My approach to supplier management involves three pillars of procurement – category management (CM), supplier relationship management (SRM), and Contract and Commercial Relationship (CCM). Many are asking, how do they work together to give procurement professionals a proven way to produce effective supplier management?
For starters, I view the three as equal partners bringing best outcomes to our procurement activities and I have added the benefits of IACCM’s SRM certification program to them.
Supplier management, one of the most important functions of any organization, is also one of the biggest challenges. Today, the task itself has become more complex as supply chains have globalized and accelerated the use of subcontractors. To effectively manage a supplier once we have entered a contractual relationship, we need to consider three things:
- commercial management,
- performance management, and
- risk management.
Many strategies exist along with competing theories surrounding this question: what is the most important organizational approach to ensure success?
Although performance management may be delegated to the end business users, supplier performance in general -- along with risk and commercial management -- very much combine as procurement responsibilities. And impacting all three is the changing nature of supplier requirements over time. Furthermore, as business strategies, commercial drivers, environment and regulatory landscapes change, the deliverables, capabilities and outputs of the suppliers will likely change as well.
This changing landscape might remove older suppliers from the market portfolio and bring in newer suppliers or cause trusted suppliers to expand their services over time. The key, therefore, is to have a well-managed, appropriately sized and sufficiently capable supplier portfolio that embraces good supplier management practices throughout all stages of the contracting engagement.
IAACM Certification fits this landscape
Before considering the various roles within procurement, we need to clarify the most appropriate way to create a common understanding of a geographically dispersed and disparately skilled organization.
Procurement professionals come from a variety of backgrounds, often from the service or skill category for which they are now procuring and from risk and governance roles. So, to garner a common language designed to make communication clearer, we need a standardized training framework. In the past, the Information Technology Infrastructure Library (ITIL) achieved this purpose within IT environments, but with the IACCM Certification we now have a toolset in place to create a shared environment and understanding within procurement departments.
What are the procurement functions?
Figure 1 shows how category management (CM), contract and commercial management (CCM) and supplier relationship management (SRM) fit together to create the cohesive whole of a holistic procurement organization.
Figure 1. The holistic procurement organization
I use the terms pre-deal and post-deal to identify timing of Figure 1. Pre-deal pertains to category management (CM) that occurs before the contract is agreed and post-deal pertains to contract and commercial management (CCM) and supplier relationship management (SRM) that occurs after contract signing.
Beyond that, one more function needs to be in place: governance and oversight which is responsible for:
- cross procurement standard setting;
- template and process creation;
- reporting; and
Governance ensures that the three activities fit together and do not drift out of step, so, when unified as a whole, they can provide valuable oversight for both management and senior stakeholders in the wider organization.
What is the first task of a pre-deal organization using category management (CM)?
A key procurement skill is to know how to select the most appropriate supplier for the correct service up front. The pre-deal organization offering a variety of services (like hard and soft services, IT and non-IT, or business and IT) has many advantages.
First, it allows expertise to grow in the technical services being procured. If the procurement staff understand the industry environment and contractual clauses, plus the key performance indicators (KPIs) and service level agreements (SLAs) that are expected to apply, they will likely achieve a better outcome. They will also understand more clearly the suitable benchmarks available and technology or business trends as well, especially when they are working with more complex requirements.
Second, a CM team can provide category plans and strategies. If the they can update and clearly understand these plans and strategies, they can reduce the time to market for providing key services and establishing the right course of action for procurement, regardless of whether their action will occur pre- or post-deal.
However, not all CM functions are set up to monitor the ongoing operation of deals once they are live. The nature of pre-deal work is that once completed and handed over to the business to operate and the post-deal team to monitor, a new set of deals will need to be completed as a priority. This is where the organization can start to work more holistically.
How does a post-deal organization using commercial contract management (CCM), respond?
The second task of supplier management kicks in after the deal is signed, the smoke and dust have cleared, and the service pre-deal procured for the business is up and running. Every service procured should, ideally, be manged through an agreed set of operational metrics, and controls and deliverables will vary based on the type of service – all of which needs to be validated for timing and quality. Much of the work will be performed by either the service owner or, in some cases, the procurement commercial contract manager.
From time to time you will experience missed deliverables or issues of quality. Also, you will need to fulfil secondary requirements of the contract as well, including such things as policy compliance, business continuity management artefacts (customary tasks) and post-mortem responsibilities after incidents and issues have occurred. To discern what the contract specifically requires, you will probably also need CCM to interpret contractual clauses and broker resolution.
In the worst-case scenario, disagreements over quality, timing, incident resolution or compliance can turn into disputes. And disputes should be resolved even if doing so means regaining mutual understanding, commercial considerations or terminating a service and migrating to a new service provider.
The third and final task of the CCM team is contract review and change (annual review). As mentioned, requirements can change over time -- whether they are providing the service -- e.g. quality or cost, the addition of regulatory or legally mandated clauses – or updating policy documents that the supplier must now adhere to. The annual review of a contract is an excellent way to maintain value in the contract and compliance with standards.
CCM in the post-deal world tends to treat a single supplier as a series of distinct contracts and may miss the commonalties among them. This can lead inefficient vendor performance management, compliance management and risk management. To better understand a supplier, we need to step into the world of supplier relationship management (SRM) that usually occurs post-deal.
The primary goal of SRM is to see the supplier as a whole and not a set of discrete contractual relationships. Services from one supplier may be treated differently for many reasons. Suppliers are often subject to mergers and acquisitions. It is not always clear who the ultimate owner of a supplier may be and depending on historical relationships, it may only be through supplier analytics that the true scope of a parent supplier may be understood. This can lead to the need to conform and combine legacy contracts, which, once identified as either one or the other, would be the responsibility of the CCM or CM teams to accomplish depending on the contractual scope.
It is easier to coordinate performance management if the supplier is seen as a holistic entity, because if problems persist among multiple services, those services can be addressed at one time with fewer disputes arising during the process. A supplier who consistently underperforms or enters regular disputes may end up being eliminated from the process when new category plans are being developed. Then, at this point, the SRM team can support the CM team in their category analysis.
When it comes to compliance, risk issues can arise if a strong relationship exists with the supplier that leads to cost advantages from efficiencies of scale (like optimum production). If policy and contractual compliance requests could strain a supplier relationship, the SRM team -- due to their ability to see the supplier as a whole -- can maximize on reusing information and seeking pragmatic solutions.
By leading an innovation agenda in governance meetings with the supplier, the SRM team may identify a new capability from an existing supplier which might mean the team can now span more than one traditional category.
Obviously, the benefits of SRM only come with the more complex suppliers where multiple contracts, multiple regions and multiple categories are involved. A segmentation of the supplier base with both the CM and CCM teams would place the focus on only the suppliers where SRM is justified.
The power of three
Treating the three pillars as equal partners helps us recognize how all of them can produce best outcomes for procurement. If we take this seriously, we will be able to rise above newer procurement challenges such as higher levels of ethics and sustainability. Once we add governance and oversight plus a common understanding that we obtain from opportunities like IACCM accreditation -- we begin to discover how to best design a proactive and knowledge-based procurement organization. So, onward, power of three!