Vendor Management at Gartner

Vendor Management Is a Critical Business Discipline
From Gartner Research/Andy Kyte
“How dependent is your business on suppliers?” Is this a fair or relevant question? Perhaps not. Let’s ask another: “How much of the success of your current business plan is dependent on suppliers?” Still not fair perhaps but probably relevant. Move the question down from the enterprise to the line of business. “In any chosen line of business, how much of the ability to achieve enterprise goals is dependent on suppliers?” Maybe now it is possible to start creating some sort of scale. Some lines of business are critically dependent on suppliers manufacturing and logistics, for example. Others are perhaps less dependent finance and accounting, and human resources (HR). Now ask the tough question: “Is the percentage of time and effort devoted by managers to suppliers proportionate to the dependence on those suppliers?”

Most enterprises are critically dependent on a wide range of suppliers: they are as integral a component of business success as any internal resource. But there is a significant difference between the investment that a business is prepared to make in managing internal resources and the investment the same business is prepared to make in managing suppliers. Internal resources especially staff have defined objectives, regular appraisals, career plans, mentors and an entire department (HR) dedicated to maximizing the value derived from them. The whole organization chart exists to show exactly who is responsible for every single member of staff.

Contrast this with the way in which most enterprises fail to manage their suppliers. For many suppliers, objectives are not set, or not monitored. Performance appraisals happen haphazardly. Perversely, account plans do exist but they are generally created by the supplier, with little insight or understanding of the real needs of the customers. Having a supplier with an account plan is like having a restaurant decide when you will visit and what you will order not exactly customer-centric, is it?

Of course, many organizations do manage some of their relationships effectively. Retailers generally manage most of their suppliers extremely tightly. Semiconductor manufacturers tend to work very closely with their equipment suppliers, and telecommunications service providers work closely with their switch equipment providers. But these tend to be the exceptions rather than the rule and even inside these businesses, there will be suppliers that are not managed at all.

Does it matter if suppliers are not managed? If it has always been like this, why can’t it carry on being like this? Well, perhaps for some suppliers it doesn’t matter very much. Many are transactional suppliers they provide goods or services in ready supply, with low impact on their customers’ value chain. They should be appraised periodically, but the buying organization does not need to incur significant management overhead with them. In fact, some companies have started to use a third party to manage them, by exploiting business process outsourcing services for procurement.

However, business models in most industry sectors are increasingly dependent on non-transactional suppliers. These are providers of goods or services with unique characteristics that can contribute to their customers’ value chain, and whose customers would experience severe and expensive disruption in the event of deterioration in their suppliers’ performance. It is this increasing dependence on suppliers that makes the traditional laissez faire approach dangerous, and has caused leading enterprises to start investing in vendor management.

Vendor management is the discipline that ensures the enterprise buying goods and services actively manages its relationships with strategic suppliers. A strategic supplier generally meets two key criteria: it delivers high value to the business, and it would be difficult and disruptive to the business to switch to an alternative supplier. Vendor management is a young discipline a “discovery” discipline. It is so young that companies engaging with it have to innovate the processes, systems, organization and culture for themselves, since there is little best practice that they can use as models. However, Gartner research finds the following common characteristics of vendor management programs.

Vendor managers need to be senior, experienced business managers. Companies are likely to be spending significant sums of money with strategic suppliers. This means that the supplier will be using a senior account executive as its representative. It is essential that the vendor manager “punches in the same weight division” as his or her counterpart. If the buyer uses an inexperienced or junior manager in the vendor management role, the supplier’s account executive will simply bamboozle and bypass them.

Vendor managers report to the line of business serviced by the supplier. This is not always the case in some instances the vendor managers report to the head of procurement, with dotted line reporting to the serviced line of business. However, it is in the interests of the business manager to have close and continuous connection with the vendor manager. For example, if a consumer electronics company is using a contract manufacturer, the vendor manager for this supplier will report to the head of manufacturing or operations, not to the head of procurement. This tension between the procurement team and the line of business managers is clearly a significant issue that can inhibit the development of vendor management as a discipline. The most effective model sees the vendor managers report to the serviced line of business but, at the same time, the central procurement function facilitates a virtual team of all the vendor managers, helping to define effective processes and behaviors.

There are no common key performance indicators for vendor managers. Most vendor managers have been appointed as troubleshooters for existing relationships. Under these circumstances, the brief has been to resolve specific problems in a dysfunctional relationship, and then to start creating the long-term processes that will keep the relationship healthy. The difficulty of articulating clearly measurable key performance indicators reinforces the need to appoint trusted senior managers into these roles. Despite the difficulty of creating measurable key performance indicators, there are several objectives for vendor managers that appear frequently across many categories of suppliers.

Developing a detailed understanding of the dynamics of the market the supplier operates in. The supplier cannot be managed as though the relationship existed in a vacuum. The supplier is critically influenced by the dynamics of their market sector. The vendor manager needs to have a very clear view of the total business performance of the supplier to understand the comparative importance of the specific relationship. For example, if the engagement becomes nonstrategic to the supplier because of a change in emphasis in their market strategy, it is critical that the vendor manager understands that shift in the dynamic of the relationship.

Understanding the totality of the engagement across all buying centers in the enterprise. All too often with strategic suppliers there will be multiple touch points in the buying business. The vendor manager needs to develop a clear understanding of all the current and potential work being undertaken with the supplier.

Creating a joint account plan. It makes no sense for the supplier to develop an account plan without the full participation of the customer. Equally, it makes no sense for the customer to deny a strategic supplier key insights into the business plan. The vendor manager must create the appropriate framework of trust that will enable a joint account plan to be developed: one that recognizes the needs of the buying organization are paramount, while permitting the supplier to derive appropriate profit from the relationship.

Obtaining clear insights into the supplier’s development plans. In the same way that the customer needs to expose plans to the supplier to facilitate planning, a strategic supplier needs to unveil its strategic plans to its customers. Whether the supplier is opening a new factory, creating a new product line, entering new markets or undertaking any strategic initiative, the vendor manager should ensure that the strategic customer has early knowledge and, where appropriate, first refusal on access to the innovations and developments.

Influencing the supplier’s R&D spend. The relationship is truly strategic when the supplier uses the customer’s needs to influence its R&D.

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