Designed to Differentiate: How Procurement Leaders Are Using Supplier Relationship Management to Achieve High Performance

Accenture defines supplier relationship management as the systematic management of supplier relationships to optimize the value delivered through the relationship over their life cycle.

For six consecutive years, Accenture has been evaluating the performance and challenges of supply chain executives within the procurement arena. In 2005, Accenture undertook a global survey to discover how companies can successfully manage supplier relationships to deliver sustainable benefits in the long term. We also sought to determine how supplier relationship management leaders differ from the rest in the industry.

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In May 2005, 229 senior procurement executives from a representative range of industries and activities participated in a survey designed to probe the value they receive from post-contract award activities with suppliers. Those executives were asked:

• What value are companies realizing from sourcing activities in comparison to post-contract activities?
• Do companies see the benefits from post-contract activities with suppliers increasing in the future?
• How do companies manage and organize their interactions with suppliers?
• What role is being played by the technologies used to support supplier relationship management?
• What are the core skills required for companies to be successful at supplier relationship management?

Survey respondents represented a wide international community of senior procurement executives. At 22 percent, more than one in five are from the United States; the remaining 78 percent cover all the main European regions. Sixty percent have their main operations in United States, United Kingdom, Germany or Spain.

Respondents hail from a wide range of organizations, but the greater proportion work in large organizations. For example, 23 percent of respondents come from organizations with more than €10 billion in sales (US$11.8 billion); 59 percent of respondents come from organizations with at least €1 billion in sales (US$1.2 billion) and 73 percent of respondents come from organizations with sales revenue in excess of €500 million (approximately US$600 million).

The range of industries and activities represented within the sample was also wide, coming from a mixture of both public and private industries. Fifteen percent come from retail, food and consumer goods; 14 percent are from communications, electronic and high tech; 10 percent were from energy, mining and natural resources and 10 percent are from transport services and industry (including aviation).

Respondents' insights don't speak solely to the cost benefits of supplier relationship management. They also indicate that, in order to extract the best value, companies must use a holistic approach to aligning procurement capabilities, technologies and processes. Furthermore, by analyzing the activities adopted by supplier relationship management leaders (as defined in the Analysis section) it also becomes clear that all companies might leverage supplier relationship management to reduce operational costs and raise the bottom line.

As earlier Accenture studies have shown, companies that successfully position their supply chains as a strategic capability really do outrun the competition. This is particularly true with respect to supplier relationship management. We found, for example, that:

• There is a tangible prize for companies that focus on supplier relationship management. Companies have an opportunity to achieve an additional 2 percent savings by increasing their focus on supplier relationship management. From a purely sourcing perspective, 2 percent savings for both all respondents and supplier relationship management leaders is achieved on total operating spend. This equates to €43 million (US$50 million) for all respondents to €59 million (US$69 million) for supplier relationship management leaders.

• A post-contract award gap opens up the potential for superior performance. Looking across the total benefits achieved, 3 percent to 5 percent savings are achieved by all respondents and supplier relationship management leaders respectively from both sourcing and post-contract activities against total procurement operating spend. This equates to an average of €61 million to €126 million (US$72 million to $149 million) for all respondents and supplier relationship management leaders respectively.

• Supplier relationship management leaders can realize a threefold increase in benefits. Supplier relationship management leaders achieved savings of 3 percent on their total annual procurement spending from supplier relationship management activities, whereas all respondents achieved 1 percent. This translates to average benefits of €67 million (US$79 million) and €18 million respectively for supplier relationship management leaders and all respondents.

• Companies' focus on supplier relationship management is set to increase. When questioned about their focus on supplier relationship management in the future, 64 percent of all respondents believe the importance of post-contract activities will increase or remain the same. Supplier relationship management leaders are even more bullish: An additional 12 percent reported that their supplier relationship management focus will increase.

• Supplier relationship management activities span departments. Survey respondents in the aggregate split their procurement activities between the procurement function and other departments within their business: 37 percent of all respondents ranked the ability to work cross-functionally as most important. Interestingly, the procurement department tends to focus on administrative activities such as logging of contract information, whereas other departments spend more time on value-adding activities such as joint product development.

