Companies that have traditionally handled their order management needs with manual, paper-intensive methods or isolated legacy systems are finding that this new complexity is resulting in error-prone, unnecessarily time-consuming, and expensive processes which make order management less reliable. Or, in some cases, data is not visible inside the organization or beyond.
As company boundaries fall and supplier collaboration becomes the norm, most organizations have a heightened need for visibility across their extended supply chain. Yet most companies are simply not accustomed to or comfortable with sharing data outside their own boundaries. Many have a legacy of maintaining internal control over data, and thus do not have the systems or the necessary integrations in place to support seamless exchange of accurate data.
Supplier relationship management (SRM) strategy will emerge as an IT imperative by 2005/06, forcing the integration of sourcing, and supplier management applications into an SRM architecture by 2006/07. This is necessary to consolidate disparate sourcing and procurement groups and improve process execution through business-to-business integration. We cannot predict a “do it or die” scenario but there are certain competitive advantages that can be gained or lost depending on how an organization architects its SRM.
According to our senior research analyst, Carl Lehman, although enterprise-wide supply chain investments have waned since the first half of 2001, many Global 2000 organizations have made marginal improvements via small ad hoc investments in procurement management systems for direct materials, collaborative negotiation technologies (e.g., requests for proposal, information, or quote — a.k.a. RFP/Q technology), and expanded data interchange practices through Internet EDI. The frequency and type of these investments identify a trend among G2000 organizations to improve external business process management with suppliers.
SRM best practices will minimize the probability of project failure and make source-to-pay processes more efficient through improved supplier performance. Through 2004, G2000 organizations will continue to make similar ad hoc supplier-facing investments, but by 2005/06, they will also include investments to ensure contractual and performance compliance tied to broader procure-to-pay business processes and performance indicators. By 2007/08, most G2000 organizations will consolidate these investments to create a uniform SRM architecture.
SRM AS A STRATEGY
SRM is not just a set of integrated technologies; it is, first and foremost, a business strategy designed to drive, and consistently attain, specific quantifiable improvements in supplier performance and compliance. In addition to process management and controls, an SRM strategy should address improvements in material quality, cost control, and margin attainment. However, our research indicates that far too many G2000 organizations fail to see the long-term strategic importance of such investments. Although this will not significantly impair these organizations, it does overlook the potential for competitive advantage when strategic planning leverages the broader benefits of SRM.
SRM architecture essentially is a set of interdependent systems (strategic sourcing, procurement management, and supplier performance management) that analyze, control, and optimize the information, material, and financial flows among supply partners. Critical to these components are common technology services that enable shared data and process control among them — for example, uniform data model, enterprise content management, contract management, workflow, messaging, collaboration, enterprise application and inter-enterprise integration technology analytic tools. We believe formidable competitive advantage can be achieved when G2000 organizations first form and articulate business strategy that targets specific quantifiable objectives, and then execute the strategy through a phased deployment of SRM components and shared techno-logy services.
By 2005/06, G2000 organizations will broadly explore new initiatives to attain competitive advantage, thus driving SRM strategy as a prelude to expanded IT investments. Specific areas of opportunity will include seeking reductions in material lead times, quality costs, inventory carrying costs, floor space, manufacturing costs, material costs, and supplier proliferation. Moreover, SRM solutions will be sought to help accelerate new product development, time to market, and problem resolution, particularly in build-to-order or just-in-time manufacturing operations.
PREPARING FOR SRM
To prepare, organizations must begin with the basics. Existing supply chain management stakeholders must identify and prioritize specific business pain points or known quantifiable strategic objectives. Many organizations are immediately aware of specific business problems with suppliers, such as the examples mentioned above. However, most fail to acquire or assimilate sufficient data about suppliers to critically evaluate their value to an organization. Indeed, our analysts indicate that most organizations fail to have a consolidated account of the number of suppliers by buying category, how much money is spent with each, and whether suppliers comply with negotiated contracts.
Exacerbating the problem are mergers, acquisitions, business divestitures and strategic business changes that result in modifications to existing products or the emergence of new product lines — all of which create and terminate supplier relationships and influence organizational structure and process flows among internal and external business stakeholders.
Therefore, it is imperative that organizations first organize effectively to capitalize on the previously stated competitive advantages and then consolidate, or centrally coordinate, the totality of supplier data and contract information from across an enterprise in preparation for continuous analysis, compliance monitoring and performance measurement.
ORGANIZING FOR SRM
Organizational alignment (and thus its effectiveness) is always challenging. During the next one to two years, we believe G2000 organizations must formalize SRM organizational models and install an SRM centre of excellence (COE) within each company. By 2004/05, the SRM COE should have a defined charter, based on quantifiable business objectives, and assign ownership throughout a cross-functional team consisting of relevant lines of business, IT resources, and SRM stakeholders, both internal and external. Governance of the SRM COE within an enterprise will vary across supply chain management, procurement management or financial management groups depending on existing organizational reporting structure and management style.
Planning and execution responsibilities of the SRM COE should span all SRM components (e.g., strategy, architecture, content, vendor/provider selection/management, infrastructure, supplier integration) and drive the collaborative development of processes for managing SRM component evolution. Longer term (2005+), the primary emphasis of the SRM COE will shift to externalize critical planning, execution, management and performance measurement systems directly with supply partners.
External service providers for SRM technology and services will play critical enabling roles in SRM efforts, particularly for initial implementations that require data consolidation/normalization and external integration with suppliers for data and process exchange. However, to ensure consistent execution and performance expectations, organizations must maintain ultimate responsibility for SRM processes, systems and performance. Indeed, a critical role for SRM COE will be to negotiate and manage the outsourced relationships with SRM IT vendors and professional services firms.
As Carl Lehman put it, by 2006/07, SRM will become one of several IT domain expertise areas — along with ERP, application design and development, CRM, etc. — that operate among core IT shared services groups (e.g., networks/telecommunications, systems management, application development), lines of business, and supply partners. Supply partners must agree and commit to improve results as measured by key performance indicators that track data access, visibility, and process execution. This drives the next step in preparing for SRM: understanding supplier performance through analytics.
—Farahmand is vice-president, META Group Inc., Consulting Canada.