Improving Supplier Reliability Insights on Supplier Development and Supplier Diversity 06/15/2016

By Lora Cecere Founder and CEO Supply Chain Insights LLC

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Contents

Research Methodology

Disclosure

Executive Summary

What Is Supplier Development? Diversity?

Program Focus

Change Management and Resistance

Recommendations

Conclusion

Terms to Know

Appendix

Additional Reports That Might Be of Interest

About Supply Chain Insights LLC

About Lora Cecere

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Research Methodology We are committed to delivering thought-leading content for the supply chain leader. Our goal is to be

the first place that visionaries turn to in order to gain unique insights.

This report is based on research completed in February through May 2016. The findings are based

on the quantitative data derived from the study outlined in Figure 1, and insights gained through the

sharing of the data at presentations at the Diverse Manufacturing Supply Chain Alliance, and the

Institute of Supply Management. Additional details on the population of the study are shared in the

Appendix of this report.

Figure 1. Overview of the Quantitative Study on Supplier Development

Disclosure Your trust is important to us. In our business we are open and transparent about our financial

relationships. In this research process, we never share the names of respondents or give attribution

to open comments collected in the research.

Our philosophy is “You give to us, and we give to you.” We collect data from a private network of

qualified participants and openly share the results. The participants of our research always receive

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the final reports; and, if interested, we share insights from the studies with the respondents of our

quantitative surveys and qualitative interviews in a complimentary one-hour phone call with supply

chain teams.

This report is written and shared using the principles of Open Content research. It is intended for you

to read and share freely with your colleagues and through social channels like LinkedIn, Facebook

and Twitter. When you use the report all we ask for in return is attribution. We publish under the

Creative Commons License Attribution-Noncommercial-Share Alike 3.0 United States and our citation

policy is outlined on the Supply Chain Insights Website.

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Executive Summary Trust, but verify. During the recession of 2007, trust in the extended supply chain was broken. As

companies throttled-back production to adjust to falling demand, many suppliers who thought that

they were strategic were left “holding the bag.” Risk was pushed backwards in the supply chain

violating the tenants of many strategic relationships.

As a result, shipments were refused and orders canceled. Payments were delayed and trust was

violated. Many supplier companies never recovered, tightening the supply of materials in discrete

value chains like automotive and high-tech.

As growth slowed over last five years, the supply chain focused on an agenda to reduce costs.

Commodity price volatility increased and procurement pressures to reduce costs resulted in

transactional buying (a focus to minimize price variance). In many companies, strategic sourcing and

commodity management through category buying programs took a “back seat.” Supplier programs

become more reactive.

In this environment, as shown in Figure 2, supplier viability—an environment for a supplier to manage

a successful business—became a pressing risk issue. Sitting four and five levels back in the value

network, suppliers experienced a double-whammy—pressure to reduce price along with the

lengthening of Days of Payables.

Ironically, while technology in supply chain finance progressively improved to enable a quick transfer

of funds across industries, Days of Payables increased 30 and 60 days. The second irony is the cost

of capital. While brand owners have a lower cost of capital than their suppliers, few companies extend

their brand capabilities in supply chain finance to their suppliers. While companies talk supply chain

finance, squeezing suppliers is the market reality.

In parallel, economic uncertainty and demand volatility increased, also putting pressure on the

supplier base. While the adoption of demand-driven processes could improve supplier alignment,

demand-driven process adoption is slow. Few companies are taking ownership of demand signals to

their supply base.

Traditional processes dominate. Companies are strongly wedded to supply-centric processes based

on traditional forecasting processes using order patterns. With the lengthening of order latency, and

the lengthening of the long tail of the supply chain, the synchronization of suppliers into the value

network is out-of-step, creating waste and obsolescence.

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The synchronization issues are greater with the increase in supply chain complexity.

Figure 2. Supply Chain Risk Management Comparison for the Period of 2010 to 2020

To improve supplier viability, supply chain leaders recognize they need to take responsibility for

supplier relationships in the management of strategic supply. For many, the evolution of “supplier

development” programs to design long-term win/win relationships is relatively new. The supplier

development team is a group that is designed to help suppliers to achieve supply chain objectives.

Supplier development is so new, that today many supply chain leaders are unaware of the term.

In this report, we share the current state of supplier development programs. We contrast how they are

different than supplier diversity programs, and share insights on why supplier development is

important. To help the reader, we also share insights on change management issues and provide

recommendations to implement a successful supplier development program.

