Traditional procurement frequently assumes an arm’s length approach, whereby services are purchased and managed through a tightly specified service contract.
But many public services are there to address messy problems – services that are intimately involved in people’s lives, such as mental health, problem families, housing and long term unemployment.
This complexity requires a more agile and flexible approach to service delivery, based on the development of long term partnerships, or Supplier Relationship Management (SRM).
Toyota is famed for its tightly knit group of suppliers and its long-term, collaborative approach to supplier relations, or keiretsu. It operates a system of shared values and work philosophy across a tightly knit supplier network, an approach that has been adopted by many other organisations, with varying degrees of success.
What are the key characteristics of this approach and what modifications need to be made for it to succeed in the public sector.
A Relationship Built on Trust
An open and honest relationship is essential. As in any relationship, each party needs to treat each other as they would like to be treated in return. All parties must be willing to earn the respect of the other. At all times, the partnership needs to avoid the feeling that one partner is trying to maximise the benefit of the relationship, to the detriment of the other. Trust is hard one, but easily lost.
Toyota operates a system of open book negotiation with its suppliers. This requires that suppliers are completely open about their costs, so that Toyota can work with them to improve their performance. Open book negotiation is well suited to Toyota, but in other settings, it can be problematic.
Information flows can become corrupted, as suppliers seek to protect themselves from revealing too much commercially sensitive information, to the extent that the partnership can descend into game playing. It is also an approach that lacks balance, working less well in relationships where the supplier has an equal or greater role, in driving service improvements and reducing costs.
An alternative approach, one more suited to the public sector, is cost, or value transparency. Unlike the one-way street of open book negotiation, value transparency is a two-way sharing of information, based on agreeing what information should be supplied, to enable the client and the supplier to work together most effectively.
It is important that public sector organisations take a keen and genuine interest in the delivery side of the supplier’s business and adopt a common system of continuous improvement. At Toyota, the expectation is that they find genuine cost reductions, through Toyota’s famed spirit of continuous improvement, or kaizen. Similarly, in the public sector cost reductions need to be based on genuine improvements, not through simple cost cutting measures, that potentially undermine the service being delivered and the achievement of wider social outcomes.
Consistency of Approach
Within the public sector, there needs to be greater consistency of approach. As a minimum, this needs to operate across those public sector organisations and their suppliers, working within a given social domain and/or locality. But ideally, there should be more consistency across the public sector as a whole. It is very difficult to expect a supplier to behave in one way, for one set of public sector customers, and then completely change character for you. If you are seeking to adopt a SRM-based approach to your supplier network, then this will be made that much harder if others are not doing the same.
The first step in establishing a SRM approach is to identify which of your suppliers are strategic and which are not. This will not be necessarily related to the size of the contract. Within this group, you will then need to decide how close the working relationship needs to be, or put another way, how much time you will need to devote to building and maintaining the relationship; and working closely with the supplier on the service being delivered.
Building strong, long lasting relationships with your strategic suppliers is not easy. But with the need to do more with less and deliver lasting social value, it is now an essential capability to develop.
This is the full version of an article that first appeared in Guardian Professional on the 6 December 2012.