Category Archives: Supplier Management

To Really Be Successful At Supplier Risk Management, ADMIRE!

Not only is supplier risk at the forefront of thought these days, but articles on it are at the forefront of online publications as well, including this recent article in Supply Chain Digest on the key drivers of successful supplier risk management. However, most of the articles miss the point.

For example, according to this article, the trick to successful supplier risk management is to:

  1. engage top-level management,
  2. segment suppliers based on relative risk,
  3. rigorously measure and manage risk,
  4. give category managers tools and training, and
  5. collaborate with key suppliers.

Which is all good advice that is fine and dandy, but it misses the point. Risk management is all about identify risks, identifying mitigations, monitoring risks, and executing mitigations at the appropriate time. Management support is important, but it doesn’t have anything to do with risk identification or mitigation. Segmentation is a good tactic as more attention needs to be placed on suppliers which represent more significant risks, but again it has nothing to do with risk identification or mitigation. The same goes for giving category managers tools and training. Collaboration is relevant only if the mitigation requires collaboration. In other words, in this list, the only key driver is the “rigorous management and mitigation of risk”.

The reality is that success depends on your ability to ADMIRE the situation. Specifically, the ability to:

  • Ascertain the risks,
  • Define the risks that could cause significant damage,
  • Monitor those risks,
  • Identify appropriate mitigations,
  • React when signs of the risk begin to materialize, and
  • Engage the supplier when collaboration is required to mitigate the risks.

That’s it.

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Five Ways to Maximize Profits from Supplier Automation

A recent article in Industry Week on “5 Ways to Maximize Profits” from Supplier Automation had some good tips on how to maximize your return from your supplier automation, provided they are implemented properly. This post will explain how to get maximum results from Industry Week’s tips.

  • Avoid the 80/20 trap

    When you only automate 80% of your suppliers, what happens is that the remaining 20% consume 80% of your procurement staff’s time and effort who have to enter data, track down errors, and deal with inquiries that would be avoided with an automated system. In other words, 80% isn’t enough. You have to keep automating until the return isn’t worth the investment. While this number will vary from company to company, generally, you have to insure that at least 90% of all document exchange is automatic, if not 99%. You keep going until the ROI (annual savings / annual cost) of automating the next supplier is less than c, for c between 2 and 3.

  • Make it Affordable and Beneficial

    Not only does it have to be affordable, but it has to make your suppliers’ lives easier. If not, it won’t be adopted.

  • Beware the Middle Man

    As the article says, another unnecessary, and completely avoidable, cost, for both you and your supplier, are the recurring monthly fees charged by “Value Added Networks” (VANs) or other such middle party service providers. Let’s face it, you know who your suppliers are, and your suppliers are quite willing to make their catalogs available to you for free because they want your business. Don’t pay an extra fee for what you already know and have access to.

  • Make Supply Chain Data Actionable

    Automating document transfer enables transaction savings by significantly reducing processing costs, but it doesn’t provide strategic savings unless you act on it. Make sure the tool allows for event driven, alert-based workflows that allow you to detect unexpected events and patterns as they happen so that you can make course corrections “mid-stream”.

  • Measure and Respond

    Continuously benchmark tool usage and process times and take action if the benchmarks don’t continuously improve.

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Sometimes the Cantankerous Supplier is Right!

Even if they are too late with respect to demonstrating their correctness.

But let’s back up. Recently, on the Purchasing Certification Blog, Charles penned a great post on “the real reason buyers don’t want to give suppliers feedback”, which, in his words, were

BECAUSE WE DON’T WANT TO PUT UP WITH THIS CRAP!

where the crap in question was the salesperson effectively saying, with their incessant badgering that no other company can produce the same product of the same quality at the same price with the same service, that you are stupid. You don’t know how to make a good decision and you don’t know how to evaluate prospective suppliers.

As Charles’ points out, it happens all too often, and most of the time, the supplier is full of crap. But sometimes the supplier isn’t — and this is often true in custom manufacturing and services. I see it in IT all the time. The buyer doesn’t really understand what’s involved in building or customizing a piece of enterprise software or system and goes with one of the low bids and ends up getting a stinking pile of crap that not only costs 50% more due to project and budget overruns, but is delivered full of bugs, doesn’t include 20% of the originally specified functionality, and takes three times as much manpower to support as it should. In the end, by the time all of the extra service and support costs are factored in, it costs three times as much as the high bid from the one firm that really understood what it was doing. The same is true in custom manufacturing. There are some corners that can’t be cut, and accepting a bid that does so leads to long term cost ramifications.

