Supplier management toolkit and guidance for leaders

It will assist you with ongoing supplier management practices within your agency and add value to those that have only just begun their supplier management journey. It provides best practice guidance for managing strategic supplier relationships and will ultimately strengthen your overall supplier relationships.

This toolkit consists of the following three sections:

• Setting up the supplier management programme
• Implementing supplier management
• Mobilisation

Setting up the supplier management programme

To set up a successful supplier management programme, you should complete:

1. The supplier management value proposition - A value proposition captures supplier management value and how this translates to benefits.
2. Supplier segmentation - Segmentation helps agencies determine which suppliers are most critical to achieving their objectives.
3. Supplier engagement strategies - Engagement strategies to be adopted with suppliers, based on the level of supplier relationship.

The supplier management value proposition

The supplier management value proposition helps you to identify additional value from strategic supplier relationships beyond the original contract. The process sets up supplier management initiatives to capture additional value through collaboration with strategic suppliers.

How to create your supplier management value proposition

Create your supplier management value proposition by following the steps outlined below. This will create a clear line of sight to your strategic objectives.

1. Identify the Government’s strategic objectives that are relevant to your agency’s initiatives. This could include broader outcomes or other procurement outcomes.
2. Identify your agency’s strategic objectives and understand how you will deliver these.
3. Finally, what is your supplier management strategy? Make sure that your supplier management strategy supports your agency’s strategic objectives, which aligns to the Government’s strategic objectives.

Further information on the Government’s priority broader outcomes is available on our website.

Broader outcomes

Measuring and sharing the value

The value proposition predicts additional value through effective management of strategic suppliers. The key principle is to engage stakeholders and secure support for the programme.

It is important to develop a method to capture direct and indirect value.

Direct value is measured financially through factors such as:

• cost reduction/avoidance – exempt from incurring future costs, eg a reduction of proposed price increase from a supplier
• net present value – captures the total value of a potential investment opportunity
• return on investment – evaluates the efficiency of an investment.

Indirect value can be documented through case studies that are validated by the agencies.

SRM focuses on collaboration and finds ways to recognise the supplier contribution. This may include direct financial recognition, supplier awards and positive publicity.

Supplier segmentation

Objectives of segmentation

The segmentation process helps you to understand risks and opportunities presented by supplier relationships. It applies a range of criteria against each supplier to determine operational criticality and strategic importance.

Segmentation allows you to make informed choices on allocation of resource, time and effort. It also allows you to deliver the expected contracted value and create additional value beyond contractual obligations.

Segmentation principles

• Segmentation indicates the engagement strategies that could be adopted.
• Segmentation uses multiple weighted criteria to assess the risk and opportunity presented by supplier relationships.
• Segmentation takes into account both category and supplier attributes.
• Segmentation should be reviewed on a regular basis (eg annually).

Segmentation process

The segmentation process is broken down into three steps:

Step 1 - Category segmentation

In a category segmentation, group your contracts according to products and/or services. For example, professional services, utilities, IT hardware and software as a solution.

You should then segment categories based on the criticality of supply and expenditure to create a clear picture of how significant each category is. You can do this by:

• Capturing data at the category level.
• Identifying weighted criticality criteria.
• Evaluating each category against the questions.
• Maintaining a central record and re-validate annually.

The category segmentation should be completed annually and endorsed by relevant stakeholders and the procurement team. The output identifies each category’s criticality to the business.

Step 2 - Supplier segmentation

In a supplier segmentation, group your suppliers based on their value potential and criticality to differentiate between suppliers within the same category. You can do this by:

• Capturing value potential information by supplier
• Identifying weighted supplier criticality criteria
• Evaluating each supplier against the question set
• Reviewing your supplier segmentation matrix

This process assesses the individual suppliers by using a set of weighted criteria; suppliers are positioned based on criticality and value potential.

Criticality considers factors including:

• Ability to consistently supply
• Ease of accessing alternative supplier
• Impact on compliance with regulatory and sustainability obligations
• Criticality to performance

Value potential includes factors such as:

• Supplier’s ability to provide value
• Supplier’s likeliness to co-operate

The output places each supplier into one of the nine boxes, as illustrated in the figure below.

The nine-box model provides guidance on how each supplier should be managed. The focus of supplier management is dependent on where the supplier sits in the 9-box model below.

