Suppliers as Strategic Partners A white paper on the evolution of the Retailer/Supplier "Strategic Partner" relationship.

The journey from Supplier to “Strategic Partner” is a Win: Win for both retailers and their suppliers; with a focus on working together to fulfill consumer needs resulting

in improved performance and a more profitable relationship.

Anecdotal evidence, from conversations with major retailers and key suppliers, confirms that the evolution in retailer/supplier relationships from being just a “Vendor” to “Supplier”, to that of a “Key Supplier”, then to a “Strategic Partner” is beginning to take hold as more retailers and their suppliers embrace the twin pillars of Efficient Consumer Response (ECR) and Supplier Performance Management (SPM). But the question is, to paraphrase a WW2 Government slogan in times of petrol rationing: “Is your journey really necessary?” For retailers, the answer is absolutely “Yes” - to enable them to build competitive advantage, reduce supply chain costs and maximise profits. For suppliers, the Pareto principle will be a deciding factor: the 20% that account for 80% of a retailer’s business will need to make the journey in order to join the club, whilst those in the next level will need to show they can improve in order to force their way into the top 20%.

Retailers For their part, retailers are locked in an intense competitive struggle for market share and, as a result, are transforming their businesses and requiring suppliers to add value in two core areas:

Value chain: The supply chain is evolving into a “Value Chain” and often defined as being: “from the supplier’s supplier to the customer’s customer”, identifying the key relationships and value added processes along the way. With extended supply chains, particularly sourcing from low cost countries, and the need to be price competitive, best practice retailers are moving to Efficient Consumer Response (ECR) – a way of doing business that involves trading partners working together to fulfil consumer wishes better, faster and at less cost.

Relationship: Retailers today do not just want their suppliers to sell them products. They want them to become “business builders”, helping to optimise the retailer’s profitability with a deep understanding of their specific business needs, as a “Strategic Partner”

Suppliers For suppliers, today’s key account relationships are becoming tremendously complex. They are characterised by shifting customer needs and growing polarisation in the retail market, requiring greater agility and responsiveness on the part of consumer products companies. In this environment, suppliers seeking to make the journey to become a strategic partner need to work with their retailer partners to:

Embrace ECR Better manage the relationship, and Support, and even initiate, SPM

Embracing Efficient Consumer Response ECR is based on two key principles:

Focus on consumers: A commitment to the belief that sustained business success stems from providing consumers with products and services that meet or surpass their demands and expectations.

Working together: The greatest consumer value can be offered only when organisations work together, both internally and with their trading partners, to improve efficiency and effectiveness.

ECR best practices are about working together to deliver superior business results by reducing costs at all stages throughout the supply chain, achieving efficiency and streamlined processes resulting in improved range, value, service and convenience offerings. This in turn will lead to greater satisfaction of consumer needs.

Better managing the relationship With the implementation of ECR, and evolution to a “Strategic Partner”, what new capabilities will retail customers’ demand of their suppliers? How will the dynamics of customer management need to change? In their recent report, The strategic agenda for consumer products customer management, IBM Business Consulting Services concluded a dramatic paradigm shift was required in how consumer products companies build, manage and sustain their customer management organisations. In particular, they say suppliers must pursue far-reaching changes in their culture, people, relationships and processes to elevate customer focus to the same level of importance as the consumer-focused dimensions of their organisation (e.g., marketing and brand management) and integrate the two to drive mutually beneficial trade relationships while maintaining strong brands. Specifically, they say consumer products companies will need to focus on two key areas to enhance product performance and improve their business with retailers:

Build a more agile, responsive organisation that efficiently and effectively responds to specific customer needs

Empower account managers and teams to become more broad-based business managers with a wider array of skills to drive business value for both the retail customer and the supplier.

"The greatest change in the way business is being conducted may be the accelerating growth of relationships based not on ownership, but on partnership” (Peter Drucker)

Suppliers as Strategic Partners

A more agile, responsive organisation ECR is about companies working together to integrate their operations and eliminate barriers that impact their ability to satisfy consumers and drive out unnecessary cost. However, in the traditional key account management structure, barriers often exist both between trading partners and between business functions within one business.

