Supplier Relationship Management in the Public Sector: from Process to Engagement
The concept of supplier relationship management (SRM) was first introduced in 1983 by a consultant named Peter Kraljic in a Harvard Business Review article titled “Purchasing Must Become Supply Management” in which he wrote: “Instead of simply monitoring current developments, management must learn to make things happen to its own advantage. This calls for nothing less than a total change of perspective: from purchasing (an operating function) to supply management (a strategic one).” This short essay remains a seminal work on the subject nearly 40 years later, so much so that the model it introduced for managing suppliers is named “the Kraljic Matrix” based on mapping the importance of suppliers to an organisation against the risks of the supply market is still used today.
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Yet there is still a long way to go in establishing strategic supplier relationship management as a discipline within the public sector. That, at least, was a message we heard at the Pan Government Alignment Forum we hosted in May 2020. Though based on our international experience, we can see that UK government departments are well advanced along this path compared to other countries.
More than any other event in recent years, the coronavirus pandemic has taught us that you cannot plan for every uncertainty and that no process, or set of processes, however robust, will see you through a severe crisis. Even when you have a clear strategic focus you can be left aimless, out of touch and ill prepared. National and local public sector organisations that fared well in the pandemic are those that built resilience by understanding their supply chains, establishing relationships based on trust with their suppliers before the crisis began. By building relationships with strategic suppliers as a matter of day-to-day practice, in other words treating supplier relationships as an engagement over time rather than a process that you perform as and when necessary, you will be able to minimise or mitigate risk in difficult times, and maximise value at all times.
Transparency and Engagement Are the Twin Pillars of SRM
Effective supplier relationship management is based on two main pillars. First, understanding supplier relationships holistically and based on a categorisation of suppliers according to a matrix, as Kraljic pointed out. Above all this means not simply classifying suppliers based on volume of spend. You might be spending vast sums of money with (for the sake of argument) a vendor of office stationery and supplies. Does that supplier add fundamental value to your organisation’s ability to perform? Not really. Does that supplier present such an existential risk to your organisation, that its failure (e.g. due to bankruptcy) would seriously disrupt operations? Absolutely not! There are plenty of alternative suppliers.
The second main pillar, once your suppliers have been effectively classified, is engagement. This should become a habit: the way you work, communicate and collaborate with the people within your strategic or critical suppliers. In some cases, you must treat them almost as though they were part of your own public sector organisation, so that they feel they have a stake in your success and can share in it. And, if the unexpected does hit, you have a lot of “credit in the bank” – your suppliers will feel committed to helping you through it on many levels, from financial to emotional.
Listen to the thoughts of Alan Sheppard, Commercial Directorate, Department of Work & Pensions and Jeremy Smith, Managing Partner, 4C Associates on SRM in the public sector in our recent webinar.
Ten Best Practices of Public Sector SRM
What does all that mean in practice? Here are ten “must-do” best practices of supplier relationship management that public sector organisations should adhere to:
- Understand where your suppliers fit in the supplier positioning matrix and manage accordingly. Build high levels of trust and loyalty, especially among high value strategic suppliers – they are partners, not just vendors.
- Invest in supplier management tools to help centralise this data, which is live and constantly evolving.
- Pay your suppliers on time and according to agreed payment terms.
- Communicate frequently on your authority’s objectives and priorities. Also communicate on a friendly, collegiate basis so that the individual employees and leaders at your suppliers feel emotionally invested in your success.
- Eliminate maverick (off-contract) spend. Ensure that everybody in your organisation purchases through the proper channels and on the agreed terms. Maverick spend is not only costly but can easily sour relationships. And remember, maverick spend may be driven by commercially aggressive suppliers who short–circuit agreed processes to get quick wins, so be careful.
- Do not classify suppliers based on pricing or volume of spend (important though that is, especially in the public sector context as it is often volume of spend that attracts public or media attention). What really matters is the value the supplier adds to your organisation.
- Relationships are important – but keep them professional and (this goes without saying) OJEU compliant. A strong supplier relationship means that the supplier is invested in your success; the relationship goes beyond what is written in the contract. Choose the most efficient services – and efficiency is a product of value not just cost, let alone price.
- Automate supplier management with alerts for expirations and renewals as well as guided onboarding for suppliers, reducing paper waste and saving taxpayers the cost of maintaining manual processes.
- Automate the contract management process to ensure that all relevant departments are kept in the loop, reducing risk of errors and missed obligations.
- Evaluate the risks of dealing with a supplier, especially if the supply chain is complex. You need transparency beyond the first tier. Where do your suppliers source their supplies and what are the alternatives? The recent scramble for PPE demonstrated how this can become critical during extraordinary times. How have your suppliers responded in previous crises? How likely are they to become bankrupt? Are there local alternatives? Evaluate all strategic suppliers with a probability-based risk profile (likelihood of failure, and impact of failure).
Inshoring and Nearshoring
Over the coming years we can expect to see public sector organisations working hard to build closer relationships with their suppliers to maximise value and minimise risk. SRM will become critical in what is being called the “new normal” with more but shorter and more local supply chains. Although we will continue to depend to some extent on suppliers in low-cost countries, we are likely to see more inshoring or nearshoring of supply chains. This will give greater agility, and will probably foster closer, more genuine and collegiate relationships with suppliers that go beyond the contract.
In order to do this, the public sector will need to invest in SRM skills and technologies, giving individual departments and agencies the tools they need to meet their particular needs while at the same time aggregating data to provide maximum visibility and transparency into the extended supply network.
Interested in taking part in our next pan-government procurement forum? Speak to our team to get more information on how your government agency can benefit from greater collaboration and information sharing across departments in the UK.