What do the best Supplier Managers get right?

A 2019 supplier management benchmarking study conducted by ADR International investigated how best practice organizations achieved higher value from vendor relationships.

We found that while most Procurement and Supply teams work hard to manage performance, best practice exemplars of supplier management focus on the conditions that allow their suppliers to excel. These four principles were demonstrated by world class practitioners of supplier management.

Principle 1: Sequence Category Management before Supplier Management

Before we start to tier / segment / classify suppliers, we must have a category strategy. The category strategy is a long-term vision of how interventions in groups of spend will support the triple bottom line of people, profit and planet. A category view assesses cost, market conditions and customer needs before deciding on the optimal sourcing, contracting and relationship strategies.

Principle 2: Make listening to suppliers – individually and collectively – a good habit

Listening with intent is a good habit for any business professional. Fostering this among Supplier Managers, Stakeholders and Procurement demonstrates to suppliers that we care about helping them meet their business goals.

Best in class supplier managers create opportunities to listen. Regular calls, dedicated time to brainstorm improvement, collecting feedback, discussing trends and surveying the supply base. Listening…

• Is courteous, encourages contribution and problem solving
• Ensures that the buy-side team adopts a common style towards a supplier
• Helps us navigate the market to our advantage through supplier insight

Principle 3: Use the customer’s needs as the basis for behaviour and reward for suppliers

Organizations that start strategy planning with the end customer’s needs focus on what is important. We demonstrate to the supplier what really matters through performance measures. If we have the mechanisms, we can reinforce this through our approach to reward and compensation.

Reward must match the behavioural style chosen for the relationship. Best practice supplier managers choose a relationship style (often in collaboration with suppliers) that matches their relationship objectives in terms of cost, quality, sustainability and customer value.

Principle 4: Guarantee success – because everyone likes to win

You know the difficulty with putting Procurement people and Sales people in the same room? They both like to win. This can also be a benefit, when it is a cross-company team. Allow, enable and encourage teams to win through small or major project initiatives. Those organizations that recognize that people like being on the winning team are the best at finding joint wins.

Conclusion

To drive value from supplier management, best practice organizations apply these principles daily. They succeed most when suppliers and stakeholders tell their peers the great outcomes they have experienced. Supplier management is best driven by great role modelling and positive behaviours rather than a systems-imposed solution.

What do modern procurement professionals want from training?

Procurement professionals want to learn and to develop themselves. It is something they look for when searching for new roles. It is also critical for attracting people into the function and keeping them there.

Organizations must offer growth opportunities for Procurement people that appeal to their interests as well as meeting organizational requirements.

At ADR, we work with organizations to design blended learning programs that address a range of needs. Many use competency assessments to determine the key skills gaps. However, some still say that the learning has not met their needs fully.

Competency assessment is best used as part of a wider review of needs, using this stepped approach:

1. Understand Business Needs that define your function’s goals

Business Needs will come from various sources

• Organizational strategy and vision
• Stakeholder and supplier feedback
• Organizational culture and team working
• Procurement department current and future strategy and targets
• Succession plans and future organizational structure
• Shareholder expectations

These needs help to define the priorities of the team and this needs to translate into daily practices and behaviors through good training.

2. Set Learning Objectives

Ultimately, Procurement will need to have a clear understanding of how they bring value to the organization and how its people underpin that. This will then drive the learning objectives. Like all good key performance indicators, they should be a few SMART metrics that are critical to success. It does not matter if they are not finance-related. Many Procurement teams define their impact in other ways like customer satisfaction, or circular economy metrics. The objectives should do the following:

• Link to organizational goals
• Clarify department target and individual contribution
• Have resources and pathways available so everyone knows how they are going to be able to contribute

3. Identify Skills Gaps

Self-assessment accompanied by line-manager discussion is a valuable method to understand the gap from the current state to the desired state. It is much more helpful to perform skills assessment against the future organizational model than against current role descriptions. An aspirational target sets the right tone – future state, not current state.

4. Create Learning Interventions

Learning interventions are training activities. The 70:20:10 learning model shows that 70% of learning should be on the job, 20% through informal learning and 10% through formal learning. Formal learning includes video, podcast, classroom, webinar and eLearning courses and discussions.