ECR aims to break these barriers down and, while the optimal organisation structure will vary depending on the company's strategic intent and the specific category's role, a number of principles hold generally true:

internally, supply management requires true cross-functional working, within manufacturers and retailers;

joint supply management requires a new type of interface structure between manufacturers and retailers; and

Performance measures need to be re-aligned from narrow functional criteria to measures which focus on end-to-end supply chain service levels.

Empowering account managers and teams The roles of key account managers and customer teams are changing dramatically. To enable their customer teams to deliver on these new retailer requirements and be viewed as trusted partners, while also driving their own growth and profitability, suppliers will need to address two key challenges:

Broadening key account manager skills and

capabilities: Key account managers need to both drive account profitability and help their customers achieve their own business objectives; however, they often lack the strategic management and analytical skills required to do so. Among the companies interviewed as part of the IBM study, account team skills development and joint planning and goal setting with retailers were mentioned most frequently as the customer management capabilities most needed to improve profitability. To improve performance in this area, account managers and teams must better understand the retailer’s business and shift from a focus on “selling products” to a focus on “addressing the customers’ business requirements”. They will need to develop new skills which will enable them to address shifting retailer needs with greater agility and impact. At the same time, however, traditional relationship-building and sales skills will still be important. The key will be to develop business management skills, while maintaining strong sales ability, to benefit the supplier in the long run.

However, many have been unsuccessful at building some of these capabilities to date. For example: in the IBM survey, only 9% of respondents felt that their suppliers had a good understanding of their business objectives.

Retailer satisfaction with suppliers’ understanding of their

business objectives.

According to IBM, 65% of US retailers surveyed believe trade relationships have improved over the past three years, however they continue to express low satisfaction with suppliers across many key areas of their relationships. In addition, retailers are starting to use more sophisticated methods of measuring supplier performance. For example, retailers with over US$1 billion in sales are measuring supplier performance on economic metrics such as supplier contribution to profit and supplier share of turnover as well as the people components of their relationship.

Managing complex customer relationships: Customer relationships have evolved from “one point-of-contact” through the sales representative to “multiple points-of-contact” coordinated by a key account manager who orchestrates the activities of a multifunctional team. The key account manager will often work with virtual teams across the organisational matrix, including individuals who may only be working with the given customer for a short period of time. To help them perform this role more effectively, suppliers will seek ways to provide their account managers with a holistic view of all customer activities, including greater access to information.

“The purpose of investing in a relationship with a supplier is to improve their performance in fulfilling the needs of the

buying organization, thereby improving the buying organization’s performance and creating mutual benefit.” (Source: Chartered Institute of Purchasing & Supply)

Suppliers as Strategic Partners

Supplier Performance Management The second pillar of the “Strategic Partner” evolution, Supplier Performance Management (SPM), is absolutely critical in closing the ECR and relationship loop by implementing the process of regular reviews to measure, analyse, and manage supplier performance and relationships to improve quality, reduce costs, mitigate supply risk, and drive continuous improvement in supply value. The discipline of SPM is vitally important and recent research by the authoritative Boston-based research company, the Aberdeen Group, confirms the intuitively obvious conclusion that using SPM programs will produce higher value supplies.

Price On-time Delivery

Quality Service

SPM program 23% 23% 21% 21%

Their research found that companies with SPM programs achieved performance improvement in every category that was studied - an average supplier performance improvement of more than 20% across the four main areas - compared with those that had no formal SPM program.

No SPM program 13% 11% 5% 17%

They conclude that “organisations that use formal supplier measurement programs outpace their peers in on-time delivery, quality, service, price competitiveness, and other supplier performance areas”. Their recommendations are:

“Organisations that don’t have formal SPM programs should investigate the benefits of developing them, aiming first to improve key supplier performance in key performance categories.

“When you measure and communicate supplier performance regularly, suppliers improve their cost, quality and responsiveness. Done in an automated, systematic way, performance

improves dramatically, in some cases by over 50%.” (Source: Aberdeen Group)

They also should develop standard supplier performance metrics, involve key suppliers in the SPM development process, and include key internal stakeholders in the process.”

