Category Archives: Supplier Management

How Do You Execute Effective Supplier Performance Management in Today’s World?

This is an interesting topic. Many books have been written about this; dozens of specialized software vendors and consultancies have cropped up over the past two and half decades to address this; many top tier analyst firms have been putting out frameworks for almost three decades; and every Big X consultancy has their detailed methodology, 200 page strategy and implementation deck, and a dozen or so publications on their website documenting numerous benefits and case studies.

In fact, there’s so much material out there that if you asked your favourite clod or chat, j’ai pété instance to write you a book, put together an implementation plan, prepare an executive presentation, prepare an implementation plan for your team, and prepare a training plan for your supply base, chances are, believe it or not (and the author rarely does) any particular Gen-AI instance is likely to do a decent job of it because there is so much nearly identical material on the subject that the models are likely to be decently weighted to generate a decent facsimile of the material.

But here’s the question — is everything that has been defined, prescribed, optimized, and re-prescribed over the last two and a half decades the right approach? This might appear dumb on first read and sound dumber on first vocalization, but it’s actually pretty poignant. Just because whatever has been prescribed for the past two decades has worked just fine, that doesn’t mean it’s optimal. And just like modern drugs can deal with most symptoms of any ailment you might get, at least at first, that doesn’t mean they address the root cause. And if they don’t address the root cause, you can still get really sick, and even die if the symptoms the drugs are addressing are covering up a long term, slowly progressing, [incurable] cancer or autoimmune disease.

Plus, certain practices are designed to achieve end-states with certain assumptions in mind that are based on expected market conditions and activities that are expected to optimize to those conditions. In other words, its assumptions across the board (on what to do) based on assumptions across the board (on what is success) based on expectation across the board where the assumptions on what to do assumes that what got a result before will again (without any proper definition of the scenario in which it worked or proof that its effective) and the assumptions on what is success is only based on what has achieved the best results (and not the best results that could be obtained) and the expectations are simply hopes that what came before will come again.

Of course, given the reliability of some of the methodologies out there, the consistent results obtained by the best-in-class providers, and the wide-spread adoption of certain methodologies, it’s hard to argue with the assumption, the underlying assumptions, and the expectations because, for most organizations that adopt the methodologies, and stick to them, they get great results!

But what happens when the results flatline?

I’m asking because I expect there’s a chance it will happen, and possibly sooner than I expect, for companies who are already practicing good supplier performance management. There are a number of reasons for this. As per above:

  • effective is not necessarily optimal
  • you can get short-term results treating the symptoms, but you can’t get long term results unless you address the route cause
  • everything is based on assumptions, on assumptions, against expectations

and

  • market conditions are (drastically) changing
  • all good things must come to an end
  • managing after the fact is not the same as laying the groundwork for success

These are the reasons in particular I suspect there is a chance that current SPM frameworks and efforts might crash.

All Good Things Must Come To An End

This universal truth holds true for anything with a limit. Since every action has a limit when it comes to the minimum time required for completion, the maximum number of uses or lifespan of a product, the value that can be delivered against a metric, and so on.

Combine this with the definition of supplier performance management which focusses on measuring, analyzing, and managing vendor performance to cut costs, minimize risks, and drive continuous improvement, this means that SPM has a limit. This, of course, is nothing new — we’ve known this for decades. But, applied properly, SPM has worked spectacularly for decades because:

  • only so many suppliers can be measured, managed, and developed at a time … so there’s an endless supply of projects
  • suppliers constantly change … increasing the endless supply of projects
  • technology in our space has kept improving, allowing for slow, continual, improvement
  • the global trade situation was relatively static for two decades
  • most companies haven’t, and still aren’t, doing SPM in earnest
  • SPM is done by humans, who aren’t perfect and continuously make mistakes

It will continue to work spectacularly for the majority of organizations the majority of the time as a result of all of these reasons. But it may soon start sputtering for some organizations. The reasons being:

  • the suppliers not measured, managed, and developed are the ones that will need it the most and cause you the most problems
  • suppliers will suddenly become (effectively) unavailable unexpectedly — often before the contract expires
  • technology has stalled in SPM
  • the global trade dynamic has drastically shifted and has entered a new age of continual instability
  • those doing SPM are running on outdated assumptions
  • Agentic AI is being injected everywhere, and decreasing the reliability and effectivness

This means that the days might be numbered for SPM-in-a-box, which is pretty much what you get because most vendors / consultancies who do SPM just do SPM.

Which is concern #1.

More importantly, SPM is pointless if the supplier is going to suddenly become unavailable or unable to produce the products that you need.

A sanction, border closing (due to conflict or epidemic with pandemic potential), seaway closing, economic collapse, etc. can all take a supplier out of the picture overnight. Chances are you’re monitoring for this for your (most) strategic suppliers, can usually see it coming with enough warning to at least take some emergency measures.

