Over the years, speakers at the Senior Supply Management Executive Summits hosted by Michigan State University have shared leading-edge ideas and effective strategies as well as defined challenges that remain to be addressed. Four common themes can be gleaned from the summits. And these themes have a common thread, which we’ll follow below. Do these themes resonate in the government procurement space?
Strategic Interdependence and Collaboration
Supply Chain Management (SCM) Scope, Integration and Leadership
Knowledge Creation, Exploitation and Innovation
Strategic Change Management and Organizational Transformation
Their glue or common thread is harder to pinpoint but can be regarded as an attitude necessary to win in today’s competitive marketplace. This attitude has multiple components; such as collaboration with key stakeholders, openness and trusting communications, mutual dependence, expanded opportunities for co-developments, etc.
Work with, not against suppliers
The attitude can be summed up as thinking that goes beyond the traditional supply management strategy that looks to enhance bargaining position. Historically, firms followed the logic of Michael Porter’s Five Forces of Market Competitiveness (Competitive Strategy: Techniques for Analyzing Industries and Competitors). According to this conventional wisdom, buyer “success” is a function of the relative balance of power in negotiations with sellers. Power is a function of market barriers, substitute potential, seller / buyer hegemony and relative scale. The intuitive result of a Porter’s analysis is that your performance was equated to the relative amount of value you could extract from a given supply network. In other words, how much of the pie could you get?
But, this take-the-most-you-can strategy falls short in two important ways.
First, it neglects to understand how big the pie could be if supply network members cooperated versus fought over slice size.
Second, it misses the point that before you can capture value, you must first create value. In varying ways and through various examples, over the years each panelist concluded that more value comes from dependence than superior Porter positioning.
Thus, dependence should be embraced, not avoided. In other words, they have concluded that benefits from mutual dependence exceed those from greater power positioning. This is an important lesson in the public sector as well, where too often the focus is on getting the lowest price possible, and a failure to engage with suppliers creates an adversarial environment.
To their credit, many agencies are interacting more with suppliers through an increased use of events such as industry days, etc. Supplier engagement, however, remains an area wide open for generating value for public sector organizations.
Reliance on suppliers increasing
For the past couple of decades, business pundits have linked success to customer focus and employee satisfaction. Indeed, every firm aspires to be both the supplier and employer of choice. Pleasing customers and attracting and retaining the best employees remain critical components of success. Arguably, in today’s globally competitive markets, loyal customers and employees are even more important.
But, there are three loyalty legs to the business success stool – customers, employees and suppliers. And, the supplier leg is not only neglected, it is both the fattest and, perhaps, offers the best opportunity for overall business improvement. Why is the supplier stool leg so fat? Consider these rough cost ratios that apply to most any firm. Employees represent about 15%, manufacturing and non-manufacturing assets are another 15%. Purchases of goods and services account for the remaining 70%.
The huge value of purchases means a far greater reliance on suppliers. And, the dependence on suppliers has been growing fast. The chart below roughly depicts the new world order for supplier dependence:
Everyone seems to agree that the value of customer loyalty cannot seem to be overemphasized. All CEOs want to be their customer’s first (and only?) choice. There is a constant stream of literature attesting to the value of customer loyalty. Does the same value exist on the other side of the coin? In other words, is supplier loyalty valuable? If we genuinely believe supplier loyalty matters, what changes are implied?
Investing in Supplier Relations is key
Over the years, we asked all of our summit participants what differentiates firms. It’s unlikely that most senior managers would regard supplier loyalty or supply management excellence as a key differentiator to firm success. Our panelists make you rethink the enormous potential on overall firm performance from enlightened supply management.
The most basic concept of business is the supply and demand curve. Most of our collective resources and management thinking around sustainable competitive advantage focuses on demand – customers. Increasingly, however, the neglected frontier of supply management offers the best opportunities to drive both increased earnings and revenue. Although we don’t always execute, we clearly understand the need to hear the voice of the customer or be a customer-driven organization. Rarely are calls made that get serious attention or resources to hear the voice of the supplier or be a supplier-driven firm. It’s time to take supply management seriously.
The world of supply management can be divided into two groups—our enlightened panelists consistently side with those viewing suppliers as assets to be developed rather than adversaries to be managed. The huge shift toward supplier collaboration and loyalty as key drivers of revenue growth, cost reduction and risk mitigation was identified by our panelists. This shift amounts to a sea change. It was observed that some organizations seem to have a better cooperative culture that accordingly earns sustainable supply advantage.
Pundits like Peter Drucker tell us that such firms look for the relationship first and transact business only after commitment to the relationship is returned by the other party. Absent initial scrutiny, some pro-active relationship builders maintain trust by routinely behaving in ways to foster trust. Understanding how relationships work, developing trust and openness, and measuring the quality of supplier perception are vital to the success of cooperative buyer/supplier alliances. Failure to earn preferential treatment from the world’s best sources will condemn firms to either bankruptcy or, at least, mediocrity. Failure to invest in supplier relations ranges somewhere between significant missed opportunity and outright financial irresponsibility.
While the public sector is often restricted in how it can engage with suppliers, having an openness to learning and listening to its vendor base will help an agency achieve its outcomes, as the best private-sector firms have shown.