Step 3 - Segmentation validation

After each segmentation cycle, the validation stage ensures you are managing suppliers at the correct tier and you get stakeholder buy-in.

Complete the validation using the following steps:

1. Identify and engage the appropriate stakeholders.
2. Document segmentation results.
3. Have appropriate engagement strategies available.
4. Discuss and refine output as appropriate.

Look for suppliers who cross several categories. For example, if a supplier is segmented a number of times (eg in different categories) as a Tier 2 supplier, there may be a case for promotion to Tier 1 supplier. This situation is something that can also be resolved based on ‘feel’ or the opinions of individuals within your organisation.

Supplier engagement strategies

Supplier engagement strategies by level

The level of engagement required with a supplier can be determined by dividing the chart into tiers to help you decide how to allocate resources.

Tier 1– Strategic

Suppliers in this tier should go through all the recommended engagement strategies.

Tier 2 – Collaborative

Very similar to those at Tier 1, however the executive level sponsors may be less senior, and meetings will be less frequent.

Tier 3 – Managed

Focus on basic contract, risk, and performance management where deemed necessary. There shouldn’t be a need for relationship management activities for suppliers in this tier.

Tier 4 – Tactical

Suppliers in this tier will have relatively low value potential and relatively low criticality. Engagement strategies at this level should focus on transactional efficiency and maintaining governance.

The following section lists the specific engagement strategies for the supplier relationships from the segmentation process. The ’ticks’ specify the activities that are essential under each tier.

Meeting structure and frequency

The arrangement of structured review meetings with the supplier’s client-facing team and internal stakeholders should be arranged by the Relationship Manager, once roles and responsibilities have been assigned.

These meetings should be established at a set frequency throughout the life cycle of the supplier relationship. This should be consistent with the level of interaction required by the engagement strategy. The list of attendees required to join each meeting will depend on the type of meeting. The type of meeting can be classified into three levels:

• Strategic
• Relationship
• Operational

Consider pre-existing and well-functioning governance structures and scheduled meetings. Where robust structures are already in place, there may not be a need to change. Adding an agenda item to address supplier management objectives may be sufficient.

The type and frequency for each type of meeting are in the tables below. This allows a degree of flexibility for face-to-face interaction with suppliers. As a minimum, the subsequent meeting frequencies should be followed.

The agenda for these meetings should also be structured and agreed in advance with internal agency participants and with the supplier.

Implementing supplier management

The New Zealand Government relies heavily on suppliers to deliver many different products and services. Robust implementation of a clear supplier relationship management framework, processes, and tools allows us to leverage the full potential of government as a customer.

There are several activities which form a supplier relationship management framework. Critical elements to consider include:

• Value opportunities beyond the contract
• Internal and supplier kick-off meetings
• Supplier relationship management value proposition
• Stakeholder engagement
• Responsibility, Accountability, Consultation, and Information (RACI)

Value opportunities beyond the contract

Supplier relationship management (SRM) offers the potential to create and deliver value that extends across the organisation. Listed below are examples of value opportunities that can be approached collaboratively with key suppliers.

Contract, performance, and risk optimisation

The supplier should adhere to the documented measures to capture the intended value of the contract. These include:

• Governance protocols
• Contract management
• Risk management policies

Manage the contract

Supplier innovation

Use a relationship model that encourages the sharing of information. This can include supplier forums that focus on the sharing of new ideas or implementing discussions around innovation into strategic meetings. Ultimately, a supplier will be more willing to discuss their product/service developments. In addition, the better they understand your own challenges the more likely they will increase supplier willingness to design innovative solutions.

Customer of choice

A ‘customer of choice’ is an organisation that, through its practices and behaviours, positions itself as a preferred customer to its key suppliers. SRM encourages the likelihood of becoming a ‘customer of choice’ through emphasis on collaboration, multi-level supplier relationships and partnership development.

Customers of choice enjoy a range of benefits including:

• Suppliers' prioritisation of your needs
• Additional resource allocation
• Preferential assignment of supplier resources
• Preferential pricing
• General responsiveness and willingness to ‘go the extra mile’

What makes a customer attractive to a supplier:

• Brand – suppliers aspire to work with well-known organisations that are well-positioned in their market and can provide long-term business continuity and stability.
• Revenue and profitability – suppliers are attracted by organisations that have budgets and demand that will create a good revenue stream and a reasonable margin.
• Ease of doing business – suppliers value relationships where it is easy to do business, where the cost to serve is minimised.