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What Is Supplier Development? Diversity? In this research study, when asked what defines an excellent supplier development program,

companies define it as one that is collaborative and performance-driven. The program has strong

accountabilities on both buy- and sell-side relationships.

The terms ‘supplier diversity’ and ‘supplier development’ are often bandied about and used at

conferences in the same sentence, but they are very different programs. While supplier development

is focused on improving supplier viability and the reliability of supply, supplier diversity is focused on

improving the percentage and contribution of women-owned and minority-managed suppliers. As

shown in Figure 3, the occurrence of supplier diversity programs is more common than the presence

of supplier development programs. Supplier diversity programs are strongly rooted in compliance,

while supplier development programs are more focused on driving opportunity and improving

reliability. In this study, 31% of respondents had both supplier diversity and supplier development

programs.

Figure 3. Presence of Supplier Diversity and Supplier Development Programs

Supplier development is one of the five important horizontal processes to drive supply chain

excellence against a business strategy. A horizontal process crosses over the functions of sell,

deliver, make, plan, and source. As shown in Figure 4, the five interlinked horizontal processes are

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Revenue Management, Sales and Operations Planning (S&OP), New Product Launch, Corporate

Social Responsibility (CSR) and Supplier Development.

Figure 4. Horizontal Processes Driving Alignment

For those with a mature supplier development program, there is a tight link between these horizontal

processes. Today, based on study results, the primary focus is on process improvement.

Program Focus The program focuses for both buyers and suppliers, as shown in Figures 5 and 6, are on process

improvement and Kaizen events. To our surprise, in this study, there is less emphasis on improving

electronic B2B capabilities than we expected. Most of the programs are based on email and

spreadsheets. Today supplier development processes are largely manual.

Scorecards are an important element of the supplier development relationship, with 71% of buyers

using scorecards and 55% of those with scorecards believing they are effective. As with most

programs, you get what you measure. As shown in Figure 5, most of the focus is on quality and on-

time delivery. E-commerce capabilities and electronic sharing of Advanced Shipping Notifications

(ASNs) are measured in less of 20% of the relationships.

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Figure 5. Scorecard Measurements by Buyers

Figure 6. Elements of the Supplier Development Program: Perceived Effectiveness by Buyers

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The scorecards are aligned to drive process reliability. As shown in Figure 6, buyers are attempting to

drive process improvement in reliability. Kaizen events, a part of mature Lean programs, are

considered effective. Electronic commerce is less of a priority, and many companies struggle to

achieve a consistent definition of supply chain excellence whicht is actionable in a supplier

development program.

Figure 7. Elements of the Supplier Development Program: Perceived Effectiveness by Suppliers

Change Management and Resistance While most companies recognize that supplier development is the right thing to do, there are many

obstacles. The internal politics and obstacles for buyers and suppliers are outlined in Figure 8. As the

pressure increases to reduce costs, the resistance gets higher. Surprisingly, suppliers get more

resistance than the buyers. Legacy supplier relationships, along with executive understanding of

performance metrics, are major stumbling blocks.

Enlightened procurement leaders align with finance. They influence the financial team to understand

the implications of risk, quality, and reliability of supply without a strong supplier development

program, and use this influence to drive the program within the organization.

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Figure 8. Internal Resistance to Supplier Development Programs for Buyers and Suppliers

Education is key. The mature procurement teams help finance to understand the implications of

lengthening Days of Payables, and effectively managing procurement policy and execution through

digital Procure-to-Pay processes. For many organizations, as shown in Figure 9, this is a fight. The

lack of alignment between finance and procurement is a gating factor to drive improvement in supplier

development programs.

Figure 9. Internal Alignment in Response to Supplier Development Programs

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Recommendations For companies driving process reliability and agility, supplier development programs are essential.

Here are five recommendations to get started:

1. Map Horizontal Processes. Spend time to do value chain mapping between S&OP, New Product Launch, Corporate Social Responsibility and Supplier Development. Use this insight in the design of the supply base and the identification of strategic sourcing relationships. Note that strategic sourcing relationships are usually about much more than volume or value of goods exchanged. Many times second and third tier suppliers are critical to the delivery of reliability.

2. Map Supplier Viability. Simulate the Potential Impacts to Drive Financial Support. The use of discrete simulation technologies helps financial teams to understand the domino impact of supplier failure. Use these tools to help finance to visualize the critical importance of supplier development.

