Supply Chain Segmentation

Video Transcript

So first I will just give a little bit of background about myself, why can I speak of supplier relationship management or even more importantly about supplier segmentation. So 16-years of experience with Fortune 100 companies in which I have built five major programs. I have literally designed, implemented and institutionalized supplier relationship management in these organizations. And I can tell you which is what we are going to go through in my opinion; supplier segmentation is the hardest and the most emotional step that you would take in your journey with SRM.

As I mentioned I work with Nationwide Insurance many of you are probably familiar, I actually had someone out in the field while I am still here say on your side, yeah? Thatís right. On your side is definitely is who we are known for itís the brand and we sell all these different types of products. It gets started as an agricultural, a farm bureau basically coverage insurance and have now moved into multiple different things including World Bank, which is why Nationwide Insurance is now actually in the financial services industry. But I am not going to actually waste a lot of time in talking about what Nationwide is, I want to actually spend the time, I have got a lot of slides to cover on supplier segmentation. So we are going hit a couple of things today, first of all the frame work, the methodology , I have got a quite a few models so that we are going to go over and I will tell you why I think thatís important and I am also going to talk about some tools. I think honestly itís probably the most critical thing for you to do to accomplish success is to try to approach this as objectively as possible. If you get into the emotion of the process, you will come out with chaos. And then finally what are some key conclusions to the activity of segmentation?

So first of all letís talk about SRM done well, I wanted to give you guys a couple of examples and I frankly could find hundreds of really good examples easily that are current and relevant but here is two really good ones. Companies that most of us are familiar with. I want to actually start in the right hand side with Cargill and Coca-Cola. So Coca-Cola, major company spends tons of money in the research and development area. I mean thatís kind of how they have maintained their market shares being innovative and coming up with new products, improving their products, appealing to the market, etc. So they have been out and they found Stevia, Coke found Stevia and Cokeís R&D department tried to go and create this sugar content out the Stevia plant. They knew it could be done, it was sweet, it was natural, it didnít have any calories that were so much good about this, right? But no matter how hard they try, they could not get rid of the bitter flavor that was at the end of that process. So they went to Cargill, Coke approached Cargill and they said you guys make this sweet, if you do you get locked in you get 100% patent rights to this, can only be used in the soda industry for Coke and we will share revenues. They obviously did it, Coke changed their products, they started adding Truvia into their sweeteners, it actually makes a difference I think most people can taste the difference with Truvia instead of Sweet N Low or aspartame or any of those types of things and now not only did they create a better product for themselves therefore increasing their own market share, they a new product and they sell it and they are driving millions of dollars of revenue with that product. Thatís supplier relationship management done well.

Then actually there is Vodafone and Cellebrite. Cellebrite is a very small company doing regular things through Vodafone. Vodafone most of us know especially those who are international, big player in the European market for cellular phones. Cellebrite had access to customer data, customer feedback and they heard the voice of the customer say that and they tried to switch their phone to Vodafone, really painful, really, really difficult to transfer all the data from an existing phone to an Orange or whatever to your Vodafone without even asking Vodafone. They went off and they created a product, they caught up the Black Box. Black box actually let you connect with the US port and transfer all your data instantaneously, it was very un-painful, it became such a really good product, they took it to Vodafone, Vodafone re-branded it, its called the Red Box obviously for their color. They now sell that Cellebrite and Vodafone share revenues. And Vodafone has actually gained market share because it is easier to switch to them.

I want to just show you a quick very cute video associated with that one which is how Vodafone completely re-branded Cellebriteís product. Now Cellebrite created it, why did Vodafone re-brand it? The brand is known, Cellebrite isnít. Did I do it right?

[Video Begins]

Female Speaker: Russ

Russ: What?

Female Speaker: Russ?

Russ: What?

Female Speaker: You not going to start swapping your numbers over now are you?

Russ: No, I was just...

Yoda: Hmmm, a challenge you face, but worry no more, help Yoda will.

Russ: Yoda... Yoda... Easy Yoda.

Yoda: Hmmm?

Russ: I'm on Vodafone; they just transferred my stuff to my new phone in store. It's fine.

Yoda: Hmmm, really?

Russ: Yes, yes it's all good.

Yoda: Without Jedi training?

Russ: Yes, look, contacts, all numbers.

Yoda: Hmmm how strong with them, the Force must be?

Male: Vodafone RED Box, another small thing that can mean the world. Vodafone, power to you

Female Speaker: Do you think he tastes of wasabi?

