In early 2002, a major insurance company that we will
call “Acme” faced a challenge common to many large
enterprises. Although the insurance giant procured over $13 billion worth of goods and services from many vendors, it managed supplier relationships through disparate organizations scattered across the company. Moreover, various business units, often with competing or conflicting interests, each managed different pieces of the relationship with a single major supplier. To improve procurement activities throughout the organization, Acme initiated an ambitious supplier relationship management (SRM) program.
Acme began with a pilot program involving 10 suppliers to demonstrate proof of concept. After analyzing the 10 initial candidates, Acme selected the 3 most strategically valuable vendors. The results were quickly visible. Acme began to see improved performance resulting from the use of agreed-upon performance metrics. It developed a deeper understanding of the internal operations of each supplier in the pilot program, and its supplier relationships became more productive with substantially improved and more honest communication channels.
Acme’s experience is not unique. Large companies from a wide variety of industries are increasingly recognizing the benefits of SRM, but commercial organizations are not the only potential beneficiaries. Weapon system sustainment is a prime candidate for SRM. The Army alone procures nearly $6 billion of class IX (repair parts) annually, but its supplier relationships are managed by a variety of project management offices (PMOs), program management offices, and product management offices that generally do not coordinate their procurement activities.
Furthermore, the complexity of weapon system parts means that most sustainment suppliers are strategically valuable to the Army. As such, they are worth incorporating into a well-designed SRM program. Just like Acme and other enterprises, the Army sustainment community can benefit by approaching its supplier relationships more strategically through an enterprise-wide SRM program.
SRM programs offer three primary benefits: improved supplier performance, risk assessment and mitigation tools, and more valuable supplier relationships facilitated by open exchanges of information.
The Army sustainment community has already made efforts to address supplier performance issues and to regularly assess supplier performance, but risk analysis and relationship value have not received the same attention. As a result, supplier management has focused more on the past than on gaining insight into future supply chain performance. By emphasizing risk mitigation and relationship value, the Army can predict future supply chain challenges and take corrective action before problems escalate.
Improved supplier performance. Supplier performance is crucial to the health of any complex supply chain, including weapon system supply chains. Supplier performance has several dimensions, including cost, delivery timeliness, and incoming item quality, among others. Different stakeholders within an organization typically have different needs and will accordingly value the various performance dimensions differently.
In the Army, for example, the Aviation and Missile Command (AMCOM) and the TACOM Life Cycle Management Command (LCMC) share several suppliers. Suppose, however, that AMCOM is primarily concerned with cost while TACOM values delivery timeliness. A well-crafted sustainment SRM program will select performance metrics carefully and collaboratively. The program can therefore mediate among the competing demands of AMCOM and TACOM stakeholders and ensure that the correct dimensions of supplier performance are emphasized and addressed.
Risk assessment and mitigation tools. Interruptions in the supply of crucial items can pose serious challenges for large enterprises and for the Army’s sustainment supply chain. However, despite the importance of an uninterrupted weapon system sustainment supply chain, the risk profile of weapon system suppliers is often overlooked.
Two risks are particularly problematic: the risk of a critical supplier becoming insolvent and the risk of a disruption in the supply of essential items. An SRM program would fill the gap by supplementing assessments of past performance with forward-looking risk profiles that can help the sustainment community anticipate future supply-chain problems involving both types of risk.
More valuable supplier relationships. Large enterprises and suppliers often have closed relationships in which little information is shared and collaboration is rare. Such closed relationships provide limited value to both the customer and the supplier.
For example, suppose that Honeywell International, the manufacturer of several UH–60 Black Hawk helicopter repair parts and a critical sustainment supplier, faced difficulties with one of its own first-tier suppliers. With a typical closed relationship, the Army would not know about the potential supply chain disruptions that could cascade from Honeywell’s own upstream supply chain. Moreover, the Army would be unable to help Honeywell deal with a problematic supplier.
With an SRM program, on the other hand, the Army and Honeywell would have a collaborative relationship with more information sharing. Through SRM, the Army would gain insight into a supplier’s own supply chain and could begin to pursue solutions to shared supply chain problems.
Doing the Homework
An SRM program is a strategic approach to managing suppliers, and enterprises must do their homework before launching into outreach. Their task is to create a detailed portrait of customer-supplier relationships by thoroughly analyzing both quantitative data (such as internal spending data) and qualitative data (such as internal or external interviews). To pursue SRM, organizations need to group suppliers according to their strategic importance and identify each stakeholder that has an interest in each supplier relationship.
Segmenting suppliers. Which suppliers will be included in the SRM program, and how should we approach them?
In Acme’s case, it analyzed 10 suppliers but pursued SRM with only the 3 that were strategically important to its supply chain. While organizations can use various approaches to segment suppliers, Acme evaluated its own planning horizon for the items provided by each supplier, existing spending volume, product influence within the supply market, and the existing health of the customer-supplier relationship, among many other factors. The end product of segmentation should be a grouping of suppliers along a continuum from least strategically important to most strategically important. These segments will help indicate the appropriate form of outreach (if any).
In excluding 70 percent of the initial candidates for SRM, Acme mirrored the experience of most large organizations whose vendor base is dominated by suppliers with relatively low strategic value. The weapon system sustainment supply chain, however, is different. Because of the typical characteristics of weapon system items, such as extreme technical complexity, long procurement leadtimes, and high unit costs, sustainment suppliers have more strategic value. Indeed, supplier segmentation will probably show that most sustainment suppliers can be included in an SRM program.
Identifying and profiling stakeholders. Which internal stakeholders should have the greatest influence?
