Using Value Engineering for world class Supplier Relationship Management

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Thapelo Photo (HS).jpgValue Engineering is a creative approach used to optimise life-cycle costs, save time, increase profits, improve quality, expand market share, solve problems, &/or use resources more effectively (VEMSA).Thapelo Petje, CPO at MTN SA tells SmartProcurement that
"In order to create value from contracts or tenders awarded procurement professionals must look at how to manage suppliers after the contract award."

"In the South African context buying organisations ignore this important element of relationship between seller and buyer. The buying organisations treat suppliers at arm's length or leave the relationship to individuals instead of managing suppliers holistic to the delivery of their products or services," he says.

"In most cases buying organisations are only active when they go out on a tender to look for products or services. Thus after the tender has been awarded or contract signed the supplier is left on its own, and only get reviewed when the contract expires or when there is a performance issue with supply deliveries. This is due to the fact that some organisations treat Supplier Relationship as low priority in the whole scheme of things and, thus the focus of procurement professionals' energies during tender and contracting activities is not on managing supplier relationships. It is common knowledge that where Supplier Relationship Management is not in place, buying organisations are overcharged, paid without delivery, paid without proper inspection, etc. This is because the relationship is not managed or left to individuals who most of the time cannot measure deliverables in accordance with Service Level Agreements (SLA), or have too much on their plate and therefore managing supplier relationships is just another extra load."

"It is important that Supplier Relationship Management is done properly with cleary measurable criteria and must be managed similar to a Marketing Division where they focus on Customer Relationship Management (CRM). It is lamentable to find that Procurement Professionals are not quietly involved in setting this criteria as most of the buying organisation focus its efforts on tenders, contracting, and evaluation, and leave this important element to an individual or the department that uses the product or service without using a cross-functional input in managing
Supplier Relationship Management."

To use Value Engineering (VE) for effective Supplier Relationship Management it is important for a buying organization to look at the four (4)-P Cycle of Continuous Improvement below (VEMSA).

The 4-P Cycle.pngSource: VEMSA

"A buying organisation is impacted by its People, Products, Processes and Productivity. The management and continuous improvement of these four Ps will create the environment for a centre of excellence in a buying organisation. When procurement professionals are accorded the strategic role in an organisation they will contribute to the strategic imperative of the company and ensure that cost containment initiatives and avoidances are closely monitored, rather than fulfilling the procurement roles as administrative officers who push papers around or just place orders or publish tenders. "

"In order to effectively manage Supplier Relationship Management a buying organisation must categorise their products/services in the following in line with commodity strategy:
Supplier Relationship1.pngLow Value Commodities - All low value items that will need little attention.  In this category of low value items, a purchasing card can be used.  Low value items e.g.: Consumables , cleaning materials, etc.
Supply Assurance - All commodities to ensure the supply of products or services is available at all times as and when required e.g.: Office automation, security, etc.
Cost/Strategic commodities - These are commodities that contribute to the company's profit margins, cost of sales and form a key part of the overall business cost structure. These items need to be managed closely with strategic thrust.  They should be managed with strategic imperative to eliminate waste, monitor performance, and keep competitive benchmarking on price/cost. 
Strategic critical commodities - All products and services that is essential to a company's core product/technology or key success factors. This needs to be managed strategically to ensure that business does not lag behind with new state-of-the art and cutting edge technologies whilst in the position of sweating its embedded technologies."


