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VOLUME
MARCH 2004
Performance of Truly Strategic Supplier Relationships
— Lutz Kaufmann, Ph.D., Professor and The Herbert-Quandt-Endowed Chair, WHU – Otto-Beisheim Graduate School of Management, Vallendar, Germany
Executive Summary
Initiatives to improve relationships with key suppliers are under way in many companies. One important decision relating to the design and administration of strategic supplier relationships is which concept to apply when measuring their performance. The relationships with strategic suppliers are multifaceted and require a multidimensional
measurement. Furthermore, measuring their performance has to be tailored to the specific situation, as not all strategic supplier relationships are created equal.
The concept of the Balanced Scorecard (BSC) is frequently employed to support the implementation of the strategies of individual business units within a multibusiness organization. This Practix best practices report describes how the principles of the BSC concept were successfully applied to strategic supplier relationships at a company from the automotive industry under the term Cross-Balanced Scorecard or X-BSC.
Background
Car-Ter Corporation (a fictionalized name) serves mainly the premium segments for passenger cars. The Car-Ter brand stands for state-of-the-art technology and design. The European-based company is also well known for highly innovative approaches in purchasing and supply management. Car-Ter’s purchase dollars as a percent of sales dollars is among the highest in the industry, well above 70 percent. Many suppliers use their business relationship with Car-Ter as a strong argument in negotiations with other car manufacturers when it comes to demonstrating innovativeness, technological know-how, and reliability.
In the 1990s, Car-Ter was among the first in the industry to segment its supply base according to the roles it wanted its suppliers to fulfill in the future.
As a consequence, purchasing and other functions would concentrate on working closely with strategic suppliers, and the
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interaction with non-strategic suppliers would be streamlined for efficiency. In some cases, relationships with non-strategic suppliers were even terminated and delegated to the strategic suppliers, leading to further supply base reductions.
Consequently, close and trustful relationships, with slightly more than 100 key suppliers, are common practice at Car-Ter today. These suppliers are termed “strategic” as they deliver innovative, technologically complex, and highly Car-Ter- specific parts that represent a significant share of the final product’s value.
Traditional Performance Measurement
Today, purchasing managers may choose from a number of approaches when planning and monitoring the performance of suppliers.
Classical supplier evaluation systems, supplier audits, supplier award systems, and relationship assessment programs are widely — and in many cases successfully — used. Best practice examples for these tools are reported from the automotive, semiconductor, computing, and retailing industries.
However, purchasing managers at Car-Ter realized that the approaches for planning and monitoring supplier performance still largely follow the notion of “one size fits all.” For most of the non- strategic suppliers, the tool set seemed largely over-engineered, while for strategic relationships,
no consistent approach was available. Another shortcoming was that most of the approaches mentioned centered on the transaction and not on the relationship. They were backward-looking, after-the-fact measurement tools and not
forward-looking, strategy-focused performance management concepts. The conclusion was obvious: In order to effectively work with its strategic, key, or preferred suppliers, Car-Ter clearly needed a tool that focused on:
• the relationship as a whole,
• the future development of the relationship, and
• fast implementation of jointly formulated relationship strategies.
From BSC to X-BSC
A concept that fulfills these requirements is the Balanced Scorecard (BSC). Developed in the early 1990s by Kaplan and Norton at Harvard Business School, today the BSC is widely used in companies of all sizes. The basic idea of the Cross-BSC (X-BSC) is to use the BSC approach to not only implement strategies formulated within their own company boundaries, but also to develop BSCs for each relationship with a strategic supplier. Furthermore, the X-BSC is based on a jointly formulated relationship strategy. Figure 1 shows parts of such an X-BSC that was jointly developed by Car-Ter and one of its strategic suppliers.
PRACTIX | Good Practices in Purchasing & Supply Chain Management | CAPS RESEARCH | March 2004
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Figure 1:
Basic Architecture and Extract of an X-BSC
Objective Measurement Target Financial
Perspective Customer Perspective B2B Process Perspective Learning and Growth Perspective
sale of developed tech- nology to a third party
improved initial quality
development time 30 months
innovative products
increase of the ROI of the relationship position in J.D. Power and Associates ranking passing of
development gates number of new patents
> 10%
(3 years after SOP)
top three planned SOP +/- 1 week
three new patents per product
Extract of X-BSC
as a whole into a set of some 20 measurable objectives. The objectives of an X-BSC essentially cover the same four dimensions as internal company BSCs do. The objectives from the financial perspective show how the supplier relationship adds financial value to both the buying organization and the supplier. The customer perspective shows where this value ultimately comes from, namely the final customer. The process perspective covers the business-to- business (B2B) processes leading to end customer enthusiasm and retention. Finally, the learning and growth perspective, also known as the employee perspective, contains those goals that need to be achieved in order to enable and empower the employees on both sides of the relationship. This architecture ensures that X-BSCs follow the same basic logic as the internal BSCs of the buyer and the supplier.
