Executive Briefings

Special Issue: E-Business Best Practices -- Strategic Sourcing, Supplier Management Bring Efficiency

From simple self-service portals to sophisticated private trading exchanges, best practice is to offer a range of connectivity in supplier relations because it brings purchasing power.

In recent years companies have used supply-chain management strategies to reduce their supplier base at the same time that they have shifted to their lead suppliers more design and manufacturing responsibility. As supplier contributions grow more critical to market success and represent an ever-increasing share of manufacturing expense, strategic sourcing initiatives coupled with more collaborative management of the supplier base become important best practices.

Supplier Relationship Management is the umbrella term being used to describe the technology and processes involved in this path, though analysts say no complete SRM solution has yet emerged and definitions of what actually constitutes SRM can vary considerably. "Some software vendors use the term to describe the extended procurement process, others to describe a collaborative portal-like layer that sits above existing supply-chain management applications and still others describe it in the context of supply-chain analytics and decision support," writes Beth Barling of AMR Research, Boston.

As is often the case with emerging solutions, confusion also exists as to vendor approach, with providers from many different sectors moving into the SRM space. Among enterprise-suite vendors, SAP, PeopleSoft, Oracle, J.D. Edwards and QAD all offer an SRM group of products. Supply-chain vendors i2 Technologies, Manugistics and Eventra have solutions, as do a number of product lifecycle management providers and strategic sourcing vendors, such as SupplyWorks, NexPrise and Apexon, which specialize in supplier connectivity, and companies like SAS that have roots in data mining and business analytics.

A few functionalities are common to most of these solutions and their successful implementation represents today's best practice in the area. Key to all of these systems is connecting to suppliers. At its simplest, this connectivity can take the form of a self-service supplier portal, where suppliers can gain access to their own account information or to information the manufacturer wants to share. This typically is the best mechanism for connecting smaller suppliers with low transaction volumes and limited technical means. More sophisticated connections come in the form of private trading networks or direct links. Best practice is to provide a spectrum of connection options to support a range of supplier technological proficiency.

Once connected, companies can collaborate with suppliers in a number of ways. One of the most basic is to negotiate contracts using electronic Request for Information and Request for Quote capabilities. Automating this process allows it to be concluded much faster than by traditional paper means and SRM applications enable companies to efficiently compare and analyze proposals in a way that looks at far more than price. Users are able to weigh various criteria based on their sourcing strategy, including such factors as lead times, responsiveness to fluctuations in demand, and past quality and delivery performance. "Leading-edge companies are looking at the total cost of ownership and also at non-quantifiable performance metrics of suppliers," says Randy Berry, partner for SCM Services at Accenture.

Supplier Selection
Some companies also are incorporating financial risk factors into this weighting, notes John Moore of ARC Advisory Group. "They are looking at the overall financial health of suppliers and tapping into Dun and Bradstreet type databases to asses such issues as whether a large order would be taxing a vendor's resources."

Sharing key performance indicators garnered from supplier monitoring and analysis helps generate an environment of continuous improvement. The manufacturer and supplier can collaboratively evaluate which processes are working and which are not and work to correct and enhance overall performance.

These scorecards also can serve as an incentive. At Lockheed Martin's missiles and fire control unit, for example, one of the criteria on which suppliers are ranked is their success in responding to needed corrective actions, says Ted Drysdale, CEO of NexPrise, a provider of SRM to Lockheed. A supplier that scores well on this and other criteria, such as price and delivery, can be named to Lockheed's Star Supplier program, which gives it an opportunity to work with more of the company's divisions.

Having real-time analytics on suppliers also can help companies make rapid decisions in crunch situations, such as might occur if a preferred supplier were unable to complete an order and the manufacturer needed to put the order out to bid. With performance analyses readily at hand, even spot sourcing decisions become more intelligent.

A key best practice that few companies have yet adopted is to also share this information with product development teams, says ARC's Moore. "Companies waste enormous resources due to a lack of tight integration between product development and strategic sourcing," he says. "Most companies still do not provide their design engineers with the tools to source products from approved vendor lists to optimize product costs at the design stage."

Another important monitoring function of SRM is in the area of contract compliance. "A company wants to make sure that it is taking full advantage of what it negotiated six months before with a supplier, relative to volume discounts that it is only now starting to achieve," says Kenneth Gottesman, with the sourcing and ERP practice at Cap Gemini Ernst & Young. "What has happened in the past is that the company would complete a really good negotiation session and then six months later when it finally hit the volumes or other terms and conditions, there was no linkage to make sure of compliance."

