Thank the Powers That Be that @wilw has All the Answers!
Monthly Archives: February 2013
A Whovian Explanation of Why You Don’t Anger a LOLCat
How Do You Identify a Stellar Supplier?
Relating to Wednesday’s post where we asked what is necessary to get a grip on risk before outsourcing to a new supplier, you also want to know how you can identify who is likely to be a stellar performing supplier in the first place. This is also a difficult question, but if you approach the subject from a supplier performance leadership perspective, you have one good starting point, which is mentioned in this recent article over on SIG on why supplier performance management should be supplier performance leadership .
Specifically, you look for a supplier that actively self-manages. You want a supplier which measures and reports its own performance against SLAs and KPIs, identifies the corrective actions it needs to take, devises a plan to put those actions in place, and then promptly informs you when it has determined that it is not meeting its targets with an outline of the corrective actions it intends to take, when they will be implemented, when it expects to improve, and when you will get a follow-up report. The supplier should want to not only meet the expectations placed on it, but get to the point where it can exceed those expectations before the contract comes up for renewal. In short, a supplier that talks the talk when it comes to customer service is good, but a supplier that walks the walk is better.
Secondly, you should look for a supplier that wants to collaborate. While it’s great to have a supplier that will bend over backwards to give you anything you want, if what you want is inefficient and costly, it’s better to have a supplier who will work with you to jointly identify opportunities for efficiency improvements and cost reductions. You need to remember that most of the smart people are outside of your organization, no matter how big you are, and if you want to out-innovate the other guy, you have to use all of the know-how available to you up and down your supply chain. There’s a reason the big buys have set up innovation networks to tap external parties — they know they can only do so much. The real winners in today’s economy are not necessarily those that can innovate, but those that can identify the right innovations to incorporate into their products and services at the right times to maximize profit.
And while this may not be everything you should look for in a perspective supplier, if you want a supplier that will lead the pack, this is where you start.
There is a Spend Rule of Three
But the Third Spend Savings may not be for thee.
Backing up, I’m referencing a very interesting article published in SIG’s recent newsletter on Spend Management’s New Norm: Uncovering Big Third Spend Savings by Mark Walsh, CEO of FedBid. According to Mark, the best way to slice, dice, and categorize spend is not to get bogged down in category taxonomies, spend thresholds, savings potential, transactional analysis, supply risk, etc. — but to simply categorize spend by the Spend Rule of Three.
Mark defines the “Spend Three” as:
- Strategic Spend
the largest category of spend that typically accounts for 80% of organizational spend across 20% of vendors and service providers - Catalog Spend
the smallest category of spend that typically accounts for less than 10% of fixed-price transactions on credit lines, p-cards, and employee expense reports - Third Spend
the middle category of spend that accounts for 10% to 20% of spend that accounts for the bulk of indirect, or tail, spending (in a non-service oriented organization, as indirect and service spend will be much higher in finance and other verticals that don’t produce physical goods)
According to Mark, the greatest savings opportunity will generally be in the Third Spend category as most organizations will have a good grip on strategic spend, where they focus all of their efforts, and catalog spend, where they will have fixed price contracts and where savings opportunities, due to such low volumes, are inconsequential. Specifically, he believes that this category represents an average savings opportunity of 11%, which is not unexpected as it is consistent with recent findings by Aberdeen, AT Kearney, CombineNet, and others over the last few years. But the savings are only there if the spend is not under management, you haven’t spent time strategically negotiating the contract, and the purchase volume is high enough to be attractive to at least one supplier.
The reality is that savings opportunities will not neatly fit into any one category, and will depend on a number of factors. How much you’re paying, the current market price, supply vs. demand, energy prices, requirement flexibility, innovation and creativity, just to name a few factors. For example, that category you’ve strategically sourced five times in the last two years might still be a huge savings opportunity if a new production technology just hit the market that allows a supplier to cut production costs by 20%. You need to do a high level analysis across all categories to identify where the greatest opportunities likely lie, not just focus on the third spend. While there are probably some big savings to be had, the biggest savings lie where you’re spending the most in a manner that’s the most off of optimal. Don’t forget that … and if by some chance you’re not one of the thousands of readers who have already downloaded Spend Visibility: An Implementation Guide a free e-book by Sourcing Innovation and Lexington Analytics that is the definitive book on next level performance, do so today. It’s worth your time.
What is Necessary to Get a Grip on Risk before You Select a Supplier for Outsourcing?
Outsourcing ain’t going away. The best we can hope for is near-sourcing, but that will depend on the ability to find the needed expertise and scale at competitive rates (at least until oil and transport across large distances becomes so expensive that labour rates don’t matter). So we need a way to select a supplier that won’t increase risk to ridiculous levels and almost guarantee that, at some point, our supply chain will come to a grinding halt when the supplier goes bankrupt, gets cutoff from its supplier, or gets cut off from us.
One way is to get an assessment of risk for the supplier, the city the supplier is located in, and the country the city is located in, build a composite picture, and determine if there is any serious risk of supplier failure, inbound supply chain failure or inaccessibility, or outbound supply chain failure or inaccessibility. But where do we get that risk assessment? And how do we know it’s the right one for us?
Where is external to the organization. We go to an organization like D&B, Resilinc, or Neo Group which has been collecting data on the supplier, city, and country and get their report. But how do we know we’re getting the right report? This is the toughie.
First of all, are they using the right risk model? If you refer back to the World Economic Forum’s annual Global Risks report, you see that, at the very least, you have to consider societal, environmental, geopolitical, economic, and technological factors at the region level, but since you will be conducting business with a supplier at a physical location, business, legal/regulatory, infrastructure, and local quality of life will also play a role. When you start talking about suppliers, you need to look at their financial stability, associations (clients/partners), governance, workforce, and (service) innovation (leadership) capabilities.
But how do you define each of these in a way that can be measured in a standard way? And will such definitions incorporate all that is relevant to your organization? For example, when we’re talking economic we’re talking inflation, currency, fiscal deficit, GDP growth, stock market performance, reserves, etc. However, when we’re talking supplier service capability, we’re talking workforce education level, tools, language proficiency, incentives, etc.
It’s a very tough question. And often what matters is category specific. I’ve reached out to a couple of the big providers of Risk Monitoring solutions. Let’s see if any take me up and provide their viewpoint.