Category Archives: Supplier Management

Are Your Suppliers Ripping You Off?

A recent post over on the public defender‘s blog asked if suppliers [are] still ripping us off. And it’s a good question, because it’s a common, constant, fear that is never talked about. Not only is it often the biggest elephant in the room, but it’s the biggest herd of elephants as there’s typically one in every room of every buying organization.

But rather than asking an array of speakers what their thoughts are, we’re going to get right to the point and give you the answer, which, surprisingly, can be summed up in six words.

That depends, are you letting them?

While your job in Procurement is to get the best damn deal you can, keeping costs as low as possible while keeping the benefits high to maximize value, the sales person’s job who is selling to you has, as their job, to get the most amount of money for the least amount of product and service, maximizing their profit and, more importantly, their bonus (which is typically 100% tied to the order value).

If you don’t do your homework and establish the true market price or true should cost price, then its likely that they can convince you that a 3% decrease on their current price (which is 30% over should-cost) is a savings and you walk away thinking you won when you are still being ripped off big time. We have to remember why so many suppliers were, and in some case, still are, resistant to e-Auctions — because these expose fat in supplier margins faster than any other sourcing exercise when you invite new, hungry, suppliers who will lower their margins just to win business.

In certain verticals, such as electronics and office supplies in particular, most suppliers make their profit by charging you as much as possible, which they do by offering you great prices on a small set of products and markups on a large set of related products that your users are just as likely, or more likely to order. For example, an office supplies vendor will give you the best deal on the 5 park of laser cartridges but the 10 pack will be 3 times the cost of the 5-pack, and the office manager, wanting to minimize orders, will order the 10-pack not knowing the 5-pack is the preferred product. And in electronics, they’ll give you a great deal on system configurations that sound good, but are sub-optimal, and then make money on upgrades a year later. For example, a desktop with the brand new processor, lots of space, and a HD screen, but only 4 MB of RAM when they know the default usage means that the machine should really have 8 MB of RAM. But there are only 2 slots, so both chips will have to be replaced at full retail rates down the road (as no special pricing was negotiated on upgrades, only full system replacements).

But it’s not just your indirect and MRO suppliers that will pull a fast one, any sleazy salesperson who sees an opening with a buyer who didn’t do their homework will pull a fast one. So if you don’t do your homework, and negotiate fact based, your organization is probably getting ripped off. Even if the costs are close to what they should be, chances are lack of hard fact-based negotiation means you missed out on value adds.

In summary, This Song’s Just Six Words Long, and whether or not you get ripped off is entirely up to you.

Enhancing MRO Supplier Value through Contract Service Levels

Today’s guest post is from Jennifer Engel, a Senior Supply Chain Project Analyst at Source One Management Services, responsible for executing strategic sourcing and process improvement initiatives.

Despite the convenience of boilerplate language and pre-approved templates to expedite execution, contracting is never a one-size-fits-all process within any silo of a business. Contracts for professional services tend to require a focus on performance expectations, and rarely have a need for protection against pricing volatility, lead time requirements, and fuel costs. Diametrically, contracts for the tactical purchase of goods focus not on service levels, but on maintaining pricing, ensuring product availability, and outlining delivery terms.

A trait often unique to the Maintenance, Repair, and Operation (MRO) space within a business is that many suppliers are providing a combination of both goods and services that support overall operations. As a result, contracts within this space are difficult to mold to a single template, and constructing agreements without taking into account the business needs to cover each area can be detrimental to the overall relationship goals. When undergoing contracting with a new or existing supplier, there are a few key principals to keep in mind that will benefit both parties as well as drive best value in pricing and service levels.

#1) Fully assess the risks associated with the goods and services separately

When negotiating terms, it is important to prioritize the areas that could most drastically impact the business should a change occur. If the pricing of a good is tied to a volatile commodity index or may be subject to interruptions due to raw material availability, protecting exposure to these factors should be at the forefront of the agreement. If the service associated is more critical than the actual good, for example a specific sanitation chemical being less critical than the completion of the actual sanitization process, then the level of service needed to ensure the business can continue to operate at or above standards should take priority. This primarily holds true to categories for which product substitutes are widely available, however the end result of the service is critical to business continuity.

#2) Adjust the terms of the agreement to form a mutually beneficial relationship that does not expose either party to significant risk.

Explicit service levels and pricing escalators and de-escalators inherently protect the business from any supplier shortcomings or market changes. As long as commodity increases are tied to a verifiable index, are accommodated by a manufacturer’s letter and advanced notice, and de-escalate at an equal rate should pricing decrease, the supplier is protected from becoming insolvent and the customer is protected from realizing an increase not driven by market conditions. For goods not driven by an identifiable index, pricing increases should be capped at a reasonable rate and subject to review and mutual agreement of the involved parties.

#3) Leverage rigorous service levels as another tool to drive negotiations and ultimately satisfy both parties.

