One of the presentations at the 6^th Annual International Symposium on Supply Chain Management was a Supplier Management Case Study by Canada Post. Canada Post, which is the 6^th largest employer in Canada, employs a workforce of 71,000 that has to deal with 40 Million items a day that can originate from 24,000 points of access (including 7,000 retail outlets), and that may need to be delivered to any one of 14 Million locations across ten million square kilometers. As a 7 Billion dollar organization, over 4 Billion dollars flows through Procure to Pay annually, with over 2 Billion dollars of that spend managed. Major categories include transportation (350 million plus), professional services (300 million plus), information technology (250 million plus), facilities (200 million plus), and mail operations (100 million plus). Approximately 80% of invoices are electronic, and approximately 64% of payments are through electronic transfer.

Given the magnitude of dollars that are at stake, Canada Post has implemented a score-card based supplier management system in an effort to reduce costs and increase value for money. It did this because a number of recent studies, including a study by Aberdeen, found that organizations that include supplier measurement and management in their sourcing programs save an average of 8% more than those who don’t, have an on-time-delivery performance that is twice as good, and a quality of product or service that is four times better. Furthermore, without a good supplier management program in place, an organization can expect 75% of sourcing savings to erode within 18 months.

To date, Canada Post has placed 60 of its 176 large (volume/spend) active suppliers on scorecards, and it intends to add 20 more by year end, with a goal of eventually having the majority of large (volume/spend) active suppliers on scorecards in the next couple of years. It’s goal is to increase value for money by implementing a common measurement approach that will allow for a comparative measure of of supplier performance within a commodity group, improve sourcing decisions, provide a foundation for supplier relationship management, and drive improvements.

It uses a multi-part scorecard that measures different aspects of on-time delivery, defect free delivery (of a product or service), continuous improvement, and value for money that rates a supplier on a 1 to 10 scale. Anything under 8 is unsatisfactory, anything between 8 and 9 needs improvement, 9 is on-target, and anything above 9 means that the supplier has exceeded expectations. The goal is to get as many suppliers as possible exceeding expectations because this is where savings and value materialize.

As part of their supplier management initiative, they did two case studies. The first case study was on a supplier who was perceived to be a poor service provider with major problems in invoice accuracy on a regular basis and unsatisfactory service. Over two quarters, the scorecard identified poor performance that ranged between 5.5 and 7.1. This got the attention of the supplier’s senior management who, committed to fixing the problem, performed a root-cause analysis, identified corrective actions, and implemented them. After the senior management implemented their corrections, overall performance improved to 7.7 over the next two quarters and the supplier is now trending to an 8.8 within the next two quarters, which is a considerable improvement.

The second case study was on a supplier with a history of excellent service who consistently exceeded expectations. The question was whether or not supplier management could be used to edge out even better performance. After implementing the scorecard, the supplier reduced spending by 3.5% over the next 6 months and identified and implemented a number of Joint Performance Initiatives that are expected to yield even further savings in the future.

In short, Canada Post found that a good supplier performance management initiative, which in this case was built on a variation of a common scorecard where both parties agree on the metrics and the supplier is tasked with maintaining the scorecard (which has to be signed off by a buyer before it is accepted), can save considerable money even in the public sector.

Editor’s Note: I wrote this before my colleague posted his take over on Spend Matters last month, but decided to delay it as a reminder to readers of both our blogs that good SPM programs achieve results. Jason’s posts can be reviewed here:
Supplier Performance: Lessons from Canada Post (Part 1)
Supplier Performance: Lessons from Canada Post (Part 2)

In modern supply chains, supplier risk is no longer limited to supply disruptions or quality lapses and also includes legal, financial, and brand risk, as evidenced by recent catastrophes which have caused unequalled harm of a preventable nature to pets and people alike. Nor is supply risk limited to products, as approximately 80% of the US economy is now driven by service industries. Risks need to be managed, as highlighted in a recent Supply Chain Management Review article on “Coming to Grips with Supplier Risk”.

Furthermore, they need to be managed counter-intuitively. According to the article, there are three situations where this is the case:

• Amount of Spend does not Matter
  Many supply management organizations sort their suppliers by descending spend and focus their attention on the top 20% of suppliers that make up 80% of the spend. But low spend suppliers can be a source of significant risk as well. A cheap part in an expensive engine can cause the engine to fail. Data theft (enabled) by (the poor security practices of) a small IT provider can cause irreparable damage to a retailer’s brand, and lead to lawsuits.
• Return on Risk Management can be Tough to Measure
  There’s no measurable return until the risk materializes and you can quantify the avoided loss. Until then, it’s only possible to estimate the impact using a metric that takes the probability of the risk and the expected magnitude of the loss.
• You Will NOT Be Fully Prepared for Some Risk Events
  Even the most successful risk management programs only reduce the impact of a risk, they do not eliminate it.

So where do you start? As I hinted above, start by graphing the probability of occurrence vs. the expected impact of each risk. The greatest risks are those with a high probability of occurrence and a large expected impact.

The result of this first step is a prioritized list of risks that need to be addressed in the sourcing process, which starts with Supplier Qualification. In this phase, a supplier is researched to determine whether or not it has adequate controls in place to address the identified risks. If it does, requirements are laid out that a supplier has to agree to before it is allowed to participate in the negotiations.

The qualification phase should also involve the creation of centralized, systematic, and readily accessible records of suppliers, products, and verifiable certifications. This augments a supplier risk database that provides a searchable repository of supplier risk profiles, as well as documented audit trails to show that the risks have been assessed, that controls have been developed, and that the supplier has the necessary certifications.

After a supplier has been selected, risk management proceeds with supplier performance monitoring. This not only helps to ensure the strength and safety of the supply chain, but it also identifies potential risks in supplier performance and compliance and makes it easier to identify problems before they occur.

Supplier performance monitoring makes it possible to set baseline goals, to tie those to performance scores, and to create alerts if those goals are not met. It also means that companies can identify not just when a target is missed but whether key milestone dates are not met, which would flag an impending problem. Monitoring also allows suppliers to provide feedback to the supply management organization in order to enhance collaboration. Suppliers can monitor their own performance against company goals and objectives.

Once monitoring is in place, the next phase of risk management is collaboration which goes beyond simply identifying the symptoms of a problem to determine its root causes. This allows a company to reduce future risks and maximize the value of its relationship.

So what do you need to do? According to the SCMR article, you need to:

1. Ensure the Right Focus
   Focus on the big risks and the benefits of risk management.
2. Engage Stakeholders
   This will help ensure you see the big picture.
3. Align Suppliers with Program Objectives
   If your suppliers are not on board, your efforts will be wasted.
4. Capture Immediate Benefits
   Early benefits enable buy-in.
5. Leverage Enabling Technologies
   Enabling technologies, such as e-sourcing, contract management, and collaboration solutions can help improve a program’s efficiency and effectiveness.

In addition, be sure to keep the Supplier Risk Management Framework, as discussed in the iBX Purchasing Transformation Blog, in mind. It captures the basics you need to keep in mind when identifying risks, selecting partners, and implementing risk mitigation strategies.