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Supplier relationships may be the critical factor in e-procurement success

Manufacturers and SRM experts say the biggest savings come from using e-procurement software as a platform for supplier innovation.

For ConAgra Foods Inc., the Omaha, Neb.-based purveyor of such household names as Hunt’s, Orville Redenbacher, and Chef Boyardee, supplier relationship management (SRM) is not just a sourcing strategy, but a catalyst for innovation.

Meeting in frequent brainstorming sessions, ConAgra procurement executives and suppliers co-developed a mono-layer plastic ketchup bottle, launched in 2007, that is cheaper and more recyclable than the standard, three-layer kind. Suppliers are also coming up with ways to take costs out of the supply chain, from procurement to manufacturing and logistics, said D.K. Singh, ConAgra’s senior vice president and chief procurement officer.

“This is much more than just the procurement function of negotiating with suppliers and saying, ‘Give me 5% or 10%,’” Singh said. “It’s taking complexity out of manufacturing.”

Supplier relationship management makes the difference

SRM experts say ConAgra’s carefully planned approach to supplier relationships (see sidebar) is the sort of collaboration needed to optimize procurement processes and technologies. It runs counter to the traditional attitude of many procurement organizations, which see their role as squeezing suppliers on price, according to John Henke, professor of marketing at Oakland University in Rochester, Mich. The confrontational style often backfires by making suppliers less cooperative. “They say, ‘Screw ‘em—they screwed us, we’ll screw them,’” Henke said.

The key is to build trust between the manufacturer’s procurement office and its suppliers, a conclusion Henke reached over 20 years of surveying supplier likes and dislikes for his consulting firm, Planning Perspectives Inc.

ConAgra makes SRM part of its corporate DNA

For its supplier relationship management (SRM) program, food maker ConAgra first designates suppliers as strategic or nonstrategic and puts them in subcategories such as core, niche and emerging. “You can’t treat everybody the same way,” said D.K. Singh, the company’s senior vice president and chief procurement officer.

Then it picks strategic suppliers for critical partnerships, setting up what Singh calls “top-to-top” connections between senior managers who own each relationship, meeting and talking regularly.

So far, the effort hasn’t required much more technology than email, but that will change next year when ConAgra installs the SRM module from its recently implemented ERP system. Singh expects it to smooth the sharing of product and service data with suppliers.

The company also uses home-grown e-procurement and contract-management tools and maintains a spreadsheet scorecard on 80 suppliers. It uses a popular e-sourcing suite for requests for proposals (RFPs) and auctions, but only for indirect commodities. With the exception of some packaging, the direct “spend”-- goods like vegetable oils and meats that go right into the foods ConAgra sells to major retailers and restaurants -- can’t be run through the e-sourcing tool. Oil, for example, trades on a commodities market, and meat vendors aren’t automated enough to use the software, according to Singh.

ConAgra’s redesigned Hunt’s Ketchup bottle has been Singh’s poster child for SRM’s role in innovation. “A lot of the work was done by the supplier,” he said. “They also saw improvement in their processes and in finding efficiencies.”

Singh expects SRM to pay dividends across ConAgra’s planned demand-driven supply chain. “In the past, the procurement function has been siloed, and so have manufacturing and logistics,” he said. Now, collaborators’ ideas -- for example, reducing the sources for carrots -- can minimize changeovers on the shop floor, consolidate shipments, and improve demand transparency. And that, said Singh, will smooth out fluctuations at each stage of the supply chain.

“What we have found and we have proven is pressure has nothing to do with the relationship -- it’s how it’s carried out,” he said. “As the pressure goes up, there is no impact unless the customer applies the pressure in an adversarial manner.”

If suppliers are encouraged to collaborate with manufacturers and given the technology to do so, they're more likely to participate in product development and cooperate in driving costs out of the supply chain, Henke said.

“When you get a stronger, more trusting relationship, suppliers are more willing and able to give better prices because they see it as being an investment in the future,” he said.

E-sourcing and e-procurement tools containing supplier performance management (SPM) and collaboration features can “have a rather significant impact,” Henke said. Software that just gives suppliers basic information on requests for proposals (RFPs) won’t do the trick because they can use it to game the system. Cultural change goes along with it; engineers, for example, must learn to share product data instead of holding it close to their chests. The supply chain finance and working capital management features in some e-procurement suites can also foster cooperative relationships because they allow manufacturers to provide financial assistance to suppliers, according to Henke.

Lacking SRM software, some high-tech manufacturers miss out on innovation, savings

Complex manufacturing industries such as aerospace could most benefit from using e-procurement and similar technology to collaborate more effectively, but seem the least inclined to do so, according to Katherine Kawamoto, vice president of research and advisory services at the International Association for Contract and Commercial Management in Ridgefield, Conn.

The reasons could be generational or a result of the engineering worldview. “When it comes to simple things like business processes, maybe it’s too simple [for them],” Kawamoto said. “It seems they don’t want to go there. They don’t have what I would call a supplier relationship management team. I have lots of conversations with suppliers in the supply chain who want to do that and are frustrated. They’re getting told, ‘We don’t want to hear about it; you’re the supplier, and your job is to give us what we need.’”

But the suppliers, many of whom make complex subassemblies, feel they have a lot to offer. “Maybe because they’re so niche, they’re so focused on their piece of it that they see lots of opportunities,” she said, “but what I was hearing is they’re not able to even have the conversation. These are very complex communication lines that are not very effective because they don’t have a common system.”

Then which platform, specifically, would be best? Kawamoto said the contract lifecycle management (CLM) tools from e-procurement vendors are best used for pure commodities and simple services, but their templates can’t handle the complexities of contract manufacturing of subassemblies. Manufacturers use CLM and similar document-management tools for basic tasks like accessing contracts and extracting metadata, “but they’re not using it in a strategic way,” she said. “If you’re forcing the other party to use something they don’t want to use, they’ll find ways to go around it.” 

Kawamoto said general-purpose web collaboration and document-management platforms -- like the one she used for RFPs at her previous employer, NCR -- can provide a basic link with suppliers, but dashboard-equipped SPM is best. It helps foster relationships by letting companies rate suppliers on innovation, rather than just price, and give them useful feedback.

This kind of collaboration is necessary for getting more from e-procurement tools. “You’re limited in cost savings you can achieve year over year,” Kawamoto said. “Co-creating -- co-engineering -- is really going to become much more important.”

Next Steps

Learn how to improve the ROI of e-procurement software

Read tips on choosing e-sourcing and e-procurement software

Understand how e-sourcing tools can improve supplier collaboration

How to control spending with e-procurement software

Dig Deeper on ERP and supply chain management

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