Taking supplier collaboration to the next level (2023)

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Companies with advanced purchasing capabilitiesThey know there are limits to the value they can generate by focusing solely on the price of the products and services they buy. These organizations understand that when buyers and suppliers are willing and able to work together, they can often find ways to unlock significant new sources of value that benefit both.

Buyers and suppliers can work together to create innovative new products, for example, to increase sales and profits for both parties. They can take an integrated approach to supply chain optimization, redesign their processes together to reduce waste and redundant effort, or buy raw materials together. Or they can collaborate on forecasting, planning and managing capacity to improve service levels, mitigate risk and strengthen the combined supply chain.

Previous work has shown that partnering with vendors really moves the needle for companies that get it right. In a McKinsey survey of more than 100 large organizations across industries, companies that regularly work with suppliers demonstrated higher growth, lower operational costs, and higher profitability than their industry peers (Figure 1).

Taking supplier collaboration to the next level (1)

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Despite the value at stake, the benefits of working with suppliers have proven elusive. While many companies can point to isolated examples of successful supplier collaborations, executives often tell us they have struggled to integrate the approach into their overall sourcing and supply chain strategies.

barriers to collaboration

Several factors make working with suppliers difficult. Projects can require significant management time and effort before they deliver value, prompting organizations to prioritize easier and faster initiatives even if they are less valuable. Collaboration requires a shift in thinking between buyers and suppliers, who may be used to more transactional or even confrontational relationships. And most collaborative efforts require intense, cross-functional participation from both sides, a marked change from the normal way many companies work. This shift from a cost- to a value-based mindset requires a paradigm shift that is often difficult to achieve.

The actual value created through collaboration can also be difficult to quantify, especially when companies are also pursuing supply chain improvement strategies and more conventional sourcing from the same suppliers, or when they are updating product designs and manufacturing processes at the same time. And even when companies are willing to strive for higher levels of supplier collaboration, leaders often admit they lack the skills, structure, and staff to design great supplier collaboration programs lacking the skills to run to them. Because what it takes to work great with suppliers is much more than just applying a process or framework: it requires approval and long-term commitment from senior executives and decision makers.

A shared perspective

To learn more about the factors that hinder or enable supplier collaboration programs, we partnered with Michigan State University (MSU) to develop a new way of looking at how companies use supplier collaboration. The Supplier Collaboration Index (SCI) is a survey and interview-based benchmarking tool that evaluates supplier collaboration programs across five key dimensions (Figure 2).

Taking supplier collaboration to the next level (2)

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In 2019, researchers from McKinsey and MSU implemented the index in a pilot project involving a dozen leading consumer products companies in North America and 10 to 15 of each company's strategic suppliers. We collected more than 300 written responses from more than 130 organizations and conducted in-depth interviews with around 60 purchasing and supplier managers. The work provides key insights into the current state of supplier collaboration, identifying the elements of collaboration that companies and suppliers believe are working well and the areas that pose the greatest challenges.

The results of our Consumer Industry Benchmark are summarized in Figure 3, with the average buyer and supplier perception of their partnership programs being rated on each of five dimensions from one (low) to ten (high).

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Overall, the research shows close agreement between buyers and sellers on the relative strength of most dimensions. It also shows a marked decline in the perception of strength when the discussion moves from theory (strategic direction) to implementation (value creation and distribution, organizational leadership).

In-depth interviews, conducted as part of SCI's data collection process with senior procurement and supplier executives, provide greater insight into the challenges organizations face in each of the five dimensions and provide some examples of best practices for underperforming organizations to emulate.

Achieve strategic alignment

The benchmark participants understood who their strategic suppliers are, although not all use formal segmentation approaches to categorize their supplier base. Suppliers also understood their strategic importance for their customers. Buyers and suppliers agreed that there was good alignment in finding sources of value beyond cost, but they also agreed that their efforts to capture those sources of value were not always successful.

The first step for an organization is to define what it wants to achieve through its collective efforts and what it needs to do to achieve those goals. Internal alignment and leadership commitment to ensure the right resources are available is also critical. For example, to develop more sustainable laundry detergents, Unilever has partnered with Novozyme, a leading enzyme supplier, to jointly develop new enzyme solutions. The collaboration leveraged each party's strengths, merging Unilever's understanding of what types of stains and materials were most relevant with Novozyme's reagent optimization capabilities. The partnership resulted in two enzyme innovations that improved product performance, increased market penetration and allowed the company to target premium brand competitors. In addition, the new formulation performed well at lower temperatures, helping customers save energy and reduce CO2 emissions.

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Joint business planning

Joint business planningIt is a collaborative planning process in which the company and its supplier align with short- and long-term business goals, agree on common goals, and jointly develop plans to achieve set goals (document). It provides a formal approach to working with suppliers and helps to engage stakeholders from different functions in the collaboration.

