SRM Leaders Outpace Peers On Lead Times, Other Key Metrics

Organizations without formal supplier relationship management (SRM) programs stunningly report 233 percent longer supplier lead times than those with such programs. (See Exhibit 1). Reducing lead times from suppliers can get inventory in and out the door faster, freeing up cash and ultimately satisfying customers.

This is a key takeaway derived from data collected in APQC’s Open Standards Benchmarking in Procurement initiative. The data shows that organizations with SRM programs are significantly more efficient. The shorter lead times translate to efficiency savings, a cleaner balance sheet, and improved customer service.

Companies using SRM also demonstrated a higher mix of strategic suppliers in their total supply base. This was true at the 25th percentile, median, and 75th percentile of the sample. (See Exhibit 2.)

Supplier relationship management is a collection of programs and initiatives aimed at maximizing the value of key supplier relationships. The goal is to improve supply chain effectiveness and dependability through close collaboration and communication with critical suppliers. Ultimately, effective SRM can drive down costs, improve customer service, and make an organization more competitive.

Without an effective SRM strategy, organizations may encounter problems such as:
• greater difficulty in competing globally,
• higher sourcing costs,
• higher material pricing,
• inconsistencies in quality and supply,
• constant adversarial battles with suppliers,
• continued inability to retain good suppliers, and
• more dissatisfied customers.

To identify the best practices that comprise effective SRM initiatives—and put some context around the data from our benchmarking research—APQC conducted a study of successful companies to see how they designed and established win-win relationships with their supply chain partners. We studied well-known industry leaders such as Cessna Aircraft Company, H.J. Heinz Company, and Anheuser-Busch as well as organizations such as Stryker Instruments, a medical device manufacturer, and Vectren Corporation, a producer of electricity and natural gas.

One of the goals was to identify excellence in supplier management that would apply equally to $50 billion organizations as well as to $50 million companies. Researchers studied how these companies designed a supplier relationship methodology, established a collaborative environment to synchronize the supply chain, used tools and technology, and measured success while providing for continuous improvement.
The APQC study team identified 10 patterns or best practices of SRM excellence that were consistent across the companies in four areas: methodology, collaboration, technology, and measurement.

SRM Methodology: Integrate Suppliers
The first three SRM best practices fall under methodology. These practices include partnering, aligning supplier relationships with corporate goals, and organizational support. The companies in the study developed methodologies to establish partnerships with suppliers and also encouraged internal and external stakeholders to work together to achieve common goals.

The partnering best practice focused on integrating SRM into strategic sourcing initiatives to improve both supply chain and customer service. In 1996, Stryker began a streak of 23 percent annual net earnings growth. To continue this level of growth, however, the company knew that it needed to improve its supply chain. “We kept raising the bar with our performance,” explained Mark Lincoln, Stryker’s vice president and plant manager. “We did very well internally, but we did not do it very well with our supply chain.” The company leaders turned to SRM, enlisting their suppliers for help in streamlining supply processes to make the supply chain more reactive and responsive to customer demand.

The best practice that aligns SRM with corporate goals is to bring cross-functional teams into supplier relationships. Cessna’s sourcing group noted that one of its top three SRM critical success factors was attaining enterprise-wide strategic alignment that links back to customers and stakeholders. To achieve this, the company formed cross-functional commodity teams from engineering, quality, finance, aftermarket, and supply chain. Suppliers were rationalized into the categories of growth, provisional, and phase-out. The process aligned the supply base with overall corporate goals.

Organizational support is critical to effective SRM; the entire organization must recognize and support the importance of supplier relationships. This support can take the form of senior management commitment to the effort, clear and consistent communication regarding the value of the SRM program, and strong performance measurement initiatives. A well-developed corporate mentality for SRM policy enforcement will discourage maverick buying practices. The best-practice partners in the study indicated lower percentages of maverick purchasing.

Collaboration: Synchronize the Supply Chain
The next three best practices come under collaboration and synchronization. They include building strategic relationships, rationalizing the supply base, and developing mutual capabilities. Strategic supplier relationships are built through communication and collaboration between the company and its suppliers to minimize conflict or resistance and to develop trust and respect.

