Category Archives: Supplier Information Management

State of Flux Has the Treatment for Your SRM Ailments: Part I The Need

But before we talk about the treatment, we’re going to talk about State of Flux‘s recent event in Chicago which was the US launch for their most recent Global SRM Research Report, The Business of Supplier Relationships, which is their 7th annual research report on the subject. We’ll talk about this report too, but first, let’s talk about the event, or more appropriately, the need for SRM as explained by the event.

Large organizations, including those desperate for savings, around the globe are leaving millions on the table on a regular basis. Some of this is due to a failure to capture negotiated savings (as per AMR’s classic series on Reaching Sourcing Excellence), and some of this is due to a failure to maximize the value of supplier relationships.

The heart of the matter is that the value delivered by your organization to its customers is ultimately dependent upon the value created and delivered by your suppliers that manufacture the product, pack the product for delivery, and provide warranty and repair services for the product. If the product is poor, delivered late (which results in stock outs and lost sales), packaged very poorly (which results in a large number of damaged units on delivery), or the warranty and repair services are slow and leave much to be desired, your customers won’t be happy with you, and there goes your perceived value and future revenue.

In other words, suppliers are critical to delivering the value that you promise your customers. But they are also critical to delivering the value required by your organization. Regardless of how good the products are, your organization needs higher quality products at a lower cost, new products to attract new marketshare, leaner production, lower cost delivery, and other renovations and innovations that add to the top line while shaving from the bottom line. This won’t happen without supplier involvement.

And suppliers won’t be involved unless the relationship is collaborative. Even though CAPS Research (Japan) has been telling us for almost a decade that collaborative supply management is the key to success, the concept hasn’t taken off much (yet) here in North America. While collaborative supply management has penetrated the Hackett Group top 8%, it’s not daily practice in the Sourcing and Procurement groups at many companies. But it should be.

The fact of the matter is there is considerable research, in addition to State of Flux’s Global SRM Research report (which has now been published 7 years in a row), that demonstrates the value of SRM. Consider the research undertaken by Planning Perspectives Inc. on the automotive sector over the last 14 years, which was presented at the Chicago event, which has not only found that the gross profit per vehicle increases as working relations improve (as per the Working Relations Index), but that 71% of the positive change is contributeable to changes in the supplier relationship. Let’s repeat that: 71% of profit increase in the automotive sector can be directly correlated to improvement in supplier relations. Not e-Procurement. Not spend analysis. Not strategic sourcing. Supplier relations. In addition, the more collaborative the working relation, the greater the price recessions offered up by suppliers in response to requested price reductions, even if the requested price reduction requested is lower than the average price reduction request. More specifically, companies with good supplier relations typically achieve 8% to 12% more price concessions than their peers.

Moreover, when there is a good working relationship:

  • suppliers are more willing to share new technology and innovations without the up-front assurance of a purchase order
  • suppliers are willing to invest in new technology in anticipation of new or additional business
  • suppliers are willing to communicate openly and honestly, which prevents surprises down the road that can lead to stock-outs or supply chain disruptions
  • suppliers are willing to support the organization above and beyond contractual obligations

And a good working relationship stems from supplier relationship management. In our next post we’ll delve deeper into some of the highlights of the State of Flux Chicago event before we reveal some of the most interesting findings from this year’s report.

Provider Damnation 66: Tier 1 Suppliers

Suppliers. Some days you can’t deal with them but you cannot survive without them. You’re in business to serve customers, who want the products your organization sells, but which your organization can only provide if your tier 1 suppliers manufacture those products you need, to the customer’s specifications. And that’s the kicker.

No suppliers, no products.

You absolutely need suppliers, even if you are a pure services agency because you still need products (be it laptops, janitorial suppliers, or even paper for reports) to deliver services. There is no such thing as a fully integrated self-sustaining business that is self-contained all the way back to the mining or harvesting of the raw materials, the production of the energy required to process them, the pumping of the water required, and so on. So you need suppliers. Lots of them. Sometimes thousands of them. And trying to manage that many suppliers, even with a best of breed SRM system, is a nightmare on a daily basis, because, if things go wrong

Once you have a contract, barring catastrophic supplier failure, you’re locked in.

A contract locks you in until an exit clause is hit, which, in an average contract in an average organization, typically is only invokeable when a supplier fails to deliver a significant portion of the contracted goods after a significant amount of time has passed (and your organization has been stocked out for weeks and lost millions of dollars), the quality gets abysmal and the warranty return rate hits the double digits, they violate a federal safety or import regulation, or they commit a crime — assuming you have a well drafted contract.