Encouraging Suppliers to Perform

Suppliers

Customer

Growth Opportunities

Healthier Operations

Better Relationships

Respected Independence

Avoided Damage

Improved Turnaround Time

Better Communication

Improved Quality

Win-Win Negotiation

Trust Relationship

Source: Adapted from PMMS Consulting

"It is always important that Supplier Relationship Management from the buying organisation to the suppliers should contain clear communication and expectations with no ambiguity about performance and quality criteria. Suppliers need not be treated with contempt by the buying organisation just because they have buying power over suppliers and use their muscle to squeeze margins to the detriment of their operations. If suppliers are squeezed out of their margins the results are that product or service quality drops if clear specifications are not set in terms of reducing cost and driving out inefficiencies in the supplier/buyer relationship. It should be noted that Value is a subject of Function (what is specified or what is scoped) and Cost (what the supplier will respond to - its margin in relation to what is being specified). Supplier Relationship Management in the cost reduction efforts will create a conducive environment that will bring supplier expertise in re-engineering its products or services to the competitive advantage of the buying organisation."
SR Source of Business.pngSource: Winslow. M

Ten Core Elements.pngSource: Winslow
Governance Cascade.pngSource: Winslow. M

Balanced Scorecard

"A Balanced Scorecard is a concise report with a set of measures that show the organisational performance of an organisation. Because each measure is associated with one or more expected values, managers are able to monitor organisational performance (such as when it drops off). The power of Information systems means that Supply Chain Management (SCM) may increasingly be measured in the context of the Balanced Scorecard (BSC) approach. With proper measurements it then becomes possible to embed outcomes on to individual manager's KPI's (Key Performance Indicators)," says Petje.

Balanced Scorecard.pngSource: Adapted from Winslow. M

Benefits
The Supplier Relationship Management has numerous benefits to the buying organisation and some of the benefits are as follows:
  • Effective budgetary control on spend and monitoring agreed Service Level Agreement.
  • Early detection of Black Economic Empowerment (BEE) fronting (in most cases fronting is post award when spend has already taken place).
  • Effective Supplier Relationship Management will deter BEE fronting.
  • Early detection of any poor quality workmanship or service delivery.
  • Management of  Terms and Conditions so that they could not be arbitrarily  contravened in the course of contract performance.
  • Monitoring Price or Cost escalation in relation to agreed contract.
  • Corrective Action could be taken earlier rather than later.
  • Enable the Buying Organisation to focus on key Strategic suppliers or partnerships.
  • Ability to use supplier's core competencies in business process improvement.
  • Creating a reliable source of supply.
Conclusion

"Supplier Relationship Management creates an environment of mutual understanding between the buying organisation and the supplier and thus the expectations of both companies will be managed in accordance with Service Level Agreements. The supplier will be in the position to know that the success of continual supply rests in the ability to meet and exceed the buying organisation's expectation SLA and also create partnership of sustainable business development and continuous improvement.

It is at times when there is no Supplier Relationship Management in a buying organisation that business is conducted without measurable criteria, and the relationship is between individuals that hamper the ability of new suppliers that are nimble and cost effective in process to compete on equal footing. This hampers companies from bringing fresh new ideas and innovation. One  could conclude that it would hamper Small Medium Micro Enterprises (SMMEs) in establishing sustainable business relationships as the relationships are tender based rather than measurement based. As SMMEs (by the very nature they are small) relationship with buying organisations are left to the mercy of individuals and their ability to optimally perform is hampered by no measurable criteria which in turn will not create sustainable operations. It is imperative that buying organisations start to take Supplier Relationship Management as a key strategic part of their procurement strategy to ensure that there is vibrant competition in the market that will improve the overall supply chain and improvement and the industry standard. "

Reference:
White P, Value Engineering Management of South Africa (VEMSA) Aberdeen Group
Monczka / Trent / Handfield: Purchasing and Supply Chain Management
Winslow M: Developing & Managing Global Relationships
Center for Advance Purchasing Studies (CAPS)
Petje T: Affirmative Procurement: Factors Affecting Small Medium Micro Enterprises (SMMEs) in the Tender / Procurement Process.

Thapelo Petje B.Com (SA); Hons B.Com (UP); M.Com (UP) & SEP (Wits/Harvard) is Chief Procurement Officer for MTN in South Africa, a leading provider of Mobile Telecommunication Services.

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