2- rules of engagement supplier
TRANSCRIPT
8132019 2- Rules of Engagement Supplier
httpslidepdfcomreaderfull2-rules-of-engagement-supplier 17
Rules of engagement A better way to interact with suppliers
To develop and maintain collaborative relationships with far-flung suppliers companies should first segment them and
then implement interaction models that set the rules of engagement Heres how to apply this approach in your own
operation
In todays global business environment success depends more than ever on supplier relationships how effectively companies select theirsuppliers and then manage measure and grow those relationships Indeed the bond between buyers and suppliers is so important thatrelationship may be too weak a word the successful ones are more like collaborative partnerships in which suppliers help their customersachieve their business objectives
Among the many levers that companies need to employ in order to successfully develop and maintain such collaborations across the valuechain are supplier segmentation based on the business objectives the suppliers help you achieve and mutually agreed-upon interaction models or supplier-specific action plans that set the rules of engagement In this article we will discussthe value of those approaches and how to implement them
Article Figures
[Figure 1] A three-step process for supplier segmentation Enlarge this image
[Figure 2] Supplier clusters profiles Enlarge this image
8132019 2- Rules of Engagement Supplier
httpslidepdfcomreaderfull2-rules-of-engagement-supplier 27
[Figure 3] Supplier segments objectives Enlarge this image
[Figure 4] Example organization of interaction principles Enlarge this image
[Figure 5] Supplier interaction model Enlarge this image
SUPPLIER SEGMENTATION
Many companies today have accumulated a proliferation of unmanaged or poorly managed suppliers that are supporting their businesses
This situation often arises out of historical imperatives to chase incremental sales and cost improvements mdasha strategy that in some cases has
contributed to substantial value creation but not without incurring certain costs
In general companies are plagued with a range of problems that stem from supplier proliferation some of which can be attributed to their
inability to effectively manage those partners Common issues that arise from this situation include failures of products to conform to
company or regulatory standards uncompetitive customer service levels due to unforeseen delays and miscommunications and overly
complex product designs and portfolio offerings that are not sufficiently differentiated in the minds of consumers and other customers
Moreover as suppliers proliferate supply risk exposure mdashfrom price volatility political and economic instability environmental disasters
and a host of other difficult-to-predict factors mdashoften increases to an unacceptably high level
In short todays supply management challenges go beyond cost containment Tomorrows leaders will differentiate themselves not through
achieving lower costs but through producing a range of other benefits That is theyll create more value by optimizing their effectiveness at
every step of the value chain
One effective way to achieve this is to organize efforts a round specific business objectives Because senior management is well aware of
challenges facing the company it has likely set objectives to meet those challenges These might include for example objectives aimed at
reducing nonconformances improving customer service or lowering supply risk exposure Sometimes the objectives at the corporate level
8132019 2- Rules of Engagement Supplier
httpslidepdfcomreaderfull2-rules-of-engagement-supplier 37
can be broad and somewhat theoretical but in a well-functioning organization the business planning organization should translate them into
more specific and useful mdashthough often multidimensional and complex mdashactions at the business-unit level and even at the level of individual
functions such as manufacturing or procurement (Throughout the rest of this article well use the term business objectives to refer to
these specifics)
A supplier segmentation effort mdashlike every business activity mdashshould be driven by practical business objectives Different businesses have
different objectives and so supplier evaluations should focus on the suppliers abilities to deliver on those objectives in ways that create value
For example if you have an objective of reducing nonconformances then the suppliers that can help you meet that objective are creating
more value than the ones that provide marginally better cost performance mdashand supplier segmentation should reflect that Figure 1
summarizes this process designing supplier segmentation based on business objectives segmenting suppliers according to their capabilities
against those objectives and creating interaction models and action plans (In the second half of this article well discuss how these action
plans are developed)
Thus when conducting supplier segmentation a company must look both outward and inward The outward part consists of a rigorous
analytical evaluation of suppliers capabilities For example Supplier X is good at innovation but has a high cost structure Supplier Y is the
cheapest but is not always dependable and Supplier Z is slightly more expensive but is reliable Of course it should be much more
sophisticated than that and you may even borrow from advanced statistical methods (such as software that performs clustering analyses to
find patterns within a seemingly disparate sample set) to identify different types of capability clusters in your supply base But in order to
correctly judge which combinations of suppliers create the most value it is also necessary to look inward mdashto get cross-functional
involvement in prioritizing the capabilities needed to achieve your business objectives Figure 2 shows an example of this type of clustering
analysis
Think of the statistically-driven analytical evaluation as a bottom-up approach to segmenting suppliers and the inward look at your
companys strategic priorities as more of a top-down approach By combining these into a sort of hybrid you gain the benefits of both
Bottom-up statistical clustering segments suppliers with similar characteristics Meanwhile top-down strategic clustering defines which
segments have the most important strategic implications You can then seek closer partnerships with the suppliers in the strongest segments
while urging suppliers in the weaker segments to either improve their capabilities or exit your supply chain
We can illustrate with an example Lets say that your top-down analysis identifies three strategic priorities reducing nonconformances
lowering supply risk exposure and ensuring dependable delivery Your bottom-up analysis mdashalthough it has evaluated other capabilities such
as containing costs and innovating mdashshould group suppliers based on their performance in just these three characteristics
Some suppliers are good at all three mdashtheyre your best partners
8132019 2- Rules of Engagement Supplier
httpslidepdfcomreaderfull2-rules-of-engagement-supplier 47
Others may be good at two out of three mdash you can explore with them how to improve their scores in the lagging category
Meanwhile you can address internally how to mitigate their weaknesses for example by developing risk management strategies
for the suppliers that expose you to certain risks
Others may be good at none or only one of your three priorities and these may be targets for rationalization Granted if the one
dimension in which a supplier excels is truly strategic then you might retain it as a niche supplier And if a supplier provides you
with something that is critical and there are no easily obtained substitutes then you may have to stay with that supplier for a
while But in general youll find that some suppliers in this segment could be eliminated a process that will help you achieve your
business objectives more quickly
Note that the results of segmentation are thus a series of action plans The action plans for top suppliers include the details of how to deepen
and strengthen your collaborative partnership For suppliers with potential the action plans involve encouraging them to meet that potential
And for less capable suppliers the action plans may involve ending the relationship Figure 3 outlines a hypothetical example of this
approach
In short suppliers should be segmented and managed differently based on the business objectives they help you achieve Furthermore this
segmentation should involve an analytical technique that is both repeatable and objective Of course each individual situation brings
complications But this is where your internal strategic analysis can get very interesting and potentially very rewarding
For example youre likely to have more than three strategic priorities mdashdepending on the complexity of your portfolio your strategic
priorities may differ dramatically for different product lines Some product lines may require innovative capabilities others reliability and
others a low cost structure But if you can group together products with similar objectives then you can manage each set of supply chains for
its objectives In other words youll be segmenting your product base as well as your supply base From a mass of undifferentiated needs and
capabilities you will segment the needs of certain groups of products along with the capabilities of certain groups of suppl iers The more you
can pair the product groups needs with suppliers capabilities the more value your segmentation effort can create
Doing segmentation this way often involves a cultural shift for supply chain functions like manufacturing and procurement To accomplish
these aims these functions have to be highly strategic in how they think about long-term business objectives They have to work