Therefore, X-BSCs are balanced in the sense that not only isolated financial or quality objectives get measured. X-BSCs can be simple and focused when developed according to the “20 is plenty” rule of putting not more than 20 strategic objectives on a scorecard. They create commitment as it becomes possible to hold the buying team and the selling team accountable for achieving the strategies of the relationship as a whole.
Additionally, they speed up the implementation process as all initiatives and activities can be tied to the overall strategic relationship objectives.
At Car-Ter, purchasing management decided early on that the X-BSC should not be confused with what may be termed “supplier-managed KPI inventory,” where large automotive OEMs set up a platform, calling it a “supplier BSC initiative,” and have suppliers provide data on certain generic performance indicators that the OEM cannot or will not generate itself. Such an approach was considered suitable for the masses of supplier relationships, but certainly not for the strategic ones at Car-Ter.
Some questions remained at this point. At what point during a supplier relationship should X-BSCs be developed, by whom, how, and at what price? Last but not least, it was interesting to learn the major obstacles in scorecarding processes that crossed company borders and how these obstacles could be overcome.
While many purchasing organizations today employ some kind of portfolio approach to segment their suppliers, Car-Ter decided to evaluate the need for cooperation with a supplier based on three criteria: (1) level of technological complexity of the purchase item; (2) level of specificity of the purchase item (does it have to be tailor-made for Car-Ter?); and (3) share of Car-Ter’s purchase volume. If all three are high, the X-BSC should come into play. Its initial setup should be integrated with the supplier selection process. In the automotive industry and for items of high complexity, specificity, and value, this is usually during the development phase. In the case of Car-Ter, the X-BSC ground rules were made part of the inquiry documents and the final contract. The X-BSC process had to immediately follow the strategy formulation for the supplier relationship as a whole. Being the process owner, the buyer manages strategic partnerships and is therefore responsible for developing the X-BSC.
Ideally, X-BSCs could be derived from a cascade of internal BSCs on the buyer and supplier side.
PRACTIX | Good Practices in Purchasing & Supply Chain Management | CAPS RESEARCH | March 2004
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Potential Roadblocks
This ideal cascade is seldom available. Luckily, the experience at Car-Ter shows that it is not an absolute necessary condition for setting up X-BSCs. The only necessary condition is that a clearly articulated strategy exists for the supplier-buyer relationship as a whole.
Developing such a strategy usually requires the input from various departments on both sides.
At Car-Ter, a procedure was developed similar to the one used for scorecards on the corporate or SBU levels. However, in order to prove feasible for up to 100 supplier relationships, this procedure had to be less time consuming and require fewer resources than the standard process to set up scorecards for whole organizational units. This is why the workable solution at Car-Ter was called “quick’n clean.” According to the experience at Car-Ter, setting up an X-BSC takes about two workshop days and comes with a price tag of roughly $18,000 for external support.
The major obstacles discovered during cross-scorecarding projects were:
• lack of supplier relationship strategy
• dominance of certain departments (i.e., leading to an over-representation of development objectives)
• lack of alignment between supplier relationship- focused actions and mono-functional strategies, on both the buyer and supplier side
• limited input of suppliers during the process
• putting too much emphasis on the software solution.
Most of these obstacles could be overcome by engaging a neutral, strong, and sufficiently experienced outside moderator and through highly visible involvement and commitment by the CPO and his/her management team. It also proved important that the parties involved did not confuse standardizing the cross-scorecarding Company Balanced
Scorecard (BSC)
BSC for strategic business unit
Key Account Management
R&D BSC
Supplier Buyer
Production &
Logistics BSC
Supplier Relationship
Strategy
X-BSC
Company Balanced Scorecard (BSC)
BSC for strategic business unit
Sales BSC
R&D BSC
Production &
Logistics BSC Sales BSC Supplier
Relationship Management Figure 2:
BSC Breakdown
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process with using overly generic performance measures for each and every supplier relationship.
The objectives, the performance indicators/ratios used, and the target values of these may well vary among the single strategic supplier relationships to some extent.
Benefits to Buyers and Suppliers
Certainly, the X-BSC added some steps to Car-Ter’s purchasing processes and required further resources during the workshops. But the realized benefits far outweighed the costs, and the number of successful strategic supplier partnerships could be improved significantly.With the new system in place, Car-Ter has a powerful tool to manage strategic partnerships.
Improved results from simultaneous engineering efforts are another result. The risks of delayed product launches and increased costs for systems and components were also greatly reduced.
Many of the advantages are equally valid for the supplier. Because the X-BSC is planned, built, and run by both parties, the supplier is motivated for continuous improvement. In contrast, the ratings of traditional supplier evaluation systems and rules for supplier awards are often not fully understood by all suppliers, and this still leads to frustrations in the relationships between many organizations. Car-Ter’s X-BSC clearly adds transparency for both parties, and issues get resolved in a fast and professional way.
Purchasing managers at Car-Ter are well aware of the fact that the X-BSC by itself will certainly not solve all the complex problems facing purchasing managers today. But the X-BSC effort seems to be a good first step in implementing solutions that, with some luck, will produce similar results from strategic supplier relations in other companies and industries to those achieved by this European premium carmaker and its top suppliers.
