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Managing Supplier Relationships
1. INTRODUCTION
As an element of a procurement process, managing supplier
relationships is more difficult than it would appear at first
glance. The supply options include in-house development,
outsourcing, single source and multiple external suppliers in open
competition. Irrespective of the supply type a good
customer/supplier relationship can be characterised by clear
boundaries of roles and responsibilities. I.e. the client knows the
business need and the supplier knows the technical solution.
Customer/supplier relationships are usually best at the start of
a project when optimism is high. An effective contract management
role is needed throughout the procurement life cycle to ensure that
difficulties, (and there will be difficulties, so plan for them,)
are overcome.
The procurement process is a project in its own right and should
be managed accordingly using traditional work-breakdown structures,
resource allocation and budgetary control methods. The potential
costs of this step in the cycle are not insignificant. Supplier
identification, qualification, shortlisting and negotiation will
take a considerable amount of time and require appropriate skills,
knowledge and experience.
2. SUPPLIER LOCATION/IDENTIFICATION
Where can you find potential suppliers? Advertisements,
exhibitions, Trade Journals/Association lists, existing contacts and
peer knowledge are all likely areas. Previous research shows that
most organisations (62%) prepared a long-list (containing
approximately 14 names) themselves using a mixture of the above
sources without seeking external advice.
2.1 MATCHING NEEDS TO SUPPLIER TYPE
Don't make the mistake of thinking that just because a supplier
is a "big name" they will have an all-embracing capability
to deliver a solution. The capability of the supplier must be
matched to your needs. For example, you may already have an
application running on hardware at your head office and there is a
need to provide access to the system for staff in branch offices.
The requirement here is for either a supplier with an in-depth
knowledge of your particular application and who has previously
managed a remote linking project; or for a company who have
experience in providing remote networked access to centralised
systems. There also may be a need for a physical network provider to
become involved. Achievement of "one stop shopping" by
using a Systems Integrator might seem an appropriate
"catch-all" solution.
In general terms, the greater the perceived project risk, the
greater the incentive will be to chose a single source of supply,
(why add-in even more difficulty by having to manage multiple
suppliers).
2.2 EXISTING RELATIONSHIPS
The phrase "people buy from people" is still valid.
Research shows that emotions play a major part in even the most
rational and logical procurement processes. Relationships can take a
long time to build. They should be dynamic and the mutual trust won
over time should be appreciated. However, known quantities are
sometimes a mixed blessing. There is a need throughout every
procurement process to ensure a competitive situation and the
even-handed treatment of suppliers. Just because a supplier
performed well the last time he was used does not necessarily imply
that he will or can this time.
It is essential for the customer to avoid becoming
"locked-in" to a given source of supply. Supplier
strategies include proprietary products at reduced prices and
"wall-to-wall" installations of mainframes, departmental
servers, PC's and applications software. The costs of
"lock-in" can become substantial especially if a supplier
becomes less internationally competitive over time and the specific
skills required to manage installations become less easily obtained.
Your goal should be to encourage long-term relationships with good
suppliers whilst keeping options open to terminate a relationship
which is failing to deliver competitively. (Especially significant
where outsourcing is involved NB. Retain core skills competence
in-house).