collaboratively with other functions to achieve these goals And they must be profoundly action-oriented when translating segmentation
analyses into results We dont want to minimize the effort that such a transformation may require But we do want to point out the benefits
of making that effort Because it is driven by business objectives this type of segmentation has the powerful effect of creating value in areas
that are important to upper management
INTERACTION MODELS
Value is created not by a segmentation analysis but by the actions you take based on that analysis The action of rationalizing inappropriate
suppliers is a good start But the real potential comes in the collaborative mutually supportive relationships you establish with the suppliers
8132019 2- Rules of Engagement Supplier
httpslidepdfcomreaderfull2-rules-of-engagement-supplier 57
whose capabilities best fit your needs By building trust and transparency with these companies you can eliminate inefficiencies collaborate
on innovations and take advantage of each others strengths
Any such partnership requires an interaction model The interaction model defines expectations around how you interact at all times in
the relationship how much information you share when and how you share it mdashin essence the rules of engagement For that reason some
companies prefer to think of an interaction model as an engagement model
Unlike a contract which tends to be the work of lawyers and be written in legal language an interaction model is a more conceptual
framework that includes roles and responsibilities process maps decision guidelines and so forth This model defines for your cross-
functional team which partner-suppliers to engage with when and how The more explicit the model the more useful it will be in the day-to-
day execution of joint activities with your suppliers
Thus to achieve a collaborative partnership you must first design (or redesign) your partnership models to build on your strengths and
achieve your business objectives You should have an interaction model for each segment or cluster of suppliers mdasheach set of suppliers with
whom you are going to create value in similar ways
The interaction points are the key to collaboration Indeed the points where partnerships often break down mdashand thus deserve particular
attention in the model mdashare the interfaces of two elements of the value chain such as Source and Make or Make and Deliver Value is created
when you make your value chain as seamless as possible these interfaces represent the old seams
As you develop interaction models internally you may want to think about a set of interaction principles that describe where and how you
will work differently than in the past For example to achieve business objectives aimed at reducing delivery time you might develop
interaction principles around the planning function that define how supply and demand planning and inventory management activities are
managed and by whom (you or your supplier-partner) These principles would be associated with specific measures of desired outcomes
such as fill rate on time in full delivery or end-to-end lead time Figure 4 shows one example of how companies can organize and define
their interaction principles
Developing interaction models for numerous supplier-partners may sound like a lot of work mdash but dont forget this is an outcome of your
segmentation effort The interaction model defined at the segment level provides the broad blueprint for how to engage suppliers in that
segment When applying the blueprint to a specific supplier you may want to tailor it based on unique market conditions or that suppliers
constraints Such tailoring should be a set of slight inexpensive and manageable tweaks (see Figure 5) Consider the example discussed
earlier of a segment of suppliers that perform well in most of your critical categories but expose you to too many risks For this segment
some of your critical interaction principles will center on risk management and your interaction model should implement them with a focus
on communicating evaluating and minimizing potential exposures You may have specific evaluation methods for a particular supplier but
the principles remain the same
8132019 2- Rules of Engagement Supplier
httpslidepdfcomreaderfull2-rules-of-engagement-supplier 67
At the supplier level you then create specific action plans that define activities you will conduct with the supplier to implement the
interaction model For example lets say your Segment A interaction model has suppliers performing both supply and demand planning
and perhaps collocating their demand planners with your brand team But if one supplier in Segment A has not yet performed demand
planning then part of the action plan would be for your planning organization to help that supplier transition to these activities including
introducing them to their counterparts in marketing and procurement
The segment interaction model and supplier-specific action plans then are much like a contract but rather than outline a legal arrangement
they pragmatically outline the operational nature of your relationship who is responsible for which activities and how those will be
measured What process adjustments can lead to maximum savings How will innovation performance be measured Who will participate in
internal client cross-functional teams and how often will they perform reviews
These types of questions are vital to the relationship and by using your segment interaction model as a blueprint for specific action plans you
ensure that they are resolved early on and ideally to mutual advantage The proof of this success of course will come in actual performance
Thus as part of the model you should design supplier scorecards to track and provide feedback on supplier performance By building
measurements into every dimension of the model you will ensure that problems can be quickly identified and addressed
In short with an interaction model and supplier-specific action plans you can apply key value drivers strategically ahead of time using a
disciplined objective repeatable approach
In which areas do you need to control risk
Which steps in the supply planning process have the greatest effects on your key value drivers (cost for example) And how can
you best achieve results at those steps (such as by using the suppliers volume to gain discounts)
How can you gain value beyond cost benefits (by cutting time to market or improving reliability or maximizing risk management
practices for example) How should responsibilities be divided so as to capture that value
These questions will inevitably vary by company and by segment They like your segmentation strategy as a whole are determined by your
business objectives
Transparency for all
Collaboration with suppliers is becoming a high priority for an increasing number of companies Leaders in industries such as consumer
packaged goods where brutal competition has forced them to focus on efficiency recognize that they must investigate all potential levers for
creating value As a result they are actively pursuing collaboration across the supply chain But you can expect the trend to hit other
industries as well
8132019 2- Rules of Engagement Supplier
httpslidepdfcomreaderfull2-rules-of-engagement-supplier 77
For example weve recently had some experience in the pharmaceutical industry where leaders have long been distinguished by superior
innovation and marketing rather than efficiency Yet even here its clear that tomorrows leaders will improve earnings not through those
factors but through excellence in operations 1The pharmaceutical industry is abandoning vertical integration and is instead becoming a
world of collaborative partners where orchestration is the essential competency
Of course if orchestration were easy it would already have been accomplished mdashin pharmaceuticals as well as in other industries Although
many companies have productively leveraged collaborative partnerships it is nevertheless a daunting task to try to coordinate the activities of
a far-flung supply chain across a large and diverse portfolio and so the concepts of segmentation and interaction models are still limited in
their application In fact thats why the first step toward truly thriving with collaborative partnerships has to be to segment the supply base
into smaller more manageable chunks We believe that coming years will see more such partnerships in most industries mdashand the best way to
start on that journey is to segment your supply base to identify good candidates for partnership
Regardless of industry partnerships are all about transparency Not only must you be willing to be transparent with a partner you trust but
the partnership also depends on both sides taking advantage of that transparency to act quickly and in mutually beneficial ways
A good interaction model and supplier-specific action plans increase transparency mdashmaking you a more desirable partner for your suppliers
In this way successful execution of the segmentation effort and resulting partnerships better achieves your (and your managements)
business objectives
8132019 2- Rules of Engagement Supplier
httpslidepdfcomreaderfull2-rules-of-engagement-supplier 27
[Figure 3] Supplier segments objectives Enlarge this image
[Figure 4] Example organization of interaction principles Enlarge this image
[Figure 5] Supplier interaction model Enlarge this image
SUPPLIER SEGMENTATION
Many companies today have accumulated a proliferation of unmanaged or poorly managed suppliers that are supporting their businesses
This situation often arises out of historical imperatives to chase incremental sales and cost improvements mdasha strategy that in some cases has
contributed to substantial value creation but not without incurring certain costs
In general companies are plagued with a range of problems that stem from supplier proliferation some of which can be attributed to their
