Supplier Relationship Management (SRM)

From Cost Squeezing to Collaboration: The Strategic Edge of SRM Finding right words and examples in an interview isn't always easy. That's why I created Procurement Interview Warm Up, a podcast designed to help you prepare by listening to deep dive conversations on the topics that matter most. Each episode is an AI powered dialogue build on credible resources from Gartner, BCG, McKinsey, and other leading institutions. The goal is simple. Immerse yourself in sharp, engaging discussions that not only refresh your knowledge but also spark ideas. This podcast is brought to you by Talent Supply, where the focus is on connecting procurement and supply chain professionals with the right opportunities. Speaker 2 If you are involved in modern business, well, you know the truth. The old playbook for procurement, it's pretty much closed for decades. It was simple, wasn't it? Speaker 3 Oh yeah, squeeze the price, increase the volume, demand better payment terms. That was the game. Speaker 2 But we've really hit the hard limit now. I mean, you can only negotiate the cost of a widget down so far before you know quality collapses or the relationship just breaks. Speaker 3 Or the supplier just goes out of business, can't get much from them then. Speaker 2 Exactly. So if we can't rely on that sort of adversarial negotiation anymore to drive profitability, where is the next massive wave of value creation or actually coming from? Where's that strategic edge? Speaker 3 Yeah, that's the $1,000,000 question. And the edge, it's not really found in competition anymore, not in the old way. It's found in collaboration. Speaker 2 Collaboration, OK. Speaker 3 Right. So this deep dive is all about that strategic relationship management or SRM, and really advanced supplier collaboration. We're basically cracking open some critical research from McKinsey and Michigan State University MSU to give you a blueprint. Speaker 2 A blueprint for what works. What truly moves the needle when you stop treating suppliers like adversaries? Speaker 3 And start treating them like, well, strategic partners. Speaker 2 And the payoff, the immediate payoff here, it sounds pretty astonishing. According to that McKinsey research, companies that successfully implement structured, ongoing collaboration with suppliers, they show significantly higher growth. Speaker 3 Oh, significantly higher, yeah. Lower operating costs, greater profitability than their industry peers. Speaker 2 Significantly higher meaning. Speaker 3 We're talking the top quartile, the best performers, beating their industry trends by almost 2 times on metrics like revenue growth, earnings before interest and taxes, EBIT. Speaker 2 Two times. Speaker 3 Wow, think about that. In today's economy, margins are tight, growth is scarce, right? Doubling the rate of your competitors just by changing how you interact with your supply chain. That's a massive competitive advantage. Unlocking Innovation, Optimization, Resilience: Overcoming Collaboration Hurdles OK, let's unpack this then. What kind of new value does this cooperation actually unlock? Because clearly it's more than just a slightly better price. Speaker 3 Absolutely. The research points to three massive sources. 1st, and maybe the most exciting one, is innovation. Speaker 2 Innovation. OK, Yeah. Speaker 3 This is when you jointly develop new products, new processes. The supplier often has some niche expertise the buyer lacks, right? Maybe material science or manufacturing optimization. You combine those insets and suddenly you can unlock totally new revenue streams for both parties. Speaker 2 That really shifts it, doesn't it? From that 0 sum game where one person's gain is another's loss to a joint win. What's the second area? Speaker 3 2nd is deep supply chain optimization. And this goes way beyond just haggling over logistics rates, right? This means taking an integrated kind of structural approach. Redesign, designing, packaging together, maybe processes, even the flow of materials. It could involve joint purchasing of raw materials to get huge scale, or sharing logistics networks to cut waste. Real integration. Speaker 2 And the third, which feels incredibly relevant right now with all the global volatility. Speaker 3 Absolutely. It's risk mitigation. You know, when you collaborate properly on capacity planning, on forecasting, you build a much more resilient combined supply chain. Speaker 2 More transparency. Speaker 3 Exactly. That transparency helps mitigate disruption risks, it ensures stability of supply, and fundamentally, it improves service levels, which down the line boosts customer satisfaction. Speaker 2 OK. So the value proposition seems crystal clear, Innovation, optimization, resilience. Yet you mentioned the research shows this huge gap between recognizing the value and actually achieving it. Speaker 3 That's the paradox, isn't it? If the reward is potentially doubling your industry's growth rate, why do so many companies really struggle to move beyond that traditional cost focus procurement model? Speaker 2 Yeah, why? This is where it gets really interesting. Because the barriers, they aren't just about, you know, people being lazy. They're systemic, right? What did the studies find were the major hurdles? Speaker 3 There are 4 main ones that kept coming up. First, just the sheer time and effort involved. These collaboration projects, they're complex, they're cross functional, and often they need significant upfront investment before you see any measurable value. So companies naturally get drawn to simpler, faster things. Speaker 2 The quick wins. Speaker 3 The quick wins. Exactly. Even if those initiatives yield far less