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| Collaboration: Leveraging Business Partners in the Inside and Outside |
Written by Dr. Florian Burgdorf, Dr. Jens Esslinger, Dr. Wolfgang Schnellbächer, Jianpeng Wang, Daniel Weise
Collaboration is defined as working with partners with the common purpose of securing benefit for the business. Faced with increasing product complexity, an expanding global supplier landscape, and the ever-rising need for alignment, managing collaboration with internal and external business partners has always been at the heart of procurement.
It helps to identify internally which value dimensions (i.e., savings, quality, speed, innovation, risk, and sustainability) are most important to other functions such as R&D or production, and it helps to appropriately reflect those requirements externally when interacting with suppliers. Yet, these collaborations are often not handled optimally—without the right focus on business partners or the optimal ways of approaching them.
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Proper collaboration management involves two layers. First, a structural layer equips procurement with the framework necessary for organizing collaboration and interaction. It serves as a skeleton and provides a solid structure for realizing core value dimensions. Second, a relational layer—the nerve system—is needed to facilitate exchange with business partners and to create a cooperative spirit involving mutual respect and motivation. The ability to best play out these two layers—aligned with company and procurement strategy—determines collaboration outcomes.
Starting position: Current best practices in collaborating with business partners
Structural layer of collaboration
From a structural perspective, five core elements characterize best-in-class collaboration: Early involvement, aligned targets and incentives, operational empowerment, and an ongoing data exchange approach – all tailored along a smart business partner clustering (see Exhibit 1). The elements apply for both internal and external collaboration.
Exhibit 1: Core structural elements for internal and external collaboration
Early involvement ensures that procurement is included as early as during the planning phase. A team involving procurement, functions (e.g., engineering, costing), and suppliers works cross-functionally on topics such as product design, manufacturing improvement, or logistics planning. For example, procurement at a global automotive OEM accompanies the end-to-end process from development to series production to safeguard supply and quality of purchase parts.
Aligned targets and incentives enable shared goals across functions within the organization and also with suppliers. A consumer goods company for example implemented a balanced scorecard to optimize the trade-offs of business needs among different functions and business units. Best-in-class companies also excel at aligning targets with business partners outside their organization.
Operational empowerment requires a strong governance structure to mandate procurement with a challenger role along the collaboration life cycle, both internally towards other functions (e.g., on product specification) and externally towards suppliers (e.g., during performance auditing). To give an idea, procurement at a global market research company is mandated especially in directs purchasing area to sit side by side with operations on selecting suppliers for field research service and solving disputes such as on delivery quality.
The ongoing data exchange approach exists at every organizational level, from strategic direction setting to day-to-day operation. At a global agricultural equipment manufacturer for example, cross-functional category councils allow senior stakeholders to jointly plan, execute, and actively steer strategic initiatives in category management.
Smart business partner clustering helps to align with partner priorities and to specifically tailor employed methods and procedures. As business partners share similarities as well as differences, clustering them appropriately enables the determination and implementation of a customized collaboration approach.
Common clustering approaches towards internal partners are based on business units, geographies, or products, whereas clustering external partners typically leverages the spend concentration/differentiation ability matrix. This matrix guides procurement in selecting the optimal form of supplier collaboration and helps to identify those suppliers that are most suited to strategic partnerships (see Exhibit 2).
Exhibit 2: Spend concentration/differentiation ability matrix for clustering suppliers
While spend concentration is assessed in terms of the ratio of category spending on a particular supplier to total category spending, differentiation ability with regard to perceived customer value requires more expert input; both a supplier’s operational performance (e.g., cost development, quality record) and its strategic potential (e.g., product know-how, innovation capability) must be considered. The evaluation process is performed at category level by cross-functional teams possessing both technical and commercial knowledge.
As a result, there are four different collaboration clusters. On one diagonal, the develop new partners cluster contains companies with limited spend but strong potential for delivering substantial future value, while the leverage major category partners cluster suggests leveraging suppliers to gain operational advantages such as creating sustainable cost savings.
