WORDS: Peter Stern
Increasing raw material prices and wages are challenging procurement in the Manufacturing industry. Traditional procurement levers have often been intensively used – now creativity is called for in supplier management.
When conventional procurement levers have been exhausted, it is enhanced cooperation with suppliers which primarily offers potential for cost optimisation. But how do you help discussions with suppliers? And how do you successfully integrate suppliers into the procurement process?
Use external ideas
In the manufacturing industry, alternatives to price rises, increases in efficiency and improvements in health and safety at work are sought after above all. Emissions and environmental protection are also an enduring theme for many enterprises. It is a broad subject in which quick-witted suppliers can deliver real added value provided they do not leave the discovery of ideas to accident, but anchor this firmly in the procurement process.
Guidelines for achieving a successful partnership with suppliers
Use the knowledge which your most important suppliers have and ask them for regular improvement suggestions. To do this, you need a structure that enables your partners to make their own suggestions. You can lay the foundations for a relationship built on cooperation and openness to innovation using the following steps.
- Quantifiable goals – what do you want? Identify the relevant suppliers and quantify their goals e.g. "Every key supplier will put forward three innovations per year".
- Clear decision-making process – ensure that the suggestions put forward pass through transparent structures with clear work flows and administrative responsibilities.
- Strong leadership –management level support is absolutely crucial so that the necessary prioritising can be carried out.
- Swift implementation – ideas that have passed successfully through the process must be implemented. Don't just kick them into the long grass or sit them out.
- Constant feedback – reflective process analysis: what is running smoothly in the selection process, where did it get stuck and what could be improved?
- Simple idea exchange – provide an online tool so suppliers can submit their ideas with very little administrative effort.
- Incentives for suppliers – how can you motivate suppliers to cooperate? For example, by offering the prospect of long-term contracts or passing on savings.
Set a strategy each year
The procurement management sets the basic strategy and the supplier management focus each year. Results from previous idea generation, evaluation and feedback phases should be incorporated here. It is important that the project remains the responsibility of Procurement although Production and Development must participate in the process.
Which are the relevant suppliers?
Procurement has the difficult task of determining which suppliers are relevant to the innovation process. The problem is that only two to five per cent of all innovations lead to success. Consequently, it needs a sufficiently large number to provide input. At the same time, examining suggestions ties up capacities and runs up costs so the pool should not be too large.
...only two to five per cent of ideas generated lead to success...
Efficio recommends four steps for selecting suppliers:
- Classifying suppliers – how strategically important is the supplier and how large is their volume?
- Your own importance to the supplier – am I a key customer with relevant demand?
- Negotiating position – what is the balance of power in the partnership?
- Potential analysis – what value-added can the customer contribute? How high is the implementation cost?
Give the process a name
Once you have chosen the participants, they can be informed of this by a personalised email, a conversation, a supplier innovation day, your internet presence or social media – and ideally via several channels. Tip: give your innovation process a memorable name and slogan so it is recognisable. Perhaps you could also offer a competition? In this way, you will immediately make the project known.
It is important that you keep an eye on incentives for suppliers. According to a study by Europe's largest application-orientated research organisation, the Frauenhof Institut, entitled "Innovation Management through Procurement", the most important motives for supplier innovations are:
- long-term commercial relationships
- long-term supplier contracts
- inclusion in the pool of suppliers
- fair commercial relationships
Make it easy for suppliers to submit their ideas using an online tool. The most popular platforms automatically pass on suggestions. Evidence indicates that every procurer should deal with ideas in their area themselves and make an initial review. This should take place according to uniform criteria.
A potential checklist for screening suggestions
- Has all the necessary information been obtained?
- Is there a clear and recognisable value-added for the company?
- Can it be implemented from a technical point of view?
- Is implementation realistic?
The most important question that every member of staff must answer is: "Am I prepared to fight for this idea?" A clear "yes" is needed for the suggestion to reach the next level.
A multi-stage evaluation process
Now begins the actual selection process which is made up of multiple stages depending on the size of the organisation. In a two-stage process, for example, the idea is first discussed and evaluated by a cross-functional team as regards the technical and commercial potential.
It is not until there is a positive result that a detailed investment budget is drawn up and submitted to the management for a decision.
It has been proven valuable to keep the supplier informed of the outcome at every stage. This is important feedback and shows that their innovation is being taken seriously.
Every idea submitted receives feedback within four to six weeks.
How large is the savings potential?
It is difficult to make reliable forecasts about this, but the potential is enormous. The advantages range from achieving a better product or service function through to a faster time-to-market and on to improved market entry and resource creation. Sometimes supplier innovations also simply lead to less pollution, less wear and tear or fewer disruptions. It is a kind of black box where the outcome is seen, and so it should be.
Strengthening procurement within the company
It is clear that an innovation process initiated by Procurement will strike a balance between procurement and technology. Frequently differing views are discussed and selected in good time with a joint evaluation team. That creates additional transparency for both sides and the opportunity to reconcile commercial and technological interests.
Recognising ancillary suppliers and staff
Moreover, strategically important customers are appreciated more as a result of participating in the process and so too are the staff taking part. If you follow an innovation from the start through to the implementation, you will have a sense of achievement. Another plus is that once the process is started, it can also be used for generating ideas internally.