3. Build a Case for Digital Procurement. Digitize Supplier Development. Digital procurement maturity is an important element in mature supplier development efforts. While it is difficult to get funding with today’s tightening IT budgets, make a case for digital procurement through supplier development simulation.

4. Implement Supplier Sensing. Recognize the Limitations of Audits. The use of unstructured text mining and supplier sensing technologies enables early sensing of supplier financial issues. Sense supplier financial health on a regular basis and deploy supplier development teams to design process improvement to improve supplier health. In CSR programs recognize the limitations of supplier audits. Build strong supplier development programs with clear ethical standards and train and incent the supplier base to drive adoption.

5. Own the Value Chain. Take responsibility for the signals you send to your suppliers. Evaluate how easy it is to do business with yourself and drive continuous improvement programs to improve strategic relationships.

Conclusion While companies can outsource their supply chain, they cannot outsource the risk. With the tightening

of supplier capacity, and the decrease in supplier viability, supplier development programs are

important to drive reliability, mitigate risk, and drive corporate social responsibility programs. This is

an important program to differentiate supply chain leaders from laggards.

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Terms to Know Getting clear on terms is often the first step to driving a supply chain transformation. To help teams to

gain greater value from the report, here we provide definitions of the terms used within:

• Risk Management. The design and implementation of programs to minimize supply chain

disruptions. These programs are designed to minimize risk, where risk is defined as the severity of

a supply chain disruption multiplied by the probability of the disruption.

• Supplier Development. A formal program designed to improve supplier response.

• Supplier Diversity. The selection of suppliers from women- and minority-owned businesses.

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Appendix In this section we share the demographic information of survey respondents, along with relevant

research findings to support the key insights shared in the text of this report.

As a part of our research method, we source survey respondents through Open Content research

techniques—the sharing of links with conference attendees, on LinkedIn and through direct mail

campaigns. Our philosophy is that “respondents give to us and we give to them.” All respondents

participating in this survey were given the results of this study and were invited to participate in a

roundtable discussion with other survey participants to gain additional insights.

In our research, the names, both of individual respondents and companies participating, are held in

confidence. Here we share the demographics to help the readers of this report gain a better

perspective on the results. The demographics and additional charts are found in Figures A–G. At the

bottom of each image are the specific questions asked in the survey along with the survey

demographics.

Figure A. Overview of Respondent Characteristics

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Figure B. Industry Segments Surveyed for This Report

Figure C. Role Definition of the Survey Participants

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Figure D. Presence of a Supplier Development Organization

Figure E. Number of Supplier Development Programs for a Supplier

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Figure F. The Focus on Supply Chain Education

Figure G. Use of Scorecards

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Additional Reports That Might Be of Interest

Prior Reports in This Series

To gain additional insights, on the topic of procurement and sourcing in Market-Driven Value

Networks, consider these additional reports:

Inventory Optimization in a Market-Driven World

Can you afford the Risk?

Building Effective Business Networks in Process Industries

Building B2B Networks: Who are the Players?

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About Supply Chain Insights LLC Founded in February, 2012 by Lora Cecere, Supply Chain Insights LLC is beginning its fifth year of

operation. The Company’s mission is to deliver independent, actionable, and objective advice for supply chain leaders. If you need to know which practices and technologies make the biggest

difference to corporate performance, we want you to turn to us. We are a company dedicated to this

research. Our goal is to help leaders understand supply chain trends, evolving technologies and

which metrics matter.

About Lora Cecere Lora Cecere (twitter ID @lcecere) is the Founder of Supply Chain Insights LLC and

the author of popular enterprise software blog Supply Chain Shaman currently read

by 5,000 supply chain professionals. She also writes as a Linkedin Influencer and

is a a contributor for Forbes. She has written four books. The first book, Bricks

Matter, (co-authored with Charlie Chase) published in 2012. The second book, The

Shaman’s Journal 2014, published in September 2014; the third book, Supply

Chain Metrics That Matter, published in December 2014; and the fourth book, The

Shaman’s Journal 2015, published in September 2015.

With over 12 years as a research analyst with AMR Research, Altimeter Group, and Gartner Group and now as the Founder of Supply Chain Insights, Lora understands supply chain. She has

worked with over 600 companies on their supply chain strategy and speaks at over 50 conferences a

year on the evolution of supply chain processes and technologies. Her research is designed for the

early adopter seeking first mover advantage.