[Video Ends]

Kimberly Proffitt: So really just a cute video that show you that it Cellebriteís product. But they knew the power was in building that, having that relationship that innovation with Vodafone the bigger brand and then re-packaging and selling that product in the market place under the big brand. They both win instead of you know a 100% of various small margins they get 50% of big margins with Vodafone. So itís about redefining the relationship and what suppliers can do that. So if we are going to talk about the framework you guys are going to hear a lot of repetition in my presentation as I am not kind of skip through some this because much of what I am going to say, you heard many of the other speakers say. Or I heard you say yourself in round tables. I mean these are not novel thoughts they are not novel philosophies right, why, how do we frame this. It is novel as how do we get it accomplished because it is highly emotive, so we are going to talk about that as well.

There are so many models out there I could have put up here. Everybody has got a model about why SRM is important. I like this one, itís from the Hackett group because it does show that SRM is really the center of supplier and your supply chain process and thatís really how it should be. When I talk about segmentation I talk about it in reference to it being the center. SRM and actually we have talked about it. Many of the other speakers talked about it, it is the bridge that brings procurement and traditional contracting processes together with our business units and it unites some of our suppliers; And for what purpose? So you see at the bottom large circle with tactical suppliers, smaller circle with important suppliers, smaller with critical and strategic. And as you go up the chain see that the value grows all the way up to innovation and you heard it also said innovation has defined a lot of different ways.

I am here to tell you innovation is we define the way your organization wants it to be defined. Well you should be careful that SRM doesnít allow your organization to limit that definition because there is lot of opportunity out there. So let your organization define innovation as thatís where you are going to find success. So this is just a really good model and we are going to talk about it later. We have a panel discussion on following, it talks about do you handle these suppliers differently. This model kind of helps you understand that. You know your tactical suppliers, sell service, P to P, automation you donít handle those suppliers. There is a huge number of them who donít handle them, all the way up to what when they do is strategic.

So what are the reasons for establishing SRM program? Going to fly through this one because you have heard this, itís essential for competitive advantage in our market place today, it is the differentiator. Itís not the same game anymore where supply chain organizations can leave the table and get significantly reduced prices. We can get reduced prices, we can you know we can pool our kind of a resources together, we can pool our buying power together still get some say minor gains but truly competitive advantage is going to come from some place else and ensures goal alignment between the supplier and the customer. We are going to talk about that, its essential. Share long term and short term strategies, Incent supplier solutions and innovation. It establishes governance and consistency, this is really hard and this is why segmentation is really important. It gives you controlled access to executives. Next we focus business units as an aggregator and as an integrator of multiple suppliers. Active supply strategies, some of us do very, very well probably some of you in the room and some of us do very poorly. We elevate the mutuality of the relationship and thatís really keen. I am going to talk a lot about this we are going to enter the different models of segmentation. We create equity between the commitment to the relationship improvement by supplier and customer. We foster cooperative competitiveness, Cargill and Coke are competitors in some aspects, Cellebrite and Vodafone are definitely competitors, yet they came together and that Coke that co-competitiveness and created something unique that benefited both of them. And finally we could attain most-favored customerís status. At the end of the day I know every organization I have worked, that is what itís been all about. That we get most favored customer status because when all of the hard drives are lined under 12 feet of water in Thailand we get the feel there at somewhere in United States and that makes a difference between us being able to do our business and failing.

So what are the core components when I take a supplier measurement solution into an organization I kind of keep to 8 essential components of a program. There is lot to these components but there is 8 essential list classification of financial viability. Supplier segmentation, performance management, strategic alliance and continuous improvement, notice I don't use ëinnovationí in that one. Report trending and analysis, demand and expense management, balance supplier diversity participation and that means more than just suppliers who are certified as diverse suppliers, thatís part of it. And sourcing portfolio management but today we are actually going to focus on supplier segmentation.

I think there are four key fundamental principles that helps to answer the question why segment? It moves beyond the process oriented approach to the strategic alliance procurement strategy. It is a procurement strategy thatís where we find the most successful organizations attaining the best value out of this type of program. It helps to align allocation of limited resources with a strategic goals of the organization, we heard Cathy talk about that just prior to me. Develops relationships that makes sense in the context of supplier roles, procurement goals and business unit strategy, thatís the triangle right there, you canít separate anyone of those pieces, to ultimately achieve value in this process. And it creates a road map for the client supplier relationship that clarifies roles, responsibilities, actions and expectations at every points of contact including the contracts including post contracts, including renewals any point of the process this is what is going to help find how that Ö that is engaged, how engaged to that.