This means that, if they’re always a few weeks late, running up costs with unnecessary expedited shipments, tacking on fuel surcharges, or slacking on quality and continually shipping orders with DOA rates just within limits, there’s nothing you can do about it. You can employ the best SRM techniques up your sleeve, but if they refuse to respond, until the contract is fulfilled and you can kick them to the curb, they’re your problem because your customers are yours to satisfy, not your supplier. Moreover, if you can’t break the contract, you can’t even shift demand to another supplier temporarily until a force majeure event occurs when they are allowed to claim inability to fulfill you orders until the event is over but

When force majeure hits, you may not be able to respond fast enough.

If it’s a custom product, it’s impossible to just go back to the runner-up in the sourcing event, award them a short-term contract (with the promise of an extension in the future when you kick your current supplier to the curb), and expect them to start production the next day. Even if, after being turned away, they say yes, and even if they say yes quickly, and even if they have capacity opening up, it takes time to retool a production line and get the engineers up to speed on a new product design. It’s going to be weeks, at the minimum, before you see the first unit.

But if you don’t find a temporary supplier, your solvency is in danger.

Cash-flow is the life-blood of the business, and without a product, it’s no sale, and no sale, no store. A company that does not sell does not survive long.

A poor supplier that locked you in to a three-year contract before you found out that they were a poor supplier (that just marginally met the minimums necessary to prevent you from cancelling the contract without a huge penalty that the organization is not likely able to afford) is a damnation of the worst kind. Fortunately there aren’t many suppliers like this because even one is way too many.

Is Your SRM Program Leaving Hundreds of Millions on the Table?

With external spend in an average company between 60% and 80%, a considerable amount of an organization’s value is dependent upon its supply base. Quality, reliability, and attractiveness are all dependent upon the supplier’s ability to create a quality product for your supply base. Service, repair, and timely customer interactions related to such all rely on the suppliers ability to deliver quality service and quality, timely, communication.

Moreover, the average organization is not only relying on its suppliers to create its value, but is losing out on hundreds of millions of dollars of value due to inefficient, and sometimes ineffective, supplier relationship management. For example, a recent study by Vantage Partners found that the top ten performers in SRM reported an average of $298 Million in financial benefits from SRM in 2014. That’s a lot of cash. As summarized in this article titled “unlocking potential value srm through effective governance” over on My Purchasing Center, there is a lot of value to be had by investing in better supplier governance.

For example, companies with good supplier relationships have suppliers who alert them to potential issues or potentially late deliveries at the earliest sign of trouble and jointly work with them to identify a resolution. But this is just the tip of the value iceberg. Joint cost reduction initiatives. Joint innovation. And so on.

But how do you get there? According to the article, the starting points are

  • supply base segmentation
  • policies and procedures
  • alignment with sourcing, category, and contract management
  • (designated) executive sponsors
  • (designated) relationship managers
  • strategic business plans

which is true, but this only addresses three of the six pillars of SRM, namely

  • stakeholder engagement & support
  • governance & process
  • business driver and value

but doesn’t really address the other three pillars of SRM,

  • people and skills – talent matters
  • information and technologies – platforms enable process
  • relationship development and culture – management is just the start

But, fortunately, there’s still time to get a handle on all of this and, more importantly, find out where your organization stacks up with respect to its peers as you still have one week to participate in the 2015 SRM Survey by State of Flux. Taking this survey, which is the most extensive survey out there on SRM, will not only give you first look into the survey results, but also give you first access to what has become the largest, most in-depth, SRM report on the planet. The 2014 SRM Survey Report clocked in at 216 pages of data, results, and expert interpretation and was full of valuable, actionable, insights — including the pillars and the ten essential starting points, not six — that your organization can use to launch an SRM program — and it’s free to all survey participants as well! Moreover, you’ll also get the full 2015 Report as soon as its available – and this will be invaluable as it will be the first report focussing on what a Supply Management organization can do to gain the executive sponsorship and support it needs for success, and the first report written with the C-Suite in mind. You will be able to use it in your quest for purchasing fire.

So don’t delay and take the 2015 SRM Survey today, before it’s too late!

Forget SIM. The Real Answer is SIR.

Earlier this year, Spend Matters ran a post by Jason Busch on Why Collect Supplier Information that highlighted some of the information needs addressed in a recent piece by Mr. Busch and Mr. Gustin on “Supplier Enablement for Invoice Discounting and Supply Chain Finance: Background, Tips, and Secrets for Success” that not only highlighted some of the needs for detailed supplier information but also outlined many other reasons why organizations need supplier information.

