When set up right, a supplier development program will lead to producing a trusted business partner. Procurement Teams are responsible for an increasing number of suppliers. Consequently, this increases the probability of doing business with suppliers that fail to perform to their potential. However, this does not mean that perfect supplier performance is an unrealistic goal. There are ways you can work with your suppliers to get closer and closer to that goal. Supplier development is one way of working with a supplier to get what you need.
Each organization is different. As such, supplier development methods should be responsive to the organization’s needs. Knowing the other approaches to working with suppliers is helpful to understand supplier development better.
The 6 Steps of Supplier Development:
- Identify categories for supplier development
- Identify suppliers for development
- Form a team
- Engage suppliers’ top management
- Identify specific development projects
- Manage the projects using project management best practices
Identify categories for supplier development:
It’s not uncommon for an organization that spends $2 billion on “stuff” to have 8,000 suppliers. If you break that into categories, it’s in the hundreds of categories. How can one even begin to develop 8,000 suppliers in hundreds of categories?
This first step is deciding which categories are most important to you. An odd expression in American English is “There is more than one way to skin a cat.” If you’re not from the USA, you may think: “Why would Americans want to skin a cat?” Thankfully, we don’t know anyone that has skinned a cat. But the expression means that there may be more than one way to accomplish something, and no single way is necessarily the right way. That’s often the case with many procurement processes and is certainly the case with identifying categories and suppliers for supplier development.
The Four Relationship Management Approaches
The following approach allows you to identify suppliers for development simultaneously, thus taking care of Steps 1 and 2 in one fell swoop. Think back to the four relationship management approaches for working with suppliers:
- Supplier collaboration
- Supplier management
- Supplier rationalization
- Supplier development
The way these terms are used to describe procurement best practices, you might assume that you should be using all these approaches with each of your suppliers. That is not the case.
Two variables should influence which relationship management approach you should take with a supplier:
- Level of sophistication of that supplier
- The supplier’s materiality to your business. A supplier’s level of sophistication can be either sophisticated or unsophisticated, and its materiality to your business can be tactical or strategic.
That leaves four possible combinations to form a supplier stratification model. And, for each combination, there is a different relationship management approach you should take.
Identify Suppliers for Development:
Once you identify your critical strategic supplies, identify the vital suppliers within those categories. First, not every supplier needs your development. Some are just fine. Consider multi-billion-dollar international companies. They have entire departments of people involved in internal development within their ranks. Focus on the few suppliers that give you the highest potential for improved results.
Form a Team:
One of the rules of supplier development is this: You can’t fix everything yourself. Collaborate with other people. So now you have a supplier that you want to develop. Again, per the white paper Avoid The Pitfalls in Supplier Development, the next step is to form a cross-functional team. The team is cross-functional because you, as a specialist in procurement, do not know everything. It’s also cross-functional because it will be a lot of work. You’re going to need resources beyond just yourself. How you go about developing a supplier is a lot like how you develop an employee. And there are lots of leaders who have different styles of developing employees.
Engage Suppliers’ Top Management:
The next step is to meet with each supplier’s top management. One of the ways of getting around the interpersonal skill challenges of having cross-functional team meetings is to go up to a more senior level and explain the workings of the relationship.
A similarity between negotiation and supplier development is that you must watch your size versus a supplier’s size. Suppose you’re with a big multi-million-dollar corporation. You demand that a small and under-performing supplier engages in supplier development with you because your business is so important to them. They might say, “You got it. I’ll fix it. I’ll invest in this. I’ll do all this work.”
But they may not have thought that commitment through, and the costs could put them out of business. If that happened, you haven’t solved anything. Think about that as you’re going through the process.
Identify Specific Development Projects:
The next step is to identify, with each supplier, the development project itself. Go through your supplier data, whatever you have, and figure out the one project that could produce the most significant return on investment for your organization.
A tip: Projects that are too complex often fail. Simple as that. Conversely, smaller projects with moderate complexity and involve moderate effort but yield big results let you accomplish more in the long run. Why? Because after you’ve proven a couple of successes using supplier development, the next time you propose one of those more complex projects, you have more experience. Your organization is more experienced with supplier development projects, and they believe that these projects can be consistently successful. When choosing your projects, be careful. Do not bite off more than you can chew.
Manage the Projects Using Project Management Best Practices:
One thing you need to do is to develop key performance metrics. Consulting the classic “SMART Goals” model should help you define your metrics. The acronym SMART, stands for
- Relevant, and
These are five characteristics your goals should have so that your metrics can reflect your progress towards your project goals.
Likewise, you need to agree with management on the scope of the supplier development project and the resources dedicated to it. Using a document called a “project charter,” a document that officially starts a project or a phase. It formally authorizes the existence of the project and provides a reference source for the future.
If you have not used a project charter before, you should not create one from scratch. We recommend you base your project charter on a successfully used project charter or an authoritative template.
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