One way of keeping procurement options open is to adopt formal
standards such as SSADM. The documentation associated with this
methodology will enable you to base competitive technical design
studies on a logic design which is independent to the technical
approach. Further inter-related mechanisms are as follows:
| Area |
Mechanism |
| Technical |
Open standards and methods -
SSADM |
| Contractual |
Well defined requirements
specification
Skills transfer
specification
Software licensing
rights
Quality documentation |
| Procurement
Project |
Minimise project elapsed
time
(if over 3 years - build in break
points)
Keep more than one supplier involved |
| Management |
Maintain high visibility of
supplier performance
Retain key skills in-house |
3. SUPPLIER ASSESSMENT
Working with a long-list of suppliers will increase your costs,
the elapsed time and the risk. Your initial objectives should
include managing these down to say 3 or 4. The usual method of
achieving this is to prepare short-listing criteria and issue a
pre-qualification questionnaire or request for information. The
starting point for determining the criteria should be your
requirements specification, (see WP1). Your eventual check-list can
be sub-divided into the following:
- common requirements e.g. integration with spreadsheets and
existing packages
- technical requirements - future proofing, flexibility, open
systems
- operational requirements - service levels
- implementation requirements - previous similar experience,
international cover
- supplier requirements - economic stability, quality standards,
staff skills
Once the criteria have been established you will need to:
- weight or prioritise the importance of each element to the
total
- assess the risk factors
- determine the rules for applying the criterion to ensure
consistent scoring
- think through how you will react to any non-compliance
Assessing the relative maturity of the supplier organisation is
an activity which has recently come to the fore. In 1987 the US
Government developed a process maturity framework to assist
potential suppliers include their underlying software engineering
process (CMM) and help government rate them on capability and
maturity. However this methodology largely ignores the maintenance
aspects of the total life-cycle. Most recently a major ISO standard
- Software Process Improvement Capability Evaluation (SPICE) has
been developed. Eventually this may supercede the more generic
BS5750 or ISO9001 accreditations.
3.1 UNDERSTANDING THE SUPPLY CHAIN
Getting things right first time, on time, every time should be
your objective. You cannot expect to achieve this degree of success
without effort, stress or even pain. There is a need for research,
study and practice. If your deadlines preclude this element from the
pre-project study phase, you are adding risk. Seriously consider
"buying-in" expertise.
The most basic supply chain can be illustrated as follows:
"One-stop shopping" i.e. dealing with a "Systems
Integrator" might seem an appropriate solution. However,
beware. Many so-called systems integrators are little more than
"surrogate" suppliers who front the supplier/customer
relationship and add little value of their own. Additionally, there
is a high risk of conflict between manufacturers and systems houses.
Manufacturers have difficulty in maintaining continuity of contact
as most of their relationships are project based. In many cased they
are direct competitors and the integrator demonstrates no loyalty to
a particular hardware supplier, (marketed as "vendor
independence"). This also means that no systems integrator can
have in-depth experience of all hardware types. You need to
understand who is the "prime" contractor and why they have
been chosen for this role by the other members of the consortium. In
general this choice should be determined by the value each brings to
the group.
There are still further divisions within each of these main
groups. For example:
- commodity suppliers (characterised as "box
shifters"). These types of organisations still exist,
(although many protest their innocence).
- project oriented systems houses selling complete solutions,
technical specialisations or consultancy
- packaged applications providers providing major application
software
- true systems integrators capable of bringing together
diverse/legacy hardware, software and network components to
result in a new business solution
3.2 RELATIONSHIPS
When IT directors are asked to rate overall satisfaction with
their commercial and technical relationships, manufacturers tend to
perform marginally better than resellers, (but no scores in recent
polls were impressive). There is obviously room for improvement on
all fronts.
The organisational types listed above will, to a large extent,
determine the type and quality of your business and technical
relationship. A much closer liaison should be expected with a
systems house, VAR or facilities management organisation than the
commodity supply types. Inevitably some of these organisations will
be larger than the client which may ultimately reduce client
leverage and influence.
3.3 POLITICAL MAPPING
The concept of a supplier client "marriage" type of
relationship, (which rarely exists,) is being replaced by that of
"flat-mates" where each contributes to the well-being of
the other according to an agreed formula. Most internal Governmental
Department guidelines discourage such closeness. However where
facilities management, outsourcing or applications management
services are involved it can be a desirable objective. Shared goals
and a will to work together closely in a "no-blame"
environment, cultivating a "Win-Win" solution should be
encouraged. Procurement projects and procedures which encourage an
adversarial stance are doomed to failure from the start.
