Improving efficiency in collaboration with suppliers

Arsi Aryanto, Contributor, Jakarta

As companies search for new opportunities to reduce costs and improve operational efficiency, relationships with their supply base have become a key asset in improving profitability.

Suppliers perform vital activities that directly impact a company's financial performance: they influence supply chain inventory levels, schedule capacity, deliver goods and services on time, communicate and promise item availability, and manage costs.

A 360-degree view of supplier capability is critical to the financial success of every company - and that is where Supplier Relationship Management, or SRM comes into the picture.

Market analysts, enterprise software vendors and corporate users almost universally agree that SRM represents a key opportunity to improve supplier relations and operate more efficiently across the extended supply chain. Yet before customers can make the decision to invest in another IT trend, it is important to look beyond the SRM hype.

A review of SRM product descriptions of leading enterprise solution providers offers broad clues, but no clear consensus. Many vendors position SRM primarily as a Web-based sourcing and procurement solution. That is a significant component of SRM, but there is more to it.

Research by leading industry analysts provides more clues. However, while analysts agree that SRM focuses on improving supplier-facing business practices, there is less of a consensus about the boundaries of SRM. In the meantime, companies that have already invested many years in implementing Supply Chain Management (SCM) solutions are wondering how SRM can be of benefit to them.

What is SRM? Sourcing and procurement are key SRM functions, but a working definition of SRM should not end there. In our view, a robust SRM system should serve the full spectrum of supplier relations. Take product design. Input from suppliers is critical when developing prototypes or upgrading existing products. Chief among development issues is whether suppliers of required materials, parts and services can meet the design tolerances and deadlines, while coming in at an acceptable price. If not, it is back to the drawing board.

The same is true of manufacturing. Many corporations that are adopting e-business strategies are moving from vertically integrated organizations to virtual models.

Increasingly, Original Equipment Manufacturers (OEMs), such as chipmakers and automobile manufacturers, are outsourcing various phases of production, from design, fabrication, product assembly, fulfillment and even customer service and support. As a result of this move to "virtualization," enterprises are spending increasing amounts on goods and services, with such expenditures often exceeding 45 percent of revenue, according to a June 2002 Gartner Research report by analyst David Hope-Ross.

While these outsourcing partnerships enable manufacturers to improve their financial performance and market competitiveness, they raise formidable supply chain and logistic issues. With contract manufacturing and other outsourced services integrated into the product life cycle, companies and their suppliers must closely manage and coordinate their activities worldwide - often across languages, time zones, currencies, regulatory climates and cultures. Moreover, companies increasingly rely on the specialized knowledge and expertise of major component and service suppliers for product design and engineering.

Based on experience, we believe there are four factors critical to the implementation of a successful SRM solution:

- Integration. First automation inside the enterprise. Automating a couple of processes is not sufficient. These processes should feed each other. A single source of truth is possible only if all the processes are based on a common data model. Integration between business processes within the enterprise is the first step.

- Connectivity. The second step is to enable connectivity with suppliers. They should be able to inquire, view and transact directly with the buyer's system. To get the buying from suppliers, the SRM connectivity mechanism must be affordable, relatively easy to use and scaled to the volume of business;

- Intelligence. With a single view of the supply chain, add business analytics that help identify the areas of greatest opportunity, then track and measure performance against established goals that can be shared across enterprise boundaries.

- Collaborative Culture. Finally, a change in mindset to promote and support collaboration across the supply chain. The buyer- supplier relationship must be cooperative in nature and focus on mutually beneficial goals.

Agreeing that collaborative SRM can deliver customers real value, how does a company get started? The prospect of organizing a geographically dispersed supplier network may seem daunting. The good news is that today's e-business solutions address the challenges of a global supply chain and provide multi-language, multi-currency support. Even better news is that SRM solutions are modular. You do not have to connect your entire supply chain in one fell swoop.

First, establish your SRM Strategy. You can begin with a critical supplier facing function that is likely to offer the greatest bang for the buck, such as sourcing and procurement. In collaboration with preferred suppliers, you can automate the Source-to-Settlement process, so the key interactions can be handled online: requisitioning, purchasing, invoicing and receiving; to payment processing, cash reconciliation and performance reporting.

Next, you might concentrate on outsourced manufacturing or demand planning. A third phase might involve design and research. There is no correct order or imposed time frame. With modular solutions, you can add functionality and features as part of a long-term, evolutionary process. What is important is that the vendor should support your needs as your appetite for the solution grows.

Once a common Web-based infrastructure and standardized SRM solution is in place, suppliers can be added without having to reengineer the system. Supplier resistance to linking to one or more buyers is lessened because of the range of interface options - XML, EDI, Web services, self-service portals and even email. What this means is that you're not asking your suppliers to invest a lot of capital and time in linking to your system. On an individual basis, you and your suppliers can figure out what works best.

SRM mutually benefits buyers and suppliers by getting everyone on the same team - and the same page. Instead of a fragmented view of suppliers, companies gain visibility across the extended supply chain and real-time access to complete business information.

Through the provision of flexible Web-based connectivity mechanisms, buyers can invite suppliers of all sizes to link up to their system. This enables cross-enterprise automation, which significantly improves the accuracy, speed and interactivity of buyer-supplier interactions. Working collaboratively, trading partners find ways to operate more cost effectively and efficiently as a group. As a result, the aim shifts from forcing the "lowest cost" for goods and services, to driving continuous process improvement and lowering total cost of ownership (TCO). In this collaborative culture, everyone wins.