The traditional answer to this is Supplier Information Management (SIM), implemented by way of a supplier portal where suppliers provide, maintain, and verify their information to the buyer on an as-needed basis. While this sounded like a good solution, especially since the amount of information some buyers need to collect on a single supplier can be staggering, which makes the task almost impossible for a large organization with thousands of suppliers, all it does is shift the burden to the supplier. The rationale provided was that the supplier, who needs to sell its wares, would accept it as a cost of doing business, especially since the supplier would need to provide much of that information on an RFX anyway and this way only has to provide the information to the buyer once as it would be maintained and reusable on every future RFX or information request.

This sounds fine and dandy, but really only makes sense if the workload for the supplier is less than the workload for the buyer. Otherwise, the work is just being shifted, overall supply chain efficiency is not increasing, and cost is not being take out of the supply chain. And SIM is not delivering on its promise.

The reality is that the workload for the supplier is not decreased because, with the proliferation of SIM systems across Procurement, more and more organizations are asking more and more of suppliers. And the perception that the supplier has less customers than the buyer has strategic suppliers is not always correct. Since most large buyers with risk avoidance tendencies only buy from large suppliers, and since suppliers can only become large suppliers by attracting a large client base, the supplier has as many buyers as the buyer has strategic suppliers — and the supplier has just as much data entry and maintenance to do as the buyer did before the buyer purchased its SIM solution. The work hasn’t been minimized, only shifted, and the cost has only increased because the supplier’s cost of data maintenance is no less than the buyer, and the supplier will just add a mark-up to cover their cost.

The true answer to the supplier information problem is not a SIM solution, but a SIR solution — an on-line, shared-access, Supplier Information Repository where a supplier can enter all of their information once, maintain it, and, under a fine-grained security model, share it with their customers (the buyers) on an as-needed basis. This reduces costs for all parties and truly takes costs out of the supply chain as the supplier only has to maintain one set of data, and the buyers can access all data from all suppliers for one low-cost annual subscription, which, because a vendor does not have to maintain multiple SIM instances, allows the vendor to offer repository access at a cost that is less than the cost of a traditional SIM solution.

Procurement Trend #16. Stronger Supplier Relationships

Thirteen anti-trends from those crazy eighties (or earlier) still remain, and as much as we’d like to provide some entertainment that hasn’t been rebooted and re-rebooted to LOLCat who is bored with our continuing anti-trend coverage, we must continue to play Sam Sheepdog and make sure that no Ralph E. Wolfe in sheep’s clothing goes undetected or unrewarded for his effort.

So why do so many historians keep pegging stronger supplier relationships as a future trend? Besides the fact that they are likely still struggling to pronounce col-lab-o-ra-tion (which is a undoubtably a new word for them), it is probably because even the Businessman knows that:

  • delivery dates can make or break a product release and a company

    as a late launch can allow your competition to launch first and secure a substantial amount of marketshare that your company may never get back

  • knowledge work needs to be done with knowledge

    and you can’t fake it by throwing more warm bodies at it

  • supplier failures can often be prevented, but only with foresight

    once a supplier’s doors have been closed, it’s too late to reconsider that 180 day net-terms policy

So what does this mean?

Delivery Dates

Product Lifecycle Management (PLM) is key. In order to make sure everything stays on schedule, Supply Management has to monitor, or manage as the case may be, the design, the supplier selection, prototype production, full production, transportation, and the delivery schedule. Any delay anywhere in the process that goes uncaught and uncorrected in a timely fashion will result in a missed delivery date.

Knowledge Work

As per our many previous posts, including our posts on inter-departmental collaboration, more stakeholder collaboration, and talent, we’re in a knowledge economy and supply management is knowledge work. Implement a good Knowledge Lifecycle Management solution, get training, collect knowledge from your employees, partners, suppliers, and customers and put it to use.

Supplier Failure

Suppliers typically fail for financial reasons, and this is often something that can be foreseen. You can follow the financial risk ratings, or you can just pay close attention to what is happening. There are always cues when a supplier is in trouble. Multiple contacts disappear overnight. Late deliveries. Poor quality. And so on. Often it’s just a cash-flow problem that is easily fixed by simply paying the supplier a little earlier (which, for many companies, translates into simply paying the supplier on time) so it can cover its operating costs. When you consider that the supplier has to buy the raw materials, produce the goods, ship the goods, wait for you to get them, and then wait for the clock to start ticking on the invoice when you can often sell the goods as soon as you get them, it’s completely understandable that they can be struggling to make payroll when they have to float operations for six months or more when you, if you are selling a hot electronics item or piece of apparel, can get paid in six days or less.