value overall, they give you that instant gratification. They're easier to report up the chain. Speaker 2 That makes total sense, but you know, if I'm a procurement manager, how am I supposed to justify spending a whole year on some joint innovation project that might not pay off when my bonus this year is based purely on hitting short term cost reduction targets right now? Speaker 3 And you've just perfectly nailed the second and third barriers. The second one is that essential mindset change, collaboration demands shifting the entire culture away from transactional, sometimes adversarial relationships where the genuine value based partnership. But that transition it's almost impossible if the company's internal incentive system, your bonus structure, is still rewarding the old behavior. Speaker 2 So the system rewards fighting over pennies. The relationship will always snap back to that default. Speaker 3 Precisely, which leads straight into the third barrier, quantification difficulty. Speaker 2 Hard to measure. Speaker 3 Notoriously hard because collaboration takes time. It happens alongside maybe conventional cost cutting efforts or product updates. It's really difficult to track the true attributable value generated just by the partnership. Speaker 2 Right. How much of that 5% margin bump came from our joint project versus just market forces or something else we did? Speaker 3 Exactly. And if you can't measure it clearly, you can't easily reward it. And then the initiative just loses steam, people lose focus. And finally, the 4th barrier. Many leaders, according to the research, they just admit they lack the structure and the staff capabilities. They don't have people trained in relationship management, not really. And they lack the formal frameworks needed to design, govern and run these advanced cross functional programs successfully. Speaker 2 Wow. OK, so that sounds like a perfect storm, doesn't it? High potential value, but low internal structure and conflicting incentives. Recipe for stalling out. Benchmarking Collaboration: The SCI and Joint Business Planning Pretty much. And to help companies navigate this mess, McKinsey and MSU developed a really key benchmarking tool, the Supplier Collaboration Index, or SEI. Speaker 2 OK, the SEI. Speaker 3 Yeah. It provides A structured sort of objective way to measure collaboration programs across five major dimensions. The initial benchmark they did in the consumer industry was very illuminating. They got over 300 responses from about 130 organizations globally. And what was encouraging actually was that buyers and suppliers, they were generally pretty aligned on their perceptions. Speaker 2 So they saw things similarly. That suggests some honesty in the relationship. Speaker 3 Exactly. But, and this is the kicker, here's where the structure reveals the cracks. Where did the scores actually fall apart? There was this massive, really clear drop in perceived strength when the questions moved from the high level theory of collaboration to the practical boots on the ground execution. Speaker 2 Theory versus practice. Speaker 3 Totally high scores were consistently achieved in things like strategic alignment. You know that what we agree on in principle, but the scores just plummeted when it came to organizational governance and value creation. The how we actually structure this and share the rewards, that's the execution gap right there in the numbers. Speaker 2 That gives us a phenomenal road map. Then let's dive into those 5S CI dimensions, starting with the one that scored highest strategic alignment. This looks at whether buyers and suppliers agree on who's strategic and the goal of pursuing value beyond just cost, right. Speaker 3 Exactly. And the high score confirms that, you know, theoretically the will is often there. Most companies kind of know who their critical suppliers are and they can articulate some sort of mutual goal. The best practice identified here is joint business planning. Speaker 2 Joint business planning like a formal process. Speaker 3 Yeah, a formal mechanism where both parties actually sit down together and align on short term and long term objectives, mutual targets, strategies for growth, innovation, quality, the works. Speaker 2 And the power of this, there's a great example, isn't there, Unilever and Novozyme, the enzyme supplier. Speaker 3 Oh yeah, classic case. This partnership wasn't about fighting over the price per kilo of enzymes, it was about leveraging Unilever's deep knowledge of laundry stains and consumer habits with Novozymes cutting edge capability to optimize enzymes for sustainability. Speaker 2 So combining strengths. Speaker 3 Exactly, They jointly developed new enzyme solutions specifically for sustainable detergents. And the result, two significant enzyme innovations that improved washing performance for customers, increased market penetration for Unilever and helped consumers save energy by washing in cold or water. That's a tangible CO2 reduction value creation on multiple levels, all driven by that initial strategic alignment. Speaker 2 Fantastic. Building Deeper Trust and Cross-Functional Engagement for Collaboration OK, moving down the score slightly. Next is communication and trust. This usually gets a solid score right, Often built on long standing relationships where people generally trust their partners to meet basic contractual commitments. Speaker 3 Yeah, the baseline trust, will they deliver on time? That's usually there. But the research points to a major hurdle in getting to true collaboration. While partners trust each other to, say, deliver the product as promised, they're far less convinced their partner will put the interests of