There are numerous articles talking about the value that remains untapped within the supply chain, if only buyer and supplier could collaborate. But what does it mean to collaborate? wonders Mike Robertson, CEO of POD Procurement.
If you were to look up the definition of collaboration, it is either:
1. To work together
2. To co-operate treasonably with the enemy
And for many procurement professionals, number two may still be closer to the mark than number one!
Assuming the correct definition in this case is ‘to work together’, what could collaboration offer the buyer? What is the untapped value in the relationship?
Following the award of a contract, between order placement and delivery, there is time. What if the supplier could apply their knowledge and experience during this time to see if they could deliver the contract for less?
This is called ‘supplier innovation’ and involves the supplier applying their expertise and knowledge to the contract in the post-contract award phase to save the buyer money.
The real question is, if the supplier could deliver the contract for less, would they tell the buyer? Unfortunately, in most cases, the answer is no.
If supplier innovation occurs between order placement and contract delivery, theoretically it could be applied to all contracts. Therefore, in order to access the untapped benefits of supplier innovation, the buyer needs to ensure the correct incentives are in place before awarding the contract. But how can you do this?
Gain share in contracts
The answer is relatively simple. In order to collaborate, both parties need to understand how they benefit – answering the “what’s in it for me?” question. Unless both parties see value in collaboration, it is likely to remain an ‘if only’ situation.
For suppliers to collaborate with buyers, they need to see financial benefit. One way traditionally used to incentivise suppliers is a ‘gain share’. A gain share is a risk/reward commercial model used to incentivise suppliers to achieve a specified objective. If the supplier achieves this objective, they receive more revenue.
Gain shares have some interesting characteristics:
- The objective is pre-defined and negotiated prior to contract award – This is counter-productive to encouraging supplier innovation, as the supplier does not know if innovation is possible until they are in the post-contract award phase.
- Gain shares can be complex and time consuming to negotiate and should, therefore, be used selectively – This is also counter-productive to encouraging supplier innovation, as the buyer needs this capability in all its contracts.
- Gain shares are a risk/reward model – Again, this is counter-productive, as, by definition, you cannot predict if innovation will occur and, therefore, it has to be achieved without increasing the risk to the supplier.
It seems clear that there is untapped value within the supply chain, if the buyer and supplier collaborate. Yet, how this is achieved while using current commercial models remains a mystery to many…
If we could make available supplier innovation within all our contracts, to encourage and reward suppliers when they innovate without risk, costs or effort to either party, have we finally found a way to access the untapped potential that resides within the supply chain?
Well, there may be a new option that both buyers and suppliers can use – The POD Model. The model is a scalable (can go into every contract) model that encourages suppliers to innovate (without increasing the supplier risks) within the contract. If innovation occurs (without making it a supplier obligation), it generates additional savings for the buyer and increased profits for the supplier (addressing the “what’s in it for me?” question). And best of all, it’s free!
So no, we’re not joking when we talk about collaboration. Can you afford not to?
About POD Procurement: POD Procurement created The POD Model. The POD Model is free to use and can be found on the CIPS knowledge website. For additional information please contact firstname.lastname@example.org