inability to effectively manage those partners Common issues that arise from this situation include failures of products to conform to
company or regulatory standards uncompetitive customer service levels due to unforeseen delays and miscommunications and overly
complex product designs and portfolio offerings that are not sufficiently differentiated in the minds of consumers and other customers
Moreover as suppliers proliferate supply risk exposure mdashfrom price volatility political and economic instability environmental disasters
and a host of other difficult-to-predict factors mdashoften increases to an unacceptably high level
In short todays supply management challenges go beyond cost containment Tomorrows leaders will differentiate themselves not through
achieving lower costs but through producing a range of other benefits That is theyll create more value by optimizing their effectiveness at
every step of the value chain
One effective way to achieve this is to organize efforts a round specific business objectives Because senior management is well aware of
challenges facing the company it has likely set objectives to meet those challenges These might include for example objectives aimed at
reducing nonconformances improving customer service or lowering supply risk exposure Sometimes the objectives at the corporate level
8132019 2- Rules of Engagement Supplier
httpslidepdfcomreaderfull2-rules-of-engagement-supplier 37
can be broad and somewhat theoretical but in a well-functioning organization the business planning organization should translate them into
more specific and useful mdashthough often multidimensional and complex mdashactions at the business-unit level and even at the level of individual
functions such as manufacturing or procurement (Throughout the rest of this article well use the term business objectives to refer to
these specifics)
A supplier segmentation effort mdashlike every business activity mdashshould be driven by practical business objectives Different businesses have
different objectives and so supplier evaluations should focus on the suppliers abilities to deliver on those objectives in ways that create value
For example if you have an objective of reducing nonconformances then the suppliers that can help you meet that objective are creating
more value than the ones that provide marginally better cost performance mdashand supplier segmentation should reflect that Figure 1
summarizes this process designing supplier segmentation based on business objectives segmenting suppliers according to their capabilities
against those objectives and creating interaction models and action plans (In the second half of this article well discuss how these action
plans are developed)
Thus when conducting supplier segmentation a company must look both outward and inward The outward part consists of a rigorous
analytical evaluation of suppliers capabilities For example Supplier X is good at innovation but has a high cost structure Supplier Y is the
cheapest but is not always dependable and Supplier Z is slightly more expensive but is reliable Of course it should be much more
sophisticated than that and you may even borrow from advanced statistical methods (such as software that performs clustering analyses to
find patterns within a seemingly disparate sample set) to identify different types of capability clusters in your supply base But in order to
correctly judge which combinations of suppliers create the most value it is also necessary to look inward mdashto get cross-functional
involvement in prioritizing the capabilities needed to achieve your business objectives Figure 2 shows an example of this type of clustering
analysis
Think of the statistically-driven analytical evaluation as a bottom-up approach to segmenting suppliers and the inward look at your
companys strategic priorities as more of a top-down approach By combining these into a sort of hybrid you gain the benefits of both
Bottom-up statistical clustering segments suppliers with similar characteristics Meanwhile top-down strategic clustering defines which
segments have the most important strategic implications You can then seek closer partnerships with the suppliers in the strongest segments
while urging suppliers in the weaker segments to either improve their capabilities or exit your supply chain
We can illustrate with an example Lets say that your top-down analysis identifies three strategic priorities reducing nonconformances
lowering supply risk exposure and ensuring dependable delivery Your bottom-up analysis mdashalthough it has evaluated other capabilities such
as containing costs and innovating mdashshould group suppliers based on their performance in just these three characteristics
Some suppliers are good at all three mdashtheyre your best partners
8132019 2- Rules of Engagement Supplier
httpslidepdfcomreaderfull2-rules-of-engagement-supplier 47
Others may be good at two out of three mdash you can explore with them how to improve their scores in the lagging category
Meanwhile you can address internally how to mitigate their weaknesses for example by developing risk management strategies
for the suppliers that expose you to certain risks
Others may be good at none or only one of your three priorities and these may be targets for rationalization Granted if the one
dimension in which a supplier excels is truly strategic then you might retain it as a niche supplier And if a supplier provides you
with something that is critical and there are no easily obtained substitutes then you may have to stay with that supplier for a
while But in general youll find that some suppliers in this segment could be eliminated a process that will help you achieve your
business objectives more quickly
Note that the results of segmentation are thus a series of action plans The action plans for top suppliers include the details of how to deepen
and strengthen your collaborative partnership For suppliers with potential the action plans involve encouraging them to meet that potential
And for less capable suppliers the action plans may involve ending the relationship Figure 3 outlines a hypothetical example of this
approach
In short suppliers should be segmented and managed differently based on the business objectives they help you achieve Furthermore this
segmentation should involve an analytical technique that is both repeatable and objective Of course each individual situation brings
complications But this is where your internal strategic analysis can get very interesting and potentially very rewarding
For example youre likely to have more than three strategic priorities mdashdepending on the complexity of your portfolio your strategic
priorities may differ dramatically for different product lines Some product lines may require innovative capabilities others reliability and
others a low cost structure But if you can group together products with similar objectives then you can manage each set of supply chains for
its objectives In other words youll be segmenting your product base as well as your supply base From a mass of undifferentiated needs and
capabilities you will segment the needs of certain groups of products along with the capabilities of certain groups of suppl iers The more you
can pair the product groups needs with suppliers capabilities the more value your segmentation effort can create
Doing segmentation this way often involves a cultural shift for supply chain functions like manufacturing and procurement To accomplish
these aims these functions have to be highly strategic in how they think about long-term business objectives They have to work
collaboratively with other functions to achieve these goals And they must be profoundly action-oriented when translating segmentation
analyses into results We dont want to minimize the effort that such a transformation may require But we do want to point out the benefits
of making that effort Because it is driven by business objectives this type of segmentation has the powerful effect of creating value in areas
that are important to upper management
INTERACTION MODELS
Value is created not by a segmentation analysis but by the actions you take based on that analysis The action of rationalizing inappropriate
suppliers is a good start But the real potential comes in the collaborative mutually supportive relationships you establish with the suppliers
8132019 2- Rules of Engagement Supplier
httpslidepdfcomreaderfull2-rules-of-engagement-supplier 57
whose capabilities best fit your needs By building trust and transparency with these companies you can eliminate inefficiencies collaborate
on innovations and take advantage of each others strengths
Any such partnership requires an interaction model The interaction model defines expectations around how you interact at all times in
the relationship how much information you share when and how you share it mdashin essence the rules of engagement For that reason some
companies prefer to think of an interaction model as an engagement model
Unlike a contract which tends to be the work of lawyers and be written in legal language an interaction model is a more conceptual
framework that includes roles and responsibilities process maps decision guidelines and so forth This model defines for your cross-
functional team which partner-suppliers to engage with when and how The more explicit the model the more useful it will be in the day-to-
day execution of joint activities with your suppliers
Thus to achieve a collaborative partnership you must first design (or redesign) your partnership models to build on your strengths and
achieve your business objectives You should have an interaction model for each segment or cluster of suppliers mdasheach set of suppliers with
whom you are going to create value in similar ways
The interaction points are the key to collaboration Indeed the points where partnerships often break down mdashand thus deserve particular