As long as supplier expectations are detailed, measurable, and tied to a condition of termination with cause, there is less business risk to include contract language that may be viewed as more favorable to a supplier than the customer. A common point of disagreement in most MRO contracts is term length. Businesses are hesitant to engage in two or more year agreements with fear of dissatisfaction in a supplier’s performance. From a supplier standpoint, these lengthier terms allow them to invest more heavily in a specific customer without risk of being replaced in the near term. As a result, suppliers are often more likely to give more favorable pricing and terms under these extended agreements. Another point of leverage that incentivizes suppliers to offer more competitive terms is exclusivity clauses or volume commitments. Both can be high risk for a business to include, however are easily protected under strict service levels and quality expectations outlined in the agreement.

When putting together such agreements, stakeholder involvement should go beyond the legal department and relationship owner (department manager and/or procurement). End users, and those more closely aligned with the day to day operations should be consulted to outline critical functions of the supplier and bring to light any historical or future potential issues that will impact the integrity of the relationship or daily operations. Contracting should be viewed as opportunity to maintain and strengthen the relationship from both parties, and not seen as a necessary evil of back and forth on general language until legal departments reach consensus. Dedicating the extra resources necessary to construct a detailed and forward thinking agreement will prove beneficial in the long term, as company standards will be maintained without sacrificing cost competitiveness.

Thanks, Jennifer.

Supplier Solutions – All About the Space …

… of Supplier Enablement. In our recent post about Supplier Networks, we discussed the value wasn’t what the provider typically promoted, but the fact that it greatly decreased the effort required by the supplier to do business. It enabled them to be efficient, whereas most sourcing and procurement applications just suck their time.

So if you are going to buy a supplier management solution, then it better be one that truly, truly, truly enables suppliers. So what does this mean?

Find a solution that focuses suppliers on missing, outlier, and information that can’t be confirmed.

Many solutions just send out regular “please review and correct” alerts and call that supplier information management. But information management isn’t about reminders and checking boxes, it’s about finding issues and fixing them. A good solution identifies missing information, information that is outlier from norms (i.e. an insurance certificate is usually only 1 year, but the supplier entered 10), and information that can’t be confirmed (such as third party audits from organizations that can’t be found in government registries).

Find a solution that makes integration with supplier’s systems (MRP, CRM, order management, etc.) easy.

Suppliers need to quickly get POs out of your portal and into their order management, MRP, ERP, accounts receivable, etc. system for which your vendor will likely not have an out-of-the-box integration solution that you are able to implement on behalf of your supplier. So make sure the solution has a well-defined API that makes it easy for the supplier to integrate their systems if they want to and well defined file formats that will allow them to export orders, etc. from your system and import shipping notices, invoices, etc. from theirs.

Find a solution that includes cash forecasting capability for the supplier based on your early payment discounting schedule.

Face it. A supplier isn’t going to go for your early payment discount program just because you say it’s a good idea — they need to run their own numbers and realize that 2% is less than they are paying in interest, etc. Give them an easy to use calculator, especially since their Procurement or AR guys are likely NOT as financially adept as your financial modellers.

In other words, if you want a true supplier solution, find one that truly, truly, truly enables the supplier. Not just you.

You Need a Supplier Network – But Not For the Reasons The Vendor Says!

Every vendor with a supplier network touts their wares, and usually does so quite loudly. They go on and on and on (and on and on) about how their industry leading supplier network:

  • makes it easy to find new suppliers
  • makes it easy to search those suppliers catalogs
  • makes it easy to send out RFXs
  • makes it easy to place orders
  • makes it easy to collaborate with suppliers
  • … and so on and so on and so on (and so on and so on) …

Now, these are valuable benefits, but they are by no means unique to a supplier network. Taking ‘em one by one (we’ll knock ‘em all down as the satellite circus won’t leave town) …

  • you can find new suppliers from online marketplaces, industry associations, co-opetition, and from within your own organization (through better data management)
  • a number of online marketplaces make it easy to search catalogs, and there are a number of suites with integrated catalog management that work quite well, no network needed
  • just about every sourcing, procurement, and related application (suite) has RFX functionality
  • dozens upon dozens of procurement suites, e-commerce applications, etc. make order placement a snap
  • e-mail, online screen sharing, online workplaces, embedded messaging, and so on make collaboration easy

In other words, no supplier network is needed. So why do you need a supplier network?

Could it be for supplier management? Some of the more advanced vendors will submit that with a supplier network will help you:

  • detect supplier performance issues early
  • initiate and manage corrective actions
  • manage innovation management

And it will, but:

  • good metric and performance tracking and regular score-carding can detect issues early just as well
  • there are a number of best of breed corrective action management solutions out there, and many good sourcing suites have this functionality built in
  • and there are solutions for innovation management, and most SXM solutions, which do not necessarily have supplier network capability, have these …

So why do you need a network? And, to be more precise, an open supplier network?

