2- rules of engagement supplier

8132019 2- Rules of Engagement Supplier

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Rules of engagement A better way to interact with suppliers

To develop and maintain collaborative relationships with far-flung suppliers companies should first segment them and

then implement interaction models that set the rules of engagement Heres how to apply this approach in your own

operation

In todays global business environment success depends more than ever on supplier relationships how effectively companies select theirsuppliers and then manage measure and grow those relationships Indeed the bond between buyers and suppliers is so important thatrelationship may be too weak a word the successful ones are more like collaborative partnerships in which suppliers help their customersachieve their business objectives

Among the many levers that companies need to employ in order to successfully develop and maintain such collaborations across the valuechain are supplier segmentation based on the business objectives the suppliers help you achieve and mutually agreed-upon interaction models or supplier-specific action plans that set the rules of engagement In this article we will discussthe value of those approaches and how to implement them

Article Figures

[Figure 1] A three-step process for supplier segmentation Enlarge this image

[Figure 2] Supplier clusters profiles Enlarge this image



[Figure 3] Supplier segments objectives Enlarge this image

[Figure 4] Example organization of interaction principles Enlarge this image

[Figure 5] Supplier interaction model Enlarge this image

SUPPLIER SEGMENTATION

Many companies today have accumulated a proliferation of unmanaged or poorly managed suppliers that are supporting their businesses

This situation often arises out of historical imperatives to chase incremental sales and cost improvements mdasha strategy that in some cases has

contributed to substantial value creation but not without incurring certain costs

In general companies are plagued with a range of problems that stem from supplier proliferation some of which can be attributed to their

inability to effectively manage those partners Common issues that arise from this situation include failures of products to conform to

company or regulatory standards uncompetitive customer service levels due to unforeseen delays and miscommunications and overly

complex product designs and portfolio offerings that are not sufficiently differentiated in the minds of consumers and other customers

Moreover as suppliers proliferate supply risk exposure mdashfrom price volatility political and economic instability environmental disasters

and a host of other difficult-to-predict factors mdashoften increases to an unacceptably high level

In short todays supply management challenges go beyond cost containment Tomorrows leaders will differentiate themselves not through

achieving lower costs but through producing a range of other benefits That is theyll create more value by optimizing their effectiveness at

every step of the value chain

One effective way to achieve this is to organize efforts a round specific business objectives Because senior management is well aware of

challenges facing the company it has likely set objectives to meet those challenges These might include for example objectives aimed at

reducing nonconformances improving customer service or lowering supply risk exposure Sometimes the objectives at the corporate level



can be broad and somewhat theoretical but in a well-functioning organization the business planning organization should translate them into

more specific and useful mdashthough often multidimensional and complex mdashactions at the business-unit level and even at the level of individual

functions such as manufacturing or procurement (Throughout the rest of this article well use the term business objectives to refer to

these specifics)

A supplier segmentation effort mdashlike every business activity mdashshould be driven by practical business objectives Different businesses have

different objectives and so supplier evaluations should focus on the suppliers abilities to deliver on those objectives in ways that create value

For example if you have an objective of reducing nonconformances then the suppliers that can help you meet that objective are creating

more value than the ones that provide marginally better cost performance mdashand supplier segmentation should reflect that Figure 1

summarizes this process designing supplier segmentation based on business objectives segmenting suppliers according to their capabilities

against those objectives and creating interaction models and action plans (In the second half of this article well discuss how these action

plans are developed)

Thus when conducting supplier segmentation a company must look both outward and inward The outward part consists of a rigorous

analytical evaluation of suppliers capabilities For example Supplier X is good at innovation but has a high cost structure Supplier Y is the

cheapest but is not always dependable and Supplier Z is slightly more expensive but is reliable Of course it should be much more

sophisticated than that and you may even borrow from advanced statistical methods (such as software that performs clustering analyses to

find patterns within a seemingly disparate sample set) to identify different types of capability clusters in your supply base But in order to

correctly judge which combinations of suppliers create the most value it is also necessary to look inward mdashto get cross-functional

involvement in prioritizing the capabilities needed to achieve your business objectives Figure 2 shows an example of this type of clustering

analysis

Think of the statistically-driven analytical evaluation as a bottom-up approach to segmenting suppliers and the inward look at your

companys strategic priorities as more of a top-down approach By combining these into a sort of hybrid you gain the benefits of both

Bottom-up statistical clustering segments suppliers with similar characteristics Meanwhile top-down strategic clustering defines which

segments have the most important strategic implications You can then seek closer partnerships with the suppliers in the strongest segments

while urging suppliers in the weaker segments to either improve their capabilities or exit your supply chain

We can illustrate with an example Lets say that your top-down analysis identifies three strategic priorities reducing nonconformances

lowering supply risk exposure and ensuring dependable delivery Your bottom-up analysis mdashalthough it has evaluated other capabilities such

as containing costs and innovating mdashshould group suppliers based on their performance in just these three characteristics