Next, so what is the methodology? So we must spend a fair amount of time try to do some of the rest of it. So step 1 is supplier segmentation and now this is another chart that I took from an industry market intelligence company. I do like it for me the time lines are a long. Six weeks never had it happened. Never in 16-years have I ever gone through a supplier segmentation process in 6 weeks, thatís even with executive support. I believe itís probably about 4 times that amount. Itís probably a 24-week exercise easily because it is highly emotive. But the objective is right to develop the vision and create a prioritized road map for supplier relationship management, the activities are accurate, these arenít new. The pitfall very accurate, I should have probably bolded this; itís a major stall point due to over-complication. And thatís why we are going to talk about models. It is very, very easy to get sucked in to making segmentation is huge massive issue where you have to think about 50 criteria for why you are going to choose them or why you are not, it really doesnít have to be that difficult. You have to think again about what are the goals of your organization and what can or will your suppliers will help you meet those goals; that should drive your criteria and not over-complicate it. I am not going talk a lot about next three steps other than just so you can see where suppliers segmentations falls any of our life cycle of supply relationship management program.

Step 2 is performance management. You can do a 2-day seminar on this in my opinion but we have heard a couple of people speak to it, if this in my opinion is the most complex piece of it, to this point you donít want to make it a punitive process. The performance management by its very nature can be exactly that, so how do you make performance management incent the suppliers and the customer the company you are working with to actually have mutual performance expectations that truly does drive you to the ultimate objective or goal that you are trying to accomplish. Continuous improvement, it's kind of a given and customer of choice. Again you are going to see me say that a lot because I believe at the end of the day that is the differential we are trying to attain in SRM program. Itís not enough to do it just because you think there is incremental value that is good if this is where we want to be, these are the suppliers you want to focus on.

So process considerations: Build and maintain internal alignment. We spoke about a lot, Kathy; I put it as my number one issue. If you cannot get your internal stakeholders aligned around the philosophy you will never drive them to a common objective or goal around SRM. It helps if you have executive support because you can use that as a kind of filter it down, but I have done it both ways I have done it with the CEO of the company saying we will do this, it was a way easier and a lot quicker and I have done it with no, no itís the right thing to do the seller solution. And in both ways this at the end of the day is the only way of successful.

Evaluate the ìrelationship fit.î I am going to talk about criteria, I have seen it done a lot of different ways; in my opinion people ultimately to fall suspend most from the strategic supplier; spend a $100million a year with them, great may be they are, may be they are not. And I think we have to really think through what that looks like, may be you spend a $100 million I am going to pick on Oracle because everybody knows Oracle, right? Most people spend a $100million in Oracle if they got them in their organization, are they strategic fit for your organization? Well most of the organization is all about ERPs and databases and you are reselling that kind of functionality? Probably not. Is that what they focus on when they spend their entire time focusing on they donít care about anything else, if thatís what they are good at thatís what they are going to do. So you have to spend a lot of money but do they fit.

So this next bullet is really important to me, you got to look beyond the traditional buyer supplier relationship to have potential partners fit strategically and financially into your company. Cellebrite is a small company. Do you really think Vodafone bought that, thatís what their next strategic move is going to me? Probably not. There is a strong relationship while negotiating an optimal deal, donít make this a fight with your supplier. If you do think this is a strategic supplier and there is a fit you have got to figure out different way to negotiate with that supplier, does it mean longer term contracts? May be if it fits within the objectives of the organization. Does it mean changing the way that you orient your contract like Tim talked about and its less about what is going to happen if everything goes wrong and more about where do we make sure that we do to incent that everything goes right or better. Establish common ground rules, processes and protocols.

I have been in-sourcing for a long time, I will say this to myself but I am going to that is a lot of heads nodding out there. We are automatically going and assuming ill intent from our suppliers. They are trying to take us or trying to take them, letís see who goes down first. So putting an SRM program together we have got to think differently about those suppliers, we have got to open up, we have got to share things with them, we have got to help them understand what more objectives are and what you are trying to attain and then give them an opportunity to say, we can help you get there and we will commit to that, we cant help you get there and we change the relationship. We need a dedicated relationship manager, I donít believe in my opinion all the organizations I have seen although I am sure there are examples are there that you are sourcing managers can do this effectively. We have to let sourcing focus on the contracts and you need a person thatís not tied to accomplishing a contract, their goals are oriented around optimizing a relationship. Connecting the dots, selling the story across the enterprise and your sourcing managers are heads down involved in negotiating terms and conditions they are less likely able to free themselves up to think about that process a little differently.

