Category Archives: Supplier Management

Is The Cliffhanger Paradox Limiting Your Supplier Performance?

A recent article in The Globe and Mail on why you need to “keep stroking clients” discussed a major reason businesses lose clients and don’t maximize lifetime value from the relationship. Dubbed the cliffhanger paradox, which describes the situation where businesses want continued loyalty and financial gains — but don’t get it, the article points out that the reason clients jump ship is because, once the client is won, the business fails to communicate meaningfully, frequently, and personally with them. Like a cliff-hanger, both sides are left in suspense.

If businesses don’t continuously communicate with clients, they don’t know where they stand until those customers either buy again or jump ship to the competition.

But the same holds true in supplier performance management. Often a company will begin a supplier improvement initiative, target the most critical or most under-performing suppliers, work with them for months until the performance meets the target level, and then quickly move on to the next supplier in the queue, thinking “the supplier has everything under control now”. Maybe they do, maybe they don’t. But most importantly, neither side knows that. If the supplier thinks all is well with the world again, they might slowly drift back to their old, under-performing ways. And if the supplier thinks you have given up on them, they might put minimal effort into fulfilling their contracted obligations and instead put all of their effort into pleasing another, easier to retain, customer. Both ways end up with you not getting the best performance you can. It’s not just your customers that need to be stroked on a regular basis … your suppliers need their whiskers stroked too.

Lavante – The Newest Contestent in the SIM Arena

As mentioned in yesterday’s post, Lavante is the latest provider of Supplier Information Management solutions in the Supply Management space (which includes Aravo, AECSoft (just acquired by SciQuest), CVM Solutions, Hiperos, and Rollstream, which have all been covered on SI). And while it arrived late, it comes ready for battle.

Since you all know by now what a good SIM solution should do (and if you don’t, reread the classic vendor SIM posts linked above), I’m not going to waste any time describing what it should do or spend a lot of time on the details. Instead, I’m going to mention all the standard stuff that the platform does and then focus on what makes Lavante different from the competition and why it should be included in your SIM vendor short list.

Like its competitors, Lavante allows you to collect detailed information on all of your suppliers, including detailed information on each contact. By default, this detailed information includes tax information, headquarters information remit-to information, business structure information, ERP (System) information, ownership information, certifications, services/materials information, risk management information, insurance information, bank information, and user defined summary information. A supplier has the option of entering all of the information on-line or downloading a template. Lavante can import your current supplier master (in a standard format such as XML) or provide a buyer with a (CSV) template to enter information for new suppliers. The information collected can be customized for every supplier, notifications on change can be configured at the element level, and approvals can be required before critical information is changed.

In addition to the standard browser interface, suppliers can also respond to e-mails or faxes (and even call a rep who will enter the information for them if they are still technologically illiterate). The supplier interface allows a supplier to log-in and manage 100% of their information, which minimizes buyer effort if suppliers take an active role in buyer interaction.

At any time, a buyer can get a list of all suppliers who have not provided requested information as well as suppliers who have registered and completed their profile. The buyer can also see which communication attempts have been tried or whether or not the supplier has not provided an e-mail or fax number.

The distinguishing characteristics of the platform are the following:

  • it was built on the cloud
    it was designed to be 100% multi-tenant and cloud compliant from day one
  • extremely configurable
    many early platforms only had the ability to send an alert when a change was made; later ones allowed for alerts to be configured to change type; Lavante’s platform allows each individual data element to be marked as notify/don’t notify on change
  • automatic validation of Tax ID
    Lavante does a real-time check of every TIN that is entered and a supplier is not allowed to register without a valid TIN that matches their name
  • multi-mode outreach
    whereas most providers assume browser or e-mail data provision, Lavante also accepts faxes and integrates OCR and provides supplier outreach services that will get suppliers onboard by e-mail, fax, or phone if necessary
  • a supplier portal that equals the buyer portal
    suppliers were an afterthought in many first generation SIM platforms and a supplier had to log in to a separate instance of the portal for each buying organization they dealt with; in Lavante’s platform, a supplier can manage their data for all buyers who use Lavante through a single log-in — information needs to only be entered once and common information is segregated from buyer specific information
  • very large supplier database
    Lavante, which started as a recovery audit vendor, has been around for 10 years and has amassed a database of over 2 Million vendors that its client do business with — as a result, it has current information on over 2 Million vendors in its database

Plus, Lavante can use this platform to streamline its recovery audits and save an organization up to 10X more than a recovery audit without access to detailed information would save. So when you add the initial savings that will come from 1099 reporting compliance with reduced SIM (when 20% to 40% of supply base information needs to change annually) resource requirements and more successful cost recovery audits, the solution pays for itself almost immediately. Plus, since it’s true multi-tenant cloud, Lavante can turn your organization on in less than an hour.

Are You Ready for the New 1099 Tax Laws?