Taking supplier collaboration to the next level (4)

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Joint business planning works best when companies have a clear understanding of the strategic suppliers they wish to work with and where they have strong core supplier management skills. The approach can be applied at different levels. In its simplest form, collaborative planning may involve aligning shared value metrics and agreements. In its most advanced form, it can involve co-investments to create new sources of value.

Other organizations participating in SCI have adopted formal methods to encourage greater strategic alignment, such as: B. The introduction of a common business planning approach. Buyer and supplier align with short- and long-term business goals, set common goals, and jointly develop plans to achieve the goals. Potential areas for collaboration include growth, innovation, productivity, quality and margins (see Joint Business Planning sidebar).

communication and trust

Both buyers and sellers describe high levels of trust in relationships they see as strategic. In most cases, this trust has been built over time, based on long-standing business relationships. Companies involved in collaborations tend to value each other's abilities, understand each other's business, and believe their partners will honor the commitments made.

However, companies are less confident that their partners are willing to put the interests of the collaboration above the interests of their own organization. Many interviewees indicated that greater transparency in sensitive areas such as costs is key to achieving the highest level of collaboration, but said that this goal is often difficult to achieve.

Building trust takes time and effort. Often this means starting small, with simple collaborative efforts that deliver results quickly and build momentum. In this way, companies can demonstrate serious cooperation and their willingness to share profits fairly. More importantly, companies must base their relationships on transparency and information sharing, with the expectation that greater trust will result.

Cosmetics company L'Oréal is taking this approach to encourage collaborative innovation. Through open dialogue about corporate goals and long-term commitment, L'Oréal was able to establish an effective joint development process. The company's annual Cherry Pack exhibition, for example, gives suppliers a preview of the consumer trends the company will be working on and challenges them to develop packaging solutions in line with those trends. During the exhibition, L'Oréal creates a trust-based forum for suppliers to present ideas and products in development, including ideas that have not yet been patented. In this way, the forum gives suppliers access to short and long-term practical ideas and projects that will ultimately accelerate packaging innovation.

cross-functional engagement

In order to generate value from changes in manufacturing methods, quality assurance systems or supply chain processes, representatives of the respective functions on both sides of the partnership must work together. However, this type of cross-functional engagement is something that most referral participants find extremely difficult. Executives reported that while traditional relationships, such as those between buyer and supplier sales teams or supplier and buyer R&D functions, were strong, broader cross-functional engagement was patchy and poorly managed at best.

Improving cross-functional engagement is a leadership responsibility. Organizations with the most successful collaborative programs use a formal approach to managing cross-functional teams with clearly defined roles and responsibilities on both sides of the partnership, supported by changes to internal incentive systems to encourage full participation in collaborative projects.

Some companies, like P&G, have gone a step further by forming cross-functional teams focused solely on co-innovating with suppliers. By creating an "Open Innovation" practice, P&G intended to coordinate its efforts and leverage the skills and interests of people across the company to assess the competitive landscape, identify types of innovation that can help generate disruptive ideas, and to identify suitable external partners. For innovation to work, P&G has emphasized the need to integrate cross-functional teams, which in turn integrate business strategy with operations, requiring a broad network of interactions.

Value creation and distribution of values

Striving for common values ​​is why buyers and suppliers engage in collaborative projects, so it is not surprising that purchasing managers see this as the most important dimension of their collaboration. However, few participants in our study are tracking the impact of collaboration on sources of value beyond cost reduction. When companies have tracked the impact of collaborative projects on revenue, margins, or other metrics, they have only done so for a handful of high-profile projects.

Additional volume remains the most common way for buyers to share the value created by collaborative projects. Some associations had used other types of shared value, such as performance-based incentives for suppliers. When these approaches were used, both buyers and suppliers were happy with the results. This suggests a significant opportunity for companies to scale up the use of such approaches, provided they can agree on cost bases and incentive structures.

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Clean Sheet Cost Modeling

Many of the possible sources of valueVendor-led collaborative efforts depend on a mutual understanding of the true cost of a product or service. However, achieving this type of transparency can be difficult in buyer-supplier relationships. Suppliers may be reluctant to reveal too much about their own manufacturing processes and costs for fear that this information will be used against them in negotiations, and buyers may not want suppliers to know how critical they are.

Clean sheet cost modeling approaches have gained prominence in recent years as a tool to facilitate an open, fact-based cost discussion between buyers and suppliers. A clean sheet calculates the cost of each step during the creation of a product, component, or service using a database of information about the materials, labor, factory space, equipment, time, and energy required to complete each step, as well as the Implications for desired product quantities when using these resources.

Clean sheet cost transparency helps collaborators generate ideas to improve design and processes. The approach can also support shared value agreements, allowing companies to set clear cost baselines and measure improvements against them.

Taking supplier collaboration to the next level (5)

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Cost transparency is a decisive factor here. Some companies have found that clean sheet cost modeling is a very effective way to have fact-based discussions about costs and improvement opportunities with their collaborative partners (see the Clean Sheet Cost Modeling box).

