful measures for these critical features of relationship quality have been in existence for a long time, but the seriousness paid to their measurement is often negligible. Rela-tionships need the right climate of pro-ductive relationship quality and a cor-rectly matched structure to deliver more than average performance.

Those measures that look backward at value achieved are often not as good pre-dictors of what will be achieved in the fu-ture. Relationships also have value deliv-ery lifecycles, so it is important to assess in which delivery period the commercial arrangement currently sits. The three key elements for assessing a relationship life-cycle are structure, quality and innova-tion capability. They vary in importance over time, and must be renewed and aligned to maintain if a sustained outflow of value is to be achieved.

In recent years it has been encourag-ing to see the translation of the percep-tion that relationships have value beyond more traditional sourcing outcomes into practical examples. Here are some promi-nent cases which demonstrate the har-nessing of relationship value drivers us-ing a variety of levers for delivery:

❙ British American Tobacco is system-atically engaging with its tobacco leaf and wood supply chains to develop more sustainable farming practices with its 200,000 suppliers who are mainly based in developing econo-mies. It aims to use no wood sourced from natural forests in its production process by 2015, and achieve a greater degree of supply security for tobacco leaf.

❙ Premier Foods and British Sugar have re-defined their working rela-tionship to leverage greater opportu-nities to jointly eliminate cost. By clearly defining joint objectives for the relationship they have managed to achieve £5.7 million savings from a combination of price, logistics, effi-ciency and innovation projects.

❙ Siemens, as part of an ambitious pro-gram to better leverage a purchasing budget of £34bn, has reduced its sup-ply base of 110,000 suppliers by 20% which has not only improved effi-ciency and lower administrative costs, but also provides greater innovative strength. The Siemens Supplier Fo-rum, a selective innovation group, brings together the company’s 30 most important suppliers in order to develop joint strategies for even more effective cooperation, with the results implemented through concrete pro-jects.

❙ By thinking more laterally about sourcing new technology NATs (the UK leader in air traffic control ser-vices) and McLaren (the formula one

racing team) will adapt race control computing developed by McLaren to aid the management of aircraft on the ground. This venture into Air-ports-Collaborative Decision Making (A-CDM) software could significantly enhance air-traffic efficiency and be marketed on a global scale.

Relationship structure, quality and innovation determine future valueFigure 3 brings together leading and lag-ging measures into one simple scorecard for a relationship with three categories each for determinants and outcomes-based measures. Each of these categories contains a metric which can be deployed to assess the current and future state of any relationship.

The focus for attention on each meas-urement category may be different. In the case of a relationship built around supply chain de-risking and process simplifica-tion it may be important to downplay the need to devote resources for reaching into new markets or devise new product/ser-vice offerings. In contrast the necessity to build innovations measured in terms of the number of deployed process improve-ments, the cycle time for process im-provement payback, and evidence of en-hanced process skill development will be more important.

Many initiatives involving collabora-tive work with the supply base are built on trust, dependency and honesty which provide the right culture for successful value co-creation. This is supported by

a holistic relationship scorecard uses leading and lagging measures of value

Figure 3. Source: Marc Day, Mark Webb, and Jonathan Hughes, 2011.

DILForientering AUGUST 2011 ÅRGANG 48611 DILForientering AUGUST 2011 ÅRGANG 48

the need to structure the relationship properly, so the end reason for the collab-oration is clear (high goal congruence), teams across functions in the organisa-tion can work well together (positive cul-tural overlaps) and there is a similarity in the strategic directions of both parties. It is also certain that there are times when both parties will disagree about the deci-sions made when working together, gain-ing access to sensitive information, differ-ential competencies or strategic focus. To assume that conflict can be eliminated is somewhat naïve at best. There is a great deal of learning to be had from disagree-ments, but the destructive power of dif-ferent perspectives can run out of control if those in the relationship do not have access to mechanisms for managing it.

The structure, or architecture, of a re-lationship gives the necessary govern-ance and programme planning frame-works for working together, and the nec-essary mechanisms for dealing with con-flict. For example, in the relationship between British Sugar and Premier Foods both organisations highlight the success of overcoming an initial nervousness on the part of both businesses by holding workshops which resulted in the develop-ment of clear, jointly agreed goals. Objec-tives were drawn up for a 24 to 36-month period along with action plans, which were signed off by appointed executive sponsors from both organisations. As well as intervening to rectify any complex conflicts between the organisations the senior sponsors held formal joint review meetings examining progress against the objectives for both businesses, and en-dorsed aims for the next 12 months. These hard structures underpin what both sides consider to be the key ele-ments to get the relationship productive: trust, people skills and commitment.

It is now becoming apparent to execu-tives that potential breakthrough value delivery in procurement does not get achieved using traditional margin man-agement, a price-dominant focus, or zero sum competitive leverage. The challenge of applying what we call relational lever-age is still in its early days. Few cases of excellent practice are in the public do-main, and only a limited amount of evi-dence is available to clearly demonstrate progress when it comes to procurement having a key role to play in leveraging co-created innovation with suppliers. The good news is that organisations are be-coming more open to begin building the necessary strategic and operational links,

along with the chemistry with chosen suppliers to secure some great break-through achievements. But, the risks of not doing so may be even greater. /

References

Day, m. & lichtenstein, s. (2006) strategic supply ma-

nagement: the relationship between supply manage-

ment practices, strategic orientation and their impact on

organisational performance. Journal of purchasing &

supply management, 12, pp. 313-21.

Day, m., magnan, g. m., hughes, J. & Webb, m. (2008)

strategic supplier relationship management. supply

chain management review, 12, pp. 40-48.

Day, m., magnan, g. m. & moeller, m. m. (2010) evalua-

ting the bases of supplier segmentation: a review and

taxonomy. industrial marketing management, 39, pp.

625-39.

Hughes, J., Wadd, J., Webb, m., faneuil, a. (2010) value

delivered by strategic suppliers relationship manage-

ment in major organizations, future purchasing/vantage

partners, guildford, uK.

Hughes, e J., Webb, m. and day, m. (2008) business re-

lationship management: the four faces of building va-

lue with strategic suppliers, henley business school/fu-

ture purchasing, henley-on-thames, uK.

Weiss, J, donigian, a. and hughes, J. (2010) extreme ne-

gotiations, harvard business review, november 2010.