Charting Supplier Relationships in the Operating Model Design

by: David Winders and Kirill Deverenski. April 2018

In our earlier articles we have looked at the Value Delivery Chains and how to identify and heatmap the necessary prerequisites for its successful delivery. Here we are focusing on the all-important supplier relationships that any organisation will need to put in place to succeed.

It goes without saying that a great deal of activities are usually involved in the final value delivery. The days when everything could be produced and fashioned in-house (if there were ever such days) are long gone. This is why when using the Operating Model Canvas methodology, we suggest you tackle supplier relationships straight after the Value Delivery Chain identification.

There are fundamentally two decisions to be made regarding supplier interactions: first is to decide which of your value delivery activities should be conducted in-house, or those that can be outsourced. Second is to put the right form of supplier relationship in place to get most value out of it.

To do or not to do?

While it is tempting to keep as much as possible in-house, there is often little value of doing so. Usual business arguments of ‘better control over the deliverable’ and ‘spreading the overheads’ mostly do not apply in today’s rapidly moving markets where agility is key. The Operating Model Canvas methodology suggests a better way to look at outsourcing needs through asking ‘Is this activity key in delivering value?’ and ‘How good are we at it comparing to others?’

Once put this way, much fog and confusion over suppliers will dissipate. Clearly, if there is a critical activity at which we excel and provides key value it must be kept in-house and nourished further. Something that is not critical to value creation and we are not good at anyway, can be safely outsourced.

There are two other options available but these are a bit trickier. Something that is critical to value but that we do not do as well as others will either have to be brought in and improved, or a special contractor relationship forged. Also, if there is something that we do really well, but it adds little to our own value delivery chain, we should either “park” or better still treat it as value propositions to outsource to someone who needs it for their value delivery chains instead.

A tool we can use to zero in on sources of competitive advantage in value delivery activities is the VRIO model (for more details, read about VIRO in this work: J. Barney (1991) ‘Firm Resources and Sustained Competitive Advantage’). It is at its best when used to identify competitive status of your activities as an indicator what to focus on prior to deciding how to go about what you discover.

VRIO technique

V Which value adding capabilities are significant in delivering customer needs and can they be developed further?
R Which capabilities does an organisation have that are rare compared to its competitors?
I How easy is it for a competitor to imitate or copy this capability?
O What parts of the value chain support this capability, does it rely on organisation support beyond the capability itself.

 

1. Valuable? 2. Rare? 3. Inimitable (Impossible to copy) 4. Supported by the Organisation Competitive Implication
NO  – Competitive disadvantage
YES NO  –  – Competitive parity
YES YES NO Temporary competitive advantage
YES YES YES YES Sustained competitive advantage

Naturally, the activities of sustained competitive advantage are the ones to focus upon, however tempting other options may be!

Importantly, an organisational ability to change itself rapidly and with minimal internal/external disruption can be a major source of competitive advantage in today’s markets.

Having identified which value delivery activities are to be kept in-house or outsourced, the second question – how to go about it – can be tackled.

How deep is your love?

Experience tells us that it is quite impossible to have a deep and meaningful relationship with each and every supplier, nor is it necessary to do so. Of course, every supplier must be treated with utmost respect and consideration, yet as with friends in life, the basis of relationship with each of them will be different.

To simplify this approach, the following map charts 4 generic supplier relationship models based on their contribution to yourValue Delivery Chain and Financial impacts that those relationships will have.

Note that Value Delivery Chain impact can be both tangible and intangible, while Financial impact covers both revenues and costs. Much like the balanced scorecard, this is to ensure that all facets of ‘value’ are taken into account.

You will notice that in the Supplier Matrix some of the areas are visually larger than others. This demonstrates the Pareto concept at work: 80% of the impacts will come from 20% of supplier relationship. It is of the essence to choose suppliers and build relationships carefully as a few key relationships will have a very large impact.

Supplier Matrix - Charting Supplier Relationships in the Operating Model Design
Supplier Matrix

Transactional Relationships

Placed on a continuum, supplier relationships will range from ‘arm’s length’ to extremely involved. It can be seen from the diagram that when examined one by one, the majority of supplier relationships fall into category of adding low value Delivery impact and low Financial impact. Industrial commodities sourcing, office support activities etc. are important on their own but are usually transactional and short term in nature as a consequence. These “traditional buyer-seller relationships” are better engaged with strict SLA parameters and managed for costs and effectiveness with frequent review and tendering.

Leverage Relationships

Leverage relationships describe activities that have considerable financial impact for an organisation but do not necessarily impact value delivery. In contact manufacturing for example, the place where a “brand offering” was manufactured is often of secondary importance to the brand offered. Plenty of goods from smartphones, to bicycles, to clothing are manufactured close to where cheaper labour or manufacturing facilities are to take advantage of available economies of scale on the contract manufacturer side with limited impact on their brand appeal and image. Such a supplier relationship is often long term, mutually inclusive and both parties tend to leverage it to their advantage.

Co-marketing Relationship

Co-marketing relationship is a relationship type when value delivery impact is somewhat higher relative to financial impact that its provides (and is often actually a financial burden). Charity endorsements, Certification & Standardisation associations and similar relationships will be important to support the delivery of the value to the intended beneficiaries and build their trust. These relationships tend to be medium term (due to shifting perceptions and trends), require prioritisation to maintain focus and are best for co-marketing.

Critical Partnership Relationships

The last on the supplier relationship continuum are the critical partnerships of strategic importance. There are likely to be very few of them and commitment to their success will be crucial for both parties. The present arrangement between Apple and Intel looks like one of those business marriages, when Apple made a commitment to Intel in all its PC systems while Intel guarantees to Apple priority and availability of its chips.

To summarise, it will be highly unlikely and unusual today to build a fully self-contained operating model where a firm does everything itself. Many activities will be – must be – outsourced to maintain the firm’s focus on its main delivery of value and therefore its competitive edge. This means the decisions on what to outsource and to whom will be potentially the “cornerstone question” on the way to developing a responsive operating model and organisational success through it.

The “Operating Model Canvas” is a well-developed methodology that has a set of dedicated tools to get outsourcing requirements and supplier relationships right.

 

 

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