ASML, a manufacturer of lithography equipment for the semiconductor industry, operates a shared value mechanism for its suppliers. The company allows its suppliers healthy margins (as a buffer against volatility), funds the infrastructure needed to manufacture its products, and offers tiered purchase guarantees. In this way, ASML encourages and rewards its strategic suppliers for prioritizing their business, gaining access to leading-edge technology, reducing costs and improving stability in an industry with short lifecycles affected by significant changes in demand.

In its long history of partnering with suppliers, P&G has leveraged a wide range of business models to work with suppliers throughout the R&D chain. Its shared value models range from pooled funds for joint product development to licensing agreements for commercialization. The flexibility to employ different mechanisms has allowed P&G to take advantage of supplier innovation without having to make large investments in developing deep partnerships with each potential partner.

Organisation und Governance

Like cross-functional engagement, the organization and governance of collaborative programs with suppliers suffers from a lack of formal structures and processes. Respondents admitted that their organizations, both buyers and suppliers, were relatively lax in monitoring and evaluating their collaboration with suppliers. Few organizations had done anything to align incentives for project participants within their own organizations, and most relied on informal mechanisms to share feedback or check progress with partners.

Introducing a clearer governance structure for the entire supplier collaboration program and for individual projects has the potential to significantly improve outcomes in most organizations. For example, two-way dashboards allow buyers and suppliers to let each other know if they are effectively supporting the program goals. Governance of collaborative projects should be cross-functional, with appropriate incentives across the organization to encourage full participation and ensure both parties are looking for long-term win-win opportunities, not just short-term savings.

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Vendor Advisory Boards

A supplier advisory board(or Council) serves as a neutral and collaborative forum for the exchange of ideas between the host company and a group of strategic suppliers. These boards are commonly used by companies with mature procurement organizations, and they do so for a variety of reasons. A panel can advise on key industry trends, risks, and potentially disruptive threats in the vendor ecosystem. Or they can provide a place for companies to examine the potential impact of business decisions on sourcing strategy. Some boards act as a hub for operational improvement projects between the company and its suppliers. Others join forces to support special projects such as joint innovation programs or sustainability initiatives.

An advisory board is typically chaired by a senior corporate sponsor and a procurement manager. Buy-side members include representatives from multiple roles, e.g. B. Marketing, Legal and Research and Development. On the vendor side, companies typically appoint a leading strategic vendor along with about a dozen vendor board members drawn from the strategic vendor base. These providers are selected after an evaluation based on a matrix of criteria determined by the objectives of the panel.

Taking supplier collaboration to the next level (6)

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Several leading organizations have established Supplier Advisory Councils to provide high-level support and guidance for their supplier management and supplier engagement programs. These boards act as a forum for the supplier base to deliberate on key issues and collaborate with the organization to advance its business agenda. Organizations use their vendor advisory boards to manage risks and disruptive threats to the vendor ecosystem, and these boards also serve as a neutral space for the exchange of ideas between the host organization and a group of strategic vendors (see Vendor Advisory Boards sidebar).

Toyota is a leading example of supplier collaboration, whose success can be partially explained by the use of clearly defined supplier goals and performance metrics. These are embedded in contracts that hold suppliers accountable for continuous improvements in quality, cost, and delivery performance. The company governs supplier relationships through a steering committee composed of relevant senior stakeholders from both organizations to define the scope and goals of collaboration, review progress and take steps to remove roadblocks and resolve issues as they arise appear.

The Supplier Collaboration Index has already identified several significant opportunities for companies looking to expand and improve their supplier collaboration efforts. Some of these ways are fairly simple, such as For example, more proactive management of cross-functional teams involved in collaborative projects or the adoption of formal governance systems to manage those projects. Others, such as greater cost transparency between buyers and suppliers or the use of performance-based supplier incentive mechanisms, may require more time and effort to achieve.

Excellent supplier collaboration requires a more active and engaged working relationship with suppliers. It also requires a mindset shift that encourages both buyers and suppliers to commit to deriving long-term value from their collaborative relationships. We conclude with eight steps any organization can take to get their collective effort on track.

  1. Begin by identifying those vendors that offer unique collaborative opportunities to create and sustain significant value.
  2. Strategically align with these partners to define common goals and develop a compelling business case for both parties.
  3. Use a methodical and structured approach to define the scope, pace and goals of collaborative projects, including a clear method for measuring value creation.
  4. Define simple and clear value-sharing mechanisms and align cross-functional team incentives accordingly.
  5. Invest in allocating adequate resources and building the necessary infrastructure to support the program.
  6. Create a governance model that focuses on performance, tracks implementation, and integrates vendor collaboration into core operational processes.
  7. Foster a culture based on proactive communication, transparency, consistency and knowledge sharing to strengthen long-term alliances.
  8. Invest in developing world-class organizational skills to ensure sustainability over time.

For any company looking to improve the performance of its procurement practices, working with suppliers can no longer be seen as a beautiful thing. As companies reach the limits of traditional purchasing practices, further progress will require a new approach based on close relationships, cross-functional engagement and a shared search for new value.

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