Procurement people often tell us that they feel their L&D offering is not suited to their needs – that training is “one size fits all”. At ADR, we find that the most common requests from procurement professionals are:

• They want to find out how future trends and technologies are going to help them.
• They want access to modern tools and resources, and support to become expert in them.
• They want choice about when, how and what to learn. This means a blended program of instructor-led classroom, webinar courses plus self-directed eLearning and micro learning on a range of topics, frequently updated.
• They want on the job and social learning efforts like peer learning, mentoring and experience sharing (the 20%) to be facilitated, recognised and rewarded in the same way as their formal training (the 10%).

5. Measure Learning effectiveness

L&D efforts must be measured against the stated learning objectives rather than a generic goal such as “save more money”. If incremental cost improvement from application of new techniques is expected, then the individual must be responsible for tracking and demonstrating the technique and its direct impact.

This requires a tool that records outputs AND outcomes not just inputs. This can be a challenge of the traditional learning management system.

When approached with a 70:20:10 mindset, procurement learning and development is not an “edge of desk” activity, it is the day job. It represents a cultural belief that doing things in the same way will not get better results. Continuous learning application is the most reliable route to improvement.

It is increasingly common for organizations to separate Sourcing from Supplier Management tasks, if not the entire function – it is clear why.

With effective cross-functional working and joint business objectives these concerns can be overcome to make a stronger supplier-facing unit, with a single voice and common message to the external parties that contribute to a high-performing team.

Buying organizations that are highly vulnerable to issues such as reputational damage, business continuity failure and security breaches often have dedicated Supplier Management functions.

Supplier Management encompasses a wide range of risk management, performance improvement and contract ownership activity. Most businesses find it is normal now to have fewer vendor relationships that house massive cost and risk.

Meanwhile, the Sourcing team has a huge responsibility to continually observe the supply market and look for emerging sources of capability and advantage. They run large, complex competitive bids, manage challenging contractual negotiations and enhance value through methods such as cost improvement and improving sustainability in their supply chains.

The advantages

Dedicated supplier performance managers, able to judiciously apply incentive programs. •Full time resource focused on supplier capability development, cost improvement and innovation.

Separation of roles protects the partnership from the relationship battering that competitive bidding can involve.

The disadvantages

Supplier Managers are sometimes inadequately involved in the process of business needs analysis and contracting, which hampers performance management later on.

Future visioning of the supply base can be a low priority when operational imperatives are the focus.

The needs of Supplier Management can overshadow commercial wisdom. Risk management, new product development or new projects mean that the Supplier Managers are not always monitoring whether the current relationship style suits the competitive landscape of the supply market.

With effective cross-functional working and joint business objectives these concerns can be overcome to make a stronger supplier-facing unit, with a single voice and common message to the external parties that contribute to a high-performing team.

One of the best things about being part of a small, global business is the frequent opportunity to learn how Procurement is evolving in other countries and cultures.

Here are some insights I gathered when speaking to my colleague Abed Sinan from ADR’s Middle East business. The team’s client base is typically in the Gulf Cooperation Council (GCC),a political and economic alliance of six Middle Eastern countries (Saudi Arabia, Kuwait, the United Arab Emirates, Bahrain, and Oman). The GCC has a population of around 45 million and GDP in excess of 1.4 Trillion USD.

A profile of procurement skills in the Middle East

Current state:

• Many procurement decisions are still largely stakeholder-led and procurement people are often perceived as an “after-the-fact” team to implement the plan.
• Many individuals have skills strengths in specific sourcing and supplier management activities, but often need training in the full category and supplier management process to make connections between the competencies and to leverage their combined knowledge. As Abed commented, “there is no one-stop shop buyer”.
• Procurement competence development is a low priority for too many organizations.

Opportunities:

• There is a high appetite for learning, and procurement competence is increasing rapidly in all GCC states.
• ADR coaches consistently report a “have a go” attitude from learners. They want to try all new tools and techniques.
• Procurement professionals in the GCC feel strongly that their learning activity should have an immediate impact on their sourcing activities. Our ADR tutors note that the “return on training” is very high when training is followed with category coaching. There is a strong will to demonstrate benefit through concentrated use of sourcing and supplier management techniques.