the collaboration itself, the joint venture, the shared goal, above their own organization's immediate self-interest. Speaker 2 Oh, OK, so it's that final mile of trust. Speaker 3 That's the hurdle. Moving from we trust you to deliver the widget to We trust you not to exploit our shared R&D idea or the cost savings we found together. That's a huge psychological lead. Speaker 2 So how do companies bridge that gap? It sounds like it requires more vulnerability. Speaker 3 It does. It requires is achieving much greater transparency over sensitive internal areas, especially things like costs. A great example of building that kind of foundational, almost vulnerable trust is the cosmetics company L'Oreal. They hold an annual Cherry Pack exhibition. Speaker 2 Cherry Pack, What's that? Speaker 3 It's this trust based forum where they allow their strategic suppliers to get an early preview of consumer trends L'Oreal is seeing, and then present their innovative packaging ideas, even ideas not yet patented, directly to L'Oreal executives. Speaker 2 Wow, sharing unpatented ideas. That's a massive demonstration of trust on both sides, really. Speaker 3 It is. It shows real commitment to partnership. It basically accelerates L'oreal's innovation pipeline because suppliers feel safe sharing their best ideas early, knowing they have guaranteed access and won't just be shopped around. That vulnerability becomes the currency of deep collaboration. Speaker 2 Interesting. OK, now let's talk about the next dimension, cross functional engagement. This one fell firmly in the mid range. You said it's a major execution challenge. Speaker 3 Huge challenge. We know the traditional links are usually OK, right? The buyer talks to the supplier sales Rep, maybe internal R&D talks to the supplier's engineer. Speaker 2 Yeah, those one to one links. Speaker 3 Those are often strong, but the research reports that wider engagement, getting manufacturing involved, quality assurance, maybe even legal or finance from both sides, talking regularly, that engagement is often described as patchy and poorly managed at best. And. Speaker 2 That's where Collaborative projects stall out, I imagine. Speaker 3 Absolutely. If the collaboration only lives within the procurement department, it's doomed to fail the minute it needs real operational support or resources from elsewhere in the business. Speaker 2 So what's the fix? Speaker 3 Successful programs use a formal approach, clearly defined roles and responsibilities across functions, not just within procurement. And crucially, this has to be backed by changes to those those pesky internal incentive systems we keep talking about. Speaker 2 Right. If the manufacturing lead isn't incentivized at all for participating in a joint supplier optimization meeting, why would they prioritize it over their own production targets? Speaker 3 They wouldn't. P&G actually addressed this head on. They created dedicated cross functional teams focused solely on open innovation with suppliers and they stressed this wasn't just an R&D side project. It required full integration between the business strategy people and the daily operations folks in all the departments. Incentives aligned. Speaker 2 Makes sense? Effective Value Sharing and Formal Organizational Governance in SRM OK, Next up is value creation and sharing. Now this one is critically important, you said, but it actually yielded a low execution score. Why the disconnect? Speaker 3 Well, procurement executives themselves rated this as the most important dimension in the SCI. They know it's crucial, yet very few companies actually track the collaborations impact effectively on metrics beyond simple price reduction. Speaker 2 So they're not tracking the impact on revenue or product margin or maybe speed to market? Speaker 3 Often not rigorously, no. Which brings us back to the measurement problem. To solve that, cost transparency is seen as the key enabler, Many leading companies are introducing clean sheet cost modeling. Speaker 2 Clean sheet cost modeling, can you break that down a bit? What does that actually involve? Speaker 3 Sure. It's basically building the products cost structure from the ground up, completely independently of the suppliers quote you calculate the true theoretical should cost. You breakdown every single element, the raw materials needed, the estimated labor hours, the factory overhead allocation, the equipment depreciation, adding a reasonable profit margin for the supplier. It's very detailed fact based work. Speaker 2 OK. And the benefit? Speaker 3 By establishing that rigorous fact based cost baseline, you often uncover opportunities for cost reduction, sometimes significant ones, McKenzie suggests. Up to 30% in some cases is that conventional adversarial negotiations would never find because the supplier would simply hide those efficiencies. Speaker 2 And once you find that potential, saving, the sharing part becomes critical. You can't just demand the supplier hand over all that newfound value. Speaker 3 Absolutely not. That kills the trust instantly. Look at ASML, the big semiconductor lithography equipment maker. They're famous for this. They understand that to get the incredibly specialized R&D they need from their suppliers, they have to incentivize them for the how do they do that? They use a sophisticated value sharing mechanism. They actively work to maintain healthy profit margins for their key suppliers. They sometimes provide financing for suppliers to upgrade their infrastructure, and they offer things like staggered purchase guarantees to give suppliers predictability. Speaker 2 So the supplier feels secure, prioritized and willing to invest in pushing the technology