attention in the model mdashare the interfaces of two elements of the value chain such as Source and Make or Make and Deliver Value is created
when you make your value chain as seamless as possible these interfaces represent the old seams
As you develop interaction models internally you may want to think about a set of interaction principles that describe where and how you
will work differently than in the past For example to achieve business objectives aimed at reducing delivery time you might develop
interaction principles around the planning function that define how supply and demand planning and inventory management activities are
managed and by whom (you or your supplier-partner) These principles would be associated with specific measures of desired outcomes
such as fill rate on time in full delivery or end-to-end lead time Figure 4 shows one example of how companies can organize and define
their interaction principles
Developing interaction models for numerous supplier-partners may sound like a lot of work mdash but dont forget this is an outcome of your
segmentation effort The interaction model defined at the segment level provides the broad blueprint for how to engage suppliers in that
segment When applying the blueprint to a specific supplier you may want to tailor it based on unique market conditions or that suppliers
constraints Such tailoring should be a set of slight inexpensive and manageable tweaks (see Figure 5) Consider the example discussed
earlier of a segment of suppliers that perform well in most of your critical categories but expose you to too many risks For this segment
some of your critical interaction principles will center on risk management and your interaction model should implement them with a focus
on communicating evaluating and minimizing potential exposures You may have specific evaluation methods for a particular supplier but
the principles remain the same
8132019 2- Rules of Engagement Supplier
httpslidepdfcomreaderfull2-rules-of-engagement-supplier 67
At the supplier level you then create specific action plans that define activities you will conduct with the supplier to implement the
interaction model For example lets say your Segment A interaction model has suppliers performing both supply and demand planning
and perhaps collocating their demand planners with your brand team But if one supplier in Segment A has not yet performed demand
planning then part of the action plan would be for your planning organization to help that supplier transition to these activities including
introducing them to their counterparts in marketing and procurement
The segment interaction model and supplier-specific action plans then are much like a contract but rather than outline a legal arrangement
they pragmatically outline the operational nature of your relationship who is responsible for which activities and how those will be
measured What process adjustments can lead to maximum savings How will innovation performance be measured Who will participate in
internal client cross-functional teams and how often will they perform reviews
These types of questions are vital to the relationship and by using your segment interaction model as a blueprint for specific action plans you
ensure that they are resolved early on and ideally to mutual advantage The proof of this success of course will come in actual performance
Thus as part of the model you should design supplier scorecards to track and provide feedback on supplier performance By building
measurements into every dimension of the model you will ensure that problems can be quickly identified and addressed
In short with an interaction model and supplier-specific action plans you can apply key value drivers strategically ahead of time using a
disciplined objective repeatable approach
In which areas do you need to control risk
Which steps in the supply planning process have the greatest effects on your key value drivers (cost for example) And how can
you best achieve results at those steps (such as by using the suppliers volume to gain discounts)
How can you gain value beyond cost benefits (by cutting time to market or improving reliability or maximizing risk management
practices for example) How should responsibilities be divided so as to capture that value
These questions will inevitably vary by company and by segment They like your segmentation strategy as a whole are determined by your
business objectives
Transparency for all
Collaboration with suppliers is becoming a high priority for an increasing number of companies Leaders in industries such as consumer
packaged goods where brutal competition has forced them to focus on efficiency recognize that they must investigate all potential levers for
creating value As a result they are actively pursuing collaboration across the supply chain But you can expect the trend to hit other
industries as well
8132019 2- Rules of Engagement Supplier
httpslidepdfcomreaderfull2-rules-of-engagement-supplier 77
For example weve recently had some experience in the pharmaceutical industry where leaders have long been distinguished by superior
innovation and marketing rather than efficiency Yet even here its clear that tomorrows leaders will improve earnings not through those
factors but through excellence in operations 1The pharmaceutical industry is abandoning vertical integration and is instead becoming a
world of collaborative partners where orchestration is the essential competency
Of course if orchestration were easy it would already have been accomplished mdashin pharmaceuticals as well as in other industries Although
many companies have productively leveraged collaborative partnerships it is nevertheless a daunting task to try to coordinate the activities of
a far-flung supply chain across a large and diverse portfolio and so the concepts of segmentation and interaction models are still limited in
their application In fact thats why the first step toward truly thriving with collaborative partnerships has to be to segment the supply base
into smaller more manageable chunks We believe that coming years will see more such partnerships in most industries mdashand the best way to
start on that journey is to segment your supply base to identify good candidates for partnership
Regardless of industry partnerships are all about transparency Not only must you be willing to be transparent with a partner you trust but
the partnership also depends on both sides taking advantage of that transparency to act quickly and in mutually beneficial ways
A good interaction model and supplier-specific action plans increase transparency mdashmaking you a more desirable partner for your suppliers
In this way successful execution of the segmentation effort and resulting partnerships better achieves your (and your managements)
business objectives
8132019 2- Rules of Engagement Supplier
httpslidepdfcomreaderfull2-rules-of-engagement-supplier 37
can be broad and somewhat theoretical but in a well-functioning organization the business planning organization should translate them into
more specific and useful mdashthough often multidimensional and complex mdashactions at the business-unit level and even at the level of individual
functions such as manufacturing or procurement (Throughout the rest of this article well use the term business objectives to refer to
these specifics)
A supplier segmentation effort mdashlike every business activity mdashshould be driven by practical business objectives Different businesses have
different objectives and so supplier evaluations should focus on the suppliers abilities to deliver on those objectives in ways that create value
For example if you have an objective of reducing nonconformances then the suppliers that can help you meet that objective are creating
more value than the ones that provide marginally better cost performance mdashand supplier segmentation should reflect that Figure 1
summarizes this process designing supplier segmentation based on business objectives segmenting suppliers according to their capabilities
against those objectives and creating interaction models and action plans (In the second half of this article well discuss how these action
plans are developed)
Thus when conducting supplier segmentation a company must look both outward and inward The outward part consists of a rigorous
analytical evaluation of suppliers capabilities For example Supplier X is good at innovation but has a high cost structure Supplier Y is the
cheapest but is not always dependable and Supplier Z is slightly more expensive but is reliable Of course it should be much more
sophisticated than that and you may even borrow from advanced statistical methods (such as software that performs clustering analyses to
find patterns within a seemingly disparate sample set) to identify different types of capability clusters in your supply base But in order to
correctly judge which combinations of suppliers create the most value it is also necessary to look inward mdashto get cross-functional
involvement in prioritizing the capabilities needed to achieve your business objectives Figure 2 shows an example of this type of clustering
analysis
Think of the statistically-driven analytical evaluation as a bottom-up approach to segmenting suppliers and the inward look at your
companys strategic priorities as more of a top-down approach By combining these into a sort of hybrid you gain the benefits of both
Bottom-up statistical clustering segments suppliers with similar characteristics Meanwhile top-down strategic clustering defines which
segments have the most important strategic implications You can then seek closer partnerships with the suppliers in the strongest segments
while urging suppliers in the weaker segments to either improve their capabilities or exit your supply chain
