Category Archives: Supplier Management

Purchasing’s Best Practice Tips for Buying in a Recession

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Purchasing recently ran an article on “best practices for buying in a recession” that contained five tips for buying in these troubled times. While most of the tips were pretty basic, sometimes the basics are best, and they are worth repeating.

The tips were:

  • Put the pressure on business stakeholders
    Put the onus for achieving defined savings goals on the business unit executives (with backing from senior management).
  • Give your suppliers a check-up
    Make sure your suppliers are healthy and not on the verge of bankruptcy. Do this by insuring your suppliers are paying their suppliers on time, aren’t burning through too much cash too fast, and have the resources to weather the storm.
  • Help key suppliers
    Start by paying promptly. Delaying payments for ridiculously long timeframes will just cost you more in the long run (since suppliers will likely not be able to get financing as cheaply as you and, at contract renewal time, will have to up their prices to cover the loss).
  • Don’t forget the fundamentals
    Consolidate buying, extend contracts with preferred suppliers, and continually monitor your suppliers’ health.
  • Get Lean
    Control inventory, control commodity costs, and minimize waste.

Supplier Relationship Management Best Practices

An article in the spring edition of the CPO Agenda addressed the issue of “SRM in turbulent times”. Noting that now is not the time to put efforts to develop stronger supplier relationships on the back burner, in addition to addressing the important issues of trust and being a good customer, it outlined some specific measures that you can take to improve your relationship.

As these measures were some of the best recommendations I’ve ever read in a traditional publication, I’m going to address them, and dive into the best ones.

  1. Accurate, Timely, Information (Exchange)
    There’s a reason they kept telling The Prisoner “We Need Information“. Simply put, you can’t effectively operate without it. And if you can’t effectively operate without it, how can you expect your suppliers to? Implement a web-based system that allows them to access what they need, when they need it. Insure that they get accurate, adequate performance metrics frequently, that design specifications for new products are complete and unambiguous, and that you provide them with realistic volume estimates for pricing new business.
  2. Realistic Cost Reduction Targets
    It’s okay to have stretch goals, but 20% cost reduction when commodities, energy costs, and labor costs are rising across the board may not be realistic. Work with the supplier to understand the process, the savings opportunities, and then set realistic targets. Also implement a program that shares the savings between you and your supplier in an equitable manner.
  3. Cost Avoidance Proposals Are Just As Good As Cost Reduction
    If your supplier comes up with a new process to produce the product that takes out certain production costs, or a new design that allows for cheaper materials to be used (without affecting performance or quality), that qualifies as a cost reduction.
  4. Provide Them With Lean Experts
    This will help both of you find ways to take waste, and cost, out of the system and demonstrate that you are committed to their success as well as yours.
  5. Provide The Supplier with Free Training
    Once you identify where they need improvement, give them the training they need to improve.
  6. Make It Clear That The Best Suppliers Get the Business
    This will reinforce the message that improvement will result in more business, and more profit.
  7. Align Purchasing And Engineering Expectations
    Nothing risks a good relationship more than forcing a supplier to be a referee when there are internal conflicts in your company when it comes to requirements.
  8. Fairly Compensate Suppliers When You Don’t Meet Your End of the Agreement
    If you cancel a program, fail to meet expectations, or change the requirements, don’t try to weasel out of your end of the agreement and force the supplier to bear the brunt of sunk costs. Pay for your mistake, or award them the new contract with an increased profit margin to allow them to make up their losses.

Increasing Your Supplier Negotiating Strength

A recent article by Mark Trowbridge in the Supply Chain Management Review covered “seven ways to build your negotiating strength” that should be considered a must read for anyone engaged in negotiations, especially if the relationship with the supplier is not a collaborative one.

