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Supply Chain/Outsourcing How To Develop A Successful Supplier Management Program " I By Fred Olds, contributing editor n 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 36 LifeScienceLeader.com 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." December 2013 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