Blog by Dylan Persuad, Managing Director, Eval-Source
As the year 2000 approached, the catchphrase “lean manufacturing” was loosely thrown around in manufacturing industries. The media and software vendors led organizations to believe that a supplier relationship management (SRM) system could achieve the promise of lean. Yet the benefits promised by SRM systems were not kept. As organizations matured, they realized how the benefits were interrelated. Information sharing, sourcing, purchasing, and supplier relationships could translate into increased customer satisfaction and control of global spending. How to efficiently predict consumer demand was beginning to come into focus. As organizations realized the need for these separate functionalities, they started to look toward a solution that would combine these tasks. Enter SRM.
As time marched on, organizations were less than impressed by the unacceptable results from how these solutions were implemented. Vendors and resellers did not educate organizations on the full user capacity or on how everything ties together. Lack of knowledge transfer from vendor to organization gave the perception that the system did not meet the organizations’ needs. Organizations lacked an understanding of how to translate the benefits of an SRM system into tangible results. They also lacked an understanding of how all the system’s features could help businesses save money, increase operational efficiency, and control global spending. Stories of failed implementations and misconceptions of what the software system promised rapidly brought the development of this “next generation” business tool to a near-complete halt.
Several years later, SRM systems are now re-emerging as the next big promise. Several of the benefits that an SRM system can deliver, such as management of globalization, adoption of mandated standards, inventory visibility, methods of managing stabilizations of technologies, and dealing with supplier auditing issues, will be examined.
Reasons for the Resurfacing of SRMGlobalization
As organizations expand and become global operating entities, SRM is viewed as a method to help manage the process. The manufacturing of products is now largely outsourced to the East, as North America has become a service-based economy. This change in business structure has caused organizations to reexamine their current systems to determine if they can satisfy the new economic conditions created by this shift in the economy.
Organizations must deal with foreign suppliers, but how? Information must flow freely between domestic and international channels and from one system to another. Global enterprise resource planning (ERP) – distribution products, such as those from SAP and Oracle, often provide such tools as supplier portals. A supplier portal is a tool for compiling information (a significant feature within the SRM software) to build contacts, audit functions of each supplier or partner, verify quality of products, and monitor supplier and partner performance. Users can think of this as customer relationship management (CRM) for suppliers.
This is done by way of supplier scorecards, establishment of sourcing relationships, the creation of supplier information, establishment and maintenance of procurement channels, etc. If a North American organization has overseas trading partners, these partners may use the SRM system as an effective means to link up with western operations and schedule shipments, manage trading partners, control sourcing strategies at the point of origin, manage supply overseas, and aid in the organizational planning of inventory to satisfy customer shipments
Large organizations, such as Wal-Mart, Target, Albertson’s Metro, etc. are mandating standards that their suppliers must conform to—that is, do business their way as a condition of partner interaction. Suppliers are forced to comply with standards that were created specifically to reduce costs, manage the supply chain from end to end, and ultimately lead to lower prices and increased customer satisfaction. Small suppliers that cannot conform to these guidelines are forced to exit from a business relationship with the originating company.
A system such as Wal-Mart’s Retail Link was designed as a tool specifically to manage inventory, suppliers, and procurement and to enable full partner disclosure to adapt to changing customer demands. The thought behind the system was that if partners could share order information, they could more accurately prevent “stock outs,” adjust order quantities, predict and accommodate forecasted quantities, and essentially reduce the size of the supply chain, leading to more selection and lower prices for the consumer.
Retail Link performs the following:
- analyzes and controls global spend by category, volume, and product
- manages service level agreements (SLAs)
- avoids duplication of contracts or materials to the same supplier
- consolidates purchasing volumes and improves supplier selection
- involves partners in the early phases of product development
Organizations maintain that inventory visibility makes them more competitive. “How much?”, “Where is it?”, “What’s its status?”, “Who currently has it?” and “When can it be delivered?” are questions all organizations ask about their inventory. Knowing and understanding these variables allow an organization to make better decisions pertaining to demand planning, replenishment stocking, and, most importantly, availability of inventory to fulfill customer orders. SRM systems are great tools to accomplish these business objectives. Even vendor managed inventory (VMI) is usually handled by some form of SRM system, normally through the supplier portal.