Some suppliers are good at all three mdashtheyre your best partners



Others may be good at two out of three mdash you can explore with them how to improve their scores in the lagging category

Meanwhile you can address internally how to mitigate their weaknesses for example by developing risk management strategies

for the suppliers that expose you to certain risks

Others may be good at none or only one of your three priorities and these may be targets for rationalization Granted if the one

dimension in which a supplier excels is truly strategic then you might retain it as a niche supplier And if a supplier provides you

with something that is critical and there are no easily obtained substitutes then you may have to stay with that supplier for a

while But in general youll find that some suppliers in this segment could be eliminated a process that will help you achieve your

business objectives more quickly

Note that the results of segmentation are thus a series of action plans The action plans for top suppliers include the details of how to deepen

and strengthen your collaborative partnership For suppliers with potential the action plans involve encouraging them to meet that potential

And for less capable suppliers the action plans may involve ending the relationship Figure 3 outlines a hypothetical example of this

approach

In short suppliers should be segmented and managed differently based on the business objectives they help you achieve Furthermore this

segmentation should involve an analytical technique that is both repeatable and objective Of course each individual situation brings

complications But this is where your internal strategic analysis can get very interesting and potentially very rewarding

For example youre likely to have more than three strategic priorities mdashdepending on the complexity of your portfolio your strategic

priorities may differ dramatically for different product lines Some product lines may require innovative capabilities others reliability and

others a low cost structure But if you can group together products with similar objectives then you can manage each set of supply chains for

its objectives In other words youll be segmenting your product base as well as your supply base From a mass of undifferentiated needs and

capabilities you will segment the needs of certain groups of products along with the capabilities of certain groups of suppl iers The more you

can pair the product groups needs with suppliers capabilities the more value your segmentation effort can create

Doing segmentation this way often involves a cultural shift for supply chain functions like manufacturing and procurement To accomplish

these aims these functions have to be highly strategic in how they think about long-term business objectives They have to work

collaboratively with other functions to achieve these goals And they must be profoundly action-oriented when translating segmentation

analyses into results We dont want to minimize the effort that such a transformation may require But we do want to point out the benefits

of making that effort Because it is driven by business objectives this type of segmentation has the powerful effect of creating value in areas

that are important to upper management

INTERACTION MODELS

Value is created not by a segmentation analysis but by the actions you take based on that analysis The action of rationalizing inappropriate

suppliers is a good start But the real potential comes in the collaborative mutually supportive relationships you establish with the suppliers



whose capabilities best fit your needs By building trust and transparency with these companies you can eliminate inefficiencies collaborate

on innovations and take advantage of each others strengths

Any such partnership requires an interaction model The interaction model defines expectations around how you interact at all times in

the relationship how much information you share when and how you share it mdashin essence the rules of engagement For that reason some

companies prefer to think of an interaction model as an engagement model

Unlike a contract which tends to be the work of lawyers and be written in legal language an interaction model is a more conceptual

framework that includes roles and responsibilities process maps decision guidelines and so forth This model defines for your cross-

functional team which partner-suppliers to engage with when and how The more explicit the model the more useful it will be in the day-to-

day execution of joint activities with your suppliers

Thus to achieve a collaborative partnership you must first design (or redesign) your partnership models to build on your strengths and

achieve your business objectives You should have an interaction model for each segment or cluster of suppliers mdasheach set of suppliers with

whom you are going to create value in similar ways

The interaction points are the key to collaboration Indeed the points where partnerships often break down mdashand thus deserve particular

attention in the model mdashare the interfaces of two elements of the value chain such as Source and Make or Make and Deliver Value is created

when you make your value chain as seamless as possible these interfaces represent the old seams

As you develop interaction models internally you may want to think about a set of interaction principles that describe where and how you

will work differently than in the past For example to achieve business objectives aimed at reducing delivery time you might develop

interaction principles around the planning function that define how supply and demand planning and inventory management activities are

managed and by whom (you or your supplier-partner) These principles would be associated with specific measures of desired outcomes

such as fill rate on time in full delivery or end-to-end lead time Figure 4 shows one example of how companies can organize and define

their interaction principles

Developing interaction models for numerous supplier-partners may sound like a lot of work mdash but dont forget this is an outcome of your

segmentation effort The interaction model defined at the segment level provides the broad blueprint for how to engage suppliers in that

segment When applying the blueprint to a specific supplier you may want to tailor it based on unique market conditions or that suppliers

constraints Such tailoring should be a set of slight inexpensive and manageable tweaks (see Figure 5) Consider the example discussed

earlier of a segment of suppliers that perform well in most of your critical categories but expose you to too many risks For this segment

some of your critical interaction principles will center on risk management and your interaction model should implement them with a focus

on communicating evaluating and minimizing potential exposures You may have specific evaluation methods for a particular supplier but

