Are you the weakest link?

Gregg Barrett SAM Walton, founder of Wal-Mart, described as the best businessman in the US (and the world) said it best: There is only one boss the customer. And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else. But consider that nearly half of every rand that a company earns is spent on goods and services provided by external suppliers and you have the reason for the focus on supplier relationship management. The most commonly accepted definition is that supplier relationship management is an integrated and comprehensive approach to create, manage and streamline the interactions with an organisations supplier base. Between 60%-80% of all business-to-business transactions are governed by a formal trade agreement, with the typical Fortune 1000 company maintaining 20000-40000 active contracts at any given time. These agreements dictate the terms, pricing and service levels of a companys customer, partner and supplier relationships. Contracts also provide a framework by which a company measures its operation and financial performance and compliance with business obligations and regulatory requirements. At the same time, most purchasing and sourcing departments face a shortfall of organisational skills and capabilities in contract management, especially as they relate to the contracting processes and policies on which their critical supplier relationship management strategies depend. Aberdeen research indicates that sustaining cost savings and driving continuous improvements in supplier performance and relationships requires the adoption of processes and systems to effectively manage the contract management life cycle from contract negotiation through compliance and performance analysis. As organisations strive to offer greater value and differentiated offerings, the key to survival and success will be to generate knowledge, leverage new technology and build powerful relationships with suppliers. Builders, for instance, look for trustworthy contractors who have a track record of meeting their obligations on time. They also want to cultivate partners for future jobs. To determine the value of a deal, ideas and information must be shared. Mutual opportunities must be explored. Commitment levels must be gauged. Negotiations must take place. Success is not merely tied to the exchange of products and services but also to the development of a business

relationship. If one looks at a recent research report from the US automotive supply base the Working Relations Index, which attempts to measure the working relationships automotive suppliers have with their Original Equipment Manufacturer (OEM) customers rely on what can be described as a reverse scorecard. Based on 17 characteristics such as trust, communication, information, efforts to reduce costs and supplier involvement in product development the study is perhaps the best objective measure of how OEMs treat their suppliers. Unfortunately, the findings from 2007-2008 do not suggest an improvement in OEM/supplier relationships despite much talk about it. The study says, five of the six leading US automakers reported a deterioration in working relationships in 2007-08, with an average fall of 7.8%. A bright spot in the study was Ford, which saw a rise of 17.9% that took it above its North American rivals Chrysler and General Motors. Its not surprising that Toyota, Honda and Nissan topped the rankings (although they also saw declines in their rating percentage). With this in mind it is important to ask: Are you the weak link in your value chain? The problem: As value chains are becoming more established in geographic and cross-cultural scope and in the trust and interdependencies between members of the value chain, individual organisations are being challenged with the key question: Are you the weakest link? While some are passing the test and are proving themselves to being the weakest link, many are also realising that they are not the strongest link either. The solution: Not all organisations have realised that they are a member of a value chain or which chain they belong to. Of the organisations that have sorted through this issue, many are asking themselves how they rank in their chain. This ranking is based on several varied factors and criteria. Often, contracting philosophy and supply management acumen are among the leading factors that set the leaders apart from the rest of the chain. The strongest links in the chain are often focused on how to improve the overall chain. There is often a passion and vision of value chain excellence set by the leading organisations in the chain. These organisations realise that certain departures from traditions and member-specific concessions particularly from themselves, are needed before success can be realised by the entire value chain. The contractual terms that are imposed on the chain members become increasingly standard across the chain.

This often means that the contractual terms imposed by the buy-side of an organisation are also imposed by the sales-side of that organisation. In short, what is good for the organisation as a buyer is also good for the organisation as a seller. This consistency, once spread across all members of the value chain, enables greatly improved contracting effectiveness. Best-practice enterprises have addressed the integration of buy-side and sell-side contracting and commitment management. This ensures efficient, synergistic relationships that support responsive delivery capabilities against shifting market and end-user customer requirements. The International Association for Contract and Commercial Management (IACCM, www.IACCM.com) research has shown that nearly 30% of corporations have some degree of integration between sales contracting and procurement contracting practices. Several leading organisations have progressed to the point where their practices are spread across and formally consolidated into the value chain. IACCM research has also shown that smaller organisations (less than $1billionn) are more likely to have an integrated contracting approach that is aligned with other members of their value chain. Some progress, but to a more limited extent, has been experienced by medium-sized and larger firms. So, are you the agent of change for this initiative in your organisation? - My thanks to Jim Bergman for his input on value chains and contracting