The key themes of Generation Z according to a McKinsey&Company article include:

• Fewer confrontations and more dialogue
• Inclusivity and multiple definitions of self
• Realistic and pragmatic perspective

The highly open and ethical mindset is conducive to effective collaborative negotiations.

These are typically difficult negotiation behaviours to master, with many Generation X and Y procurement negotiators falling back to competitive behaviour when pressured for savings or speed.

Most importantly, collaborative negotiations are increasingly the norm. Many procurement professionals are working on categories that involve strategic relationships with suppliers. This may be because the market is non-competitive, dependency or because there is a clear benefit from close long-term working.

It is often the case that strategic relationships are given to the more experienced or long-serving staff members. However, the portfolio matrix reminds us that resource allocation should be based on behavioural fit. Given this profile, Strategic categories fit Generation Z procurement professionals well.

Critical category: ideal buyer personalities

• Tenacious
• Problem-solving
• Dynamic

Strategic category: ideal buyer personalities:

• Creative
• Inclusive
• Discussion-leading

Acquisition category: ideal buyer personalities

• Organised
• Meticulous
• Data-driven decision-makers

Leverage category: ideal buyer personalities:

• Driven
• Motivated and motivators
• High expectation of self and others

At ADR International, we teach negotiation skills to Procurement professionals worldwide, both classroom and online. With a larger proportion of Generation Z buyers in our classes, the shift towards digital learning is apparent. In addition to providing more online learning, what should Procurement Leaders do to ensure their Generation Z procurement staff are developed to excel in collaborative negotiation?

• Generation Zers need to experiment and explore. Allocate them to strategic category teams to contribute.
• Empower Generation Zers. They will generate ideas and should be accountable for delivering them.
• Encourage them in supplier management and supplier meetings. Being attuned to the importance of mutual gains will add authenticity to their discussions.

Source: McKinsey&Company. “True Gen: Generation Z and its implications for companies”. Tracy Francis and Fernanda Hoefel

There is a lot of advice about how to plan and execute supplier negotiations, but the key to success is understanding the objectives and tactics of the supplier.

Counter-tactics can improve negotiating outcomes for procurement professionals. For example:

Know where the supplier is in their sales cycle.

The supplier may be at the stage of prospecting, identifying needs or proposing a solution directly to budget holders or functional managers. The procurement person will be using different conditioning and influencing methods at each stage.

Remember, the supplier will sell first and negotiate second.

Avoiding negotiation is a smart way of deal-making for suppliers. Procurement can counter this by starting the negotiation process first, and early.

Recognise the supplier closing tactics.

There are many ways a supplier will try and close discussion and make agreement. The procurement professional needs to be in control of this. Taking charge of the progress of discussion blocks the suppliers attempts to close too soon.

There are 3 ways you can learn more about supplier negotiation tactics and how to tackle them:

• ADR’s Online Procurement Academy for Negotiation: eLearning for people who negotiate with suppliers
• ADR’s Online Supplier Influence Course: An instructor-led webinar for in-house teams
• ADR’s Negotiation Tactics Training : A role-play based classroom course for procurement people

Sustainable procurement looks at how sourcing and supplier management activity supports sustainable development, where economic and social growth is encouraged in ways that does not negatively impact life. Environmental, social, economic and health topics all fall under this banner.

ISO 20040, the quality standard for Sustainable Procurement was introduced in 2017. This gave organizations a framework for understanding and monitoring the impact of their procurement activities on individuals, communities and the environment.

Some organizations focus on the Dow sustainability indexes, which provides a global measurement of corporate sustainability performance across multiple sectors.

Many organizations seek the coveted Industry Leaders title. These organizations are the top performing companies in each of the 60 industries represented in RobecoSAM’s Corporate Sustainability Assessment (CSA) and the Dow Jones Sustainability Indices.

However, many Procurement teams are not embedding sustainable procurement practices in their daily work. These three areas should be a key focus for sustainable procurement activity:

1. Strategy development

Category and sourcing strategies should identify the specific sustainable procurement issues that are most relevant to the category being purchased, and actively demonstrate that research and creative thinking is being used to improve the sustainability impact of the acquisition.
For example, a life cycle sustainability assessment would include the identification of solutions that minimize energy usage, extend pro-social procurement and enhance life opportunities in the communities where  the organization buys from.