One way of building such a relationship is via a "political
mapping" strategy. Here the suppliers Chief Executive is
matched with the clients CEO. The client senior technical manager
with the supplier Technical Design Authority and the suppliers
Finance Director with his equivalent in the client organisation.
Obviously this is only practicable on large procurements and the
format of their meetings and discussions needs to be well planned
and managed. To ensure continuity, the upward and downward
communication of agreements must be effective throughout the whole
project team.
4. KNOWING WHAT YOU WANT
It often helps to have a high level overview of what you are
expecting, (to help reduce the risk of being disappointed). The
following checklist is suggested:
4.1 WHAT YOU WANT FROM THE CHANNEL
All suppliers must:
- be well established and have a good reputation ideally in your
business type
- be financially secure and demonstrate long-term investment
spend
- have a professional sales approach, ideally using industry
specialists
- deliver on time and to budget
- be responsive, even pro-active to requests/needs for problem
resolution
- be prepared to develop a closer relationship and share common
goals
- have consistency of contacts - no frequent account team
changes
- demonstrate honesty/ethics/trust
4.2 WHAT YOU WANT FROM THE SOLUTION
Most City institutions have no control or evaluation procedures
in place to measure the effectiveness of their IT systems. This
situation is reflected throughout industry. In some researched
cases, IT costs accounted for 25% of total business costs. IT
departments need to become more commercially aware and business
oriented. The key is to use measurements of effectiveness that the
business can understand and which can be benchmarked regularly.
The document will define, (in business terms which are
measurable):
- the working environment
- the user details
- the mandatory functional requirements
- the desirable requirements
- the system operational detail
- the mandatory performance levels
- the desirable performance levels
- any constraints
- all assumptions
The steps towards production of an outline requirements
specification are:
- prepare description of requirements
- agree internally with all parties that the description is
correct and it is needed
- agree potential budget, (perhaps undertake feasibility study)
The critical success factors for any solution include the
following:
- the needs must still be relevant to the current business
objectives and priorities. Business needs generally fall into
two camps - those which are cost driven. For example, reducing
operating costs and/or reducing staff; and those which are
infrastructure driven - improving management information,
improving planning cycles, speeding up communications
- if assumptions were made when calculating the potential
benefits, then you must understand these in-depth and endeavour
to work towards reducing the risk of these estimates
- there must be mutual agreement that the resulting benefits are
both achievable and measurable
5. EXPRESSING WHAT YOU WANT
Knowing what you want and telling someone else isn't easy. The
formal procedures of a large procurement exercise do not tend to
contribute to achievement of this objective. There is a need for a
more open behavioural style and empathy towards potential bidders.
The costs of proposal production are high, (the current estimated
average is 1-5% of total solution cost). Ultimately the whole buying
community pays for these, (even the rejected bids.) Therefore it
should be your objective to be clear, be helpful in answering
questions and above all, allow enough time for suppliers to produce
quality, well-costed proposals. (NB: don't expect them all to work
over the Christmas holiday period just because you have allocated 20
days for this stage).
5.1 ITT PRODUCTION
The major part of this document will result from the statement of
requirements. Therefore its success is largely dependent on it.
Critical success factors are:
- does the document effectively convey all our requirements,
(business, strategic, technical, operational, quality,
budgetary, timescales, resources, support, training etc.)
enabling suppliers to respond quickly and in a compliant manner?
- have we told them how they will be evaluated?
- is our success criteria clearly stated?
- have we allowed time and made resources available for
questions and queries to be answered, (it is in your interest to
manage out any ambiguity) and how will we communicate our
responses to all potential bidders?
- is it a "quality" document in its own right, is it
well structured thereby enabling a structured response and easy
checking of compliance?
