This is the second column in a series about category management. The previous column addressed strategic sourcing.
Nurturing the relationship with suppliers is a critical component of the category management procurement model. Supplier relationship management, or SRM, reshapes every step of the traditional acquisition lifecycle to increase the likelihood that agencies will contract with the most suitable suppliers and enable those companies to deliver on expectations.
SRM goes well beyond the requirements of traditional Federal Acquisition Regulation contract management: It requires extensive knowledge and analysis of markets and suppliers to improve sourcing. It results in more precise contracts that better match commercial practices. And it creates an environment that supports improved supplier performance and more effective measurement of that performance by the government.
As a result, capable, high-quality suppliers are more likely to bid on government work and to deliver it exceptionally. SRM also helps streamline government buying and drives down total costs over the term of the contract.
Consequently, the government becomes a more attractive customer and gets more value for its contract spending, while suppliers are incentivized to provide better quality goods and services. This helps build the pool of well qualified suppliers for future work.
Meeting Government’s Goals
Successful SRM requires organizations to clearly express what they are trying to achieve. A key part of the procurement organization’s role is to make sure suppliers understand how their contract performance supports program and agency goals and how success will be measured.
Procurement officials must clearly spell out performance metrics in contracts and measure how well suppliers support their customers in meeting their goals and the agency’s mission.
A simple way to test an organization’s supplier engagement and relationships is to establish whether the top vendors—for instance, those that account for 80 percent of contract spending—can clearly articulate the organization’s objectives and goals, explain how they help achieve those goals and how their performance is measured monthly in a way that demonstrates their success.
If suppliers do not specifically understand their roles and how they are contributing to the client’s and the organization’s objectives, then they probably aren’t being measured against those objectives or contributing to achieving them. This is a serious problem, especially for suppliers that directly enable program and agency missions.
SRM begins with identifying the right potential suppliers and the critical existing suppliers needing special focus by government procurement teams. These teams perform market and supplier analysis, a far more extensive and continuous form of intelligence gathering than traditional market research.
They gather and analyze an array of market-specific information about trends, innovations, leading suppliers, risks, supply chains, common buying practices and performance metrics and more.
Using this comprehensive knowledge, teams identify high-quality potential suppliers and assess current ones. Government shapes successful procurements by ensuring that requirements and contracting approaches are aligned with the relevant market and company characteristics.
That shaping includes adopting a sourcing approach that creates the best possible opportunity to maximize supplier performance. Market and supplier insights lead to procurement steps not often considered in traditional acquisition strategy and planning—such as buying at the right time, linking payment to desired outcomes, attracting bids from targeted suppliers and developing performance-based or similar specifications and choosing contract types aligned to the market. The sourcing plan also should include contract performance and supplier management metrics tied to the organization’s goals.
Attracting bids from the best-suited, highest performing suppliers requires agencies to convince them that bidding is worth the cost, there is a strong likelihood of being competitive and that the conditions favor success in delivering the sought-after results. This is especially important for suppliers that are new to an organization or where bidding presents significant costs.
To build an environment favoring supplier success and high performance, buyers should ensure that the contract will deliver the promised revenue. This can include aggregating spend across an organization or among agencies, committing it to the contract and tracking and enforcing usage and compliance. Committed spending is especially important for attracting new suppliers, which often also need help navigating the bidding process and guidance on the rules and regulations.
Once a contract is awarded, SRM helps set the right level and type of engagement, including the processes and behavior to enable suppliers to meet the contract performance goals. An optimal environment provides not just a clear understanding of what’s required, but also allows for changes in objectives over time.
Buyers and the procurement function also must provide the practical means to succeed, such as space and tools, sufficient access to the appropriate type and level of staff, unambiguous instruction, feedback and guidance on improvement, a route for resolving disputes, and efficient processes and practices. Performance metrics should be consistently applied and results reported and shared with key stakeholders.
Selectively Applying SRM
Agencies cannot afford to apply SRM to all their providers. Generally the suppliers receiving the largest proportion of an agency’s spend should be SRM targets because they have a large impact on achieving its goals. Other suppliers should be targeted according to the agency’s primary purposes or to align with policy requirements, for example, managing risk, information assurance or mentorship of small business subcontractors.
Determining an appropriate SRM approach for different suppliers also depends on the type of organization and its categories of spending. Organizations will have a combination of unique categories and distinct goals and spend within more common categories. However, some basic principles apply:
- Contract performance metrics should be measured, reported regularly, consolidated at an organizational level and form part of an SRM approach, which should include specific supplier improvement efforts.
- A structured approach needs to be created to manage the relationship at both an operational and strategic level.
- Buyers and suppliers should agree on continuous improvement plans including cost reduction targets. They should collaborate to follow, jointly monitor and report performance against these plans. The plans also should include cooperation in improving how the government consumes, transacts for and manages goods and services.
- Continuously monitored performance objectives for contracting officer’s representatives, contracting officers and their supplier counterparts should be related to contract outcomes and the government’s objectives.
In most cases an SRM program will include monthly review meetings with critical suppliers and less frequent, but recurring, executive-to-executive meetings between an organization and key suppliers.
Building Strategic Relationships
Companies often designate certain supplier relationships as strategic. They are characterized by high-level, longtime commitments and investment from both companies, whose systems and practices often become increasingly integrated. They share innovations, jointly invest in solving problems, and sometimes set up new organizational structures to develop and market new products.
Creating truly strategic supplier relationships is not easy for large and complex organizations. Government agencies face special challenges. For example the regulatory and legal framework requires continuous competition and often results in “arms-length behavior toward suppliers. In addition, the scale and complexity of organizational requirements are vast and public sector organizations often lack SRM tools, data and expertise.
Government organizations often are unwilling, as well as unable, to jointly invest with or commit to suppliers for the long term. As a result, they are limited in offering sufficient benefits to incentivize key suppliers to engage in strategic relationships as they exist in the private sector.
However, government’s long and extensive relationships with a subset of suppliers offer a basis for a form of strategic engagement. This subset of companies generally is among government’s Top 100 suppliers, 80 percent of which, in 2016, also had been active government suppliers in 1996. Thirty-nine of those companies were in the Top 100 in both years, according to Brian Friel, founder of federal data firm Nation Analytics.
With such long tenure as top governmentwide suppliers, these companies have significant value and unique insight in addressing both agency-specific and cross-government issues. That makes them prime candidates for management as strategic governmentwide suppliers.
Offering such companies access to key decision-makers responsible for governmentwide policies or programs, for example, can incentivize them to invest more deeply in solving cross-agency procurement challenges. Large suppliers serving multiple agencies certainly would find it advantageous to help shape management initiatives such as moving to shared services, delivering digital services or achieving policy outcomes through the market.
SRM requires a high degree of internal collaboration and an integrated approach established by the procurement function and managed in conjunction with other functions and with programs. But the payoff vastly exceeds the required investment by making every aspect of procurement more efficient and effective, especially contract performance and results.
David Shields is Managing Director for Procurement Transformation and Category Management at ASI Government.