• Superior results are achieved by those that focus on collaboration with suppliers. Supplier relationship management leaders not only recognize the importance of value-added collaboration with suppliers, but they also assign greater resources against these activities. For example, supplier relationship management leaders dedicate (on average) nine full-time employees to joint product development compared with all respondents, who only dedicate three full-time employees. However, those wishing to achieve the results are not merely switching emphasis: Supplier relationship management leaders also ensure that they get the basics right, such as monitoring and reporting suppliers' performance.

• There is a supplier relationship management skills gap. Supplier relationship management requires supply chain skills that appear to be lacking inside and outside of the procurement department. This is illustrated by the fact that supplier relationship management leaders consider the most important activity to be monitoring supplier performance, yet only 15 percent consider themselves to be experts in this activity.

• Supplier relationship management leaders use collaborative technology. Supplier relationship management leaders demonstrate higher levels of technology adoption across all functional areas of procurement technology. The difference between the supplier relationship management leaders and all respondents is greatest for contract management, business-to-business integration/collaboration and e-sourcing.

• There are industry-specific differences. Among the global survey population, the greatest percentage of supplier relationship management leaders were found in media and entertainment (50 percent); automotive (38 percent); and pharmaceutical, medical products and health (32 percent). The lowest corresponding percentages were found in property and facilities management (0 percent); banking and insurance (5 percent); and industry and manufacturing (8 percent).

Who are the supplier relationship management leaders?
Most supply chain leaders are in a perpetual state of strategic sourcing—evaluating, rationalizing and tightening relationships with suppliers to reduce costs and build strategic alliances. Every day, those companies ask: "How can we better leverage our supplier base?" Accenture's work is underpinned by the belief that, in every area of business endeavor, it is possible to identify—and learn from—supplier relationship management leaders and the strategies that they pursue.

Our research team identified supplier relationship management leaders as the 41 companies within the sample of 229 companies (the top 18 percent) that had the highest percentage savings resulting from post-contract activities. These companies demonstrated 50 percent or higher savings resulting from post-contract activities compared to sourcing activities. However, although supplier relationship management leaders do have higher overall benefits from both sourcing and supplier relationship management activities, the savings results may be influenced by the fact that they are also larger companies.

The sample of supplier relationship management leaders was quite evenly spread across different geographies. Within Europe, Finland had 50 percent of respondents that were identified as supplier relationship management leaders, Sweden 40 percent and France a third. The United States and the United Kingdom had the highest number of supplier relationship management leaders within the total supplier relationship management leaders group (40 percent).

Although supplier relationship management leaders were broadly represented across industries, they composed more than one-third of the media and entertainment, automotive, transportation services, and pharmaceutical industry groups. Additionally, in government, industrial equipment and energy, mining and minerals, and utilities, supplier relationship management leaders represented one-fourth of all companies.

An interesting characteristic of supplier relationship management leaders, however, was the fact that they tend to come from larger companies. Although 29 percent of supplier relationship management leaders came from companies with revenue of more than €10 billion (US$11.8 billion) and 68 percent from more than €1 billion (US$1.2 billion), smaller companies were by no means excluded from the leader category. Supplier relationship management leaders also ran larger procurement functions—59 percent had more than 50 people.

As our survey reveals, supplier relationship management leaders are not dictated by size or industry. What matters, as companies strive to achieve high performance, is the approach and leadership demonstrated when undertaking supplier relationship management activities. The opportunities are available to all companies regardless of their size or industry.

How do supplier relationship management leaders benefit?
The Accenture survey noted a clear difference between supplier relationship management leaders and all respondents with respect to post-contract activities. While all respondents indicated that they are delivering 1 percent savings on their total annual procurement spend through supplier relationship management activities, supplier relationship management leaders experience about 3 percent savings. Calculated against the revenue streams of the companies surveyed, this equates to an average benefit of €67 million (US$79 million) from post-contract activities for supplier relationship management leaders compared with €18 million (US$21 million) for all respondents. In addition, more than 75 percent of supplier relationship management leaders feel that benefits from post-contract activities will increase or remain the same, compared to 64 percent for all respondents.