It is generally considered that ease of doing business is the one element that will sustain a healthy relationship and contribute most towards being a customer of choice. This can be achieved by paying attention to the attributes that suppliers deem most important in building a successful relationship.

Transactional efficiency and ease of doing business

The benefits of improving transactional efficiency are clear in terms of cost and time, however, transactional efficiency is also important. In many cases, simple transactional details such as timeliness and payment improve supplier relationships.

Risk reduction

Working collaboratively with suppliers to better anticipate changes to risk profiles. Also, proactively develop joint mitigation strategies with suppliers.

Social and environmental policy

Working closely with suppliers on sustainability to better understand and mitigate risk exposure. This will drive improvement and enable you to achieve your policy objectives.

Negotiation outcomes

SRM achieves better outcomes for both parties through reduced time spent negotiating, less legal involvement, more responsible allocation of risk, and more win-win outcomes.

Issue resolution

By implementing the SRM governance model principles, you create structures and behaviours to resolve issues quickly and equitably. This can avoid costly litigation and breakdown of strategic supplier relationships.

Supplier relationship management value proposition

SRM value is based on a set of value opportunities on the supplier’s side, that will be applicable to you. The supplier value opportunities are key to obtaining engagement and support from suppliers.

Stakeholder engagement

Analysis and management strategies

Stakeholder engagement and support is essential for the success of the supplier relationship management (SRM) programme. The stakeholder management tool helps identify internal and external stakeholders, establish current stakeholder influence and support for SRM. This helps you develop appropriate management strategies and engagement plans.

Communication strategies

An effective communication strategy facilitates the change management needed to improve supplier relationships. Your communications strategy should establish clear objectives, audiences, messages, tools and activities, resources and timescales.

Your objectives are the key to the success of your communications strategy. They should ensure that your communications strategy is organisationally driven rather than communications driven. Your communications activity is not an end in itself but should serve and hence be aligned with your objectives. Ask yourself what you can do within communications to help you achieve your objectives. Work with your own agency communications colleagues and protocols.

Responsibility, Accountability, Consultation, and Information (RACI)

Clearly defined roles and responsibilities across all activities and interactions with the supplier is fundamental to effective supplier relationship management.

A typical approach involves listing all activities and interactions with a given supplier and allocating responsibility, accountability, consultation, and information against the supplier management roles identified in the operating model.

In the case of more complex supplier relationships that span several agencies, the output should be a single RACI for each supplier relationship.

Other approaches to the RACI model are described under ‘Set up governance and project structure’.

Set up governance and project structure

Internal and supplier kick off meetings

The internal and the supplier kick-off meetings bring together the key supplier relationship management stakeholders. Attendees for the internal kick-off meeting may include the Executive Relationship Owner, Relationship Manager, and other internal stakeholders. Attendees for the supplier kick-off meeting include the Executive Relationship Owner, Relationship Manager, and the Account Manager. The supplier will likely have attendees representing the same functions from their business.

The objective of these meetings is to agree on the approach, activities, milestones, timelines, roles, responsibilities and expectations for the supplier relationship management programme.

A typical internal kick-off meeting agenda will consist of:

• Meeting purpose and desired outcomes
• Recap the supplier relationship strategy and expectations
• Discuss and validate the supplier relationship management value opportunities
• Discuss and validate the governance, reporting and RACI.

In addition to the meeting agenda items from the internal kick-off meeting, a typical supplier kick-off meeting agenda will also consist of:

• Discuss and validate the supplier’s value proposition
• Next steps – share the mobilisation plan.

Mobilisation stage

The mobilisation stage acknowledges that each use of the SRM toolkit will be unique to each situation – and to each relationship between supplier and internal stakeholders. The templates and tips in the set-up and implementation phase are there to help you progress towards a joint business planning workshop and ultimately the creation of a joint business plan.

The SRM value proposition template and the kick-off meeting template can be used by agencies and suppliers to help identify potential value creating opportunities. These can be brought to a joint business planning workshop.