2. Supplier selection

Supplier selection and evaluation criteria should highlight that  prospective suppliers who can evidence proactive development in economic, environmental and social issues (both in their own organization and in their supply chain) will be recognised as part of the competitive bidding process.
For example, there may be a high emphasis and weighting of services suppliers that can demonstrate that their recruitment policies are supporting local workers, creating apprenticeships or enabling SMEs to become a greater proportion of their supply base.

3. Contract management

The ongoing review of supplier operational and business performance should include sustainability improvement as a key element of  continuous improvement activity.
For example, a supplier of goods, equipment or materials may work in collaboration with the buying organization to reduce waste in the production, storage and distribution of the items.

By working together with stakeholders, procurement professionals can extend sustainable practises into many elements of the sourcing process and contribute to the organization’s sustainable credentials in its overall supply chain management.

Find out more about how you can improve your sustainable procurement practices in ADR’s Ethics and Sustainability Course, available as an Instructor-Led Classroom or Virtual Classroom Event.

Negotiating with suppliers requires a blend of behavioural and analytical skills. Without thorough analysis, no mystical influencing techniques will help to secure agreement in a challenging discussion. A review of the buyers’ and sellers’ markets alongside an assessment of the position of the respective parties is essential.

Supplier economic analysis uses supplier financial statements to provide a view of the supplier’s financial performance and associated negotiation stance. The buyer can choose to take a quick view of the supplier’s position and how this may impact relative power. Or, the buyer can choose to take a more in-depth study of the supplier. This will depend on the level of risk involved in the purchase and the amount of time available to invest for what level of return.

A quick overview will tell the buyer some information that is useful prior to negotiation:

• What gross and net profit does the supplier make as a business?

This may be compared to the industry benchmark, to the historical trend and to the account cost model that the buyer has obtained from the supplier for the purposes of should or could cost analysis.

• How is the supplier organization structured?

Ownership is an important element of how the supplier makes decisions. If they are shareholder owned, they may have different priorities and perspectives to a private or family owned organization.  The organization will impact when the supplier’s financial year runs and when their accounts are published in what form. It is useful to be aware of financial quarters of the supplier when they may feel pressured to make a significant sale.

The form of the accounts may be an extensive annual report or a summary that meets government requirements, depending on the organization type. This may impact the type and quantity of information available to the buyer.

• What level of financial risk does the supplier represent?

A brief calculation of the size of the buyer as an account relative to the supplier’s overall income gives a good indication of how the buyer sits compared to the suppliers’ other customers.

This also helps the buyer to determine if the level of planned spend with the supplier is appropriate, particularly given the overall mix of products and services that the supplier is selling.

The size, profitability and attractiveness of the sale are relevant to the supplier’s potential motivation to sell to and service the buyer’s account.

An analysis of supplier solvency and liquidity provides a snapshot of the supplier’s ability to meet both immediate and longer-term liabilities in the form of salaries, purchases and debts. This analysis can be supported by a credit report and should be viewed in the context of the overall business plans of the supplier and the market conditions.

Deeper analysis

Where there is a greater need to assess supplier financial performance to understand their business efficiency and effectiveness, ratio analysis is useful to support a deeper economic study. This will give indicators of performance through return on capital employed, speed of collection of income from customers and inventory turnover. Comparison of these elements with similar organizations and industry benchmarks will provide the buyer vital clues that indicate where there are areas of opportunity.

This opportunity could be immediate cost reduction or longer-term continuous improvement ideas. In either case, supplier economic analysis is a good starting point for a challenging or collaborative discussion with a supplier.

Yes, you can learn negotiation techniques online. It is not an “inferior” approach to instructor-led classroom role-play-based teaching. E-learning is simply a different learning mode that fits with the way the modern professional wants to learn.

1. It’s global: E-learning breaks physical barrier limitations. With internet access negotiators from any part of the world can access content 24/7/365 on desktop, laptop or tablet.

2. Learn at your own pace: With internet access learning is provided on demand. Got a negotiation coming up and need to prepare and plan? Need to decide on the negotiation strategy? E-learning is there to help just when you need it.

3. It’s interactive: The best way to “sense-check” your negotiation strategy or determine if “I have been doing it the right way all these years?” is to self-evaluate using e-learning’s scenarios, checkpoints and quizzes based on real-life scenarios.