Encourage collaboration in conflict resolution, negotiation, problem solving and conducting difficult conversations. Mutually addressed, not framed as ours of theirs. Again sourcing for a long time thatís where we go first, while we write our contracts that way. Identify and discuss multiple supplier relationships so a supplier can be a customer; a supplier can be a competitor; supplier can just be a supplier, you need to understand the dynamics of every single one of those types of relationships that you have with your most sought after suppliers.

Periodically review the health in relationship by conducting joint reviews to assess business schools and the quality of the working relationship. Thatís your presentation here in a single bullet so sounds easy, it's not. And honestly at the end of the day this is what itís all about - Identify and manage change. It is going to change if it doesnít you donít have the right supplier selected as your strategic suppliers, it has to change, otherwise you wouldnít be investing in a process of identifying these individuals if you werenít saying I need a relationship to be different.

So here are some things that you need to keep in mind as you are implementing.

Identify the main strategies. That is just not enough, in my opinion; itís not enough to say I am going to implement SRM, why? Why does the company say itís important for me to implement SRM? What do I believe the value is going to be? Document that, make sure that is your communicating that to your stake holders if the same consistent message each and every time and thatís a message you feel like you can live up to. The end of the day you feel you can deliver of what it is you are saying is the value of this process. Review strategically important commodities and services. I am going to actually show you a case study of Wendyís.

It was kind of an ëahaí moment for me such a simple model, it was a bit of an ëahaí moment to me. They went through and they said which commodity, what product or services are so important to what I am trying to do, so important to my brand that it automatically differentiates itself. And which ones we donít care about that we may have thought we did but we really donít. We have to go through that exercise, so an exercise you have to do with your business partners; it is not one that your sourcing individuals can actually do alone. And your sourcing partner should be able to table it to you; this affects the way we do contracts. It affects the way that we are thinking about these suppliers in terms of contracts, so should be your business partners and your sourcing partners inking through the commodities and services and determining which ones are the long range potentials.

Coordinate the supplier base across the organization. I donít know about you guys, for me thatís the hardest. I have 20 financial spend systems inside my organization and thatís a normal number. Getting to what my total relationship looks like with the supplier is really hard. It does usually take some input with our supplier community that we have chosen to say, okay, this is what we see. Does it match what you are billing us, does it match the revenue and being vulnerable right its, thatís vulnerable to reveal to supplier, we donít know the depth of relationship we have with you. We know itís big, we just donít have it. We have to get to that point.

Develop a segmentation plan and it should include steps and management tools. Now we personally you know my own personality I kind of like just to go with that dot, right? This is what we are supposed to do and this why letís go and do it. Not take the time to document it, the documentation is important enough to you it is important for the individuals that you are selling the story to, many of them need to see the steps written down they need to understand the plan as well as you do in your head.

There are some areas that you are going to run and see difficulty happens every time. If we donít have supplier segmentation in place, it is very difficult to evaluate supplier performance and impact of supplier relationship because back to 29% of our contracts are not giving us the results that we are expecting and not managing them, we donít have clear expectation set of ourselves or suppliers. Inability to focus company resources to maximize the supply base, an ineffective to manage the suppliers as an undifferentiating group.

It really comes down to at our last point. If we try to manage all suppliers in the same way which is here is the contract you have with you, now go do instead of how can we do it differently then the contract states so that we have a better win for both of us a mutual long term competitive advantage.

So here are some criteria, notice the segments at the top it will be always consideration that you have to have as you think about segments in your supply base. It has to be, if you are investing not much money in some of your supplier relationship it is either because they can bring you value above the product you are service that they are contributing or you have a lot of reliance on that product and service, either way that automatically segments that supplier base for you either they have innovation opportunity and competitive advantage capability or they are a niche supplier we have dependency. Thatís to manage both of them or just manage a little differently.

Some other things, difficulty in switching alignment of services to Nationwide, sorry thatís my but alignment of services to company strategies. Supplier performance over time, supplier markets standing, financial condition expertise, donít minimize that impact. I think many of you who have been in this for a while understand that the supplierís market standing is as important as your market standing. Whatís the risk portfolio? Whatís the length of the relationship? Whatís the client relationship? Donít be afraid to say we are a $100million customer of yours. I am not saying that your next contract tenders on you being a customer of ours but you should at least see what our products and services are and consider whether they fit into your organization. And it's not quid pro quo but it is a consideration of the connectedness that we are trying to have with these suppliers.

