Supplier scrutiny

9 February 2006

Do organisations really need to invest in a dedicated supplier relationship management (SRM) software package in order to effectively manage their supply base?

How does your organisation select which suppliers to do business with? Does it select them on the basis of price, quality, or delivery times? Can managers accurately measure the historical performance of individual suppliers? To what extent can the organisation automate many of the time-consuming administrative tasks that are involved in managing those suppliers? And can it identify specific problems with individual suppliers – and make the supplier aware of these?

The answer is, probably not. Phone, fax, email and sometimes, EDI (electronic data interchange) systems are the methods most commonly used by organisations to communicate with their scattered networks of suppliers. As a result, many organisations juggle multiple documents in multiple formats, creating burdensome administrative costs. What is more, they have only a hazy notion of the value their suppliers add to their overall business. But is there a better, more automated way?

"Very few companies have a systematic approach to supplier evaluation, selection and ongoing relationship management today. Instead, most have disparate supplier management processes throughout their companies," says a recent report from research group Gartner. Given that, Gartner analysts – and others – are urging organisations to put in place cohesive supplier relationship management (SRM) strategies, or risk seeing their profits dwindle.

"By 2005," they predict, "Fortune 500 enterprises will move strongly to SRM methodologies or they will incur profit reductions of close to 2%."

Question of merit
The software industry has been quick to recognise the potential for software that supports improved business processes across the supply chain, that enables organisations to measure the performance of suppliers, and that can ultimately result in faster product cycles and reduced costs. After all, as Gartner analysts point out, "with an increasing level of product value coming from suppliers (on average, a company spends 45 cents on external purchases for every dollar it earns in revenue), few can afford to overlook SRM as a key to cost reduction."

Questions, questions...

Companies are using supplier relationship management tools and methodologies to answer a number of strategic, board-level questions relating to their supplier strategy. Among them, say executives at supply chain management company Manugistics, are the following:

Spend analysis: Is price our only consideration when selecting suppliers? Do we consider total landed cost? Do we consider supplier risk and performance metrics? Are we certain that our supply base is contributing to our profitability?
Procurement execution: Do we provide our suppliers with the right planning data? Can they provide us with real-time data when they experience an operational issue? Are we holding the wrong inventories due to poor or limited communication with our supply base?
Collaborative design: Can we collaboratively share product designs during the early stages of a product's lifecycle? Can we simultaneously share engineering change orders with our entire supply base?
Strategic sourcing: Are we able to electronically manage the request for proposal/request for quotation process in a real-time manner? Can we quickly evaluate and compare all areas of supplier responses? Can we provide individual suppliers with feedback for areas of proposed improvement?

This potential has sparked a flurry of re-branding and product initiatives in the past year. Among the companies that purport to offer dedicated SRM packages are enterprise resource planning software vendors PeopleSoft and SAP, and supply chain specialists such as i2 Technologies, Manugistics and SupplyWorks.

But to what extent is the introduction of SRM capabilities purely a matter of product positioning. Bruce Richardson, head of research at IT market analyst AMR Research, recalls a meeting with executives at i2 Technologies in late 2000 in which they first pitched the concept to him. "The notion of SRM started an internal debate over whether it was a real category or just an acronym that i2 had given to a grab bag of products," he recalls.

Over a year on, Richardson now believes there is "a lot of merit" in the SRM concept. "[Organisations] think a lot about winning and retaining customers, but not enough about building lasting relationships with their key suppliers," he argues. Some organisations, of course, have broken this mould, he says, elevating supplier rationalisation "to an art form". At PC vendor Dell Computer, for example, the company's top 30 suppliers represent about 75% of its total spend, while the top 50 account for 95%.

Clever hybrid
But just because there is some support for the concept, should organisations be investigating the merits of products from supporters of SRM? Not necessarily, because while few existing software products can support all the processes involved in SRM, a clever hybrid of technologies – albeit one that involves a significant integration effort – can achieve similar results.

This is because, in its simplest form, there are essentially two aspects to supplier relationship management. First, there is the automation of the collaborative business processes by which a company procures direct or indirect materials. This can range in sophistication from automatic generation of request for proposals (RFPs) to more holistic order management systems. Second, there are the analytic functions that enable buyers to take multi-dimensional views of historical supplier data; for example, the speed of delivery of a particular component in a particular region.

Sam Brown, Manugistics: "Its about taking human intervention out of the picture."

This has meant that a wide variety of applications are now being marketed as having some SRM capabilities. For example, on the process side, e-procurement company Ariba has expanded its product line to incorporate spend analysis and contract management functions, while supply chain vendors such as Manugistics are honing their support for collaborative supply planning and data visibility. A key part of streamlining these processes is through automation. "We are talking about a system that not only tells you when you are running short of a component but, at the same time, tells you, 'And by the way, I have automatically sent a request for quotation to your 20 preferred suppliers for that particular part'. It's about taking human intervention out of the picture wherever possible," says Sam Brown, marketing director for manufacturing solutions at Manugistics.

On the analytics side, meanwhile, business intelligence software suppliers such as SAS Institute, Cognos and Business Objects are offering reporting and analysis tools specifically optimised for handling supplier data. According to Christine Kelly, worldwide marketing programme manager for SAS' SRM tools, the company has been using the term SRM for several years. "We concentrate on helping customers to identify their most profitable suppliers, enabling them to analyse corporate spend or quality levels. And we make this information available to different levels of managers within the procurement process."