Gartner Group also emphasizes this best practice. "The identification and efficient management of all contracts with suppliers is an underrated process," it reports. "Although contracts are at the heart of the supplier management activity, most enterprises have no formal systems in place to manage the contract lifecycle. This lack of visibility and control will often cause an enterprise to fail to extract full value from the contract and the supplier relationship."

Extracting full value from supplier relationships is further aided by sharing operational information, such as inventory positions or manufacturing schedules. Automotive supplier GHSP, a Grand Haven, Mich., manufacturer of transmission assemblies, is using a QAD-hosted web site to provide its suppliers with information on inventory and parts requirements. The Supply Visibility solution captures inventory demand information by continuously monitoring data flowing through GHSP's enterprise resource planning application and updates the data every 15 minutes. By logging on to the secured web site, suppliers can determine when they need to ship parts to replenish supplies.

Prior to using the Supply Visibility (SV) solution, suppliers had to contact GHSP by phone, fax or e-mail to obtain information about manufacturing requirements. "We have a goal of reducing our inventory by 10 percent every year," says Bob Matz, director of materials for GHSP. "With SV, our suppliers have the latest information [on inventory positions] and can react more quickly."

Purchasing Power
For now, users have to have QAD's ERP system installed to use SV, says Jim Kirkley, QAD's chief technical officer. But new versions of SV expected in the next few months will support ERP systems from PeopleSoft, SAP and others.

Another very important aspect of SRM is focused on internal processes and is designed to help companies consolidate and leverage their purchasing power. According to most estimates, manufacturing companies spend up to 70 percent of sales revenue with suppliers, but few companies have the ability to analyze their spend across business units, divisions or facilities. As a result, they are unable to use volume as an effective negotiating tool.

Spend management solutions help companies overcome this problem by more easily identifying parts and suppliers that may be common to different business units but known by different names. Schneider Electric, one of the largest global manufacturers of electrical distributions systems and components, wanted to leverage its purchasing over four market areas and 33 commodity groups. "We have three or four big manufacturers, and if each manufacturer buys the same component in its respective country, there are three or four different prices," says Serge Vanborre, project manager at Schneider Electric's purchasing headquarters. "But if we can make one negotiation for the component for all the subsidiaries, we can get a much better deal." Schneider implemented an SRM spend analysis solution from SAS that not only consolidates purchasing information by commodity, it accesses information from Dunn and Bradstreet to reveal the affiliation of companies with different names, giving Schneider a global understanding of how much it was buying from the same parent company.

In recent years companies have used supply-chain management strategies to reduce their supplier base at the same time that they have shifted to their lead suppliers more design and manufacturing responsibility. As supplier contributions grow more critical to market success and represent an ever-increasing share of manufacturing expense, strategic sourcing initiatives coupled with more collaborative management of the supplier base become important best practices.

Supplier Relationship Management is the umbrella term being used to describe the technology and processes involved in this path, though analysts say no complete SRM solution has yet emerged and definitions of what actually constitutes SRM can vary considerably. "Some software vendors use the term to describe the extended procurement process, others to describe a collaborative portal-like layer that sits above existing supply-chain management applications and still others describe it in the context of supply-chain analytics and decision support," writes Beth Barling of AMR Research, Boston.

As is often the case with emerging solutions, confusion also exists as to vendor approach, with providers from many different sectors moving into the SRM space. Among enterprise-suite vendors, SAP, PeopleSoft, Oracle, J.D. Edwards and QAD all offer an SRM group of products. Supply-chain vendors i2 Technologies, Manugistics and Eventra have solutions, as do a number of product lifecycle management providers and strategic sourcing vendors, such as SupplyWorks, NexPrise and Apexon, which specialize in supplier connectivity, and companies like SAS that have roots in data mining and business analytics.

A few functionalities are common to most of these solutions and their successful implementation represents today's best practice in the area. Key to all of these systems is connecting to suppliers. At its simplest, this connectivity can take the form of a self-service supplier portal, where suppliers can gain access to their own account information or to information the manufacturer wants to share. This typically is the best mechanism for connecting smaller suppliers with low transaction volumes and limited technical means. More sophisticated connections come in the form of private trading networks or direct links. Best practice is to provide a spectrum of connection options to support a range of supplier technological proficiency.

Once connected, companies can collaborate with suppliers in a number of ways. One of the most basic is to negotiate contracts using electronic Request for Information and Request for Quote capabilities. Automating this process allows it to be concluded much faster than by traditional paper means and SRM applications enable companies to efficiently compare and analyze proposals in a way that looks at far more than price. Users are able to weigh various criteria based on their sourcing strategy, including such factors as lead times, responsiveness to fluctuations in demand, and past quality and delivery performance. "Leading-edge companies are looking at the total cost of ownership and also at non-quantifiable performance metrics of suppliers," says Randy Berry, partner for SCM Services at Accenture.