Where are suppliers on the “Strategic Partner” Journey? The journey from Vendor to Supplier, to Key Supplier, then a “Strategic Partner” can be tracked through four stages, dependent on how their performance is rated by their retailer customers:

Early: “Red Zone”; Low ratings; New/occasional, vendor; “Me too” products, price-based; Irregular contact/orders; Strictly transactional relationship;

Efficient: “Orange Zone”; Below average ratings; Low consumer franchise; Some USPs; Regular contact (one point); Moderate importance to retailer; Proficient in supply and service; Delivers results;

Effective: Average/above ratings; Proven products, solid USPs, high value, ranked 3-5 in category; Moderate/growing consumer franchise; Beginning ECR; Key account rep main contact, frequent call cycle; Shares responsibility for results.

Excellence: “Green Zone”; High ratings; A Strategic Partner can be defined by a number of key characteristics, some of which are:

Suppliers are at different stages of the journey to “Strategic Partner”. It is important that retailers understand where each key supplier in their portfolio sits so they might, together, develop strategies for improvement. Many suppliers are now taking the initiative and implementing their own Key Accounts Review programs – SPM in reverse – in order to improve their performance and reach their full potential to contribute value to the retailer and to gain a competitive advantage and cement their “strategic Partner” position.

“If you want to have early warnings about possible problems in a relationship and a way to surface issues and to address

them collaboratively, you have to have a mechanism to take the temperature of the relationship, comparing its effectiveness up against agreed metrics, and then talking about the results.” (Source: Vantage Partners)

Suppliers as Strategic Partners

SPM in Australia For many years both Woolworths and Mitre 10, and recently Myer, have used formal supplier reviews as the basis for their “Supplier of the Year” programs and awards. However, to our knowledge only a few retailers undertake formal annual, or quarterly, performance reviews with their suppliers, using Key Performance Indicators and a formal rating process that looks at the entire business relationship. The advent of web-based, multi-user software makes the implementation of SPM easy and it encourages a collaborative approach to continuous performance improvement in what are complex business relationships, with multiple touch-points in both organisations, often spread over many geographic locations. Our Performware™ platform is a suite of non-prescriptive on-line tools designed to add value and drive business partner performance improvement. Based on traditional Performance Management techniques, it allows organisations to review their business partners and agree on action plans to improve performance and to better manage the often complex relationships - for mutual benefit. Retailers can assess the performance of key supplier partners, using their own KPIs and importance weightings, with input from multiple stakeholders (plus supplier self-assessment) and even stores.

Case Study - Mitre 10 The Mitre 10 Supplier of the Year program involves their key suppliers being reviewed by their 540+ stores, National Office Business and Category Managers and Retail Area Managers. The suppliers are rated on their performance using four groups of KPIs. Suppliers undertake a self-assessment and also assess Mitre 10’s performance on specific KPIs. Mitre 10 Managers receive a range of reports, including supplier ratings and rankings - overall, by Business Unit, State, and Store Brand. Each Business Unit Manager receives a report on his area and each supplier gets a full report on their ratings and rankings, with detailed breakdowns and verbatim comments from store and National Office assessors. The example “Action Matrix” uses the two dimensions of DIFOT and Service and Support. A number of suppliers, including the Supplier of the Year, along with the supplier’s self-assessment average, are positioned in the “Strategic Partner”, green zone, with high ratings; The worst performing supplier is shown in the bottom left, bordering on the red “Vendor” zone. The average ratings of each of the six product categories/ Business Units are shown in the “Effective”, average or above, zone. Summary Our experience is that suppliers are keen to participate in, and contribute to the costs of, Supplier Performance Management reviews. They see value in the constructive feedback and the ability to access results on-line to identify their weaknesses and put action plans in place for improvement - resulting in higher levels of engagement and a closer business partner relationship. In fact, some are already taking the initiative themselves and inviting their key accounts to review them on a regular basis, using jointly agreed KPIs. The journey to that of a strategic partner is not easy. It requires paradigm shifts by both parties, particularly in attitudes, requiring openness and trust, information sharing and a commitment to meeting consumer needs. But it is a journey worth making with the result a Win: Win, for both, of improved performance and a closer and more profitable relationship.

Contact: Ron Latham, Managing Director Latham Consulting Pty Ltd 41b Spruson Street, Neutral Bay, NSW 2089

Ph: (02) 9959 3815 Email: ron@lathamconsulting.com.auWeb: www.performware.com.au www.lathamconsulting.com.au

"The greatest change in the way business is being conducted may be the accelerating growth of relationships based not on ownership, but on partnership” (Peter Drucker)