As previously noted, an SRM program can help reconcile competing demands within a customer organization. It is not uncommon for different business units within an enterprise to have differing performance needs or unequal risk thresholds, but without first identifying these stakeholders and determining their relative importance to the customer-supplier relationship, the enterprise will be unable to mediate among the different business units.
Several pieces of information make up a stakeholder profile, including internal spending data, the strategic value of the stakeholder’s business unit to the enterprise’s supply chain, and the business unit’s position within the organization’s corporate structure.
All other things being equal, stakeholders that account for more spending, that are more central to the enterprise’s core business, and that are more senior in the organization’s hierarchy should be given more of a voice in an SRM program. The business unit that is most important to a customer-supplier relationship should be given ultimate responsibility for owning and managing that supplier relationship. Even so, all interested stakeholders should participate so that the SRM program is truly representative of the full breadth of interests within the enterprise.
In an Army sustainment context, it is unlikely that a stakeholder’s importance to the supply chain will vary significantly. As a result, weapon system stakeholder profiles will be primarily guided by spending and position in the Army enterprise.
A sustainment supplier relationship can be managed at the item, weapon-system, platform, cross-platform, LCMC, or Army Materiel Command (AMC) level. Currently, weapon-system supplier relationships tend to be managed at the item or weapon-system level, but there are benefits to managing a supplier relationship at a higher level within AMC.
When dealing with suppliers that provide items across multiple weapon systems, the Army can increase its leverage by aggregating each weapon system’s spending into a single requirement and a single supplier negotiation. Nevertheless, managing a supplier relationship at a higher organizational level is not always warranted. By profiling stakeholders through an SRM program, the Army can balance the benefits of elevating the management of a supplier relationship with the realities of each supplier’s spending profile.
Managing Supplier Relationships
Suppose, for example, that AMC has a set of suppliers with spending breakdowns resembling those in the table on page 16. Even though each supplier does $500 million worth of business with AMC, their spending breakdown across the different levels of the AMC enterprise implies a different relationship owner for each supplier.
The combined spending of Supplier 1 and Supplier 2 is concentrated within AMCOM and, more specifically, within Program Executive Office (PEO) Aviation. On the other hand, Supplier 1’s spending is exclusively related to the Black Hawk helicopter, and Supplier 2’s spending is spread across the Black Hawk and Apache platforms.
The Army can leverage Supplier 1’s spending base by managing its relationship at the platform level. Ownership of the Supplier 2 relationship should be elevated to the PEO (cross-platform) level.
Supplier 3’s spending is concentrated within a single LCMC. Because it is divided between PEO Ground Combat Systems and PEO Soldier, the Supplier 3 relationship should be managed at the LCMC level. Supplier 4’s spending is shared between AMCOM and TACOM, and the Supplier 4 relationship should be managed at the AMC level.
Regardless of who owns the relationship, however, all stakeholders with an interest in the relationship should participate in the SRM program. Even in the extreme case of Supplier 1, in which all spending accrues to PMO Utility Helicopter, PEO Aviation, AMCOM, and AMC stakeholders should be involved in SRM activities.
|This table shows the dollars (in millions) spent by the various suppliers in the scenario. Although each supplier’s total spending with the Army Materiel Command is the same, their different spending profiles imply different relationship owners.
Tailoring the SRM Program
When supplier segmentation and stakeholder analysis are complete, an organization can begin to create its SRM program. Unlike SRM preparation, which is a similar process for each enterprise, there is no single formula for supplier outreach. Outreach can be as simple as measuring the performance of a supplier according to a small set of key metrics or as complex as full supply chain integration through a series of partnership contracts. For most suppliers, however, the extent of supplier outreach will lie between these two extremes.
Regardless of the extent of SRM outreach, tailoring it to the needs of an individual supplier relationship is key. The factors that guide the design of outreach include the strategic value of a supplier to the organization, the anticipated duration of the customer-supplier relationship, and the existing health of the customer-supplier relationship.
It would be a waste of resources to partner with a short-term supplier or a supplier that is of little strategic value, and it would be too risky to partner with a supplier whose existing relationship with the organization is unhealthy. Similarly, an enterprise will miss opportunities to capture the full benefits of SRM by pursuing hands-off performance measurement with strategically valuable suppliers, long-term suppliers, or suppliers with an existing healthy relationship.
Within the Army sustainment community, examples exist of both performance measurement and partnership. At the performance measurement extreme, metrics like “procurement lead time” or “acquisition lead time” are often included in contracts. At the partnership extreme, the Army has entered into partnerships with crucial weapon system suppliers, including GE, Sikorsky, and Lockheed Martin. Partnerships, however, generally cover a single part or weapon system and do not resemble the more complex, enterprise-wide partnerships envisioned by SRM programs.
Similarly, performance measurement typically occurs at the contract or item level and does not provide an enterprise-wide picture of supplier performance. Moreover, for most weapon system suppliers, performance measurement is an inappropriate form of supplier outreach. As noted above, the sustainment supply chain differs from those of private industry in that it consists primarily of long-term suppliers with strategic value to the Army. In an Army sustainment context, SRM outreach will skew toward more complex, collaborative programs aimed at joint supply chain improvements.
SRM programs are an increasingly recognized best practice among private industry. As the Army continues to evolve and improve its sustainment supply chain, it should incorporate SRM in order to improve management, assess and mitigate risk, and increase the value of its supplier relationships.
The Army’s sustainment supply chain is dominated by strategically valuable, long-term suppliers that provide complex items with long leadtimes. The Army will consequently gain more from SRM than will private industry, and it is in a unique position to implement a highly effective sustainment SRM program.
More broadly, the principles of SRM apply equally to all Department of Defense services. As the services explore joint sourcing of sustainment items, SRM can be a valuable tool for reconciling their potentially competing demands.