Category Archives: Supplier Management

If You Let Your Supplier Rip You Off …

Then whatever else they do to you, blame yourself!

Not long ago, over on Spend Matters UK, the public defender penned a post on “Public Sector Project Failures, Blame the Suppliers!” which, while likely deserving of some vile for having the audacity to continue to overcharge the public coffers for the products and services they deliver (something they likely wouldn’t get away with if it was a big private sector client which was a leader in strategic sourcing and supplier management), is not, in the doctor‘s view, deserving of all the vile. After all, as we penned here not that long ago in our post on whether or not your suppliers are ripping you off, if you are letting them, then they are.

But that’s not all they are doing if you let them. What else you ask? We’ll get to that, but first, let’s step back.

If you flip over to the public defender‘s post, he mentions an article by Allan Watton of Best Practice Group discusses what an organization can do if a provider exhibits problems that impacts the service to your recommendation. And this is the crux of it. If they are willing to rip you off, and you are willing to let them, then if their quality slides, they are likely also willing to send you (more) inferior/defective products, let their service commitments slip (in favour of another customer if resources are thinner than they guaranteed), and even fail to enforce necessary social responsibility and sustainability requirements that they agreed to (that will get you, and not them, thrown into boiling hot water if not adhered to).

And, frankly, as far as Si is concerned, if this happens, if you are not watching them and working with (or, if necessary, replacing) them, then it is all your fault and you only have yourself to blame. Yes, they are deserving of vile for being such scumbags in the first place if they do any of this, but it’s your supply chain delivering your product to your customers, so it’s your responsibility to monitor and if anything happens, as per legislations being introduced around the globe, unless you took reasonable measures to monitor, it’s your fault. So the ultimate blame rests with you.

But, as the public defender points out, sometimes monitoring and managing won’t be enough. Often time the suppliers, while a little bad, aren’t truly rotten and can be improved with monitoring and management, but sometimes you truly do have a truly rotten apple that you can’t do anything with. In this case, you will need to switch, and to do that quickly and effectively, with as little disruption as possible, you will need a disaster recovery plan, an extreme mitigation plan where you are not dealing with a temporary disruption due to weather, equipment failure, etc. but the need to replace an entire supplier permanently. And that’s why risk management is discussed regularly on this blog, because it does no good to identify millions of savings with optimization and analytics only to lose it because you weren’t prepared for that eventual black-swan mega-disruption that is coming your way!

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.