How Business Leaders Can Get Both Low Cost and Differentiation from Their Suppliers

Worse yet, to allow for comparability, the differences among suppliers are often systematically suppressed, making cost the dominant consideration. Even for progressive companies that apply more comprehensive approaches, such as analysis of total cost of ownership, collaborative optimization modeling, or other systems to compensate for supplier differences, there remains a strong bias for negotiating the best price for a given requirement.

We have found that not all companies behave this way. In particular, select companies in certain industries have shifted their procurement focus away from cost and toward innovation because competitive forces require them to. The food & beverage industry is one example of this.

“Instead of cost reductions, some companies are asking their suppliers for access to and support for innovation.”

The immense competition to find the next big idea that resonates with consumers, such as unique tastes or flavor profiles, has prompted some leading procurement groups to change their “asks” of suppliers. Instead of cost reductions, they are asking for access to and support for innovation to gain an advantage over the competition. Another example is the energy industry, where leaders have to justify enormous capex investment costs. This long-run investment horizon requires a long-term focus with supply partners that offer structural cost advantage or the tools and technology needed to make these investment choices successful.

The procurement and supply chain respondents to A.T. Kearney’s Assessment of Excellence in Procurement (AEP) survey want more than lower costs. They want to maximize the value they get from their suppliers by expecting more and being willing to invest and collaborate. The several hundred large corporations surveyed in the AEP expect the share of value from SRM to double from three years ago to three years from now—increasing from 19 percent to 43 percent of all value generated by suppliers.

Where the leaders stand out is that they have already been getting significantly higher contribution from SRM over the past three years. What is particularly interesting is that the AEP study leaders are dominated by the food & beverage, high tech and other specialty industries. These industries have companies that overwhelmingly belong to what Harvard Business School Professor Michael Porter calls the “differentiation” or “focus” segments.

Leaders have found that driving value through SRM is a proven method for avoiding commoditization. In other words, their company’s strategy focused on differentiation, not just being the low-cost player. The goal is to achieve a competitive advantage from initiatives like supplier-driven innovation, strategic risk management, and capital optimization.

Open innovation has grown in importance—from not being a target three years ago, to being less important than cost reduction today, to most expecting it to be equally or more important than cost reduction in three years. A minority of participants had an open innovation effort in place with suppliers three years ago; today, half the leaders have this in place, double the rate of the typical company. The rest expect to close this gap over the next three years.

Similarly, risk management capabilities are expected to improve in the next three years. Most AEP participants lacked a risk management strategy three years ago, and the leaders were primarily taking ad-hoc approaches. Today, most leaders have explicitly defined risk supplier strategies, and within three years, nearly everyone expects to have this capability.

If differentiation is the goal, a select few suppliers could provide a set of differentiating capabilities that, if harnessed correctly, could not only reduce costs but also bring in new technologies, intellectual property, or even design or manufacturing competencies. BMW called on Magna, the automotive supplier, to design and bring back a “new” Mini, understanding that Magna’s expertise was the only way to bring the Mini so quickly and effectively into the market.

For Apple, innovations from its supply base allowed it to deploy its finger-reading system faster than rivals. P&G launched it’s “proudly found elsewhere” initiative for harnessing supplier innovation a decade ago and has since transformed from a company that relies on in-house product development to finding more than half its innovations from its supply base.

How can all companies start tapping into supplier innovation? From our experience, the leaders start at the CEO level, with a mandate to business leaders to team with procurement to create measurable multi-dimensional value by harnessing supplier capabilities. The goal for these parties is to go beyond targeting lower costs through strategic sourcing and build a complementary SRM capability that identifies, develops, and harnesses differentiating capabilities with select suppliers. Then it is necessary to segment suppliers into clusters and define a different set of objectives for each cluster—a process we call TrueSRM.

Many companies have started to build their SRM capability by focusing on foundational activities that apply to all suppliers, like supplier performance reporting and supplier onboarding. Applying the TrueSRM-style framework allows leaders to focus on the less than one percent of “critical” suppliers whose collaboration can help build a compelling competitive advantage, or the “problematic” suppliers that need to be to be replaced, developed, or bailed out.

Overall, the work for better SRM seems to be paying off. Forty-two percent of leaders are highly satisfied with their SRM capability, compared with 8 percent for the typical company. As the global economy continues to recover and more companies seek competitive differentiation, SRM will increasingly become a major area of focus. The leading companies have figured out that, to truly stand out, they need both low cost through strategic sourcing and differentiation from a strategic SRM capability.

For a full copy of the Assessment of Excellence in Procurement Study, please visit www.atkearney.com/procurement/assessment-of-excellence-in-procurement-study.

Jules Goffre is a partner with A.T. Kearney and is based in Munich. He can be contacted at jules.goffre@atkearney.com. Mike Hales is a partner with A.T. Kearney. He is based in Chicago and can be contacted at mike.hales@atkearney.com. Yves Thill is a partner with A.T. Kearney. He is based in Atlanta and can be reached at yves.thill@atkearney.com. John Piatek is a consultant with A.T. Kearney and is based in Chicago.


 

Read more on this topic:

How an End-to-End Supply Chain Strategy Creates a Stronger Customer Advantage

9 Critical Criteria for Global Supply Chain Expansion

Five Rules for How CEOs Can Redefine Winning with Strategic Suppliers

How to Get the Most from Your Chief Supply Chain Officer

 

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Jules Goffre is a partner with A.T. Kearney and is based in Munich. He can be contacted at jules.goffre@atkearney.com. Mike Hales is a partner with A.T. Kearney. He is based in Chicago and can be contacted at mike.hales@atkearney.com. Yves Thill is a partner with A.T. Kearney. He is based in Atlanta and can be reached at yves.thill@atkearney.com. John Piatek is a consultant with A.T. Kearney and is based in Chicago.

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