Market boundaries
The market for SRM tools is not as clearly delineated as this. Many of the SRM applications vendors incorporate some analytic capabilities into their packages. In fact, says Bob Shecterle, VP of supplier relationship management strategy at enterprise application vendor PeopleSoft, such an amalgam is essential.

In practice: Jewson

Mandy Fairley, ebusiness project manager at timber and building materials distributor Jewson, is confident that executives within the company know how to tell a good supplier from a bad one. They know when one of their trusted suppliers fulfills an order late. They know when it is incomplete. "We can track and audit every order we make with our suppliers. We can even measure the performance of the individual depots of each of our suppliers," she says. This kind of visibility, she adds, means that Jewson will be able to reduce cycle times and reduce administrative costs.

Jewson is in the first phase of a major project with WeSupply, a UK-based vendor of hosted supply chain applications. At present, WeSupply handles the purchases made by just 10 Jewson branches with 20 of the company's most strategic suppliers. But in the second phase of the project, commencing in late March 2002, all 540 of Jewson's branches will use WeSupply to purchase their stock of timber and building supplies from those 20 key suppliers. From July 2002 onwards, the company will concentrate its efforts on bringing more suppliers online, with a target of 300 suppliers set for the end of the year.

Jewson opted to use applications hosted by a third-party supplier for two reasons. First, the company wanted a system to automate the supplier relationship management process that was completely independent of its enterprise resource management (ERP) system, as it intends to renew its ERP software sometime in the next 19 months).

Second, Jewson wanted a system flexible enough to suit the IT capabilities of its entire supplier base. This, says Fairley, is an extremely diverse group: "Some suppliers just have one PC, others are using more rigid EDI [electronic data interchange] systems, while some are starting to investigate XML [extensible markup language]."

The SRM system, which enables real-time sharing of demand and fulfilment information, is to be used first for placing orders to Jewson's suppliers, providing real-time alerts on changes and exceptions across the supply chain by email and SMS (short message service) text messages. In future, Jewson intends to expand its use of WeSupply to include order amendments, and despatch, transportation and goods receiving information.

The challenge for Jewson is convincing its suppliers to come on board – WeSupply charges both buyers and suppliers for using its software. Fairley says this has not been a problem to date. "We believe that the benefits are very, very evident early on. Suppliers quickly see that WeSupply takes out much of the cost of trading for both parties." Nevertheless, supplier buy-in is an imperative Jewson has not neglected.

The company has worked with a third-party consultancy company to assist its supplier base in adopting WeSupply. At the end of the first phase of the project, Jewson intends to commission an independent return-on-investment study to examine the benefits experienced by the first 20 suppliers involved in the 'proof of concept' stage. This, Fairley says, will provide the basis of the company's effort to get the rest of its key suppliers to buy into the system.

PeopleSoft, for example, has introduced new applications for its SRM suite (which includes around 12 disparate but integrated software products in total), including e-procurement and strategic sourcing software. However, the suite also offers embedded analytics, and for companies that require a more sophisticated level of analysis, PeopleSoft sells an advanced analytics product called Supply Chain Warehouse, which allows them to perform more customised reporting. "Business intelligence [tools] are a critical component of an SRM system," says Shecterle. "After all, in order to manage your supply base efficiently, you have to have a pretty good idea of what you spend, where, and for what reason."

The beauty of a so-called end-to-end package, says Shecterle, is that it enables organisations to bypass the potentially huge integration effort that stems from the analysis of data from a mix of different corporate systems. This same argument is used by Jeff Herrmann, CEO of SRM specialist SupplyWorks: "What is needed is an integrated and holistic set of management tools focused on the interaction of a manufacturer with its suppliers."

Nevertheless, many organisations are achieving improved supplier management through a hybrid blend of existing technologies. One such company is Gist, a supplier of supply chain services – from technology and management consultancy services to warehouse and logistics management – to some of the UK's largest retailers.

The company recently launched a supplier portal for Marks & Spencer (M&S), which enables around 200 of its suppliers to check up on sales and stock positions at the company, and respond more rapidly to change.

Immense pressure
"[M&S's] is one of the fastest short-life supply chains in the UK. If you bought a sandwich this morning from M&S, you can be pretty sure it left the supplier's premises pretty late last night," says Damian Fazackerley, IT director at Gist. This speed of turnaround creates immense pressures for the supplier, he adds. Gist's portal seeks to address this by enabling them to reduce 'stock outs' (an undersupply of goods to the retailer) and 'out of life' wastage (an oversupply of goods to the retailer).

Fazackerley says that the company has made a £300,000 total investment in the supplier portal architecture. This infrastructure, which consists of a blend of technologies including analytics from Business Objects and supply chain applications from specialist Descartes Systems, is capable of supporting the individual supplier portals of five of Gist's leading clients. By charging suppliers around £200 per year to use this portal, Gist expects to see a return on its initial investment in under two years.

Says Fazackerley: "There are two places where you can find value in the supply chain. The first is in physical goods, whether they are shirts, groceries, or washing machines. The second is in data. But if data doesn't assist someone in making better purchasing decisions, then that data is pretty useless."

Its proponents claim that SRM can make those decisions on suppliers better as a matter of course.

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