However, chances are that this sub-tier supplier, or it’s sub-tier supplier, aren’t monitoring for potential disruptions like you are. What happens when those suppliers suddenly shut down or become unavailable. Then your supplier is unable to produce the products you depend on, and it’s essentially the same as that supplier suddenly becoming unavailable.

Which means you need Supply Chain Visibility in order to not only select appropriate suppliers, but ensure your suppliers are selecting appropriate sub-tier suppliers and, if not, help them to do so. However, not only are most companies still not adopting SCV solutions, but they aren’t part of standard SPM.

In addition, it’s not just availability, it’s supply line, and dependency. Rare earths are becoming more rare, oil keeps going up, and many renewable commodities in the food stuff categories are in relatively short supply due to population increase, droughts, and wildfires. Sufficient supply demands that dependency on any one raw material be minimized to the extent possible. This means that PLM, and especially design, alternate designs, and substitution capability is becoming more and more critical. But this is completely ignored by today’s SPM that just focusses on making the production process more efficient, not the product.

In other words, while the classic SPM theory is fine, and the implementation close to flawless in a handful of suppliers, the impact will soon be minimal to non-existent if they continue to address the wrong problem or try to address the right problem in a vacuum.

Now that process performance is often not the critical problem, the effectiveness of traditional SPM may begin to wane — fast.

Which brings us back to the starting question:

How Do You Execute Effective Supplier Performance Management in Today’s World?

I don’t have a good answer yet, but I believe you need to find one before the question becomes relevant.

It’s Time For a Resurgence of Keiretsu!

Keiretsu, which can be briefly described as a long continual business relationship, in one way or another, has been a significant force in the Japanese economy for over four decades and, despite its long and varied history, criticisms, the Structural Impediments Initiative, and economic downturns, is still a strong foundation for many supply chain relationships in Japan. But now it needs to be the foundation for supply chain relationships the world over.

Twenty years ago we were in a period of (rising) globalization. Opening markets with the (first) cold war behind us. Limited, contained, conflicts. Relatively stable fuel prices. Piracy (off the Ivory Coast) was being curbed. And with the introduction of modern e-Sourcing and e-Procurement tools, it was easier by the day to invite more (and more) suppliers to events, to swap them out on a whim for (semi-)commodities, and keep supply lines fluid.

Relationships went on the decline for all but the most strategic suppliers because they weren’t necessary. But that was then, this is now.

Now we have anti-globalization and isolationism. Sanctions and closing markets. Escalating conflicts and closures of seas, straits, and critical shipping lanes. Rising and unpredictable fuel prices. A resurgence of piracy. Suppliers failing as a result of a myriad of tariffs, trade wars, border closings, shipping lanes, etc. Carriers failing as a result of rapid rising in fuel prices, insurance, increased theft, seizures, and blockades.

Suppliers who can actually fulfill your orders that you can actually receive products from that were once a dime a dozen to add to the RFP are now few and far between.

That means, now, more than anything, with risk and volatility increasing by the day, relationships matter again. Relationships that are:

  • long term: to create economic efficiencies that can help both parties survive the economic storm
  • knowledge sharing: workforce and even executives
  • business sharing: both parties buy from each other when possible and introduce throughout their partner networks
  • stock sharing: of the financial or physical variety — that reinforces each partner’s financial status when relevant or ensures security of cross-supply when stock-outs must be avoided
  • mutually beneficial asymmetrical trade: that works best for both parties

And relationships that can:

  • move low-value-add production to subsidiaries
  • ensure continuous high quality production capability to avoid excess production & consumer problems
  • improve risk management, especially with regards to variable or uncertain demand
  • ensure increased sales mean a corresponding increase for subsidiaries that are essential to the parent company’s survival
  • prevent critical confidential IP and technological information from being disclosed to short-term suppliers that may not be so obliged to keep it in the future, despite agreements

Which can help keep your supply chains running smooth in these troubled times.

The Kraljic Matrix is NOT a Foundation for Future Fit Supplier Segmentation

A recent piece over on Procurement Leaders noted how the author had several recent conversations about how the Kraljic Matrix has become outdated (and, as per our series last week, it has) and how one consumer goods company came up with their own approach to supplier segmentation to “leverage critical supplier capabilities to maximise value”. More specifically, he company has focused its supplier segmentation on two completely different matrices: first, the level of engagement; and second, suppliers’ ability to execute commercial growth and capabilities in an attempt to allow the company to do is to segment suppliers based on the strength of their relationship and the specific value they should bring to the business.

And, in effect, shift the Kraljic matrix from “noncritical, leverage, bottleneck and strategic” to “transactional, essential, visionary and strategic”.