Donít be afraid to push that that envelop. Future innovation potential, co-branding marketing and joined development and mutual revenue generation and I am going to brief through these because you guys get this presentation. Why did I pull it, I donít know 6-7 slides in here about models? I said from the very beginning, it is a highly emotive part of the process because these people are being taken to dinner by suppliers, they are going to conventions and it has been paid for by the supplier where they may not have the opportunity to do it, otherwise the company may be locking down travel expenses or whatever. Suppliers helping them get some of that market intelligence by going and there is nothing wrong with that but what it does is create some interesting relationships between our business unit partners and the suppliers thatís why emotional. These business unit partners donít want to lose what they feel like is inside connections of that supplier. Probably understand that its not about losing an inside connection, it's about elevating that inside connection, it's not just UIT partner that should have a type of relationship with the supplier, so should HR and so should other business units within the organization, we want to elevate that, what you have got and get it across the organization. So I think the best way to do it, create a model, make it objective. Figure out which model works for what you are trying to attain, because there are just many of them in the market place, well focused, 3-dimensional, risk management, multi-dimensional. I am going to show you these, potential based product development performance based and material based. So figure out which one of you attain the building objectives that you are looking for within the organization.

This one is probably the one that you see the most, right - volume spend and criticality and how to define where your suppliers fall in the quadrants. Itís a good one and itís a really good one for a person who is starting the process, so it's very easy for people to understand and get those two components, it's somewhat easy to start to plot those suppliers so itís a good first step for a segmentation process.

The next one is growth focused. So maybe you have been doing this for a while or may be what your company is really all about in their goals and objectives is how do we grow? How do we become more in this market or we have better capital growth in our process, so there is actually a way in this criteria that goes with this, for you to look at these supplier relationships that helps to create that growth focused environment. This is one of my favorite, it is highly complex and it's probably not a place to start, itís a place to go into, which is 3 dimensional. At the end of the day what I look for in SRM program thatís starting to reach some maturity is that you are not just looking at spend and how dependent you are on that supplier, you are really looking at a lot of different things joint R&D.

I know suppliers with organizations I have been in that have literally built data centers, completely dedicated towards product development for that company, not for anybody else, for that company because they have co-invested. So this is I think a model that intend to grow into not necessarily one that you start with but if you are aggressive and you think that this is where you want to be, start here, its not a bad model to try to socialize in the organization. Here is another one that most people see a lot which is Spend Again being one of the factors and Business Impact being another. This is really going to funnel out for you a critical suppliers, right? The ones that you have the most risk dependency with so if risk is kind of an orientation for you, itís a really good model for you to start with.

Multi-dimensional is my second favorite, again very complex. It talks about supplier importance and it talks about supplier alignment. Itís important that your suppliers have the same or similar rules and objectives that you do and this model helped me fair those out determine which supplier is may be a good cultural partner as well as a market partner.

Potential based and this is the product development one. Again its very much like the first one I shared, it's pretty simple, mostly focused on technology. Here is the case study, it's with Wendyís. How many of you been at Wendyís? Everybody, right? Can anybody describe to me what their straws look like? May be. I am sorry? They are red, you are both right. They donít care about their straws. They literally tell their managers go to GFS stores or to the Costco or whatever is in your city and go buy straws off the market. They donít impact our brand. McDonaldís on the other hand, what color are McDonaldís straws? White with red and yellow stripes, right? They care, that's part of their brand image so their straws are important in their process. So this is a model where they literally took the products that helped to define the brand and that is how they determine which supplier is going to become critical or strategic in the process. This is an interesting case study.

I am not going to through the tools with you, one, because I am out of time but this you get, here are some examples of tools that Iíve used that other individuals on the SRM industry have used to help to create an objective process for segmentation. This one right here literally has a calculations and ratings filled in behind these questions, so when you fill it out the creates a score that supplier based for what they are doing and what you think they can do for us and it would tell you which supplier segment they fall into based upon your own values and your own objectives. This is a really good example of the very objective process that takes some of the sentiment out of it. Some of them I have build, so they are home grown, other sources I have actually noted them on the slides you may be able to see them.

All right, so conclusion, I want to read these to you. It is pretty much some of what I have already said. Make sure that you have defined the process, make sure that you have shared and gotten alignment inside of organization and with your supplier community and make sure you create a very objective process. And more than anything else, make sure that your contracting process, number two there, it provides the rules of engagement, it sets the expectation but it doesnít define the entire relationship, you donít want to pigeonhole people under the process.