5.2 MANDATORIES/DESIRABLES
There are two schools of thought, (within suppliers,) on how to
respond to an Invitation To Tender. One discipline advocates
"minimal compliance" that is -
"we will provide the client with a proposal which delivers
only the mandatories. In that way we will propose the lowest
compliant cost and stand the best chance of winning. Desirables are
additions and will cost more."
Many suppliers even plan to make all their profit from
"additions" or amendments to initial contract
deliverables.
However, in these days of recession, increased competition and
reduced margins other suppliers feel more comfortable with
attempting to add value to justify a higher price. Providing all or
even more than was asked for has a tendency to make this type of
supplier appear attractive but remember to cost/benefit qualify
every "nice-to-have".
5.3 PRICE
Price is no arbiter of value but should be considered a useful
guide. The most appropriate time to invite best and final offers is
at the end of the evaluation period. By then most of the intricacies
associated with delivery timescales, resources and solution
definition should have been resolved and a supplier will be better
able to refine his budgetsn and manage out contingency.
During the negotiation stage it is imperative that, so far as
price is concerned, there is only one contact point within each
organisation. Where the client is concerned this contact should have
been a member of the project team from the outset and should share
the need to succeed. To cover risk and provide continuity in the
event of tragedy he should have a deputy. The concept of a
negotiating "team" should be considered. Position in the
client management hierachy should not determine who is allocated to
this role. Negotiation skills are essential and previous training
and experience are desirable. The general purchasing manager,
(unless he has been a member of the project team,) or the MD, (due
to conflict of priorities,) are unlikely to be the best options.
Some advocate that the lead negotiator should sit outside both the
IT and procurement function but this is unlikely to be achievable
due to the knowledge areas required. However, it is preferable that
the lead negotiator should not be a budget holder in his/her own
right. Whilst he may be given corporate authority to "strike a
deal" obviously this should never be displayed or disclosed as
it inevitably weakens the negotiating position.
The skills sets required are:
| Skill or Knowledsge
Area |
Ability |
| Business Knowledge |
to take a strategic
view
to express costs/benefits
in
business
terms
a detailed understanding of
the
processes |
| Empathy with Users |
to understand
needs/wants
to involve, direct and motivate |
| Supply chain |
to manage
suppliers
to asses their capability - SWOT |
| Technology |
to understand IT
trends
to understand opportunities
and
risks
to manage projects and people |
| Procurement |
to interpret and document
contracts
to lead negotiations |
| Interpersonal |
to display
empathy
to display "open"
behaviour
to build relationships |
If they don't exist within your organisation and there is
insufficient time to train someone to the required level then you
should seriously consider looking outside for either full-time or
consultancy assistance.
This is the time to:
- agree outline terms and conditions
- agree precisely what is being quoted for
- ensure the inclusion of all costs/charges (no surprises later)
Again, (and we cannot overstress this) you are going for a
"Win-Win" agreement which is good for both parties. Any
one-sided deal will affect both the relationship and the eventual
deliverables. Your suppliers are probably working to the Miller
Heiman methodology, (most UK IT companies use this Strategic Selling
Tool). Your chief negotiator should familiarise himself with the
main points of this strategy prior to discussing price. Probably the
most important factor in being able to negotiate from strength is
having a viable competition. Being able to view 2 or more offers
will be better able to make comparative decisions. A prime objective
is to ensure that the costings used to strike the deal are as
accurate as possible without there being too much contingency or
undue margin.
6. BUYING WITH CONFIDENCE
Buying systems is prone to risk. Risk, (or the perception of
risk,) induces uncertainty, fear, mistrust and doubt. To manage out
this stressful situation consider using Assurances. An Assurance is
an activity that can be undertaken to reduce one or more risks.
Assurances provide procurers with information about how they can
address major issues and minimise risk.
6.1 ASSURANCES
We recommend study and the use of the principles documented in
"Managing Risk in Open Systems Procurement - a practical
guide" published by the DTI in conjunction with NCC Blackwell
which can be obtained from the BuyIT Campaign Office on 0171 828
7300.