4. Use and learn at the same time: Negotiation e-learning is packed with templates that can be used to model the learner’s own negotiation strategy. By completing the templates the learning and negotiation execution happen at the same time.

5. It’s inclusive: Negotiation e-learning focuses not only on the buyer’s role and negotiation tactics but on those of stakeholders and suppliers too. E-learning takes into account all parties’ perspectives and counter-tactics.

6. Leaves no stone unturned: Negotiation e-learning reminds us that no single tactic or personal negotiating style makes for an effective negotiation. Each negotiation must be tailored and adapted to secure an effective agreement.

7. It’s flexible: Negotiation e-learning can be used standalone or blended with other learning modes such as pre and post online negotiation skills assessment, instructor-led negotiation simulation and online coaching.

Often buyers are expected to negotiate commercial agreements with third party suppliers with very little support to prepare them.

The suppliers are often represented by well-trained professional sales people who have negotiated hundreds of successful deals, usually to the detriment of the buying organization on the other side of the negotiating table.

How do buyers try to even these odds and generate value for their organization?

Certainly not through any of the following:

• Using their power
• Bullying the supplier into making an agreement with false promises or threats
• Using negotiation like it is magic, where certain “tricks” will somehow charm or persuade the supplier into submission and agreement.

Like any art, negotiation is about understanding the very precise and technical rules to maximize your effectiveness; and making the appropriate choices about the right techniques to make use of and when in any given negotiating scenario.

1. The best negotiators know when to negotiate and when not to negotiate

The first question in negotiation preparation must be “is there a need to negotiate?”.  Negotiation can be – at best – resource intensive.  At worst, it can expose the organization to risk by having to give damaging concessions that were not fully thought-through.

Alternatives to negotiation may be:

• Keeping the status quo
• Choosing an alternative solution to the problem in hand
• Presenting a unilateral proposal that is unconditionally accepted

Some buyers view the last item on this list as a form of negotiation. They await an “offer” from their supplier and either accept it or reject it and demand an improved offer. This is not negotiation.  This is a power tactic.

2. The best negotiators don’t think “what do I want?”, they think “what do they want?”

Where objective evaluation shows that there is a need to negotiate, the next activity of the buyer is to assess the background situation of the negotiating parties. This will serve to create as accurate assessment as possible about the positions, interests, objectives and negotiating range of the buying organization and the selling organization.

Suppliers may be swayed by the buyer’s money but negotiation reviews tells us that are many other factors that are of equal of greater importance.  For example:

• The opportunity to leverage the agreement to win other work inside and outside the buying organization
• A consistent and reliable income source
• A test ground for new products, services, technologies, concepts
• Association with a brand, or a set of values, certain people or a lifestyle
• Access to people, places, ideas that are closed to them otherwise
• Securing a customer that helps meet the organization’s goals at that time in terms of product mix, service offering, utilization, product lifecycle, capacity, profit aspiration or any other criteria

3. The best negotiators know that the more power you have, the more influence you have

Best negotiators will use their preparation time to assess the relative power of each negotiating party. If it is assessed that your organization has less power actions need to be taken to determine the best approach to the negotiation. For example:

• Strengthen your best alternative to negotiated agreement (BATNA). A strong BATNA means that if you fail to reach agreement, you have a credible alternative to fall back on. This improves your negotiation plan, and your negotiating mind-set.
• Increase the number and quality of concessions you may use. Concessions are “trade-offs” that may be traded for what you want. You don’t have to use all of the ones you have planned for but having them available gives you more variables to move closer to an agreement.
• Gain all negotiating parties consent to have a non-competitive negotiation. This type of collaboration works when everyone agrees that agreement is better than no agreement, even where agreement does not fully meet your initial interests. Collaborative negotiation fosters the sort of creative problem solving that drives greater value for all parties. But it only works if everyone is committed to it, and it clearly makes sense for them.

Negotiation is life skill that we all use daily. It is possible for buyers and anyone who negotiates with suppliers to improve their skills and move closer to being one of the best negotiators. But to do so first requires the humility and insight to observe and critique one’s own style, endeavors and mistakes; and then make a plan for how to do better next time.