Supplier relationship management differentiation: Capabilities
When we look more closely at the focus areas for supplier relationship management leaders, we begin to see some real discrepancies between this group and all respondents. While all respondents concentrate on effective logging of contract information as their second most-important activity where they dedicate resources inside the procurement function, supplier relationship management leaders fail to even classify this activity within their top four focus areas. Interestingly, it is the process that supplier relationship management leaders consider most important. A possible explanation for this is that supplier relationship management leaders view this activity as fundamental—a function that they have already mastered. Rather than provide additional resources to this function, supplier relationship management leaders instead focus on more strategic activities within procurement.

Outside the procurement function, however, supplier relationship management leaders and all respondents demonstrate more similarities by focusing their resources on the same activities: joint product development, supplier performance management and joint process improvement.

Supplier relationship management differentiation: Processes
Leaders are not only more focused on collaboration, but they are also superior in basic procurement processes such as effective logging of contract information. This may suggest that they are focusing on getting the fundamental aspects of supplier relationship management right before moving into the "nice-to-have" areas of sourcing management. Fifty-nine percent of supplier relationship management leaders segment their supplier base, primarily by the size of their organization's spend with the supplier. This is closely followed by segmentation according to the type of product or service, and then by degree of supplier integration within the supply chain. This approach differs for all respondents, who segment first according to size of spend and then by quality of the product. Perhaps this difference demonstrates a greater awareness by the leaders of the role suppliers play within the end-to-end supply chain.

Our research also found that supplier relationship management leaders always discuss pricing challenges, joint cost reduction and problems requiring resolution with their suppliers. Although nearly 50 percent of leaders always discuss price with their suppliers, they also judge discussing problems requiring resolution and joint cost reduction activities as high on the agenda. This is expected because leaders seek to develop robust processes that enable consistent working practices throughout their organization and the delivery of quality outputs.

Supplier relationship management differentiation: Technology
Compared to all respondents, leaders are better able to leverage leading-edge technology that enhances supplier relationship management processes and performance reporting. In particular, in the areas of contract management and business-to-business integration/supplier collaboration, leaders are more advanced in their capabilities compared to all respondents. Basically, leaders invest more to reduce efforts and automate processes.

Our research provides three clear messages for global senior executives working in the procurement community today:

• Organizations can reap rewards by pursuing and successfully implementing supplier relationship management activities.
• Companies need to adopt a holistic approach to supplier relationship management.
• Companies must work collaboratively with those outside of the procurement department.

The opportunity for chief procurement officers is to lead their supplier relationship management efforts by mastering the basics (e.g., contract management) and by also shaping the business case and framework for supplier integration/collaboration.

Accenture has been working with senior supply chain executives for more than 20 years. Supported by the results of this survey, we believe that organizations can achieve world-class supplier relationship management by:

• Segmenting their supplier base.
• Developing specific strategies for each supplier segment.
• Creating comprehensive plans and performance-monitoring processes to drive and track performance for each segment aligned with sourcing goals.
• Developing robust supplier relationship management processes to consistently deliver quality outputs.
• Developing the organization to include supplier relationship management roles performed by skilled professionals.
• Using technology appropriately to enable supplier relationship management processes and performance management.
• Constantly monitoring, assessing and setting priorities.

The path to partnership is never an easy one. Leaders that have embraced supplier relationship management from a more strategic and holistic standpoint, however, are clearly winning in the marketplace—and not purely through cost reductions. Companies can realize other benefits beyond savings, including reduced risk, increased speed-to-market, and access to new technology and solutions.

Supplier relationship management, although not a panacea, can help companies differentiate themselves in an increasingly competitive landscape. Successfully harnessed, supplier relationship management can channel innovation into an organization and help businesses move one step closer toward achieving high performance.

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