On the other diagonal, the standardize interactions cluster contains a majority of suppliers that offer standardized and replaceable products or services, whereas the establish partnerships cluster contains the smallest percentage of all suppliers. Here, the key to success is creating long-term strategic partnerships and the suppliers should be given not only the purchasing managers’ but also the senior executives’ full attention.
Each cluster requires a distinct method and intensity of interaction. For suppliers with standardizing interactions, negotiations are conducted at predefined intervals, contracts are designed uniformly, and only obligatory tasks such as audits and risk assessments are conducted by buying companies. When establishing partnerships, requirements for managing strategic partners are clearly defined and they involve a variety of tasks for dedicated roles within the organization. Among other things, it is important to align standards that define how to interact with suppliers, outlining for example, how often and which level of hierarchy is involved.
How it’s been done: Supplier collaboration at a laser technology and machining tools company A global laser technology and machining tools company was under increasing pressure to reduce costs. As traditional commercial levers gradually dried up, the company decided to explore new areas of opportunity by boosting collaboration with suppliers. The company set concrete standards for managing its over 50 strategic suppliers.
A dedicated supplier coordinator was nominated for each of these suppliers to ensure a single point of contact and maximum value creation. Depending on the supplier’s financial impact and strategic relevance (e.g., innovation performance or the number of categories covered), either a local buyer, a category manager, or a purchasing manager was made responsible for managing the relationship. Moreover, systematic interaction was set up: supplier visits were conducted at least four times per year along with representatives from the relevant functions, such as production.
Also, suppliers were granted exclusive access to the company’s innovation pipeline to be able to challenge specifications early in the new product development process and thus instigate cost-saving and/or value-creating opportunities. Previously only 20% of the savings pipeline was made up by non-commercial levers (e.g., product redesign); the ratio has now risen to over 40%.
Relational layer of collaboration:
Besides a factual approach, interpersonal aspects are also relevant for collaborations. Elements in a clear argumentation approach provide a solid basis for discussions with business partners, while aspects of influencing techniques create the appropriate atmosphere for backing such a structure (see Exhibit 3).
Exhibit 3: Relational elements in internal and external collaboration
Argumentation approaches encompass logic, principles, commitment, appeal to authority, competitive threat, and appeal to relationship. For example, logic sets out a series of logical arguments justifying why a position is correct, while principles help to gauge whether the counterpart’s position is in line with the principles of, for example, the mutual relationship.
Some argumentation approaches such as logic and principles can be applied to all business partners, whereas others can involve people’s feelings and should be chosen with caution. For example, competitive threat might work well for suppliers positioned in the standardize interactions cluster, but it can jeopardize collaboration with suppliers with which the company wants to establish partnership.
Influencing techniques include honesty, emotion, humor, disbelief, and choice architecture. Deliberate application of these techniques can, for example, help smooth the course of collaboration and maximize outcomes. For instance, being open and honest towards the counterpart helps to build trust and credibility, while a little bit of humor helps to ease the tension and can bring collaboration back on track.
How it’s been done: Managing supplier relationships at a global FMCG company Years ago, a worldwide FMCG company introduced a comprehensive collaboration framework aiming to improve supplier relationships. Still, no progress was made—instead savings realized in negotiations decreased over time. A more detailed analysis showed that traditional supplier interaction was typically stuck in a zero-sum situation, a new form of collaboration was needed. However despite of all structural elements existing, an internal survey revealed not only a poor perception of procurement’s role with low value-add in collaborations, but also a broken relationship between procurement and partners.
The procurement team was frequently described as “rigid” and “driven by uninspired zero-sum thinking” by internal functions and suppliers. So, the company rolled out group-wide cross-functional training courses focusing on argumentation and influencing techniques. In the trainings, participants from procurement were grouped with for example R&D or production colleagues to jointly solve business challenges. In supplementary coaching session, communication experts instructed buyers during simulated negotiations on how to best apply relational elements in internal and external collaborations.
