World-Class Supplier Relationship Management
Supply and demand. This mission-critical component of business has shifted from price and availability to collaboration. A glance at recent headlines tells the story: world-class companies are quickly forming numerous very strategic alliances with their supply base. Supplier relationship management (SRM) is a sourcing strategy that includes technological tools and expertise to optimize a company’s supply base. Meta Group predicts the SRM market will be $32 billion by 2003. SRM tools enable supply planning so that there is instant visibility across the extended supply chain, allowing companies to drive inventory out; with collaboration, order management becomes a match between demand and capacity.
The Strategy
John Kelley, director of market development for i2 Technologies, Inc., spells out the beginning steps in SRM strategy. Procurement professional first needs to understand their company’s business objectives (that might be anything from reducing costs to being more innovative). “Then they need to understand product roadmaps, technology roadmaps, supplier performance and contract performance. They also need to know aggregated spend and demand.”
A commodity manager then analyzes this information and creates a sourcing strategy per commodity, for each vendor. For a commodity such as cement or plastic resin, the strategy might be to have a broad supply chain and seek aggressive pricing around B2B eMarketplaces. And the strategy for a commodity that is integral to a product being manufactured by the company might be to purchase all that commodity from three vendors with whom tight relationships are formed.
Most companies segment their buying strategies according to value and risk. Even where the cost of an item is low, there can be a high supply chain risk if there are few vendor choices, a commodity is constrained, or there is low industry capacity. Where there is a high element of risk, the strategy would be to have very strategic relationships. Similarly, “where an item has high value because it adds competitive differentiation to a company’s product,” Kelley says, “a customer will work strategically with its suppliers in innovative design collaboration and to ensure those items are available. Where there is both a high value item and a high value supply chain risk, the customer often guarantees certain allocations to their strategic vendors, potentially even negotiating to buy a percent of their factory capacity.”
The Software
The i2 Tradematrix SRM suite is the first complete SRM solution for B2B procurement for both direct and indirect purchasing. Inside the product suite is a sourcing tool that allows companies to analyze their spend and segment it by value and risk and then helps to develop strategies. There is also a contract negotiation tool, design collaboration and supply planning tools, ordering and buying tools, and management tools.
It works through a desktop and allows users to work by exception or by opportunity. As Kelley describes it, “Instead of walking in every day and running some big report and sifting through 50 pages of reports, we have event managers that run behind the scene; and if there is an event, it will alerts the user. Basically the user defines a set of parameters. You say, if everything is working between plus or minus of what I want it to be, then don’t tell me. But if it goes outside these boundaries of what I call ‘good,’ then send me an alert.” It allows users to focus on their core responsibilities instead of filtering through data.
Monitors measure the supply chain and let the users know how it’s performing on an aggregated basis — (how is the on-time performance doing versus the target?) The desktop includes content in the form of customized news feeds that allow users to see what’s happening in the industry. “And those news feeds could include even things like opportunities to participate in a public procurement opportunity,” Kelley adds. “On a day-to-day basis, the desktop is how somebody would manage their whole business or their whole job in a single place. There is also a task list, which is a sort of calendar of events including workflows.”
The value of the integrated suite of tools is that it has the ability to track and aggregate all sorts of supplier and customer information. The strategic sourcing system instantly tells users the quantity, by period, that they need to or can negotiate at a given moment. Then, at the push of a button, they can create an RFQ bid package in just a few hours. The built-in supplier scorecard system indicates instantly which suppliers are qualified for the bid according to capability and capacity. It enabled 3Com to reduce its RFQ preparation time from three months to less than a week.
The software suite enabled IBM to reduce time to market by 70 percent and eliminate 50 percent of its parts inventory. Emerson’s projected two-year cost reduction over 60+ divisions is $100 million. Dana is projected to reduce its $8 billion worldwide spend by $1 billion over four years.
Some public B2B eMarketplaces currently host the strategic sourcing and order management components of the software. According to Kelley, public eMarketplace owners are trying to create services so that smaller vendors can log into a public marketplace and participate in private collaboration sessions with their customers.
The Service
Best-in-class provider of strategic sourcing services, A. T. Kearney, approached i2, which had the number one strategic sourcing software tool, about a partnership. It was a fairly natural marriage and, together, they formed 2Source in January 2001. They expect to save Global 1000 companies more than $10 billion in just three years. Both were limited before their partnership. Kearney had great processes but no tools, and i2 could market its great tools only to companies with efficient internal processes already in place. 2Source now can go in to a client company, teach it how to do effective strategic sourcing and supplier relationship management using a software solutions that make the process more effective, as well as repeatable, scalable and sustainable.
The SRM solution requires integration with other operational and legacy systems, but Kelley says implementation rolls out much faster than ERP. The i2 product allows buyers to segment or create a phased deployment. “In three- to six-month chunks,” he says, “you can roll out meaningful pieces of functionality that give you a significant value and return.” EDS, long-time alliance partner of A. T. Kearney has already solved that problem for most companies — it has created an ASP version for outsourcing 2Source services.