6.2 BID ASSESSMENT
This step is essentially qualitative. The objective is to produce
an initial short-list of 3/4 suppliers.
General elements to consider are:
- have the most likely suppliers responded? If not, why?
- are we able to differentiate between suppliers solutions?
- will our evaluation model and procedures produce the best
final short-list?
- are we achieving the required benefits at optimum cost?
There is a need to plan for all activities within this stage e.g.
initial scoring, debrief to rejected suppliers, presentations, test
data preparation, demonstrations, workshop, prototyping, testing,
requirements refining, supplier credibility verification, reference
checking, ad-hoc technical meetings, recommendation documentation.
An evaluation checklist should include:
- conformance - does solution meet specified requirements?
- benefits - have those we defined been met or exceeded?
- quality - what standards does the supplier conform to?
- commitment - how has supplier demonstrated this?
- information supplied - is it comprehensive and concise, can we
contract against this?
- people - can we work with them, are there any potential
clashes of personalities or objectives
- financial credibility
- references
- experience - have they done this type of work before?
- size - is the job the right size for the supplier or are they
out of their league?
- roles - do you both know how you will be involved in the
project?
- change control - has a process been defined?
- techniques - are suitable tools defined for analysis, design,
development and project management?
- price - is it sensible, if it is significantly lower than the
competition - why?
- time-scale - if the quote is significantly less than the
competition - why?
- geography - will distance from supplier impose unacceptable
costs?
- contract - are the T's & C's likely to be acceptable?
6.3 CONTRACTS
How straight forward and formal is the contractual relationship
will depend in part on the type of supplier involved (e.g. vendor,
supplier, service provider, in-house etc.)
Trhe objectives of the contract manager should be aimed at
ensuring the quality and value for money provided is in accord with
the contract and that changing user needs are accommodated smoothly.
The contract is a tool to ensure requirements are met and
obligations are fulfilled. A well founded and drafted contract which
recognises the need for contract management and the likelihood of
change will facilitate a better relationship.
As well as being a dynamic document, the contract should equally
recognise the responsibilities of the customer towards meeting
obligations. Therefore the role of a contract manager can be a
delicate balancing act requiring considerable interpersonal skills.
To ensure that the best relationships are fostered you need to
plan and put in place:
- regular meetings and liaison between the customer contract
manager and the supplier
- reviews of interim deliverables
- change control and charge variation procedures
The TAP Services Guide has a section specifically addressing
contract management.
7. DO'S AND DON'TS
7.1 PROJECTS AND RELATIONSHIPS SUCCEED WHERE:
- there is support and commitment from the whole of each
organisation together with shared objectives
- client expectations are realistic and achievable
- there are adequate resources
- the agreed priority is to deliver the project on time, even if
this means going over budget
- users lead
- the plan will deliver benefits early
- luck is on your side
Therefore don't change responsibilities during the project. Agree
what is going to be delivered, when, by who and at what cost. Keep
both project teams aware of what is happening and make sure you have
the best resources available. Try to see things from the others
point of view and have mutually agreed priorities. Involve users at
every stage and plan to overachieve.
7.2 PROJECTS AND RELATIONSHIPS FAIL WHERE:
- there is no management commitment or involvement and the
benefits are vague
- users are uncommitted or haven't been consulted/involved
- levels of expectation are unrealistic
- there are inadequate or inappropriate resources. Typically
implementation accounts for one third of the total cost.
There is little point in selecting a solution if you cannot
afford to implement it.
- the requirement is overcomplicated and the solution is
over-engineered
- the environment is too rigid to accept change
- the implementation plan is too risky or the deadlines are too
tight
You will need to involve all relevant players and politically map
these to their counterparts. The benefits must be achievable and
measurable. Keep it simple and able to be implemented (thereby
delivering benefits) rapidly. Aim for open relationships and shared
risk. Finally, pray for your share of luck.
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