The training took effect. Two years later, not only a self-assessment showed greatly improved confidence in and perception of collaboration capabilities, the company was also highly recognized in the industry for its strict but fair management of supplier relationships. For those suppliers that successfully achieved the targets, the company showed its commitment towards the relationship by sharing the achieved outcomes, for example, cost reductions. Still, the company continued to regularly conduct an extensive performance assessment and peer benchmarking of suppliers; results and especially performance gaps were clearly laid out.
The company also made it clear to suppliers that they would be phased out if the gaps could not be justified or closed in time. By always acting faithfully toward its suppliers, the company has proved its credibility, which has resulted in deep collaborations, for example, with suppliers willing to open their books. These approaches and techniques helped the company to establish a win-win relationship on a long-term basis.
Upcoming challenges
Successful procurement organizations across industries are able to align targets with internal functions and identify the right suppliers for creating strong partnerships. However, while these approaches have worked well in the past, they are likely to fall short when it comes to seizing the immense opportunities offered by the looming digital revolution.
CPOs must critically think through how to steer the changes that digitization brings to their collaborations. The upcoming changes require procurement to be able to leverage the digital tools and approaches available. In particular, two challenges stand out:
- Connecting widespread information sources to develop collaborative wisdom
- Leveraging AI defined service and product clusters to tailor collaboration approaches
How digital is changing the game: Tackling the barriers of collaboration
Connecting widespread information sources to develop collaborative wisdom In a traditional approach, an innovation inquirer either reaches out to academic world, industry association, or suppliers already known. Technical workshops are organized in physical form or per video conference, which is both time consuming and inefficient. Avant-garde companies start exploiting new digital opportunities to better connect widespread information sources with stakeholders in the whole ecosystem and to collaboratively work on business needs. The digital innovation platforms, for example, provide a virtual collaboration space that can be accessed anytime by both internal and external business partners.
The posted requests for creative solutions are seen and answered immediately by a variety of players including existing suppliers, unknown start-ups, academic scholars, or even “hidden” innovation champions within the same company from other locations. This open environment significantly extends the border of the ecosystem and minimizes white spots in innovation identification.
A multinational consumer appliance and technology corporation, for example, implemented an open innovation platform where internal stakeholders and suppliers can work together on solutions to meet company’s needs. A leading life sciences company opened an online platform to enable agile exchange with suppliers on business challenges and possible solutions. Especially smaller non-incumbent suppliers used this opportunity to connect to the life science company and show their innovation potential.
Other companies utilize technology scouting enabled by big data to detect recent innovations or identify emerging trends within the sector. Such technology engines leverage automated data analytics and machine intelligence to extract and process data around preset topics from diverse databases and expert networks.
The results are structured and presented in a visualized form to highlight e.g. technology breakthrough or tipping points of trends. For instance, a European diary company embedded a trend detection technology into its management process to enable early spotting of inspirations for new business opportunities.
Leveraging AI defined service and product clusters to tailor collaboration approaches Most companies today fall short of unlocking their suppliers’ full capabilities to address challenges, not to mention being able to identify new suppliers in order to harvest upcoming opportunities.
In the future, AI enabled technology can support buying companies to harness external innovation capabilities more effectively in order to develop increased value-add for customers. It assists internal functions in forming a fitting and focused strategy and based on this, find the best suited suppliers, award according to the envisioned collaboration strategy and execute according to a pre-defined collaboration clustering.
As starting point, AI can support the definition of an innovation sourcing strategy, such as splitting complex service requirements or product developments into separate modules (e.g., defining the best split between MRO (Maintenance, repair, and operations) components to foster supplier bundling) or identifying the optimal integration of components into a package (e.g., partitioning software with hardware elements in autonomous driving technology to optimize interface management).