We can illustrate with an example Lets say that your top-down analysis identifies three strategic priorities reducing nonconformances
lowering supply risk exposure and ensuring dependable delivery Your bottom-up analysis mdashalthough it has evaluated other capabilities such
as containing costs and innovating mdashshould group suppliers based on their performance in just these three characteristics
Some suppliers are good at all three mdashtheyre your best partners
8132019 2- Rules of Engagement Supplier
httpslidepdfcomreaderfull2-rules-of-engagement-supplier 47
Others may be good at two out of three mdash you can explore with them how to improve their scores in the lagging category
Meanwhile you can address internally how to mitigate their weaknesses for example by developing risk management strategies
for the suppliers that expose you to certain risks
Others may be good at none or only one of your three priorities and these may be targets for rationalization Granted if the one
dimension in which a supplier excels is truly strategic then you might retain it as a niche supplier And if a supplier provides you
with something that is critical and there are no easily obtained substitutes then you may have to stay with that supplier for a
while But in general youll find that some suppliers in this segment could be eliminated a process that will help you achieve your
business objectives more quickly
Note that the results of segmentation are thus a series of action plans The action plans for top suppliers include the details of how to deepen
and strengthen your collaborative partnership For suppliers with potential the action plans involve encouraging them to meet that potential
And for less capable suppliers the action plans may involve ending the relationship Figure 3 outlines a hypothetical example of this
approach
In short suppliers should be segmented and managed differently based on the business objectives they help you achieve Furthermore this
segmentation should involve an analytical technique that is both repeatable and objective Of course each individual situation brings
complications But this is where your internal strategic analysis can get very interesting and potentially very rewarding
For example youre likely to have more than three strategic priorities mdashdepending on the complexity of your portfolio your strategic
priorities may differ dramatically for different product lines Some product lines may require innovative capabilities others reliability and
others a low cost structure But if you can group together products with similar objectives then you can manage each set of supply chains for
its objectives In other words youll be segmenting your product base as well as your supply base From a mass of undifferentiated needs and
capabilities you will segment the needs of certain groups of products along with the capabilities of certain groups of suppl iers The more you
can pair the product groups needs with suppliers capabilities the more value your segmentation effort can create
Doing segmentation this way often involves a cultural shift for supply chain functions like manufacturing and procurement To accomplish
these aims these functions have to be highly strategic in how they think about long-term business objectives They have to work
collaboratively with other functions to achieve these goals And they must be profoundly action-oriented when translating segmentation
analyses into results We dont want to minimize the effort that such a transformation may require But we do want to point out the benefits
of making that effort Because it is driven by business objectives this type of segmentation has the powerful effect of creating value in areas
that are important to upper management
INTERACTION MODELS
Value is created not by a segmentation analysis but by the actions you take based on that analysis The action of rationalizing inappropriate
suppliers is a good start But the real potential comes in the collaborative mutually supportive relationships you establish with the suppliers
8132019 2- Rules of Engagement Supplier
httpslidepdfcomreaderfull2-rules-of-engagement-supplier 57
whose capabilities best fit your needs By building trust and transparency with these companies you can eliminate inefficiencies collaborate
on innovations and take advantage of each others strengths
Any such partnership requires an interaction model The interaction model defines expectations around how you interact at all times in
the relationship how much information you share when and how you share it mdashin essence the rules of engagement For that reason some
companies prefer to think of an interaction model as an engagement model
Unlike a contract which tends to be the work of lawyers and be written in legal language an interaction model is a more conceptual
framework that includes roles and responsibilities process maps decision guidelines and so forth This model defines for your cross-
functional team which partner-suppliers to engage with when and how The more explicit the model the more useful it will be in the day-to-
day execution of joint activities with your suppliers
Thus to achieve a collaborative partnership you must first design (or redesign) your partnership models to build on your strengths and
achieve your business objectives You should have an interaction model for each segment or cluster of suppliers mdasheach set of suppliers with
whom you are going to create value in similar ways
The interaction points are the key to collaboration Indeed the points where partnerships often break down mdashand thus deserve particular
attention in the model mdashare the interfaces of two elements of the value chain such as Source and Make or Make and Deliver Value is created
when you make your value chain as seamless as possible these interfaces represent the old seams
As you develop interaction models internally you may want to think about a set of interaction principles that describe where and how you
will work differently than in the past For example to achieve business objectives aimed at reducing delivery time you might develop
interaction principles around the planning function that define how supply and demand planning and inventory management activities are
managed and by whom (you or your supplier-partner) These principles would be associated with specific measures of desired outcomes
such as fill rate on time in full delivery or end-to-end lead time Figure 4 shows one example of how companies can organize and define
their interaction principles
Developing interaction models for numerous supplier-partners may sound like a lot of work mdash but dont forget this is an outcome of your
segmentation effort The interaction model defined at the segment level provides the broad blueprint for how to engage suppliers in that
segment When applying the blueprint to a specific supplier you may want to tailor it based on unique market conditions or that suppliers
constraints Such tailoring should be a set of slight inexpensive and manageable tweaks (see Figure 5) Consider the example discussed
earlier of a segment of suppliers that perform well in most of your critical categories but expose you to too many risks For this segment
some of your critical interaction principles will center on risk management and your interaction model should implement them with a focus
on communicating evaluating and minimizing potential exposures You may have specific evaluation methods for a particular supplier but
the principles remain the same
8132019 2- Rules of Engagement Supplier
httpslidepdfcomreaderfull2-rules-of-engagement-supplier 67
At the supplier level you then create specific action plans that define activities you will conduct with the supplier to implement the
interaction model For example lets say your Segment A interaction model has suppliers performing both supply and demand planning
and perhaps collocating their demand planners with your brand team But if one supplier in Segment A has not yet performed demand
planning then part of the action plan would be for your planning organization to help that supplier transition to these activities including
introducing them to their counterparts in marketing and procurement
The segment interaction model and supplier-specific action plans then are much like a contract but rather than outline a legal arrangement
they pragmatically outline the operational nature of your relationship who is responsible for which activities and how those will be
measured What process adjustments can lead to maximum savings How will innovation performance be measured Who will participate in
internal client cross-functional teams and how often will they perform reviews
These types of questions are vital to the relationship and by using your segment interaction model as a blueprint for specific action plans you
ensure that they are resolved early on and ideally to mutual advantage The proof of this success of course will come in actual performance
Thus as part of the model you should design supplier scorecards to track and provide feedback on supplier performance By building
measurements into every dimension of the model you will ensure that problems can be quickly identified and addressed
In short with an interaction model and supplier-specific action plans you can apply key value drivers strategically ahead of time using a
disciplined objective repeatable approach
In which areas do you need to control risk
Which steps in the supply planning process have the greatest effects on your key value drivers (cost for example) And how can
you best achieve results at those steps (such as by using the suppliers volume to gain discounts)
How can you gain value beyond cost benefits (by cutting time to market or improving reliability or maximizing risk management
practices for example) How should responsibilities be divided so as to capture that value
