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Vendor Business Planning: Maximizing Your Vendor ROI
by David N. Rasmussen, Senior Consultant, Cutter Consortium
THE BUSINESS CHALLENGE
How do you measure your vendors' performance? On-time delivery? Reject rate? Lowest product cost? Quality of service? These are all important metrics; however, they may not provide you with sufficient information to determine the adequacy of your return on the investment you made with your vendors. Such metrics tend to focus on the tactical attributes of the relationship but don't necessarily help evaluate the broader strategic attributes.
You and your vendor are on the same team, right? But how do you know? How much investment have you made to build the relationship to where it is now? And how much more will you need to invest in the future to help achieve your strategic business objectives? For that matter, how much "skin in the game" (i.e., commitment resources) has your partner invested in your relationship?
Interestingly, we all know exactly how to measure "partner" sporting events -- match play golf, team tennis, basketball, football. Yet we rarely apply a similar philosophy to measuring team business events. As the old saying goes, "You can't tell the players without a scorecard." In business relationships, we might say, "You can't tell the score without a plan."
MANAGING THE VENDOR ALLIANCE
In the second Executive Update in this three-part series on vendor management, we discussed the five critical success factors for managing alliances [2]. A few of the salient points about alliances are shown in Figure 1. Both strategic and tactical relationships with vendors require a commitment to effective communication in order to succeed. And good communication does not come for free. It requires time and energy on the part of key alliance participants to keep both parties apprised of activities, results, and problems.
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Figure 1 -- Important aspects in creating business alliances.
Each party should assign a single person (i.e., a champion) with responsibility to achieve the success of the partnership as defined in the business plan. That person should have the authority to make decisions within the scope of the plan, manage the operational work of the partners, represent the performance interests of the respective partners, and be accountable for achieving the plan metrics. In addition, each party should also identify an executive sponsor of the alliance who has several responsibilities, such as the following:
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Serves as the corporate approval authority for the vendor business plan
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Provides an officer-level contact for strategic business issues
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Supports the vendor program manager in resolving periodic operational challenges
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Ensures the adequacy of corporate resources to achieve the business objectives of the vendor program
The Vendor Business Plan
Many companies manage their relationships with vendors without giving much thought to the investment required to achieve the desired objectives from working together. In fact, they often don't clarify their objectives beyond receiving delivery of products and/or services on schedule and within budget. Actually, this may be all that is required for a tactical, opportunistic relationship.
For more strategic vendor partnerships, however, it may be helpful to develop a business plan that provides the framework for multiple initiatives between the partners over a longer time period. In this case, the plan should be no different from that for any major business venture in the company. Simply stated, it should address the seven strategic questions listed in Figure 2 regarding the company's resources that will be involved in the work of the vendor relationship. Resources, of course, include people, funds, plant and equipment, and other assets to be used in performing work with the vendor partner. The vendor business plan should contain a concise description of the investment to be made along with the metrics to be used to measure ROI (both quantitative and qualitative).
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Figure 2 -- Seven strategic questions.
In some cases of strategic importance to the company, it may be useful to consider developing the vendor business plan jointly with the partner company or companies. Depending on the level of trust between the partners, this could be a good opportunity to clarify the "skin in the game" for both companies and possibly share the same metrics for success. The joint plan can help establish and/or reinforce key elements of a business alliance. For any sort of strategic alliance, it is vital that the partners understand both their own investment as well as the investment of the other party.
The vendor business plan is more than a Gantt chart of scheduled tasks. As shown in Figure 3, it summarizes the details of the client or product requirements along with a description of a proposed solution to those requirements. It also includes a financial summary of the investments required of both partners along with the financial returns to be shared. Additionally, it describes the resources required to implement, deliver, support, and service the joint product or solution. However, it does not need to be overly complex. A focus on providing answers to the seven strategic questions from Figure 2 can be an excellent tool for invoking the KISS principle -- keep it short and simple!
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Figure 3 -- Components of the vendor business plan.