With the capabilities to view “in transit” inventory over multiple modes, an organization can control and manage critical supply problems. The SRM system provides a unified view of inventory from one source that supports the business. Issues such as custom delays, extended lead times, scheduling conflicts, and transportation problems, to name just a few obstacles, can be adjusted and addressed within the SRM software. This advance notice of possible disruption to the supply of goods can provide alerts to all partners affected so that they may react accordingly and adjust to the disruption. The ability to view “in transit” products allows for accurate forecasting and replenishment. The collaboration of all the affected business partners allows organizations to respond to rapid market changes, and to deliver goods to consumers on time and at decent prices.
Stabilization of Technologies
The new millennium has brought stabilization of technology. The rapid growth of the Internet has allowed organizations to use stable technology to share information over secure channels. The second nature of this method of communication has allowed for stable connections between locations as well as increased throughputs of network communications, which had previously not been reliable in the 90s. Modem connections gave way to e-mail, digital subscriber line (DSL), and T1 connections, and fax machines became electronic data interchange (EDI), extensible markup language (XML), and flat files that were sent electronically. This level of technology may have been previously overlooked or neglected due to poor information technology (IT) infrastructure and non-communication between partners. These technological advances were catalysts in taking partner interactions and trading to the next level. As organizations have built their networks and stable connections are now the norm, the industry is reaping the rewards of SRM systems
Web services have enabled business-to-business communication to progress. This is the base technology used for supplier portals, and it requires access from several locations globally. Any business partner can log in and check the status of a part, peruse an order, check an estimated delivery time, etc. based on user security. This convenience and information sharing is expected to be standard, as organizations try to limit shipping costs, plan efficient routes for their goods, control and manage suppliers, and minimize costs. Stable technology allows organizations options when implementing SRM systems. In terms of supply chain execution software available, only recently have vendors started to offer hosted models of software as a service (SaaS). Traditionally, this type of software was available only as in-house applications. Today, companies in all supply chain disciplines offer SaaS solutions, from demand management and warehouse management systems (WMS) to SRM. E2open, for one, offers a full SRM-hosted solution.Secure access and availability of industry-specific hubs (such as automotive or aerospace) are offered through hosted solutions. This level of collaboration capability may not be possible through an in-house system. A hosted solution offers access to other trading partners online. This service makes it possible for even small organizations to compete globally and comply with mandated standards imposed by trading partners.
Organizations have difficulty holding suppliers responsible. Metrics can easily be built within an SRM system because supplier data is located within the system. The collection of data gathered from the portal repository lends itself well to holding suppliers responsible for quality and compliance issues. According to an Archstone Consulting survey conducted in August 2006, 58 percent of organizations fail to use incentives and penalties to audit suppliers. Resources (approximately 49 percent) are not properly assigned to supplier management, consequently causing quality issues and duplication of resource managers for the same vendor accounts. Organizations assign duplicate resources to accounts without realizing it, which can be due to having several points of contact instead of just one, and time and money are spent unnecessarily to do the same job twice.
Issues with quality and lack of compliance are not accurately tracked. According to Archstone Consulting, 45 percent of organizations believe that suppliers do not comply with their own SLAs when they deliver product. Organizations have been looking at ways to change their sourcing and procurement strategies to get the above metrics back in line. They are beginning to see the value of the information a portal can supply. Consequently, the data aggregated from an SRM system can be used to analyze spend, cost, and performance, and eventually to align the data to the business practices.
Organizations are realizing that the issues an SRM system can address can significantly influence their bottom lines. Factors such as globalization, mandated standards, inventory visibility, stabilization of technologies, and supplier accountability are forcing organizations to reevaluate the need for an SRM system.
SRM solutions exist today that were not available just a few years ago. The possibility of a hosted solution for SRM, such as those offered by SAP and E2Open, are now more available than they have ever been. Of course, an organization always has the option of implementing in-house applications. Stabilization of technology has lowered the price points of these systems, which are allowing more organizations to take advantage of benefit from the vast benefits an SRM system can offer.Common benefits of an SRM system include
- increased customer service
- accurate forecasting and product planning
- control of global spending
- control of procurement and sourcing
- greater inventory visibility
- reduced inventory carrying and holding costs
If these are organizational goals that are mandated from the top down, then an SRM system may be the solution to implement some of these initiatives, while receiving a return on investment (ROI) that is palatable.
Eval-Source provides professional services and products for enterprise software evaluation, system benchmarking, software investment evaluation, and procurement automation outsourcing. For more information, check out www.eval-source.com.