Daily Archives: November 24, 2008

Supplier Management Works … Even in the Public Sector

One of the presentations at the 6th Annual International Symposium on Supply Chain Management was a Supplier Management Case Study by Canada Post. Canada Post, which is the 6th largest employer in Canada, employs a workforce of 71,000 that has to deal with 40 Million items a day that can originate from 24,000 points of access (including 7,000 retail outlets), and that may need to be delivered to any one of 14 Million locations across ten million square kilometers. As a 7 Billion dollar organization, over 4 Billion dollars flows through Procure to Pay annually, with over 2 Billion dollars of that spend managed. Major categories include transportation (350 million plus), professional services (300 million plus), information technology (250 million plus), facilities (200 million plus), and mail operations (100 million plus). Approximately 80% of invoices are electronic, and approximately 64% of payments are through electronic transfer.

Given the magnitude of dollars that are at stake, Canada Post has implemented a score-card based supplier management system in an effort to reduce costs and increase value for money. It did this because a number of recent studies, including a study by Aberdeen, found that organizations that include supplier measurement and management in their sourcing programs save an average of 8% more than those who don’t, have an on-time-delivery performance that is twice as good, and a quality of product or service that is four times better. Furthermore, without a good supplier management program in place, an organization can expect 75% of sourcing savings to erode within 18 months.

To date, Canada Post has placed 60 of its 176 large (volume/spend) active suppliers on scorecards, and it intends to add 20 more by year end, with a goal of eventually having the majority of large (volume/spend) active suppliers on scorecards in the next couple of years. It’s goal is to increase value for money by implementing a common measurement approach that will allow for a comparative measure of of supplier performance within a commodity group, improve sourcing decisions, provide a foundation for supplier relationship management, and drive improvements.

It uses a multi-part scorecard that measures different aspects of on-time delivery, defect free delivery (of a product or service), continuous improvement, and value for money that rates a supplier on a 1 to 10 scale. Anything under 8 is unsatisfactory, anything between 8 and 9 needs improvement, 9 is on-target, and anything above 9 means that the supplier has exceeded expectations. The goal is to get as many suppliers as possible exceeding expectations because this is where savings and value materialize.

As part of their supplier management initiative, they did two case studies. The first case study was on a supplier who was perceived to be a poor service provider with major problems in invoice accuracy on a regular basis and unsatisfactory service. Over two quarters, the scorecard identified poor performance that ranged between 5.5 and 7.1. This got the attention of the supplier’s senior management who, committed to fixing the problem, performed a root-cause analysis, identified corrective actions, and implemented them. After the senior management implemented their corrections, overall performance improved to 7.7 over the next two quarters and the supplier is now trending to an 8.8 within the next two quarters, which is a considerable improvement.

The second case study was on a supplier with a history of excellent service who consistently exceeded expectations. The question was whether or not supplier management could be used to edge out even better performance. After implementing the scorecard, the supplier reduced spending by 3.5% over the next 6 months and identified and implemented a number of Joint Performance Initiatives that are expected to yield even further savings in the future.

In short, Canada Post found that a good supplier performance management initiative, which in this case was built on a variation of a common scorecard where both parties agree on the metrics and the supplier is tasked with maintaining the scorecard (which has to be signed off by a buyer before it is accepted), can save considerable money even in the public sector.

Editor’s Note: I wrote this before my colleague posted his take over on Spend Matters last month, but decided to delay it as a reminder to readers of both our blogs that good SPM programs achieve results. Jason’s posts can be reviewed here:
Supplier Performance: Lessons from Canada Post (Part 1)
Supplier Performance: Lessons from Canada Post (Part 2)