'V': Together we are better; together we create value
The ultimate reason for a supplier relationship within the VIPER hierarchy is the additional value that is possible from suppliers, especially through working together with certain, specific suppliers who possess the capability to help us achieve our corporate goals. Value sits at the top of the VIPER hierarchy and represents, perhaps immense, benefit that we can choose to pursue if we want to. Value could include many things: price and cost reduction, innovation, outsourcing benefits and many others; however, the point with value here at the top of the hierarchy is the ability to unlock the next level of value, beyond the traditional list of standard benefits, that can really make a difference.
Outsourcing certain activities to suppliers who are experts at what they do to look after specific, bounded parts of our operation and, in theory, do it better and more effectively than we can, makes us more effective. For example, a finance company using an outsourced call centre provider might be able to improve effectiveness and reduce operating costs. It doesn't always follow that improved effectiveness and reducing costs go together; often this is true but there are scenarios where tapping into supplier capabilities will increase costs but will deliver much more than would otherwise be possible. A marketing function may have the capability to devise an adequate advertising campaign but outsourcing this to a creative agency could deliver a winning campaign.
With the right model of engagement and relationship, certain suppliers can contribute significant value to an organization that in turn will help create and grow brand equity. Brand equity is the value that a specific brand can hold when consumers believe the brand's offerings are better then others and choose it in preference. Neumeier (2006) suggests that brand equity can be one of the most valuable assets a company can have and a good brand can help a business grow market share, increase profit margin and establish long-term revenues through customer loyalty. It is no surprise then that companies invest billions in building and protecting their brands. Arguably just being a supplier helps build brand to some extent by fulfilling requirements, but given the right conditions some suppliers can contribute much more and in some cases can be instrumental in the development of a competitive edge or even an entire brand identity. There are, therefore, different levels at which suppliers can contribute to brand equity development beyond fulfilment (Figure 2.4).
Traditionally the role to develop brand equity has been viewed as that of the marketing function. However, today, as businesses choose to outsource more non-core activities to carefully chosen suppliers, these suppliers hold the potential to make a solid contribution to the brand equity of a business and as such redefining the role of the purchasing function to help make this happen. Brand equity is created where suppliers can help us create a differentiator or something that gives us a competitive edge. This could take many forms, for example:
• working with a supplier to reduce cost through the entire supply chain helps grow margin or even establish price leadership;
• where our brand can be enhanced by association with the supplier's brand; and
• if a supplier has a unique capability, feature or offering that can enhance our offering we can use this to help create a differentiator, especially if we can secure exclusivity.
Unlocking the next level of value requires a new form of supplier collaboration. If buyer and supplier choose to work together the value of what can be achieved is sometimes greater than the sum of each parties' achievement if we act independently. However, it is easy to assume that all suppliers would naturally want to collaborate with us if we so desired. This may not be the case, despite what they might say. For value to be unlocked through a
FIGURE 2.4 How the supply base contributes to brand equity
collaborative relationship then both parties need to be truly interested and want to put additional effort into making it work and actually follow through to make it work. The game of 'Stag Hunt' from the world of game theory helps us understand this. This is illustrated by Skyrms (2004) who explains the concept as one where each party makes a rational choice as to their course of action. He likens it to two women rowing a boat: The outcome is the best for both women if they make headway. If both choose not to row neither has lost anything as both stay in the same place; however, if the one in front rows and the one at the back does not, it is the worst outcome for the one rowing as she expends all her energy but the boat makes little headway. The same is true for those supplier relationships that hold potential for us; we both must want to row the boat and make headway if we are to unlock value. For example, a small supplier providing something unique and of interest to us would benefit by surety of future revenues and we will benefit if we can secure future supply. This could develop further and by providing the supplier with a contracted volume commitment and guaranteed growth, we would enable the supplier to invest in business development whilst we benefit from greater security of supply and the opportunity to secure and lock in preferential terms. We could take this a step further and get more involved with the supplier so as to align their offer and development with our future plans and needs. We could even choose to acquire a stake in their business or simply buy them. Value therefore has degrees depending upon the degree of mutual collaboration (Figure 2.5).
Everyday suppliers might jump at the chance of a close relationship that affords them the chance to grow their business but there may be little benefit to us, especially if we have choice and the ability to switch in the marketplace. Similarly some suppliers will be uninterested in us beyond convincing us to buy from them. Others might speak of collaboration but not mean it. If neither rows the boat, we have lost nothing, we are merely transacting for the supply of goods or services but the worst outcome is if one party believes the relationship is collaborative while the other pretends, as this will not enable value creation. The key to this type of value lies in the will of both parties to want to collaborate, and therefore the potential pay-off by doing so. One test of how serious a supplier is to row the boat with us is the degree of investment the company puts into achieving outcomes. If the 'joint working' extends only as far at the Key Account Manager then the commitment on their part may be superficial. However, if the collaboration extends further into their business then it is usually real.
Collaboration for mutual value development doesn't just happen but needs to be structured, with a joint team, jointly agreed mutually beneficial goals and both investing time and resources to do so. Here, using the Strategic Collaborative Relationships (SCR) process can provide the process and framework to do this and we'll cover this in Chapter 13.
FIGURE 2.5 Degrees of collaboration
Relationship requirements
Within category management, the entire process is underpinned by the Business Requirements; a comprehensive definition of exactly what the organization needs and wants for a specific category of spend or group of products/services. Business requirements are developed cross-functionally with key stakeholder engagement and must translate corporate objectives into specific requirements that determine what the organization buys. The process of developing business requirements challenges what has gone before and, if done well, can be the source of great breakthrough. There are different frameworks for business requirements. I favour the RAQSCI model in Figure 2.6 which, like VIPER, is also hierarchical.
VIPER works in a similar way and underpins the entire SRM process as the means to define the Relationship Requirements. It provides the framework to define what we need from the supply base at a macro level or indeed specific requirements for individual suppliers. At a macro level we can use the framework to modulate the wider corporate aims or objectives of the organization together with any specific needs the business has from the supply base in general. At a supplier-specific level it helps us convert a problem or opportunity into a target that will be achieved with a specific piece of supplier intervention.
FIGURE 2.6 The business requirements framework, as used with category management
Within SRM, business requirements are relevant also, as what we need or want for what we buy, influence the relationship requirements for whom we buy from. This is one of the key linkages between category management and SRM and Figure 2.7 shows how business and relationship requirements integrate. It could be argued that both requirement frameworks are doing the same thing or that business requirements can define what is needed from the supply base. Indeed many of the inputs are common, for example the requirements 'must comply with company CSR policy' could apply to both goods sourced and suppliers. Any overlap is not important, instead by using VIPER relationship requirements alongside RAQSCI business requirements means we are effectively considering what is needed from a supplier through two separate lenses, which helps us see broader opportunities. Where an organization is using both category management and SRM, both definitions of requirements should work in concert across both initiatives for the good of the firm.
VIPER therefore seeks to answer the pathway question what contribution do we need from our suppliers and why? This contribution is defined in our relationship requirements, at a macro level initially and then at individual supplier level. Figure 2.8 provides an example of macro relationship requirements using VIPER. Here note how this collection of requirements resembles an overarching purchasing strategy and that is simply because at a macro level VIPER is effectively a framework for defining a key component of a firm's purchasing strategy. This initial and often neglected step is crucial as it forms the basis for how we will identify those suppliers who are important to us and therefore require some form of intervention.
FIGURE 2.7 Using business requirements and relationship requirements together
FIGURE 2.8 Example of macro level relationship requirements
