Purchasing departments can concentrate on important tasks

Suppliers are increasingly taken up on their promises in terms of quality management and responsibility for products after their installation. Suppliers will take over maintenance work and accompany machines over their entire service life. That should be taken into account in the selection of suppliers.

The term supplier relationship management (SRM) is existing already for more than ten years. "During that time, e-procurement was talked about a lot", Bruno Bischinger remembers, Managing Director of the service provider Curecomp, "but only now, people really begin to understand the potential of SRM." Those times are over when a company put an invitation to tender on the table and suppliers fought hard over the award. "That hasn't gained acceptance." 

What's important today is to integrate suppliers much more into a company's own processes and IT infrastructures. "A good SRM images the processes continuously", says Bischinger. Not every standard software is suitable. "Often, small companies win against large ERP providers because the small ones have specialized on software for supplier relationships." Figuratively speaking, for him, the ERP system is the Secretary of the Interior, the supplier software the Secretary of State. Via interfaces, media break-free processing of orders must be ensured – which is not yet the case in most of the companies. "SRM is the basis for interaction models", explains Professor Dr. Erik Hofmann, head of the Kerkhoff Competence Center of Supply Chain Management at the University of St. Gallen. That means: Important vendors are not only integrated in a company's own IT systems but their intensive collaboration also goes from regular meetings all the way to joint product development. Because the supplier alone can decide whether the pertinent parts for a product optimization are available at all or can be manufactured. "All these items must be stored in an interaction model", says Hofmann.

Responsibility should not be endlessly shifted to the next lower supplier stage

For suppliers, that will mean more responsibility – for instance in what concerns the provision of spare parts or the maintenance of completed machines. Performance contracting is the technical term describing the trend away from supply chain management towards a service supply management. "That will go so far that the supplier is responsible for the entire service life of a machine and its output", explains Hofmann. However, he doesn't think much of the idea that ever supplier passes responsibility on to the next lower stage as is often the case in the automobile sector. "That can't be within the intent of SRM because when small suppliers get into financial difficulties – as had often been the case in the financial crisis – the big ones must help out." Bischinger confirms: "The auto industry wants to work with the fewest possible suppliers and will push forward system suppliers which manufacture not only mufflers and exhaust pipes but also complete exhaust systems. The auto company gives up its responsibility and leaves it to the system suppliers to organize themselves with the small suppliers." That's how it happens that risks of tier1 suppliers are passed on to the tier7 level.

Such great dependency and the tie-up of vendors is advantageous only in the short run, but risky in the long run: "In times of crises, suppliers can be squeezed to the last drop", says Bischinger, "but if they break down, buyers will also have a problem." His motto is to live and let live. SRM would only work when both sides are satisfied: "Although negotiations are tough, a fair contract must result in the end for both sides."

But what does it mean for the buyer? "Nobody can still afford exceptional situations in supplier relations", underlines Bischinger. For static processes, orders are awarded with fixed delivery dates. If the supplier cannot keep the date, the customer will have a problem. In contrast, with a functioning SRM process, all information is tabled without any time delay. "Although the problem of exceeding the due date continues to exist, it can be remedied faster and possible consequences be toned down", says Bischinger. The advantage: Since SRM only shows problematic cases, the purchasing department can concentrate fully on these processes. "The rest will proceed on its own." If a company processes e.g. 500,000 procurement cases per year, more than 85 percent thereof will no longer be seen by the company. And that means there'll be more time to talk with suppliers about the really important things – for instance, prices and deadline faithfulness – or to look for better suppliers and alternative products. "That's how strategic purchasing can be established and operative purchasing improved and automated", says Bischinger.

SRM is suitable for producing companies which have no great parts list depth and purchase many things additionally from the systems supplier. The value of the parts is not important in this case: "Even the purchase of high-value parts can be facilitated and optimized with it", says Bischinger. Apart from classical mechanical engineering, the target group also includes the manufacturers of special machines. Bischinger: "Own manufacture is frequently too expensive."

Good SRM not only facilitates order processing but also pays off financially. "The savings potential is between five and ten percent, depending on how much has already been saved in purchasing", says Hofmann. That concerns, on the one hand, classical savings with material costs and costs of product groups and, on the other hand, savings with regard to current assets (working capital management). Additionally, purchases of raw materials and energy as well as logistics and transport could be organized jointly with other companies. Horizontally across companies, purchasing can e.g. be bundled via supplier cooperations with small, important vendors; vertically, it is possible to take down redundancies in communications and informational flows. When the supplier already operates a portal in which customers place their orders, the buyer need not set up yet another system. "If a joint portal exists, even quality controls can be taken down", says Hofmann. The integration of offshore suppliers into the corporate IT in the course of global sourcing does not work quite as smoothly but it can be provided via the central platform of a service provider. The trend is towards application service providing (ASP) or, respectively, software-as-a-service (SaaS). "Our customers can thus use neutralized data", says Bischinger. The process changeover takes about three to four months; return on investment (ROI) is realized after a maximum of two years.

For complex goods, however, the buyer wants to be in close contact with the supplier. "A stay abroad with a friendly company should be scheduled", advises Hofmann. Misunderstandings could be avoided already beforehand in combination with seminars, consultants on location and a small network. A permanent purchasing office abroad is also possible. But the speed of globalization is decreasing. The higher the percentage of transport costs in the procurement costs, the more it will pay to return to regional and local sourcing. Hofmann: "Goods with a low value per weight or volume have more sensitive reactions towards transport cost variations than high-value products."

But the choice of the right supplier does not depend on geography alone. "That's not a singular decision but a process", says Hofmann. First of all, procurement market research would need to be done, supplier databases sifted through, and a long list prepared. Selection criteria would be, for example, the products and the size of the product range, as well as the size of the company and its sales. In the second stage, a short list is prepared on the basis of quality criteria – such as certifications and references. "The third stage is most important", emphasizes Hofmann. It comprises a detailed evaluation of the collected data and the structure of company-specific catalogs including prices, terms and conditions, performance contracting, range of services, quality characteristics, logistics, time, places, and many other things. "Soft criteria should not be neglected", says Hofmann. That means: Customers must assess the know-how of suppliers, their power of innovation, their credit standing, sustainability in terms of the environment and social aspects, as well as compliance guidelines, especially for suppliers in Africa and Asia.

■ Kirsten Seegmüller
Free journalist in Leinfelden