  1. Involve Supply Management Early and Often
    This tactic, employed by world-class sourcing groups, will assist in communication and coordination with internal customers.
  2. Differentiate Between Competitive and Collaborative Negotiations
    Competition is a great way to level the playing field and drive suppliers down to market-efficient pricing, provided that there is competition, movement ability, sufficient volume, sufficient time, and a willingness to change. In comparison, competitive bargaining can assist in complex negotiations where you’re “negotiating out of a hole”.
  3. Prepare the Team to Fight the Tough Battles
    As the author notes: 75% of negotiation time should be spent outside of the room preparing data, strategy, and roles.
  4. Empower Negotiations through Factual Data
    There’s nothing more powerful than being able to call out a supplier in a negotiation when you have a well-researched should-cost model that backs up your claim that the supplier should be able to come down 20% if you consent to the volume necessary for optimal production runs.
  5. Negotiate ALL TCO Elements Before Entering a Relationship
    Forget the transportation costs? That’s a shakedown. The holding costs? That’s a shakedown. The disposal costs? That’s a shakedown. The service fees? You bet that’s a shakedown.
  6. Shift the Supplier’s Paradigm
    Even when a supplier thinks they have a deal locked up, it may still be possible to convince them otherwise and create a significant advantage. Starting renewal negotiations early, putting other products or services on the table, and tabling joint development can all play in your favor.
  7. Leverage the Buyer’s Performance
    Use the supplier’s past performance as a lever in negotiating future product or services acquisitions.

And, whatever you do, don’t allow the following mistakes to be made:

  • Letting a supplier know they have the business before the negotiation is done.
  • Creating specifications that can only be satisfied by one supplier.
  • Not allowing sufficient time to complete the requirements.
  • Allowing colleagues and executives “on the supplier’s side” to be involved in the negotiations.
  • Failing to recognize the scope and complexity of a multi-faceted, high-value acquisition.
  • Letting business units make key concessions to the supplier.
  • Allowing “inside information” to fall into the hands of the supplier.

Supply Chain Performance Improvement For the Beginner

Industry Week recently ran an article on “supply chain performance improvement for the rest of us” that is a good read for any organization just starting down the supply chain improvement path. The article outlined four strategies which can be used to jump-start a performance improvement initiative in an organization that is not best-in-class, or, in layman’s terms, your average organization. (Less than 20% of organizations are truly best-in-class, and the reality of supply chain improvement is that you need to do it in stages and trying to bite off too much too fast will just lead to failure.)

  1. Stop Obsessing Over Six Sigma
    It’s not the methodology, but where you apply it and how you use it to better your operations. It’s about leveraging the chosen process life-cycle improvements to focus on customer-visible process improvements, not about the processes themselves. Eventually you’ll want to optimize every process to the nth degree, but not when you’re starting out. An 80% improvement across the board is much better than a 98% improvement on one process that only affects 10% of production. After all, would you rather be 1.8 times as productive as a whole or 1.198 times as productive?
  2. Forget About “The Perfect Order”
    The “Perfect Order” is Supply Chain Nirvana, and every budding Buddhist knows that this is a lifelong journey. You need to start by improving your basic processes, which will minimize errors, and managing the mistakes (or order exceptions) better when they do happen. Install visibility systems that allow you to identify and deal with exceptions as soon as possible and the process improvements this will inevitably lead to will result in a significant drop in errors almost overnight.
  3. Pay Your Suppliers Better
    This will save your company money. Not only will it strengthen vendor relations, which could lead to happy suppliers willing to share insights and best practices and go the extra mile, but it will reduce the amount of capital the supplier has to borrow, which usually comes at a high cost. This reduces the supplier’s cost of capital, which reduces the supplier’s overhead, which decreases the mark-up the supplier has to charge, which enables the supplier to offer early payment discounts or charge you less (at renewal time).
  4. Don’t Talk to Customers
    Stop wasting time haggling over credit and other meaningless disputes. Automate the dispute resolution process and spend time listening to your customers’ product and service interests and business process priorities instead. That way you can find out what your customers really want and improve your offerings accordingly.

