2023 GLOBAL SRM RESEARCH REPORT
WHAT IS THE ‘EXTENDED ENTERPRISE’?
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“Procurement has predominantly allowed itself to become trademarked as the ‘strategic sourcing function’ - and, at the heart of that, is running RFPs,” he says. “This puts the profession in a fragile position because the existence of AI means technology is fast able to automate a lot of this work, which could prompt the question ‘why do we need procurement?’ “The profession needs to adapt. And since more than 50% of the workforce of many businesses is employed by its suppliers, procurement needs to shift to becoming synonymous with managing this extended enterprise.”
Owning supplier management: the business case When considering why procurement should take the lead in managing supplier relationships, and the extended enterprise as a whole, first consider the benefits case for supplier management within your organisation generally. A number of areas can be improved through diligent supplier management. They include: • The ability to model costs more accurately • Utilisation of cross- organisational teams • Reduction in the impact of price fluctuations on cost structures • Early supplier involvement in product and service development • Transfer of knowledge through the supply chain • Planning and design synergy • Use of metrics to drive change for both organisations • Improved risk management and continuity of supply • Access to and speed of innovation From a financial perspective, supplier management enables the deal that has been done to be implemented and managed in such a way that it avoids the Currently, however, not nearly enough procurement functions are conducting supplier management, or doing it to the extent that they can assure their organisations they are helping suppliers to be the best they can be, to get the results they both want and need. “It’s worth remembering that organisations are only as good as their worst supplier,” says Day. Procurement can and will still add
erosion of cost savings over time. This can be as high as 50% of the initial cost-benefit achieved. In addition, good supplier management can typically increase the level of savings by 3-5% and reduce risk. To answer why it is that procurement should be managing the extended enterprise, consider the following points: • It enables procurement to foster an environment where suppliers share improvement ideas and innovation. • Given the multiple levels of supplier management ownership that typically occur in any company, procurement fulfils a useful role as an ‘honest broker’ between the supplier and the wider organisation. • Procurement’s orientation towards process and governance internally makes it well suited to managing external suppliers. • Procurement is best placed to access supplier information, given its existing relationships with suppliers across the organisation. • Having visibility of the organisation’s operations and value at the start of any process, particularly in the assessment of wants versus needs, but managing the extended enterprise is where it must now be. Further Reading • Extended Enterprise, page 36 • Customer of Choice, page 19 • Summary of Key Statistics, page 30 • Call to Action, page 35
(97%) believe suppliers should be considered part of their extended enterprise, however, less than half are doing so. Most (79%) believe treating suppliers as part of an extended enterprise reduces risk. However, just one in five have made a point of mapping the supplier journey to try to fully understand their experience. “Supplier management and supplier’s performance is critical to businesses. If your role is effectively managing the extended enterprise you need to be really good at it,” says Day. Being “good at it” means knowing
some kind of treatment strategy for them all, to improve performance across the board and reduce risk. He says the importance of regularly aligning treatment of your suppliers with your strategic corporate priorities (rather than just focusing on the largest spend) was highlighted during COVID-19. “What COVID-19 exposed was that just because a business is small, or only provides something relatively small to your organisation, it doesn’t mean they’re not strategic. If you can’t get the product or service they supply elsewhere, or to the same quality, its lack could cause a major issue. So companies have to consider in more detail who is important to them in terms of price and risk.” For Day, it all comes back to segmentation of suppliers and appropriate treatment strategies for them. Many companies have only defined and dedicated attention to their very top suppliers. What’s required is a holistic, company-wide approach, he advises. “A rising tide lifts all boats,” says Day. “It’s no good only concentrating on a few suppliers - although it’s an excellent place to start. Once the supply base is segmented, all will need suitable treatment strategies, including a playbook covering roles and responsibilities embedded in job descriptions, training, and consistent behaviour. Only then can procurement teams truly say they are leaders in this field.” There’s also the issue of mounting risk. Over the past 50 years, procurement has helped to insulate corporations from risk using contractual terms to avoid liability. However, increased regulation and legislation means they can longer abdicate responsibility. Outsourcing is no protection from accountability. Corporates essentially hold the risk around sustainability issues for the entire supply chain. Suppose a supplier’s supplier’s supplier’s supplier is caught doing something they shouldn’t have done deep into the third, fourth or fifth tier.
In that case, the end company may ultimately be answerable for it. Big fines tend to follow; the money and the reputational damage alone could be catastrophic. Companies are expected to be transparent about all matters concerning the environment, social and governance (ESG); it is now very much in their interests to take action. All of a sudden, every company in the supply chain is potentially part of one’s extended enterprise, and, as such, can either help you to succeed or fail. Some sectors have been working to higher requirements for some time. Financial services, for instance, have been subject to greater controls for the past 20 years, and other verticals, such as pharmaceuticals, are already held to more stringent standards. Meanwhile, many others haven’t yet been obliged to actively manage their supply chains in this way “but that’s going to change,” says Hyner, “and that is huge”. Walking the line Admittedly, it’s a tricky balance to strike - bringing suppliers into the fold, sharing information and forming closer relationships, while also being able to remain objective and separate. If suppliers become too close they could become complacent; equally, if the relationship is too arms-length or those involved come to dislike each other, it could implode. “People think of KPIs only as a means of measuring a supplier’s performance using key performance indicators. We should think about reframing our use of this acronym. I’ve seen it said that it would better stand for ‘keeping people informed/inspired/ interested/involved,’ and I think that’s exactly right”. “Rather than just train individuals on how to set a KPI, consider what supplier behaviour you are trying to drive with that KPI, and how that will help your and your supplier’s business continuously improve.”
Organisations are only as good as their worst supplier.
Hyner summarises the challenge in a light hearted way - asking CPOs about all the actions their procurement and supply chain departments complete, “which pass the ChatGPT test?” In other words, could a series of algorithms do what they want to do instead? The conclusion is that procurement professionals need to focus on how they can use technology outputs to maximise their business value. Managing and being the real experts at managing, their organisation’s extended enterprise is a value-add role. Day says while he has witnessed “pockets” of people treating suppliers as part of their extended enterprise, it has tended to be based on the action of an individual, rather than based on a business-wide approach. He says the concern is that too few organisations have an intelligent supplier management and third- party risk management programme, and for those that do, only a small proportion of their suppliers are part of it. This means very few are treated like an important extension of the enterprise. This is despite the fact that the majority recognise the logic of this approach. This year’s State of Flux research found almost all
the business of those suppliers almost better than they know it themselves. “To successfully manage key suppliers - and to best serve their own companies - procurement needs to know supplier’s cost drivers; how to harness innovation; understand risk; and appreciate how best to motivate them to achieve the best performance.” Managing the extended enterprise To capture the benefits and avoid the pitfalls, suppliers that are deemed strategic to an organisation’s operation should be the first area of focus to be managed and nurtured using a supplier management process. Examples include suppliers with whom the organisation spends significant amounts of money, those that provide critical products or services, those with a record of innovation, or those that can make the greatest impact on an area of critical importance, such as carbon reduction. But it must not be only them. Hyner says while not every supplier is strategic, organisations need to consider who is and how best to manage them, while also considering
the entire supply chain for a particular supplier allows procurement to make more informed buying decisions.
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