As of January 1, 2012, as per reporting requirements set forth by the Patient Protection & Affordable Care Act that passed in March 2010, which provides an Amendment to Section 6041 of the Internal Revenue Code, 1099-MISC reporting will now be required for all payees that receive payments that total $600 or more in a calendar year.

No longer will service providers that were incorporated be exempted, and no longer will companies that provide you with physical goods be exempted. A 1099-MISC must be filed for any payee that receives more than $600 worth of payments in a single calendar year.

For many organizations, this will increase the 1099 filing requirement from about 10% of the supply base to 90% of the supply base, a nine-fold increase in 1099-MISC reporting!

Furthermore, the IRS intends to make sure that everyone complies through the establishment of 16,000 new auditor positions. Right now, the Joint Committee on Taxation is estimated this is going to result in 17 Billion in additional revenues from 2012 to 2019 (which will likely cover the cost of the auditors 3 times over). And this amount does not include the revenue from fines that will be collected from each company not in compliance, which are increasing to $250 for each supplier that is not properly reported (from a current fine amount of $50), to a maximum liability of $1,500,000 in a calendar year (from the current liability of 250,000).

Right now, chances are that your organization doesn’t even have a TIN for most of the suppliers that need to be reported under the new legislation. So what do you do?

As per a recent white paper from Lavante that describes the impending challenge that your organization is about to face as well as a series of steps to become compliant, you could start with good Supplier Information Management (SIM). Not only will this solve your immediate 1099 reporting requirements (when integrated with your ERP / Accounting System), but it will enable a slew of other benefits (as described in previous posts here on Sourcing Innovation).

Lavante is the first to offer a SIM solution that will solve this challenge, which will be the subject of our next post.

Low Cost Country Sourcing Is Not a Magic Bullet

As per this recent article in CPO Agenda from the Boston Consulting Group on how you “reap what you sow in low cost countries”, not all industries are gaining the full benefits of sourcing from best-cost countries. Sectors with highly complex products or stringent safety requirements … are finding that most suppliers in developing economies fall far short of the quality standards and process excellence of suppliers in the developed world –and that the risks of using sub-standard inputs far outweigh any potential cost savings. More importantly, a problem with just one of a product’s parts or ingredients can lead to recalls, PR nightmares, and brand erosion –all of which extract an extremely high cost that significantly exceeds any savings the organization had hoped to extract.

However, if the right choice is made, which must take into account manufacturing flexibility and economic density (which Dick Locke elaborated on in his posts last week), and the right amount of effort is put into making low-cost country sourcing work, significant and measurable benefits can be realised. But it will take more than a few RFXs and a site visit or two to make things work, because an organization can’t just transfer home-country quality systems and processes to offshore production facilities as low-cost country suppliers often have different capabilities (and equipment). Everything will have to be customized (or redone) end-to-end to get good results. That’s why most attempts have failed (and why most companies with plants in low-cost countries still source raw materials and components from foreign suppliers, because they haven’t figured out how to get quality from local suppliers).

So, assuming the organization has chosen the right low-cost country and right supplier(s), how does it go about extracting quality and reliability? It starts with an appropriately devised supplier development program that will increase the capability and reliability of its suppliers. According to the Boston Consulting Group, such a program must:

  • Target a Small Number of Suppliers
    as the organization won’t have the resources to support a large supply base
  • Focus on What Matters Most
    as there will be a lot of problems — perhaps an overwhelming number — but not all will be critical
  • Align the Organization
    because supplier development must live within Supply Management, not Quality Control, as only Supply Management can take the business away if suppliers don’t shape up
  • Choose the Right Development Approach
    according to the supplier’s level of motivation, capability, and cultural style; the organization may be able to get away with a “check-in” approach, may need to escalate to a “SWAT team” approach, or may need to put a dedicated team on site (see the”reap what you sow in low cost countries” article on the CPO Agenda for details)
  • Engage and Motivate Target Suppliers
    and align penalties and incentives
  • Have a RoadMap
    and make sure the approach to implementation is defined, disciplined, and followed
  • Measure and Track Results
    because follow-through over the long term is critical

These are all good tidbits of advice, but the most important thing is to make the necessary resource commitments to a long-term supplier development effort because, despite what the article may imply when it says that an organization can see measurable benefits in as little as six months, it will generally take an average organization years to realize the desired benefits.

A Short Term Win IS NOT A Long Term Gain

I was really disappointed by this recent blog over on the Harvard Business Review that said you should “play stupid to win smart in negotiations”. While it’s true, and great advice if you’re making a one-time purchase of an expensive, over-priced, and always marked-up item, it’s not the best way to build a good long-term relationship with a (potentially) important supplier. How do you think the relationship is going to go if the supplier figures out six months in that you played him for a fool?

Ask yourself before your next negotiation.

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