A Great Guide to Outsourcing Risk Management, Part V

In Part I we discussed the starting point of your outsourcing project and how you go about selecting service providers to issue RFPs to. In Part II we discussed proposal evaluation and in Part III we discussed the dispute resolution process that needs to be addressed up-front in the contract. Then in Part IV we discussed the service level agreement. Today we will discuss what you do after the deal is signed, and remind you to check out the full series on outsourcing risk management by Alsbridge, as printed by SourcingMag.com, that the first four parts of this series is partially based on as well as “4 dimensions to managing your service provider” that today’s post is partially based on.

Now That The Deal Is Signed, What Do You Do Next?

You manage the relationship. It’s important to remember that risk management is a continual process of planning, monitoring and control that will last the lifetime of the project. It might seem intuitive, but a lot of companies believe that once the deal is signed, it’s the vendors problem. It’s the vendor’s responsibility, but it’s still your problem as it’s still your liability. You’re the one that can be fined and imprisoned under SOX (like poor old Fox) if you file incorrect financial statements, fined and imprisoned under IEEPA if you buy or sell the wrong kind of product from or to a denied party, and fined or imprisoned under a host of other import and export control and financial acts.

An outsourced function requires continual oversight and change management. There should be weekly oversight meetings between project managers and immediate escalation of any issues that can’t be amicably resolved within the allowed time-frames, and issues should be primarily identified on an exception basis. The meetings should only focus on issues and yellow and red-light metrics — anything green and going well doesn’t need to be discussed. In addition, all information on issues to be discussed should be made available on the corporate intranet well in advance of any meeting so that all parties can be briefed on the issue before hand and the meeting can focus simply on resolution.

After Months and Months of Work, Your Outsourcing Project Finally Hit ROI. Now What?

You keep monitoring, you keep managing, and, more importantly, you look for ways to improve the initiative. You didn’t spend weeks defining and negotiating that iron-clad contract with extensive SLAs, Change Management Provisions, and Staged Milestones for nothing. You put all that effort in up-front so that you could continue to extract better and better returns on the back-end. So look for areas of improvement, streamline the processes, and move it forward.

So How Do You Manage the Relationship?

Carefully. The first thing to remember is that vendors work for other people’s shareholders. To gain the payoff while minimizing costs and risks, vendors must be carefully managed, otherwise the full ROI will never materialize. The next thing to remember is that vendors feel they are getting paid to deliver results as fast as possible, not to manage the life-cycle their work product is part of. Some vendors are more than willing to sacrifice quality for “quick results”, especially if they believe they are only being paid for the latter or that they won’t be around to deal with the eventual consequences of cutting corners.

It takes a lot of time to manage outsourcing. In addition to the usual technical guidance, you also have to manage the HR issues. Not only might you find yourself in the position where you have to hound them to fill vacancies, but you might have to pressure them to replace staff if the staff they assign you aren’t good enough. Then you need project manager buffers to keep the more aggressive service providers at bay who will be all over you to outsource even more activities or start new projects. And your compliance and legal staff will have to constantly monitor their performance with respect to the contract to make sure that they are holding up their end of the agreement. The reality is that everything you were monitoring before still has to be monitored, and probably has to be monitored more regularly. Plus, you will need to review their performance on a regular basis against every function they are doing for you. That’s why you only outsource functions that have associated economies of scale. For example, invoice processing in a mid-size or larger organization that requires ten or more staff to process the invoices is a good candidate. Invoice processing in an organization that only keeps three full time staff busy is not, because they’ll still need to retain one or two people to monitor throughput and handle exceptions and you want the cost of the monitoring resources the organization needs to maintain to be less than the savings obtained from outsourcing the function.

Essentially, for each function you outsource, you need to retain at least one person internally who did that function to monitor the performance of the service provider and help resolve issues as they arise. And then they have to pass on any issues that go unresolved for more than a minimal amount of time to the project manager to get resolved at the next meeting. Outsourcing can pay off where there are economies of scale to be had, but only if you remember to monitor it carefully and help the vendor improve their performance year-over-year and quarter-over-quarter. Otherwise, you’re better off just hiring more people internally to tackle more strategic sourcing projects and increase your savings that way.