It’s progress, but not much. It’s making the same error that every analyst firm (and even analyst) is making, and that’s thinking that segmentation can be appropriately captured by a 2*2.

As per our series last week on what the Busch-Lamoureux Exact Purchasing framework really is, it’s not a matrix, it’s a pocket cube* — which accomplishes the goal of the Kraljic matrix by appropriately segmenting categories in a manner that allows them to be properly managed from a supply-assurance based Procurement perspective. This is the point you need to start from if you want to create a supplier segmentation strategy for appropriate supplier management.

Then you see it’s not just

  • transactions (transactional in Exact Purchasing)
  • essential (governance in Exact Purchasing)
  • visionary (risk monitoring in Exact Purchasing)
  • strategic (architecture in Exact Purchasing)

Because

  • transactions can be low impact (and non-critical) or high impact (and create a bottleneck if they don’t show up)
  • governance can be accomplished at the spend level if the spend is low impact, but needs to be relationship level if the spend is high impact
  • risk monitoring is enough (and no vision required) for low impact spend but detailed risk management with mitigation plans that involve strategic, and maybe visionary, relationships will be key for high impact spend
  • strategic can be accomplished through cost architecture and mitigation strategies for low impact categories, but require detailed supply chain architecture with supplier participation in the high impact categories

This means that there are at least seven categories that need appropriate supplier management — all of the high impact transactions, plus the cost architecture (as you need supplier input), market risk management (as you need supplier relationships to rapidly shift demand), and relationship governance (as you need cooperation to manage obligations). And the degree of management depends on the categories.

Plus, to make matters even more difficult, some suppliers will cross multiple categories — which means that you can’t just put them into the most intense management category and treat all interactions as interactions in that category. You have to take the category into account, and focus the management on what’s critical, not what isn’t. Management requires HUMAN INTERACTION, and you only have so many people with so much time to build the RELATIONSHIPS, so you have to focus based on the category being supplied.

In other words, it’s not a matrix, it’s a cube that manages the supplier based on the category impact to the P&L, the market risk (that lies primarily with the supplier or the supply chain they introduce), and the complexity (where the supplier needs to be able to produce items that meet the complex requirements). And suppliers who supply more than one category will fall into more than one bucket.

In other words, to fix supplier management, first fix Purchasing.

(And that’s why it’s so critical to Take Purchasing.)

* and, one that’s different for every industry, which might make it a 4-polytope, but since each company can customize the pocket-cube, we’ll stick with the pocket cube

Supplier Management Must Be Continuous AND Proactive Throughout the Supply Chain!

Xavier recently wrote a great article over on Hackket Spend Matters on how you must treat Supplier management as a continuous signal because it points out that while traditional supplier management worked well when supplier ecosystems were smaller and more stable, it does not scale well in today’s operating reality.

As Xavier points out:

  • risk does not neatly emerge during onboarding, it accumulates through behavior over time and
  • risk changes continuously with performance and fitness as
  • pricing behaviour shifts, reliability degrades, dispute frequency increases, payment anomalies appear, and compliance exposure evolves with regulation

And this is not captured by periodic reviews.

However, just continuously capturing the updates that flow through the P2P system (from POs, receipts, invoices, payments, and disputes) is not enough for continuous management and monitoring. As per above, you need to be monitoring for regulatory compliance changes that can impact the supplier or the relationship. You need to be capturing returns and issues in the warehouse and with service for performance. And you have to be tracking the identified risks.

But that’s not enough. You have to get into the supply chain.

  • pricing behaviour shifts with supply chain events — supply gets caught off, transportation becomes scarce, the Tariff King decrees new tariffs, etc.
  • on time delivery and lead time reliability shifts with carrier availability which shifts with overall demand, geopolitical events, labour availability, and the current price of oil
  • payment issues arrive AFTER impact events (loss of a major customer, supply shortages, major financial loss from a lawsuit or natural disaster, etc.)
  • etc.

There’s a reason the doctor co-authored a series with Bob Ferrari on why Direct Sourcing Should Be Part of Supply Chain Management, and that’s because if you’re not tapped into the supply chain, you’re not getting all the signals you need to manage suppliers.

Because it’s not just the supplier signals, it’s the supply chain signals that will, in short order, impact the suppliers and their ability to serve you. This includes border closings, strikes that shut down docks and ports, natural disaster that cut off entire regions and disrupt flows, and geopolitics that have sweeping implications globally and that’s why, as Koray Köse says, Geopolitics Now Lives Inside the P&L.

So integrate with your supply chain, or realize that you’re still operating in a static bubble when the world is a very dynamic one and that if the static bubble pops when you’re unprepared, your supply chain pops with it and then you’re in trouble.