forward for ASML. Speaker 3 Exactly, it encourages the supplier to prioritize Asml's business and invest heavily in that cutting edge tech, ensuring SML gets first access. It's a true win win built on shared value. Speaker 2 OK. Finally, we reach organizational governance and you said this had the lowest score across the board, the single biggest execution hurdle identified. Speaker 3 Yeah, the lowest, which is honestly, it's a pretty devastating finding when you think about it. Speaker 2 Why devastating? Speaker 3 Because it implies the biggest blockage to collaboration isn't necessarily a lack of willingness between partners or even finding the value. It's a lack of internal structure within in the companies themselves. Both buyers and suppliers, according to the research, were relatively LAX and systematically tracking, valuing and aligning their own internal incentives for these complex collaborative efforts. Too much reliance on informal feedback, goodwill, maybe the occasional check in. Speaker 2 So the very foundation of this potentially game changing high value strategic initiative, it's often built on what a handshake and maybe some wishful thinking rather than formal accountability. Speaker 3 That's a pretty accurate summary for many, yes, and that's precisely why formal governance structures are so vital. This means implementing tools like two way scorecards. Speaker 2 Two way scorecards. Speaker 3 Yeah. Not just tracking the suppliers delivery metrics, but tracking mutual performance across all those five SEI dimensions we've discussed. How are both sides doing on communication, on alignment? On value creation? Speaker 2 OK, mutual accountability. Speaker 3 Right. And, perhaps even more importantly, it means establishing things like supplier advisory boards or councils. Speaker 2 And what specific role do those advisory boards play? Speaker 3 They act as a strategic forum, They help manage risks proactively, they advise on broader industry trends, and crucially, they serve as a neutral space for high level executive exchange. They prevent small operational issues from escalating into damaging transactional conflicts. Speaker 2 Got it. Like a steering committee. Speaker 3 Exactly. Toyota is famous for this. Of course, they have clearly find targets and performance metrics built right into their supplier contracts, and they govern the key relationships using a formal steering committee with senior stakeholders from both organizations. That committee defines the scope, aligns priorities, and resolves issues that inevitably cross functional lines. If there's a conflict between, say, Toyota Engineering and Procurement regarding a supplier, the steering committee resolves it systemically, not just the individual buyer arguing with the engineer. Speaker 2 That makes so much sense. Embracing the Internal Paradigm Shift for Breakthrough Collaboration Value OK, so wrapping this all up, what does this mean for you, the listener trying to navigate this increasingly complex and competitive landscape? It seems clear supplier collaboration can no longer be seen as just a nice to have sort of bolt on program as traditional purchasing really hits those hard limits we talked about. Future success seems to demand a long term structural commitment based on genuinely pursuing new value together. Speaker 3 Absolutely. The insights from the MSU and McKinsey research really confirm that the key isn't just finding better suppliers, it's about being a better partner yourself. The recommended path forward really boils down to about 8 key steps which we've touched on. Speaker 2 Can you summarize those quickly? Speaker 3 Sure, It's about clearly defining who you're truly strategic partners are aligning objectives using formal joint business planning, creating structured collaboration projects with clear value sharing mechanisms, maybe using things like clean sheet modelling, investing in dedicated people and resources for this. And maybe most crucially, hardwiring that formal governance and a culture of, well, radical transparency right into the core of your own operation. Speaker 2 Right, embedding it. Speaker 3 Exactly. And you know, if we connect this back to the bigger picture, that CIA data tells a really compelling story. The most successful collaborations, the ones getting that incredible 2X industry growth, they don't really struggle with the vision. Strategic alignment scored high. Remember, they struggle with the internal mechanisms to actually execute that vision. Governance and value creation scored low. Speaker 2 The execution gap. Speaker 3 And this raises, I think, a really important provocative question for you, the listener, to consider how much of the difficulty you might be facing in achieving successful supplier collaboration is actually external, based on maybe perceived distrust or issues with your partner. And how much of it is actually internal a fundamental lack of organizational commitment, misaligned incentives, and poor governance structures within your own company? Speaker 2 Oh, that's a tough question to ask internally. Speaker 3 It is but that internal piece. That's likely where the real paradigm shift needs to begin, and that's probably where you should focus your exploration first. Speaker 2 Absolutely. Really think about that internal structure and how you're incentivizing or maybe disincentivizing your own team to stop just fighting for cents on the dollar and start collaborating for that breakthrough value. Food for thought. Thank you for joining us for this deep dive. Speaker 1 This podcast is brought to you by Talent Supply, where the focus is on connecting procurement and supply chain professionals with the right opportunities.