With such clusters, potential barriers like company size or one-stop-shop offerings are lowered and more suppliers, including startups, are both able and incentivized to participate in e.g. RfPs, so that the maximum external knowledge can be leveraged. AI can also make recommendations on potential suppliers likely to deliver the best outcome, giving internal functions the task of assessing those recommendations and then taking action towards implementation.
Depending on the strategy chosen in the earlier defined cluster, a tailored collaboration approach is proposed and implemented. The digital platform can be configured accordingly so that all interaction, such as ongoing editing and the submission of concepts as well as feedback can be performed directly on the platform, simplifying collaborative work among multiple partners. Functions owning business demand sit side by side with procurement in a joint evaluation committee to ensure that suppliers with maximum innovation power and business suitability are transparently selected.
How it’s been done: AI-supported innovation scouting at a leading premium auto manufacturer Under changing market conditions, traditional procurement approaches like global sourcing or forward sourcing are becoming less effective at identifying the best suited suppliers. A leading premium auto OEM turned to AI for help. It partnered with a startup to leverage its capabilities in digital scouting enabled by an AI-driven suite. For each scouting request, either aiming for savings or innovation, the case was specified by the OEM and enriched—with help of AI recommendations—with all the relevant keywords for crucial components, for example, ‘LIDAR sensor’.
The specification and these keywords formed the criteria setting for scouting. The AI algorithm started by leveraging the spend concentration/differentiation ability matrix to quickly execute a focused effort on existing suppliers, assessing their suitability in regards to the scouting request. As next step, all available media were screened to identify potential new suppliers that match defined specifications and keywords. Furthermore, the subsequent supplier communication and sourcing process was performed directly via a dedicated platform.
After awarding, suppliers were integrated and (re-)clustered in the spend concentration/differentiation ability matrix to directly derive a tailored interaction process, consistent with the company’s overall collaboration approach. Doing so allows to further simplify collaborative work in the future, e.g., by customized questions during an RfP process.
The effect of applying such an intelligent and streamlined process was enormous. Finding suppliers for innovative finished products, for example, used to take 1-2 years, but now takes only some months depending on complexity. Furthermore, the associated internal costs were significantly reduced (in selected cases by up to 80%).
Looking ahead
As a traditional point of contact between internal functions and external suppliers, procurement offers the potential of integrating all information sources to generate maximal value from collaboration. This potential has to be unlocked by exploiting the possibilities opened up by digitization and technology development.
Completely mobilizing the extended ecosystem and fully leveraging suppliers represent the focus of collaboration in the digital age. To address these challenges, CPOs need to make timely decisions and bold moves. We believe that companies that make right investments will seize opportunities and gain advantage over competitors in the future.
Dr. Florian Burgdorf
Dr. Jens Esslinger
Dr. Wolfgang Schnellbächer
Jianpeng Wang
Daniel Weise
Dr. Florian Burgdorf is a Project Leader in BCG’s Munich office and core group member of BCG’s Operations and Industrial Goods practice areas, with a functional focus on procurement. Dr. Jens Esslinger is a Consultant in BCG’s Frankfurt office and a member of the firm’s Operations practice. Managing Director and Partner Dr. Wolfgang Schnellbächer leads BCG’s procurement business line in CEMA region and is a member of the procurement practice leadership team.
Jianpeng Wang is a Consultant in BCG’s Frankfurt office and also a member of the firm’s Operations practice. Managing Director and Partner Daniel Weise leads BCG’s procurement business line globally and is part of BCG’s global Operations practice leadership team.
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The Author: Daniel Weise
About:
I am a procurement enthusiast and have the privilege to lead BCGs procurement business line globally. Supporting my clients globally and across industries, I focus on value delivery - beyond cost and including resilient supply chains and sustainability, operating model redesign and digitization programs.
I have also supported many of my clients in PMI and restructuring settings. Recently, I have published my first book summarizing my experiences in digitizing procurement functions: "Jumpstart to Digital Procurement". In BCG, I am also part of our global Operations Practice Area leadership team.
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