However, the supplier should still back off once the buyer has made an award decision, even if it is the wrong one. Because it is not the buyer who made the stupid decision, but the supplier. If the supplier truly had a better product of a better quality at a better price and service level, then the supplier should have taken the time to provide the buyer with the education she needed to understand that when the supplier had the opportunity. Instead of chest thumping about how great they are and how they are so much better than the competition, the supplier shouldn’t have even tried to sell at all. They should have said “we know we can meet your needs better than any of our competitors, but that’s not important. What’s important is that you understand why we can do that. For you to truly understand how we are better, you need to understand what the major drivers of cost, quality, and service are around this product. So we’re going to help you with that.” And if they truly were the best solution, then the buyer should be able to see that and choose them. (And if they truly were the best solution and the buyer didn’t see it, is that a buyer the supplier really wants to be working with?)

And regardless of whether or not the supplier has the best solution or not, once the buyer makes her decision, the supplier has to back off, and this is the only appropriate response from the supplier.

“We’re very sorry to hear that you chose someone else. We still believe we could provide you the best overall value with respect to your needs and would appreciate the opportunity to try again at the appropriate time. Could you let us know when you expect to be going out to market again for this product so we can contact you again at the appropriate time to request the RFP? Also, if your chosen supplier proves unable to meet all of your needs, please feel free to reach out to us at any time. Thank you again for the opportunity and we hope to have another opportunity to compete for your business again in the future.”

Anything more and the buyer has every right to blacklist the supplier.

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Supplier Audits Must Be Surprise To Be Effective

As per this recent article in CPO Agenda by Meryl Bushell on why “ethical audits aren’t the final word on supplier standards”, in the past few years, audits have been shown to be ineffective for workers and also to be increasingly affected by fraud, double bookkeeping and coaching for workers so that they give “the right answer”.

If a supplier who knowingly violates common standards on child labour, health, safety, and hygiene, working hours, and wages (among other things) knows that they are going to be audited on a given day, they are going to be prepared. They’ll send the child labour home. They’ll reduce the work force on that day to “safe” numbers (which is whatever number they have enough “show” protective equipment for and / or whatever number fits in the factory without overcrowding). They’ll make sure to give the staff that will be present that day some “time off” the previous two days (i.e. they’ll only work them 8 hours instead of 16) so they don’t look dog dead tired. And they’ll fix all the books so that everyone makes a “living wage”.

But if you show up unannounced, you’ll see how things really run. You’ll see whether or not they (regularly) use child labour. (In some situations, child labour is okay. We let our children work part time at McDonalds when they turn 13. If they only employ children part time for light work in safe situations, in struggling economies, that’s a good thing because it boosts the family income, teaches them responsibility, and gives them a better quality of life. But if they work the child labour 80 hours a week in the mines or on the shop floor, that’s a different story. In this situation, they should all get life in work-camp prison doing the same job.) You’ll also see how “safe” working conditions really are and whether or not their people are not overworked simply by counting the number of employees with bags under their eyes and lifeless faces. (And if you get to the office fast enough, you might even catch them with the real books on the table!)

In addition, as Meryl recommends, you should also make sure that the surprise audit includes a detailed forensic assessment and unsupervised off-site interviews with random workers. This type of audit can quickly reveal a range of serious problems including child labour, below-minimum wages, faked records and protective equipment provide only during audits even when the standard on-site audit reveals only minor issues.

Now it’s true that regular surprise audits can pose quite a resource strain on your suppliers, and a financial strain on the suppliers that aren’t committing ethical atrocities in particular, and that your average supplier shouldn’t be subjected to more than a couple of surprise audits each year, but this problem is easily rectified if you cooperate with other major customers of the supplier and hire a reputable third-party that specializes in ethical audits to perform the extended surprise audits (with forensics and off-site interviews) on your behalf. This way, the supplier knows that they won’t be overburdened with too many resource and productivity draining audits, without knowing when the semi-annual audits will actually happen. It’s a win for everyone.

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Unscrupulous Supplier Reverse Auction Tactics

Are you prepared for them?

The best part of a recent ChainLink Research piece on “Contract Management: Negotiating, Creating, and Monitoring Compliance” was actually the sidebar on supplier reverse auction tactics that presented some of the less-than-scrupulous strategies sophisticated suppliers will employ in an attempt to win, or deflect, your business. If you are not prepared for them, they could derail your event. They include:

  • bidding to purposely come in second with less aggressive price, counting on advantages in non-price areas
  • bidding low on the auction in an attempt to capitalize on lock-in to sell un-auctioned related services and materials at high margins
  • “Sniping” in “hard-ending” auctions
  • Deliberately no-bidding auctions when they calculate it is not in their interest to participate

So what can you do?

  • if you are using a total weighting, be very careful in your weighting of non-price factors and indicate, up-front, that there will be significant (and serious) financial penalties (which must be enforced) for not adhering to any promises on lead-time/delivery time, defect rate, or quality (or other relevant factors)
  • make sure you also bid out all related and associated services
  • don’t do hard-ends — always do short extensions
  • create a policy that suppliers who do not bid do not get business, period

While some suppliers might still attempt to ply their dirty tricks even if you take these steps, once they see what it costs them, they’ll stop. Or you’ll get better suppliers. Either way, you win.

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