Expectations of supply chain functions continue to intensify. As organizations face rapidly shifting markets, quality/reliability concerns, sustainability demands, and natural disasters and regional instability, suppliers represent a key strategic resource for enabling responsiveness, innovation, risk and cost reduction, and corporate social responsibility. Supply chain functions and procurement teams must move beyond a cost focus in supplier relationship management to develop mutually beneficial, collaborative partnerships. -Marisa Brown, Senior Supply Chain Principal Research Lead, APQC

Sourcing models focused on low costs are insufficient in meeting current demands. Procurement teams must now involve suppliers in improving outcomes in order to see significant results. APQC sees three immediate directives necessary to foster value-creating supplier alliances.

1. Establish strategic partnerships. As focus shifts from negotiating the most low-cost/-risk contract to managing long-term relationships with reliable suppliers, procurement teams must establish expectations for truly collaborative innovation and value creation. This requires a more sophisticated understanding of an organization’s business model and vulnerabilities, which will drive how teams harness supplier potential. Procurement teams must also understand the total cost of their sourcing models, including factors such as quality and training. Given this information, teams must specify performance outcomes (in terms of scope, performance, pricing, and communication expectations) and motivate suppliers to develop solutions, improve processes and decrease costs. A well-structured supplier relationship embodying win-win contracts—supported by a well-designed relationship management system with feedback loops and shared risks and rewards—can then create tremendous value. Such partnerships are characterized by a focus on clearly defined outcomes rather than transactions, with a system of trade-offs in terms of costs and services.

2. Leverage governance in segmenting suppliers. A procurement governance structure should provide both oversight and insight. Flexible operational and governance frameworks allow a hyper-collaborative environment that continually aligns suppliers around strategic objectives. With governance insight, empowered suppliers then find the best way to achieve the plan and contribute to goals.

Such a collaborative framework requires segmenting suppliers by tiers of collaboration desired. Organizations typically segment by size of contract, risk exposure, track record in quality and compliance, the importance of the deliverable, customer satisfaction, and sustainability. This provides a risk-based approach to prioritizing and governing alliances.

3. Secure internal competencies. Currently, leadership and relationship management skills are critical, under-sourced needs for most supply chain functions. Given the collaboration required for true alliances, APQC finds the ability to negotiate and collaborate with suppliers is the most critical competency for procurement teams. Organizations need to secure problem solvers, strategic thinkers, and proven communicators. Procurement teams need supply chain architects who can balance the relational and economic aspects of sourcing contracts.

Consider the best-practice example of Intel Corp. Leveraging both incentives and consequences in fostering trusting supplier alliances, Intel manages supplier relationships to reduce risks, improve product quality, achieve environmental goals, and improve overall performance. Its governance structure and supplier segmentation process advance accountability and improve performance across the supply chain. With this prioritization, Intel annually identifies its 300 to 350 most strategic suppliers, using standard criteria. Intel’s supply chain leaders attribute its supplier relationship management success with ensuring its teams have the right mix of content expertise, acumen and process expertise.

The Outlook

Procurement teams can no longer prioritize costs over value. By 2020, they must understand business needs at a sophisticated level, prioritize and foster alliances, and set expectations for collaboration and supplier empowerment to improve outcomes. Reflecting the increasing strategic importance of the supply chain function, procurement teams need the strategic partnerships, governance framework, segmentation processes, and internal skills to foster current long-term relationships and prepare for the additional disruptive technologies and marketplace demands to come.