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What The Last Recession Taught Me About Truly Effective SRM

Insights copy – Procurement No 4 Oct 14

We may or may not be emerging from the biggest global downturn since the Great Depression of the 1930s. Positive signs of growth in some countries and sectors contrast with deepening economic and political worry in others, with the epicenter firmly in the Eurozone right now. No matter whether we are nearing the end or there is more to come, the recession has shown us all that we need new approaches to manage the suppliers that we depend upon.

Though suppliers have had to compete harder to survive in recent times, surely the new global market place opens up new possibilities and provides greater buyer power? Indeed it does, but only where we have choice: where we are buying generic products or services and where there are still plenty of providers out there ready and willing to fight to secure our business. So it’s business as usual with buyers wielding increased leverage.

However there is another story here—the recession has changed the global market place, perhaps forever, driving many players out of business. For those that have survived, the imposed need for ‘austerity’ has forced all to reconsider their position. Companies have scaled back, reduced capacities, stalled expansions, put investment on hold and changed their business model to one that can weather an economic storm. If we did this then our suppliers did too, though these changes may well be invisible to us. So what? Surely we expect our suppliers to manage their business effectively. True again, but in this case ignorance, or at best reckless assumption, could prove dangerous.

If a supplier we are dependent upon, and cannot easily switch away from, has fundamentally changed their business in order to survive, we could be blind to a significant assurance of supply risk. Add to this other global concerns, such as environmental events that we haven’t seen before and commodity scarcity, then security of supply may be a problem waiting to happen that we simply don’t see. Worse, if there is an issue that restricts, but does not stop supply, then how can we be assured that the supplier will give us priority? Good supply-side risk management can help, but the recession has shown that, to have any confidence here, we must manage our relationship with those suppliers who are the most important to us. There are, in fact, four considerations:

1 - Know who is important to you: All suppliers are not equal—some are more equal than others. Importance is not just about suppliers with whom we spend the most, but is also about those who present risk to our business. This risk could be in the form of assurance of supply risk, or risk of brand damage through poor practices in the supply chain. Importance is also linked to the nature of our dependence upon suppliers or where a supplier presents future opportunity to us. A tiny supplier working on some new ideas might appear insignificant, but with help they could provide innovation that could create massive brand value. We have finite resources and we can only direct it in the right way if we know who is important and what makes them important.

2 – Manage the risk: Supply-side risk management is frequently neglected, perhaps because it is seen as a burdensome task. However, if we really know who is important to us we can focus our efforts more precisely, and work to build more robust relationships with these suppliers. A structured risk assessment approach helps to ensure we don’t miss anything.

3 - Understand them: Procurement people are well practiced at understanding what a supplier does, where they are located and who in their organization does what. However, an understanding of any given supplier rarely penetrates beyond the veneer the supplier wants us to see. Behind the scenes things could be very different—there could be hidden risks and unseen opportunities. To truly understand a supplier, we need to initially get close to them and then stay there, making time to investigate and understand what is really happening. We then watch for signs of change that might warrant further checks (e.g. changes in ownership, direction, staffing or general activities). To do this, we need to meet with them, visit them and create opportunities for interaction.

4 – Don’t take them for granted: The buyer mindset of ‘the supplier is always there, and will work on my terms’ is something I see a lot, but for our key supplier this belief can be misguided. Instead a different mindset centred around building a relationship is frequently more fruitful. Whilst our competitors are working on the next best thing, so are those suppliers we have in common. One thing the recession has shown is that companies need to work harder to survive and succeed, which means we must find new differentiators and ways to gain competitive advantage. The supply base can help, though such a contribution is not automatic; it instead demands collaboration that must be mutually beneficial. This is only achieved by working to build the right relationship with our most valuable suppliers.

So there are many things we could learn from the recession—but one vital lesson is that if we know which suppliers are crucial to us, then we can work to manage risk and better understand them. We then need to progressively work more closely with those critical few that hold the potential to make a sustainable, game-changing difference to our business.

Written by

Jonathan O'Brien - Positive Purchasing