Because supplier information management solutions, supposed to ease the burden of information management, don’t really ease it — they just transfer it to the supplier (who is supposed to log into the portal and maintain it). This sounds great, but given that a given supplier will have hundreds (or thousands) of customers, each with their own sourcing / procurement / SXM solution, instead of one customer having to maintain thousands of supplier profiles, each supplier has to maintain hundreds of their own profile instances for their customers.

In other words, you’ve just transferred costs through the supply chain, shifting your overhead into your suppliers who will, surprise, have to pass that cost onto you. But if you have an open supplier network, a supplier only has to maintain one profile, either in the network, or in the system of their choice that is capable of exporting and updating their profile in a standard (XML) format to the open network as needed. Instead of shifting information management through the chain, and the associated costs, you’ve minimized it, and eliminated the majority of the cost.

ClientLoyalty – Ironic Name, Straight-Laced Solution

Supplier Relationship Management is quickly becoming the “hot topic” among progressive Procurement organizations that want to advance on their supply management journey, and materializing as a slew of checkboxes that are appearing on product selection and evaluation checklists. But Supplier Relationship Management, while a hot topic among buyers, and a hot topic among marketers, is not a hot topic among developers. While many suite suppliers have supplier management solutions, the reality is that the majority of these fall into the classic Supplier Information Management or the slightly more modern Supplier Performance Management buckets.

The reason that SRM is a “hot topic” but not a common offering is that to truly support the relationship “R” in SRM, the software has to go beyond simply tracking information, performance metrics, and action plans. It has to track, measure, and manage feedback — from the organization and the supplier, monitor measures that track the evolution of the relationship — and not just performance, and allow for the collaborative creation of action plans to improve the relationship.

While many platforms will track all relevant supplier information — such as locations, contacts, products; and all performance metrics — such as on time delivery, defect rate, and target cost performance; few will go beyond that. Only true best of breed SRM platforms will address the relationship aspect. One of these, and possibly the newest entrant to the SRM arena, is ClientLoyalty.

ClientLoyalty was founded with the desire to bring true relationship management to companies that realized that in order to get the most value for their money, and the best performance from their suppliers, they needed to actively measure, manage, and improve the relationship. Therefore, they built a tool that allows an organization to track, measure, and manage performance, experience, risk, and reputation and integrate this more holistic 360-degree view into a single relationship strength indicator using net promoter scores.

The net promoter score is a customer loyalty metric developed by Fred Reichheld, Bain & Company, ad Satmetrix Systems, and introduced by Reichheld in a HBR article in 2003. Calculated as the difference between positive responses and negative scores, the net promoter score is positive if the overall experience is generally positive and negative if the overall experience is generally negative. If the relationship is improving, then the net promoter score will improve over time and if the relationship is degrading, then the net promoter score will degrade over time.

The ClientLoyalty NPS Loyalty metric is the (possibly weighted) average of performance, experience, risk, and reputation. Performance is calculated using a net promoter score over hard performance metrics calculated and tracked by the organization and hard performance metrics submitted by the supplier. These metrics will generally differ as both parties will generally have different definitions and calculation parameters. For example, the buyer might define on time delivery as the truck in the yard at 8 am and the supplier might define on time delivery as the driver reporting a delivery on the same date. Because of this, the buyer might have an on time delivery rating on the supplier of 80% and the supplier might have an on time delivery rating for the buyer of 98%. In this situation, the supplier would have a negative NPS due to the buyer’s lower appraisal of the situation – and this discrepancy highlights an issue. In addition, the platform comes with over 90 built in KPI definitions that the organization can use to get started, and more appear with every release.

The platform also supports extensive document management capability. Users can upload and tag critical documents in a central storage system for easy search, reference, and tracking. Contracts can be specially tagged as contracts and additional metadata and tags defined for contract status tracking and monitoring. Attachments can be correlated as well.

It’s a rather unique offering as it appears to be the only one with true, 360-degree, NPS scores and a home-grown sentiment analysis algorithm that can monitor social media sources and news sites to identify relevant comments and stories and extract the sentiment from the sites and stories and integrate it into a consistent score and one of the first platforms built from the ground up with full data import and export capability through CSV, XML, and APIs and extensible document capability.

But, like any new platform, it does have its weaknesses. There is no out of the box support for major procurement and ERP platforms; no ability for automated meta-data identification and extraction; and no innovation management. An action plan is a corrective action plan, not an innovation management solution.

However, especially given the relative dearth of true SRM providers compared to SIM providers and Sourcing/Procurement suites, ClientLoyalty is still one to watch and one to likely put on the shortlist, especially in North America.

For a deep dive into this wily provider, check out the recent in-depth coverage by the doctor and the prophet over on Spend Matters Pro [membership required]. (Part I, Part II, and Part III)