The reader may be asking the question, "Why share our proprietary information or our financial plans for the investment with a vendor?" Perhaps the better question is "Why not?" Given that you can achieve the five critical success factors (discussed in Part II [2]), most companies have more to gain by working together closely than they have to lose. And, it certainly reinforces the element of trust in the relationship.
The "Living Plan"
Regardless of whether the partners choose to develop a joint business plan or separate plans, it is vital that the plan(s) be reviewed, discussed, and updated on a regular basis. As business conditions change and the partnership gains experience together, the plan(s) should be updated to reflect the results achieved as well as to plan for new objectives, strategies, goals, tactics, investments, and metrics. Recall that Part II discussed the importance of effective communication in the relationship [2]. A good process for achieving a "living plan" is to conduct regular, quarterly management reviews of the partnership's performance regarding plan objectives. Such reviews should include senior executives and program personnel from both partners to discuss and evaluate the performance of the program and to agree on any changes to the business plan.
To help illustrate this point, consider the potential benefits of incorporating a long-range (four-quarter) product forecast process as part of the business plan. Generally speaking, when the procuring partner can offer relatively accurate long-range forecasts for needed products, the supplying partner should be able to gain improvements in product cost, production scheduling, and delivery. By passing those benefits on to the procuring partner, both parties win. This would be one of the topics to be considered during the quarterly business plan reviews.
The discussions about areas of real success and failure in plan implementation should lead to identifying changes to be undertaken in the future. The plan(s) should then be updated to incorporate the changes required in people, funds, equipment, forecasts, management support, and other assets in order to successfully achieve the updated goals of the partnership (see Figure 4).
Figure 4 -- Four-quarter planning process.lifecycle.
MEASURING PERFORMANCE TOGETHER
Almost every business justification for an investment can be put into one of five categories, as shown in Figure 5. The first three typically offer choices from several alternative investments; the latter two are more likely to require a simple binary decision -- either make the investment or plan for a possible short-lived business future.
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Figure 5 -- Five basic reasons to justify a vendor investment.
Regardless of the nature of the justification, you can't evaluate what you don't measure. With a strategic partner, it can help if the partners undertake this together. Among other benefits, it helps ensure that all partners understand their own "skin in the game" as well as that of the other parties. It further supports efforts to communicate, collaborate, and adjust to changing business conditions and maximize the opportunity for the alliance to succeed.
Recall the five critical success factors for strategic alliances from Part II -- trust, communication, culture, commitment, and champion [2]. The joint business plan should describe the steps to be taken by the partners in order to achieve these critical success factors and, to the extent possible, measure them. Trust is difficult to measure quantitatively -- however, you surely know when you have it or not! Whichever of the five investment justification categories may apply to a particular initiative should have both quantitative and qualitative metrics defined in the business plan. These should be reviewed together by the partners quarterly, as part of the "living plan" process, and serve as indicators for changing the plan to better deal with future business environments.
CONCLUSION
Parts I and II discussed the vendor relationship continuum (see Figure 6) and suggested that partners should consciously determine where they want to operate for any particular alliance [1, 2].
Figure 6 -- The relationship continuum.
The final questions, therefore, to be asked in your pursuit of better vendor management performance are:
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Where are you now with each of your vendors?
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Where do you want to be?
We will end this discussion on vendor management by suggesting that the answers to these questions begin with a key paradigm shift -- from the concept of purchasing products to that of working collaboratively with value-added partners. Once the responsibilities of "vendor managers" have been defined, the development of strategic relationships should follow shortly.
This Update is the last in a three-part series on the subject of vendor management.
REFERENCES
1. Rasmussen, David N. "A Business Approach to Managing Vendors." Cutter Consortium Sourcing and Vendor Relationships Executive Update, Vol. 7, No. 2, 2006.
2. Rasmussen, David N. "Managing Strategic Alliances: A Model of Critical Success Factors." Cutter Consortium Sourcing and Vendor Relationships Executive Update, Vol. 7, No. 8, 2006.