These questions will inevitably vary by company and by segment They like your segmentation strategy as a whole are determined by your
business objectives
Transparency for all
Collaboration with suppliers is becoming a high priority for an increasing number of companies Leaders in industries such as consumer
packaged goods where brutal competition has forced them to focus on efficiency recognize that they must investigate all potential levers for
creating value As a result they are actively pursuing collaboration across the supply chain But you can expect the trend to hit other
industries as well
8132019 2- Rules of Engagement Supplier
httpslidepdfcomreaderfull2-rules-of-engagement-supplier 77
For example weve recently had some experience in the pharmaceutical industry where leaders have long been distinguished by superior
innovation and marketing rather than efficiency Yet even here its clear that tomorrows leaders will improve earnings not through those
factors but through excellence in operations 1The pharmaceutical industry is abandoning vertical integration and is instead becoming a
world of collaborative partners where orchestration is the essential competency
Of course if orchestration were easy it would already have been accomplished mdashin pharmaceuticals as well as in other industries Although
many companies have productively leveraged collaborative partnerships it is nevertheless a daunting task to try to coordinate the activities of
a far-flung supply chain across a large and diverse portfolio and so the concepts of segmentation and interaction models are still limited in
their application In fact thats why the first step toward truly thriving with collaborative partnerships has to be to segment the supply base
into smaller more manageable chunks We believe that coming years will see more such partnerships in most industries mdashand the best way to
start on that journey is to segment your supply base to identify good candidates for partnership
Regardless of industry partnerships are all about transparency Not only must you be willing to be transparent with a partner you trust but
the partnership also depends on both sides taking advantage of that transparency to act quickly and in mutually beneficial ways
A good interaction model and supplier-specific action plans increase transparency mdashmaking you a more desirable partner for your suppliers
In this way successful execution of the segmentation effort and resulting partnerships better achieves your (and your managements)
business objectives
8132019 2- Rules of Engagement Supplier
httpslidepdfcomreaderfull2-rules-of-engagement-supplier 47
Others may be good at two out of three mdash you can explore with them how to improve their scores in the lagging category
Meanwhile you can address internally how to mitigate their weaknesses for example by developing risk management strategies
for the suppliers that expose you to certain risks
Others may be good at none or only one of your three priorities and these may be targets for rationalization Granted if the one
dimension in which a supplier excels is truly strategic then you might retain it as a niche supplier And if a supplier provides you
with something that is critical and there are no easily obtained substitutes then you may have to stay with that supplier for a
while But in general youll find that some suppliers in this segment could be eliminated a process that will help you achieve your
business objectives more quickly
Note that the results of segmentation are thus a series of action plans The action plans for top suppliers include the details of how to deepen
and strengthen your collaborative partnership For suppliers with potential the action plans involve encouraging them to meet that potential
And for less capable suppliers the action plans may involve ending the relationship Figure 3 outlines a hypothetical example of this
approach
In short suppliers should be segmented and managed differently based on the business objectives they help you achieve Furthermore this
segmentation should involve an analytical technique that is both repeatable and objective Of course each individual situation brings
complications But this is where your internal strategic analysis can get very interesting and potentially very rewarding
For example youre likely to have more than three strategic priorities mdashdepending on the complexity of your portfolio your strategic
priorities may differ dramatically for different product lines Some product lines may require innovative capabilities others reliability and
others a low cost structure But if you can group together products with similar objectives then you can manage each set of supply chains for
its objectives In other words youll be segmenting your product base as well as your supply base From a mass of undifferentiated needs and
capabilities you will segment the needs of certain groups of products along with the capabilities of certain groups of suppl iers The more you
can pair the product groups needs with suppliers capabilities the more value your segmentation effort can create
Doing segmentation this way often involves a cultural shift for supply chain functions like manufacturing and procurement To accomplish
these aims these functions have to be highly strategic in how they think about long-term business objectives They have to work
collaboratively with other functions to achieve these goals And they must be profoundly action-oriented when translating segmentation
analyses into results We dont want to minimize the effort that such a transformation may require But we do want to point out the benefits
of making that effort Because it is driven by business objectives this type of segmentation has the powerful effect of creating value in areas
that are important to upper management
INTERACTION MODELS
Value is created not by a segmentation analysis but by the actions you take based on that analysis The action of rationalizing inappropriate
suppliers is a good start But the real potential comes in the collaborative mutually supportive relationships you establish with the suppliers
8132019 2- Rules of Engagement Supplier
httpslidepdfcomreaderfull2-rules-of-engagement-supplier 57
whose capabilities best fit your needs By building trust and transparency with these companies you can eliminate inefficiencies collaborate
on innovations and take advantage of each others strengths
Any such partnership requires an interaction model The interaction model defines expectations around how you interact at all times in
the relationship how much information you share when and how you share it mdashin essence the rules of engagement For that reason some
companies prefer to think of an interaction model as an engagement model
Unlike a contract which tends to be the work of lawyers and be written in legal language an interaction model is a more conceptual
framework that includes roles and responsibilities process maps decision guidelines and so forth This model defines for your cross-
functional team which partner-suppliers to engage with when and how The more explicit the model the more useful it will be in the day-to-
day execution of joint activities with your suppliers
Thus to achieve a collaborative partnership you must first design (or redesign) your partnership models to build on your strengths and
achieve your business objectives You should have an interaction model for each segment or cluster of suppliers mdasheach set of suppliers with
whom you are going to create value in similar ways
The interaction points are the key to collaboration Indeed the points where partnerships often break down mdashand thus deserve particular
attention in the model mdashare the interfaces of two elements of the value chain such as Source and Make or Make and Deliver Value is created
when you make your value chain as seamless as possible these interfaces represent the old seams
As you develop interaction models internally you may want to think about a set of interaction principles that describe where and how you
will work differently than in the past For example to achieve business objectives aimed at reducing delivery time you might develop
interaction principles around the planning function that define how supply and demand planning and inventory management activities are
managed and by whom (you or your supplier-partner) These principles would be associated with specific measures of desired outcomes
such as fill rate on time in full delivery or end-to-end lead time Figure 4 shows one example of how companies can organize and define
their interaction principles
Developing interaction models for numerous supplier-partners may sound like a lot of work mdash but dont forget this is an outcome of your
segmentation effort The interaction model defined at the segment level provides the broad blueprint for how to engage suppliers in that
segment When applying the blueprint to a specific supplier you may want to tailor it based on unique market conditions or that suppliers
constraints Such tailoring should be a set of slight inexpensive and manageable tweaks (see Figure 5) Consider the example discussed
earlier of a segment of suppliers that perform well in most of your critical categories but expose you to too many risks For this segment
some of your critical interaction principles will center on risk management and your interaction model should implement them with a focus
on communicating evaluating and minimizing potential exposures You may have specific evaluation methods for a particular supplier but
the principles remain the same
8132019 2- Rules of Engagement Supplier
httpslidepdfcomreaderfull2-rules-of-engagement-supplier 67
At the supplier level you then create specific action plans that define activities you will conduct with the supplier to implement the
interaction model For example lets say your Segment A interaction model has suppliers performing both supply and demand planning
