INTERVIEW / INNOVATION Q&A
INTERVIEW
V ALUE DOESN’T ONLY COME during the company, who has implemented supplier relationship management in a number of organisations, says most companies focus only on driving value through the initial deal – largely through strategic sourcing. They then often make two mistakes. First, they may fail to actually protect the value gained through the sourcing exercise once the deal is signed. Second, by taking no other steps to manage their suppliers, they lose the opportunity to generate new value. For many, switching from traditional supplier management to a meaningful partnership that supports and encourages innovation will require a huge shift. Parva, echoes the State of Flux view of the importance of collaborating with your most strategic suppliers and capitalising on innovation. Here we ask him to explain his approach to generating value by encouraging, capturing and actioning good ideas. procurement cycle, it can also be generated throughout the life of the contract, says Nikhil Parva. The executive from a global technology Q. How do you make the business case for supplier relationship management? Procurement helps internal business partners to choose the right vendors. The procurement cycle is designed to drive value for those partners in three areas – scope, pricing and legal considerations. In most situations, the scope and legal aspects are the table stakes – the minimum entry requirement for a business arrangement – the variability comes on price. On average, we assume 5-8% of savings are standard through a procurement process for a product or service, depending on when the sourcing exercise was last done. Once the contract is agreed, it is handed over to the business partners who focus on the scope. The problem is, if no-one is properly managing these contracts once they are signed – particularly the strategic ones – that 5-8% of value can potentially get lost. This is because on the supplier’s side you have account managers who have the remit to ensure that the 5-8% of value is levelled off during the term of the contract. Those forces, if not counteracted equally by the business through SRM at a strategic level, will lead to that value – or a substantial part of it – disappearing.
For Fortune 100 companies, indirect spend alone runs into billions of dollars, so the value at stake is significant and must be looked into. It requires a unit of SRM experts to counteract those forces from the supplier to maintain that 5-8% value. I call them the ‘Net value protectors’ and this is one of the key reasons why companies need supplier relationship management (SRM). Q. How can companies who already do SRM achieve more value from it? The primary focus of an SRM organisation is protecting the value of strategic relationships. To do that, SRM staff typically become entrenched in the business units. They collaborate and drive partnerships with their internal customers and use centralised frameworks and structures to help to protect that 5-8% of value. But as SRM matures the focus is on 'what else?’, ‘what more?’. That’s where the idea of the innovation framework comes in. It is where procurement and their internal stakeholders try to maximise the value of that relationship throughout the duration of the contract for the benefit of all and manage to bring in new value. The innovation framework is not only about capturing ideas, its essence is how to drive ideation to capture value from the suppliers that can be quantified in financial terms.
HOW TO CREATE NEW VALUE
Q. What’s the process for the ‘Innovation Framework’?
This is a structured means of moving ideas through an ideation pipeline, where each idea is vetted and reviewed. It has four stages: 1. Envision: Where anyone who has an idea they feel passionate about is able to put it in the pipeline. It can come from the supplier or the customer. 2. Engage: This is about the engagement between suppliers and customers, through bi-weekly meetings, weekly calls – any governance arrangements. 3. Evaluate: The assessment of the idea. 4. Execute: Where the supplier puts the idea into action. Evaluation happens on a two-by-two matrix to assess the idea’s level of impact and the amount of effort involved. Priority is given to those that lead to maximum impact for minimum input. Ideas are split into two buckets: those that achieve value from cost and those that secure value beyond cost. The first is ‘can I drive cost savings and cost avoidance during the contract?’ →
APPLYING THE INNOVATION FRAMEWORK GENERATES AN AVERAGE 2% OF HARD FINANCIAL VALUE ABOVE CONTRACTUAL OBLIGATIONS.
To persuade top tier suppliers to share their best ideas, you need to take a systematic approach to assessing innovation.
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STATE OF FLUX
2021 GLOBAL SRM RESEARCH REPORT
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