the principles remain the same



At the supplier level you then create specific action plans that define activities you will conduct with the supplier to implement the

interaction model For example lets say your Segment A interaction model has suppliers performing both supply and demand planning

and perhaps collocating their demand planners with your brand team But if one supplier in Segment A has not yet performed demand

planning then part of the action plan would be for your planning organization to help that supplier transition to these activities including

introducing them to their counterparts in marketing and procurement

The segment interaction model and supplier-specific action plans then are much like a contract but rather than outline a legal arrangement

they pragmatically outline the operational nature of your relationship who is responsible for which activities and how those will be

measured What process adjustments can lead to maximum savings How will innovation performance be measured Who will participate in

internal client cross-functional teams and how often will they perform reviews

These types of questions are vital to the relationship and by using your segment interaction model as a blueprint for specific action plans you

ensure that they are resolved early on and ideally to mutual advantage The proof of this success of course will come in actual performance

Thus as part of the model you should design supplier scorecards to track and provide feedback on supplier performance By building

measurements into every dimension of the model you will ensure that problems can be quickly identified and addressed

In short with an interaction model and supplier-specific action plans you can apply key value drivers strategically ahead of time using a

disciplined objective repeatable approach

In which areas do you need to control risk

Which steps in the supply planning process have the greatest effects on your key value drivers (cost for example) And how can

you best achieve results at those steps (such as by using the suppliers volume to gain discounts)

How can you gain value beyond cost benefits (by cutting time to market or improving reliability or maximizing risk management

practices for example) How should responsibilities be divided so as to capture that value

These questions will inevitably vary by company and by segment They like your segmentation strategy as a whole are determined by your

business objectives

Transparency for all

Collaboration with suppliers is becoming a high priority for an increasing number of companies Leaders in industries such as consumer

packaged goods where brutal competition has forced them to focus on efficiency recognize that they must investigate all potential levers for

creating value As a result they are actively pursuing collaboration across the supply chain But you can expect the trend to hit other

industries as well



For example weve recently had some experience in the pharmaceutical industry where leaders have long been distinguished by superior

innovation and marketing rather than efficiency Yet even here its clear that tomorrows leaders will improve earnings not through those

factors but through excellence in operations 1The pharmaceutical industry is abandoning vertical integration and is instead becoming a

world of collaborative partners where orchestration is the essential competency

Of course if orchestration were easy it would already have been accomplished mdashin pharmaceuticals as well as in other industries Although

many companies have productively leveraged collaborative partnerships it is nevertheless a daunting task to try to coordinate the activities of

a far-flung supply chain across a large and diverse portfolio and so the concepts of segmentation and interaction models are still limited in

their application In fact thats why the first step toward truly thriving with collaborative partnerships has to be to segment the supply base

into smaller more manageable chunks We believe that coming years will see more such partnerships in most industries mdashand the best way to

start on that journey is to segment your supply base to identify good candidates for partnership

Regardless of industry partnerships are all about transparency Not only must you be willing to be transparent with a partner you trust but

the partnership also depends on both sides taking advantage of that transparency to act quickly and in mutually beneficial ways

A good interaction model and supplier-specific action plans increase transparency mdashmaking you a more desirable partner for your suppliers

In this way successful execution of the segmentation effort and resulting partnerships better achieves your (and your managements)

business objectives



[Figure 3] Supplier segments objectives Enlarge this image

[Figure 4] Example organization of interaction principles Enlarge this image

[Figure 5] Supplier interaction model Enlarge this image

SUPPLIER SEGMENTATION

Many companies today have accumulated a proliferation of unmanaged or poorly managed suppliers that are supporting their businesses

This situation often arises out of historical imperatives to chase incremental sales and cost improvements mdasha strategy that in some cases has

contributed to substantial value creation but not without incurring certain costs

In general companies are plagued with a range of problems that stem from supplier proliferation some of which can be attributed to their

inability to effectively manage those partners Common issues that arise from this situation include failures of products to conform to

company or regulatory standards uncompetitive customer service levels due to unforeseen delays and miscommunications and overly

complex product designs and portfolio offerings that are not sufficiently differentiated in the minds of consumers and other customers

Moreover as suppliers proliferate supply risk exposure mdashfrom price volatility political and economic instability environmental disasters

and a host of other difficult-to-predict factors mdashoften increases to an unacceptably high level

In short todays supply management challenges go beyond cost containment Tomorrows leaders will differentiate themselves not through

achieving lower costs but through producing a range of other benefits That is theyll create more value by optimizing their effectiveness at

every step of the value chain

One effective way to achieve this is to organize efforts a round specific business objectives Because senior management is well aware of

challenges facing the company it has likely set objectives to meet those challenges These might include for example objectives aimed at

reducing nonconformances improving customer service or lowering supply risk exposure Sometimes the objectives at the corporate level






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2- rules of engagement supplier

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