and perhaps collocating their demand planners with your brand team But if one supplier in Segment A has not yet performed demand
planning then part of the action plan would be for your planning organization to help that supplier transition to these activities including
introducing them to their counterparts in marketing and procurement
The segment interaction model and supplier-specific action plans then are much like a contract but rather than outline a legal arrangement
they pragmatically outline the operational nature of your relationship who is responsible for which activities and how those will be
measured What process adjustments can lead to maximum savings How will innovation performance be measured Who will participate in
internal client cross-functional teams and how often will they perform reviews
These types of questions are vital to the relationship and by using your segment interaction model as a blueprint for specific action plans you
ensure that they are resolved early on and ideally to mutual advantage The proof of this success of course will come in actual performance
Thus as part of the model you should design supplier scorecards to track and provide feedback on supplier performance By building
measurements into every dimension of the model you will ensure that problems can be quickly identified and addressed
In short with an interaction model and supplier-specific action plans you can apply key value drivers strategically ahead of time using a
disciplined objective repeatable approach
In which areas do you need to control risk
Which steps in the supply planning process have the greatest effects on your key value drivers (cost for example) And how can
you best achieve results at those steps (such as by using the suppliers volume to gain discounts)
How can you gain value beyond cost benefits (by cutting time to market or improving reliability or maximizing risk management
practices for example) How should responsibilities be divided so as to capture that value
These questions will inevitably vary by company and by segment They like your segmentation strategy as a whole are determined by your
business objectives
Transparency for all
Collaboration with suppliers is becoming a high priority for an increasing number of companies Leaders in industries such as consumer
packaged goods where brutal competition has forced them to focus on efficiency recognize that they must investigate all potential levers for
creating value As a result they are actively pursuing collaboration across the supply chain But you can expect the trend to hit other
industries as well
8132019 2- Rules of Engagement Supplier
httpslidepdfcomreaderfull2-rules-of-engagement-supplier 77
For example weve recently had some experience in the pharmaceutical industry where leaders have long been distinguished by superior
innovation and marketing rather than efficiency Yet even here its clear that tomorrows leaders will improve earnings not through those
factors but through excellence in operations 1The pharmaceutical industry is abandoning vertical integration and is instead becoming a
world of collaborative partners where orchestration is the essential competency
Of course if orchestration were easy it would already have been accomplished mdashin pharmaceuticals as well as in other industries Although
many companies have productively leveraged collaborative partnerships it is nevertheless a daunting task to try to coordinate the activities of
a far-flung supply chain across a large and diverse portfolio and so the concepts of segmentation and interaction models are still limited in
their application In fact thats why the first step toward truly thriving with collaborative partnerships has to be to segment the supply base
into smaller more manageable chunks We believe that coming years will see more such partnerships in most industries mdashand the best way to
start on that journey is to segment your supply base to identify good candidates for partnership
Regardless of industry partnerships are all about transparency Not only must you be willing to be transparent with a partner you trust but
the partnership also depends on both sides taking advantage of that transparency to act quickly and in mutually beneficial ways
A good interaction model and supplier-specific action plans increase transparency mdashmaking you a more desirable partner for your suppliers
In this way successful execution of the segmentation effort and resulting partnerships better achieves your (and your managements)
business objectives
8132019 2- Rules of Engagement Supplier
httpslidepdfcomreaderfull2-rules-of-engagement-supplier 57
whose capabilities best fit your needs By building trust and transparency with these companies you can eliminate inefficiencies collaborate
on innovations and take advantage of each others strengths
Any such partnership requires an interaction model The interaction model defines expectations around how you interact at all times in
the relationship how much information you share when and how you share it mdashin essence the rules of engagement For that reason some
companies prefer to think of an interaction model as an engagement model
Unlike a contract which tends to be the work of lawyers and be written in legal language an interaction model is a more conceptual
framework that includes roles and responsibilities process maps decision guidelines and so forth This model defines for your cross-
functional team which partner-suppliers to engage with when and how The more explicit the model the more useful it will be in the day-to-
day execution of joint activities with your suppliers
Thus to achieve a collaborative partnership you must first design (or redesign) your partnership models to build on your strengths and
achieve your business objectives You should have an interaction model for each segment or cluster of suppliers mdasheach set of suppliers with
whom you are going to create value in similar ways
The interaction points are the key to collaboration Indeed the points where partnerships often break down mdashand thus deserve particular
attention in the model mdashare the interfaces of two elements of the value chain such as Source and Make or Make and Deliver Value is created
when you make your value chain as seamless as possible these interfaces represent the old seams
As you develop interaction models internally you may want to think about a set of interaction principles that describe where and how you
will work differently than in the past For example to achieve business objectives aimed at reducing delivery time you might develop
interaction principles around the planning function that define how supply and demand planning and inventory management activities are
managed and by whom (you or your supplier-partner) These principles would be associated with specific measures of desired outcomes
such as fill rate on time in full delivery or end-to-end lead time Figure 4 shows one example of how companies can organize and define
their interaction principles
Developing interaction models for numerous supplier-partners may sound like a lot of work mdash but dont forget this is an outcome of your
segmentation effort The interaction model defined at the segment level provides the broad blueprint for how to engage suppliers in that
segment When applying the blueprint to a specific supplier you may want to tailor it based on unique market conditions or that suppliers
constraints Such tailoring should be a set of slight inexpensive and manageable tweaks (see Figure 5) Consider the example discussed
earlier of a segment of suppliers that perform well in most of your critical categories but expose you to too many risks For this segment
some of your critical interaction principles will center on risk management and your interaction model should implement them with a focus
on communicating evaluating and minimizing potential exposures You may have specific evaluation methods for a particular supplier but
the principles remain the same
8132019 2- Rules of Engagement Supplier
httpslidepdfcomreaderfull2-rules-of-engagement-supplier 67
At the supplier level you then create specific action plans that define activities you will conduct with the supplier to implement the
interaction model For example lets say your Segment A interaction model has suppliers performing both supply and demand planning
and perhaps collocating their demand planners with your brand team But if one supplier in Segment A has not yet performed demand
planning then part of the action plan would be for your planning organization to help that supplier transition to these activities including
introducing them to their counterparts in marketing and procurement
The segment interaction model and supplier-specific action plans then are much like a contract but rather than outline a legal arrangement
they pragmatically outline the operational nature of your relationship who is responsible for which activities and how those will be
measured What process adjustments can lead to maximum savings How will innovation performance be measured Who will participate in
internal client cross-functional teams and how often will they perform reviews
These types of questions are vital to the relationship and by using your segment interaction model as a blueprint for specific action plans you
ensure that they are resolved early on and ideally to mutual advantage The proof of this success of course will come in actual performance
Thus as part of the model you should design supplier scorecards to track and provide feedback on supplier performance By building
measurements into every dimension of the model you will ensure that problems can be quickly identified and addressed
In short with an interaction model and supplier-specific action plans you can apply key value drivers strategically ahead of time using a