Building strategic relationships requires time, trust, mutual understanding, and regular and consistent communication. It also calls for mutual commitment to establish a long-term relationship. Cessna and its suppliers integrate processes and resources in a relationship driven by the mutual motivation to work together to improve quality, reliability, delivery, and service. The company and its suppliers joined forces to address the cost pressures of raw materials, crude oil, and health care. They also collaborated to meet customer expectations of faster, better, and cheaper delivery.

The best practice of rationalizing the supply base is a matter of utilizing the right number of suppliers as well as the right suppliers. For most companies, this means cleaning up a sprawling collection of suppliers that have accumulated over years (sometimes even decades) into an incoherent mishmash of semi-maverick spend. Cessna sought to reduce its supply base by 75 percent in a four-phase program of define, align, improve, and integrate. The company reduced its supply base from 3,500 to 840 over five to six years.

The best practice of developing mutual capabilities means working with suppliers to develop capabilities and strengths that can continuously improve supply chain effectiveness and, ultimately, customer service. Stryker developed two key initiatives to establish a collaborative environment—a supplier advisory board and supplier roundtables. The company convenes quarterly advisory board meetings to review performance data for the previous quarter and discuss what went right and wrong. The process has helped Stryker move to the next level of performance and create true partnerships with suppliers.

Technology: Tools and Processes
Two best practices fall under technology and process improvement: establishing standards and collaborating on technology. The best-practice partners in this study work collaboratively with their suppliers to determine the features and functionality of tools and technology necessary to support an integrated supply chain that enables continuous improvement.

Setting standards is critical for executing an efficient and effective supply flow. This process includes designing a system of sourcing and spending practices with attached accountability. The Heinz North American supply chain, for instance, interacts with its suppliers through global sourcing teams organized by category. Over a two-year period, the company’s supply chain group conducted planning and review sessions on four strategic imperatives: driving profitable growth, simplifying business, measuring performance, and reducing cost. The group found that all four imperatives work in conjunction with one another.

The best practice of working with suppliers to identify and implement tools, technology, and proven processes is a collaborative foundation for continuous improvement. Cessna’s sourcing organization performs an annual gap analysis to identify opportunities for adopting enabling tools and technologies. The gap analysis begins with the customers and stakeholders and ends with continuous improvement and results. The company shares its successful processes and tools with suppliers to reduce the total cost of acquisition.

Measurement: Metrics to Improve Results
The final two best practices identified fall in the measurement category. These include creating effective metrics and developing measurements and rewards to support the metrics. The goal is to improve mutual capabilities and performance. Importantly, performance objectives need to be measured and reinforced with a rewards system.

The best practice of developing effective metrics involves collaborating with suppliers and stakeholders to ensure the metrics are realistic and promote buy-in. Vectren created standard performance measures like supplier lead time, supplier fill rate, and on-time deliveries. The company then collaborated with strategic suppliers to determine applicable key performance indicators aligned to meet strategic goals. The metrics are reviewed quarterly and adjusted to ensure that the measurement system is helping to obtain desired results.

The best practice of developing measurement and rewards works to ensure program success while driving results. At Heinz, the procurement group instituted reviews that have two important attributes: a quantitative, data-driven scorecard and the inclusion of senior management from both Heinz and the supplier. The reviews have become essential to the company’s successful supplier relationships.

The Message: SRM Fuels Efficiencies
APQC used its Open Standards Benchmarking research to see how well the best-practice partners in the SRM study ranked against average and top-performing companies. In all the benchmarked supply-chain metrics—from on-time delivery to perfect orders and order fill rates—the companies with well-developed SRM programs were among the top performers. The qualitative study APQC conducted with the group of industry leaders showed how SRM was being put into practice. The research identified specific best practices that delivered real value for these organizations and their supply partners.

The bottom line: The benefits of SRM are real. They fuel greater supply chain efficiencies for all of the participants.

Rob Spiegel is Knowledge Specialist–Supply Chain for APQC.
APQC is a member-based nonprofit founded in 1977. APQC is the leading resource for performance analytics, best practices, process improvement, and knowledge management. For more information, visit http://www.apqc.org or call 713-681-4020.

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