The
OPERaTIONS ADvANTAGE
Supplier Power: The New
Competitive Differentiator
For leading companies, supply management is not just a way to
cut costs—it’s a strategic capability.
By Mike Hales, Jules Goffre, John Piatek, and Yves Thill
Mike Hales is a
Chicago-based
partner with A.T.
Kearney. He can be
reached at mike.
hales@atkearney.
com. Jules Goffre is
a partner with A.T.
Kearney based in
Munich. He can be
reached at jules.
goffre@atkearney.
com. Yves Thill is
an Atlanta-based
partner with A.T.
Kearney. He can be
reached at yves.
thill@atkearney.
com. John Piatek is a
consultant with A.T.
Kearney based in
Chicago.
www.scmr.com For the leading comFor now, the leaders have a jump start. They
panies
identified have established the foundation for a sustainable
in A.T. Kearney’s competitive advantage by taking four key steps.
2014 Assessment
1. Target a Competitive Advantage Through
of Excellence in Innovation and Risk Management. The AEP’s
Procurement (AEP), leaders are twice as likely to have expanded their
supply management business goals to become more strategic over the
is not just a way to past three years, going beyond unit-price reduccut costs—it’s a stra- tion and supply continuity to include total cost of
tegic capability that ownership (TCO), innovation, new market growth,
can also drive sustainable earnings performance enhanced risk management, and optimized use of
and competitive advantage through supplier-driven capital. The leaders also get twice the impact from
innovation and risk management (see sidebar).
supplier-driven innovation and risk management—
The success formula covers three pillars: cate- one in five leaders reported breakthrough results
gory excellence, high-performing teams, and sup- from innovation and TCO reductions.
plier excellence. The first pillar, category excelAll participants expect the share of value from
lence, can double the level of cost reductions SRM to double from three years ago to three
through an analytics powered sourcing process years from now—increasing from 19 percent to
combined with long-term category strategies.
43 percent of all value generated by procurement.
The second pillar, team excellence, gives pro- Where the leaders stand out is that they have
curement a seat at the C-level table, allowing been getting significantly higher contribution from
procurement to focus more on strategic activities SRM over the past three years (see Exhibit 1).
such as sourcing and supplier relationship manFor nearly all participants in the AEP survey,
agement (SRM), and better measure its impact open innovation has grown far more important—
on the organization, including cost
EXHIBIT 1
reductions and value beyond cost.
Supplier excellence, the third pilThe Value Potential in SRM
Share of Value: Sourcing vs. SRM
lar, is where the AEP leaders truly
SRM % out of 100% Procurement Value
shine. These companies are going
beyond cost reduction and creating
44% Leaders
competitive advantage by tapping
43% Typical Companies
into supplier-driven innovation and
33%
risk management skills.
26%
26%
For most firms today, supplier
19%
excellence remains the least-developed
pillar of procurement, but all CPOs
3 Years Ago
Today
In 3 Years
recognize the need to build out this
capability in the next three years.
Source: A.T. Kearney Assessment of Excellence in Procurement
Supply Chain Management Review
•
March/April 2015
53
The
OPERaTIONS ADvANTAGE (continued)
from not being a target three years ago, to being less important than cost reduction today, to most expecting it to be
equally or more important than cost reduction in three years.
A minority of participants had an open innovation effort
in place with suppliers three years ago; today, half the leaders have this in place, double the rate of the typical company. The laggards expect to close this gap over the next three
years. Similarly, risk management capabilities will change in
the next three years. Most participants did not have a risk
management strategy in place three years ago and the leaders
were primarily taking ad hoc approaches. Today, most leaders have explicitly defined risk supplier strategies, and within
three years nearly everyone expects to have this capability.
2. Build a Structured, Procurement-led SRM
Capability. Over the past three years, all CPOs have made
significant progress in establishing a consistent, repeatable,
commonly understood SRM process and vocabulary across
procurement, their company, and with key suppliers. That
progress is expected to continue.
For most companies today, the scope of SRM with key
suppliers extends from contracting to the coordination of
overall communications and driving value beyond the contract. Leaders stand out by defining an SRM capability that
includes a set of foundational processes applicable to all
suppliers (performance management, portfolio management)
as well as a set of strategic processes focused on select suppliers (segmentation, supplier interaction models)—all supported by a defined governance and operating model.
The leaders are 50 percent more likely to have their procurement teams lead SRM and 50 percent more likely to include
teaming with business unit and functional leaders in the process. While most respondents say they see category managers
and senior procurement executives as the key resources for
running SRM, the leaders are twice as likely to have dedicated SRM staff. The vast majority of CPOs believe that SRM
requires greater skill than sourcing, especially in terms of EQ
and leadership. The work seems to be paying off: Forty-two
percent of leaders are highly satisfied with their SRM capability compared to 8 percent for the typical company.
3. Segment the Supply Base to Enable Strategic
Collaboration. Leading CPOs are already far more likely to
have built a supply base in which 80 percent of spend is covered by 20 percent of suppliers. But beyond that, the leaders
are also 50 percent more likely to use a wide array of criteria
to segment their supply base—well beyond merely determining which companies represent the largest amount of spend.
From our experience, the best practice is to segment
suppliers based on potential and performance across three
clusters—critical, problematic, and ordinary—covering
nine segments, with 99 percent of suppliers being in the
ordinary cluster.
54
Supply Chain Management Review
•
Going through this segmentation exercise allows leaders to focus on the 1 percent of suppliers where collaboration can either build a competitive advantage or preclude
extraordinary risk. A consistent, repeatable process for collaboration covers four steps: selecting partners, developing
joint opportunities, initiating joint implementation, and
capturing value while building a relationship.
Leaders are four times as likely to do both internal analyses to define hypotheses before engaging the supplier, and to
develop and manage joint process plans with key suppliers.
4. Push Progress Across All Pillars in Parallel.
The leading companies are not waiting for a crisis to figure
out how to harness the power of their supply base. They
understand that the value of supplier collaboration is too
much to ignore, and also that it requires time to mature.
Many leaders push success in all three pillars at the same
time. The benefits of this approach include leveraging the
interdependencies across the pillars, “self-funding” (from
the fast gains made by sourcing and collaboration), and the
relative certainty of high-impact value from cost reductions
and competitive advantage.
Time to Invest
The leading companies are investing today in generating
strategic returns from their best supply relationships. By
tapping into the expertise of their best and most important
suppliers, they are building a crucial, long-term competitive
advantage. The time is now for companies to invest in the
people and SRM capabilities needed to build a competitive
advantage by leveraging the power of their suppliers. jjj
About the Study
A.T.
Kearney’s 2014 Assessment of Excellence in
Procurement study is the eighth in the series
since 1992. The objective of this latest study is threefold:
• evaluate how procurement has progressed since 2011;
• determine how ready procurement is for the future;
• and identify lessons learned from leading procure-
ment organizations.
The study includes input from procurement and supply chain executives at more than 185 global companies
across multiple industry sectors.
The study identified a select group of companies as overall AEP leaders due to their overall strong performance in
the use of procurement practices across category, team, and
supplier management excellence, together with high financial impact as measured by return on supply management
assets, or ROSMASM. Additionally, those scoring in the top
20 percent for supplier management excellence were designated supplier relationship management (SRM) leaders.
March/April 2015
www.scmr.com