disciplined objective repeatable approach
In which areas do you need to control risk
Which steps in the supply planning process have the greatest effects on your key value drivers (cost for example) And how can
you best achieve results at those steps (such as by using the suppliers volume to gain discounts)
How can you gain value beyond cost benefits (by cutting time to market or improving reliability or maximizing risk management
practices for example) How should responsibilities be divided so as to capture that value
These questions will inevitably vary by company and by segment They like your segmentation strategy as a whole are determined by your
business objectives
Transparency for all
Collaboration with suppliers is becoming a high priority for an increasing number of companies Leaders in industries such as consumer
packaged goods where brutal competition has forced them to focus on efficiency recognize that they must investigate all potential levers for
creating value As a result they are actively pursuing collaboration across the supply chain But you can expect the trend to hit other
industries as well
8132019 2- Rules of Engagement Supplier
httpslidepdfcomreaderfull2-rules-of-engagement-supplier 77
For example weve recently had some experience in the pharmaceutical industry where leaders have long been distinguished by superior
innovation and marketing rather than efficiency Yet even here its clear that tomorrows leaders will improve earnings not through those
factors but through excellence in operations 1The pharmaceutical industry is abandoning vertical integration and is instead becoming a
world of collaborative partners where orchestration is the essential competency
Of course if orchestration were easy it would already have been accomplished mdashin pharmaceuticals as well as in other industries Although
many companies have productively leveraged collaborative partnerships it is nevertheless a daunting task to try to coordinate the activities of
a far-flung supply chain across a large and diverse portfolio and so the concepts of segmentation and interaction models are still limited in
their application In fact thats why the first step toward truly thriving with collaborative partnerships has to be to segment the supply base
into smaller more manageable chunks We believe that coming years will see more such partnerships in most industries mdashand the best way to
start on that journey is to segment your supply base to identify good candidates for partnership
Regardless of industry partnerships are all about transparency Not only must you be willing to be transparent with a partner you trust but
the partnership also depends on both sides taking advantage of that transparency to act quickly and in mutually beneficial ways
A good interaction model and supplier-specific action plans increase transparency mdashmaking you a more desirable partner for your suppliers
In this way successful execution of the segmentation effort and resulting partnerships better achieves your (and your managements)
business objectives
8132019 2- Rules of Engagement Supplier
httpslidepdfcomreaderfull2-rules-of-engagement-supplier 67
At the supplier level you then create specific action plans that define activities you will conduct with the supplier to implement the
interaction model For example lets say your Segment A interaction model has suppliers performing both supply and demand planning
and perhaps collocating their demand planners with your brand team But if one supplier in Segment A has not yet performed demand
planning then part of the action plan would be for your planning organization to help that supplier transition to these activities including
introducing them to their counterparts in marketing and procurement
The segment interaction model and supplier-specific action plans then are much like a contract but rather than outline a legal arrangement
they pragmatically outline the operational nature of your relationship who is responsible for which activities and how those will be
measured What process adjustments can lead to maximum savings How will innovation performance be measured Who will participate in
internal client cross-functional teams and how often will they perform reviews
These types of questions are vital to the relationship and by using your segment interaction model as a blueprint for specific action plans you
ensure that they are resolved early on and ideally to mutual advantage The proof of this success of course will come in actual performance
Thus as part of the model you should design supplier scorecards to track and provide feedback on supplier performance By building
measurements into every dimension of the model you will ensure that problems can be quickly identified and addressed
In short with an interaction model and supplier-specific action plans you can apply key value drivers strategically ahead of time using a
disciplined objective repeatable approach
In which areas do you need to control risk
Which steps in the supply planning process have the greatest effects on your key value drivers (cost for example) And how can
you best achieve results at those steps (such as by using the suppliers volume to gain discounts)
How can you gain value beyond cost benefits (by cutting time to market or improving reliability or maximizing risk management
practices for example) How should responsibilities be divided so as to capture that value
These questions will inevitably vary by company and by segment They like your segmentation strategy as a whole are determined by your
business objectives
Transparency for all
Collaboration with suppliers is becoming a high priority for an increasing number of companies Leaders in industries such as consumer
packaged goods where brutal competition has forced them to focus on efficiency recognize that they must investigate all potential levers for
creating value As a result they are actively pursuing collaboration across the supply chain But you can expect the trend to hit other
industries as well
8132019 2- Rules of Engagement Supplier
httpslidepdfcomreaderfull2-rules-of-engagement-supplier 77
For example weve recently had some experience in the pharmaceutical industry where leaders have long been distinguished by superior
innovation and marketing rather than efficiency Yet even here its clear that tomorrows leaders will improve earnings not through those
factors but through excellence in operations 1The pharmaceutical industry is abandoning vertical integration and is instead becoming a
world of collaborative partners where orchestration is the essential competency
Of course if orchestration were easy it would already have been accomplished mdashin pharmaceuticals as well as in other industries Although
many companies have productively leveraged collaborative partnerships it is nevertheless a daunting task to try to coordinate the activities of
a far-flung supply chain across a large and diverse portfolio and so the concepts of segmentation and interaction models are still limited in
their application In fact thats why the first step toward truly thriving with collaborative partnerships has to be to segment the supply base
into smaller more manageable chunks We believe that coming years will see more such partnerships in most industries mdashand the best way to
start on that journey is to segment your supply base to identify good candidates for partnership
Regardless of industry partnerships are all about transparency Not only must you be willing to be transparent with a partner you trust but
the partnership also depends on both sides taking advantage of that transparency to act quickly and in mutually beneficial ways
A good interaction model and supplier-specific action plans increase transparency mdashmaking you a more desirable partner for your suppliers
In this way successful execution of the segmentation effort and resulting partnerships better achieves your (and your managements)
business objectives
8132019 2- Rules of Engagement Supplier
httpslidepdfcomreaderfull2-rules-of-engagement-supplier 77
For example weve recently had some experience in the pharmaceutical industry where leaders have long been distinguished by superior
innovation and marketing rather than efficiency Yet even here its clear that tomorrows leaders will improve earnings not through those
factors but through excellence in operations 1The pharmaceutical industry is abandoning vertical integration and is instead becoming a
world of collaborative partners where orchestration is the essential competency
Of course if orchestration were easy it would already have been accomplished mdashin pharmaceuticals as well as in other industries Although
many companies have productively leveraged collaborative partnerships it is nevertheless a daunting task to try to coordinate the activities of
a far-flung supply chain across a large and diverse portfolio and so the concepts of segmentation and interaction models are still limited in
their application In fact thats why the first step toward truly thriving with collaborative partnerships has to be to segment the supply base
into smaller more manageable chunks We believe that coming years will see more such partnerships in most industries mdashand the best way to
start on that journey is to segment your supply base to identify good candidates for partnership
Regardless of industry partnerships are all about transparency Not only must you be willing to be transparent with a partner you trust but
the partnership also depends on both sides taking advantage of that transparency to act quickly and in mutually beneficial ways
A good interaction model and supplier-specific action plans increase transparency mdashmaking you a more desirable partner for your suppliers
In this way successful execution of the segmentation effort and resulting partnerships better achieves your (and your managements)
business objectives