How To Develop A Successful Supplier Management Program

By Fred Olds, contributing editor

In today’s world, a company can no longer be good at everything,” says Hans Melotte, VP and chief procurement officer (CPO) at J&J. He says J&J came to realize that vertical integration no longer worked for them, and they needed to seek expertise through partnerships with outside entities. With tens of thousands of suppliers, horizontal integration posed a challenge to Melotte and his staff. His answer was standardization of their approach to suppliers and the development of business relationships with strategic suppliers.

In an interview in 2012 following Melotte’s selection as Chief Procurement Officer of the Year by procurement leaders, he said procurement had to maneuver itself into new business models. He said CPOs needed to build competencies around developing relationships with suppliers, and he launched J&J on a course to do just that. It is a process that continues today.

“A couple of years ago, we set up procurement processes that could be applied across the enterprise in a consistent manner,” says Melotte. Procedures were standardized, and common language introduced so employees in J&J procurement would understand what governance, resource, or effort would be required in specific situations.

A supplier management program was developed to clarify how to interface with suppliers. There are three components to the program: Shape the supplier base and ensure the right mix and size, focus on relationship management, and build engagement with suppliers. The program delineates how to stratify suppliers based on strategic importance, the type and frequency of meetings, and where the company should be involved with the supplier.

The goals, says Melotte, are to 1. present J&J in a consistent and institutionalized manner to all suppliers, 2. allocate time appropriately by segmenting suppliers according to strategic needs, and 3. engage suppliers in a way that inspires them to not only want to work with J&J but view it as a customer of choice.

Engaging Suppliers
One of his key objectives is to engage J&J’s supplier partners in long-term conversations. J&J segments suppliers in three groups using multiple criteria. “Where I think we are different is in our focus and philosophy on managing relationships, rather than managing suppliers.” He feels the latter could imply a patronizing approach to suppliers.

The term “business relationship” implies two parties on equal footing. Each side has interests and needs that the other helps fulfill. “If you think of a company the size of ours,” says Melotte, “it’s like extending J&J’s supply chain into an ecosystem of partners.”

Engagement begins with an invitation to discuss strategic goals and needs with a supplier. It’s not a discussion about payment terms or delivery schedules. “These relationships are about developing a long-term conversation,” he says. “Our relationships are two-way and ‘multi-multi’ where no one party has control over everything.”

Melotte always wants to hear how suppliers view J&J as a customer. He also wants to know new and better ideas from other companies, and what J&J can do to become a supplier’s customer of choice.

The hope is that partners will come to you when they have business opportunities or ideas to share. This could present in the form of marketing new products, exploring new markets, or R&D. Melotte says, “If you do the math, J&J spends about $30 billion with suppliers. This is an expense to us, but it is revenue to the suppliers. Of that revenue, they reinvest about 3.8 percent in R&D, which equates to a little more than $1 billion of R&D investment. We would prefer to see that investment flow back to J&J, augmenting our own R&D investment.”

Ground Rules For Setting Up the Relationship
There must be an honest, transparent, and specific conversation. “Any supplier will say, ‘J&J you’re important to us,’” Melotte says. “But let’s face it, there are degrees of importance. Companies need to sit eye to eye and ask, ‘How important are we to you, really?’ Then ask why, and to what degree.” J&J may say it’s because the supplier has contacts in Latin America, for example, while suppliers may say it’s because J&J is their most profitable account. Knowing the basis of the relationship is important because it defines the dialogue and the evolution of the partnership.

Each side also needs to bring top leadership to the table. That demonstrates a company is serious about working together and has enlisted the people with the authority to make decisions and resolve issues. The dialogue in early meetings should describe and compare the two companies’ businesses and goals. “This doesn’t mean the goals have to be aligned,” says Melotte. “But it does mean they cannot be exclusive.” The point in establishing the relationship is to further their mutual goals and discover how they can strengthen each other.

Melotte recommends that, when you can, work on creating a joint charter. Such an agreement could involve building a manufacturing facility or redesigning a product. The charter sets goals for an initiative or project, describes what success looks like, and delineates responsibilities, time lines, and resources.

Segmentation and Selecting Partners
“Shape your partner base so that it complements who you are and your business needs,” Melotte says. Neither volume of business, history, or size necessarily moves a supplier to Segment 1 status. Instead, it’s a matter of the supplier’s strategic importance to the partners.

First, look at your supply chain and determine if your supplier base has the right mix to offer what you need. This isn’t merely a question of whether your company gets enough pens, bolts, and equipment. Examine if the base meets the company’s strategic business plan. For instance, a company that wants to expand into Asia might need to complement its current supplier base with suppliers in Asia. The new partner becomes a Segment 1 supplier because of its strategic location or expertise.

“Another consideration in segmentation is your vantage point,” says Melotte. “I might designate a small supplier as Segment 3 in the overall J&J universe. Yet that supplier might be ultracritical to our baby business in India. So, the supplier may end up as a Segment 1 relationship.”

Segmentation is a dynamic process. It has to keep pace with changing markets and opportunities. Melotte says, “Our business portfolio, our business needs, and our strategic priorities change, so our supplier base needs to change.” He believes their supplier management program provides the platform to meet change. It calls for continual evaluation of the size and mix of J&J’s supplier base. If necessary, the staff can resegment suppliers and continue to manage relationships in a consistent manner.

Strengthening The Relationship
Sustaining relationships requires consistent face-to-face contact and feedback. J&J meets regularly with suppliers to measure progress and provide updates on their businesses. These meetings serve as a barometer of how well the relationship is working.

Making progress and experiencing success not only furthers both companies’ goals, it strengthens the relationship. On the other hand, “If you meet once a month to ‘renew your vows,’ but nothing happens, the relationship is bound to deteriorate,” says Melotte.

He explains that in addition to these frequent meetings, it is helpful to occasionally gather groups of partners together to conduct an open conversation on the process in general. For example, as part of the launch of its supplier engagement program in 2012, J&J invited the leadership of a select group of its strategic suppliers to a roundtable. The purpose was to provide a venue where the partners could engage with J&J senior leadership in an open dialogue about business strategy and opportunities to drive growth.

J&J brought its top management to the roundtable to meet their counterparts. J&J executive leadership opened the meeting by sharing their business model, products, plans, and strategic imperatives. Further discussions grouped suppliers in a manner that they could share ideas on common issues and facilitate networking. Appropriate representatives from J&J were paired with the suppliers to moderate discussions and record feedback. In follow-up, suppliers expressed their desire to continue the dialogue on an individual basis and meet again in this general forum annually. They also commented that they had not been approached by other companies with such an opportunity.

An Ecosystem Of Suppliers And Partners
At this stage of the deployment of a supplier management program, many of the metrics are activity-based. The current proxies are the supplier customer-of-choice survey and a net-promoter score. “About 70 percent of Segment 1 suppliers rate us as one of their customers of choice,” says Melotte. “This suggests that more than two-thirds of our suppliers are inclined to dedicate their best and brightest resources to us, or to come to J&J with their innovative ideas.” For him, the ultimate test is how the company performs in meeting its goals and doing what is right by its patients and customers.

Melotte says, “It takes time, failures, and successes to learn to manage business relationships with other companies, but any enterprise needs other companies to succeed in today’s world. To grow and survive, a company needs to form an ecosystem of suppliers and partners that, in the aggregate, make them a stronger system.” He suggests that while this is true for a large company like J&J, it may be even more important for a small company that often has very little room for error.