Procurement’s pursuit of best-in-class performance has traditionally focused on a number of areas including category management, supplier consolidation and supplier relationship management with key vendors. This has delivered strong results in terms of minimising risk exposure, providing commercial benefits and penetration of value delivery with key suppliers.
A strong supplier management strategy looks to leverage the whole supply base, the right supplier to provide the right service or product and not just the biggest supplier. In turn, companies are looking to put in place approaches that compliment existing activities to ensure they capture the value that small and medium enterprises (SMEs) create. Here it’s worth understanding some of the important ways in which they can capture SME value.
Strengthened supply chain
The supply chain, tied with innovation and creativity, is the strongest business benefit for companies. In a global economy, multinational companies tend to rely on global supply chains, which offer economies of scale through a small number of high-volume suppliers. As a result small, national suppliers often lose out. However, there is a strong case for local and more focused sourcing models, such as improved access to quality raw materials. The Business in the Community (BITC) research indicates that businesses that diversify their suppliers (accessing smaller, ethnically diverse, social and local procurement) are able to reduce that risk.
There are a number of companies supporting SMEs through incubators, hubs and enterprise zones, many of which then support their supply chains.
By actively managing the SME supply base companies maximise the gain from accessing SME talent.
They also take advantage of companies that often have already been naturally selected by the business in instances where value can be increased or delivered in other areas.
Employee motivation is increasingly linked to the level of synergy between the employee and the organisation’s values, interaction with colleagues outside the normal work environment, and the use of skills to benefit a supported programme or enterprise.
This is magnified through the interaction with SME organisations and talent. This trend has been identified by the Boston Consulting Group, which stated: ’In a study of 40 global companies over three years we found (improvement) of more than 5% in operating margin and more than 3% in net profit between the companies with high employee engagement as opposed to those with low engagement’.
Greater innovation & creativity
Part of the value derived from working with SMEs ranges from the introduction of new products/services, different ways of working to access the most senior people within the enterprises, and the inevitable seep of innovative and creative thinking into the business. Business research continues to emphasise that innovation is crucial in corporate growth strategies, a point made clear by the UK Government’s 2010 Innovation for Growth study: “Half the companies identified as innovation leaders subsequently demonstrated an increase in share price of at least 50% over the following two years and, as a portfolio over the same period, innovation leaders delivered a return of 48.6%, significantly better than that of the FTSE, NASDAQ or Dow Jones”.
Global technology giant HP, for example, works alongside over 600 SMEs to deliver large contracts. HP recognises that working alongside a small and agile business helps staff to change the way they approach certain tasks, and provides greater cost effectiveness, adding value to their contracts.
Extending and opening access to supply chains for local and/or smaller enterprises is often a key part of realising stated corporate values and goals – as summed up by vice president corporate responsibility, InterContinental Hotels Group, Kate Gibson, who said: “By working with local enterprises, we can source products locally and differentiate ourselves in the market, supporting the local community and meeting guest needs. A values-based procurement approach can help our hotels have an even bigger impact on the local economy and local people”.
Expanded business growth
Targeted use of SMEs to provide product/service leadership, relationship or operational differentiation becomes important to channel efforts behind key growth markets.
A significant number of enterprise support programmes are specifically designed to support SMEs, including social enterprises, with new business or routes to market. Research shows that supporting enterprise can also lead to business opportunities for the supporting business, often through expanding the customer base directly, or enhancing their offer. There are also examples, especially involving enterprise hubs and incubators, where the enterprise and the business have worked together and gained new customers.
Increased financial return
The financial benefits from working with SMEs range from the increase in revenue due to innovation and access to new markets to the lessons learnt in leaner processes and more agile thinking. Indirectly, higher levels of team engagement, mean less turn-over and lower risk means lower levels of contingency or capital required to cover incidents.
Research shows that companies that consistently manage and measure their responsible business activities outperformed their FTSE-350 peers in seven out of the past eight years.
Identifying SME value
With 95% of companies in prosperous countries being SMEs and in the UK, nine out of every 10 new jobs being created by SMEs there is a substantial opportunity for companies.
This opportunity is being made available to all by changes in the drivers and enablers of the SME market. The opportunity can be captured by companies through initiatives that improve access, transparency and integrate into existing supplier management activities. This collaboration can be scaled further by working with internal business partners, key suppliers, SMEs as well as organisations like BITC, FSB, MSD UK, We Connect and Action Sustainability.
Managing the end game
Managing a large supply base of SMEs brings with it additional considerations, such as exposure to risk, effective time management and prioritisation, but by addressing these an organisation can become more effective and efficient.
With the end goal in mind, get started by targeting certain categories where small suppliers and innovation flourish like marketing or HR. Certain processes or control points that are barriers of entry or affect access to business can also be targeted. For example, Goldman Sachs has moved to a process whereby the cost of undertaking the vast majority of vendor screening activities (Vendor Background Reviews, Vendor Information Security Reviews etc.) are absorbed by the company. Lloyds has developed a free-of-charge sustainability action planning tool for SMEs; and a programme of events for SMEs which includes content demonstrating sustainability credentials as part of contract tendering for larger organisations.
Be cautious about when you tackle certain complex topics like developing firm-wide SME policies. Santander has made non-disclosure agreements with all suppliers valid for a 12-month period. Similarly, it has made its financial due diligence and approval of suppliers an annual process.
Doing this all in partnership with teams from across the company is great, obviously the corporate social responsibility CSR team, but also business partners from R&D to risk. Throughout, the access to SME entrepreneurial talent is invaluable; think how you can capture the essence of an entrepreneur through focus, agility, intuition and determination as well as the natural spirit of creativity and collaboration.
Liza Tait, corporate responsibility & communications, Visa Europe, said it best: “Our support of social enterprises is enabling our staff to absorb the natural entrepreneurial and innovative spirit from these enterprises, and […] better interact more efficiently and successfully with a growing market”.