Supplier Selection
Some companies also are incorporating financial risk factors into this weighting, notes John Moore of ARC Advisory Group. "They are looking at the overall financial health of suppliers and tapping into Dun and Bradstreet type databases to asses such issues as whether a large order would be taxing a vendor's resources."

Sharing key performance indicators garnered from supplier monitoring and analysis helps generate an environment of continuous improvement. The manufacturer and supplier can collaboratively evaluate which processes are working and which are not and work to correct and enhance overall performance.

These scorecards also can serve as an incentive. At Lockheed Martin's missiles and fire control unit, for example, one of the criteria on which suppliers are ranked is their success in responding to needed corrective actions, says Ted Drysdale, CEO of NexPrise, a provider of SRM to Lockheed. A supplier that scores well on this and other criteria, such as price and delivery, can be named to Lockheed's Star Supplier program, which gives it an opportunity to work with more of the company's divisions.

Having real-time analytics on suppliers also can help companies make rapid decisions in crunch situations, such as might occur if a preferred supplier were unable to complete an order and the manufacturer needed to put the order out to bid. With performance analyses readily at hand, even spot sourcing decisions become more intelligent.

A key best practice that few companies have yet adopted is to also share this information with product development teams, says ARC's Moore. "Companies waste enormous resources due to a lack of tight integration between product development and strategic sourcing," he says. "Most companies still do not provide their design engineers with the tools to source products from approved vendor lists to optimize product costs at the design stage."

Another important monitoring function of SRM is in the area of contract compliance. "A company wants to make sure that it is taking full advantage of what it negotiated six months before with a supplier, relative to volume discounts that it is only now starting to achieve," says Kenneth Gottesman, with the sourcing and ERP practice at Cap Gemini Ernst & Young. "What has happened in the past is that the company would complete a really good negotiation session and then six months later when it finally hit the volumes or other terms and conditions, there was no linkage to make sure of compliance."

Gartner Group also emphasizes this best practice. "The identification and efficient management of all contracts with suppliers is an underrated process," it reports. "Although contracts are at the heart of the supplier management activity, most enterprises have no formal systems in place to manage the contract lifecycle. This lack of visibility and control will often cause an enterprise to fail to extract full value from the contract and the supplier relationship."

Extracting full value from supplier relationships is further aided by sharing operational information, such as inventory positions or manufacturing schedules. Automotive supplier GHSP, a Grand Haven, Mich., manufacturer of transmission assemblies, is using a QAD-hosted web site to provide its suppliers with information on inventory and parts requirements. The Supply Visibility solution captures inventory demand information by continuously monitoring data flowing through GHSP's enterprise resource planning application and updates the data every 15 minutes. By logging on to the secured web site, suppliers can determine when they need to ship parts to replenish supplies.

Prior to using the Supply Visibility (SV) solution, suppliers had to contact GHSP by phone, fax or e-mail to obtain information about manufacturing requirements. "We have a goal of reducing our inventory by 10 percent every year," says Bob Matz, director of materials for GHSP. "With SV, our suppliers have the latest information [on inventory positions] and can react more quickly."

Purchasing Power
For now, users have to have QAD's ERP system installed to use SV, says Jim Kirkley, QAD's chief technical officer. But new versions of SV expected in the next few months will support ERP systems from PeopleSoft, SAP and others.

Another very important aspect of SRM is focused on internal processes and is designed to help companies consolidate and leverage their purchasing power. According to most estimates, manufacturing companies spend up to 70 percent of sales revenue with suppliers, but few companies have the ability to analyze their spend across business units, divisions or facilities. As a result, they are unable to use volume as an effective negotiating tool.

Spend management solutions help companies overcome this problem by more easily identifying parts and suppliers that may be common to different business units but known by different names. Schneider Electric, one of the largest global manufacturers of electrical distributions systems and components, wanted to leverage its purchasing over four market areas and 33 commodity groups. "We have three or four big manufacturers, and if each manufacturer buys the same component in its respective country, there are three or four different prices," says Serge Vanborre, project manager at Schneider Electric's purchasing headquarters. "But if we can make one negotiation for the component for all the subsidiaries, we can get a much better deal." Schneider implemented an SRM spend analysis solution from SAS that not only consolidates purchasing information by commodity, it accesses information from Dunn and Bradstreet to reveal the affiliation of companies with different names, giving Schneider a global understanding of how much it was buying from the same parent company.