Nov
8
Buyers and Suppliers don’t have to do battle – why SRM and long term relationships matter
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Lets face it – the key result that most procurement professionals are still attempting to get is leverage on price. Cost down is still the top draw for many senior executives and decision makers and for many, the primary reason for the procurement team to exist. Developing relationships is often the last consideration and where it is considered the “how to implement part” is glossed over.
The standard relationship can place buyers and suppliers in gladiatorial combat at different ends of the arena with each focusing on their own primary targets (cost/margin) and failing to capitalize on any benefits that might be obtained through closer collaboration. Such a method relies on adversarial positions and relationships that foster competition (either squeezing or retaining margin).
Procurement executives should consider that there is more than one method that can be used to generate benefit and that the procurement task does not stop at contract sign off but involves close scrutiny of requirements AND the development of post contract opportunities which can both generate significant benefit.
Companies must consider appropriate mechanisms or incentives that foster this approach.
The contract is still one of the best weapons in the procurement executives’ arsenal. However, all to often the approach is not robust and focus on the initial contract phase is weak – all too often one of two things happen –
1/ The contract requirements are ill thought through focusing on short term goals overcoming long term aspirations and while today’s requirements (often current target price or crazy lead times) are met tomorrows (stability, efficiency, capability) are not.
2/ The contract is generated outside of the procurement team with often little focus on long term requirements (e.g. sustainability or compliancy). These contracts get thrown “over the fence” and the procurement team is left to pick up the pieces.
One key issue that businesses need to address is that to foster success, the contracting phase and relationship management need to be closely coupled and embedded within the same process.
If the contract is constructed correctly then everyone benefits. Total requirements are met, long term efficiencies targeted and mutually beneficial relationships developed.
When you think about it a robust approach to mutually beneficial supplier relationships makes sense – suppliers are looking to develop long term revenue streams and stable margins whilst buyers are looking to manage cost and consistency of supply whilst mitigating potential future issues – these requirements are far better suited to collaboration than fighting over a $10 dollar reduction in the price of the piece part.
Significantly a key issue of this approach is that it requires a greater perspective than merely Cost, Quality and Delivery (QCD). Businesses must consider how innovation and collaboration are included and measured. Both organizations MUST consider total acquisition cost rather than purely the initial purchase price. This is especially true for those organizations that maybe faced with increasing compliancy issues (sustainability) or other issues such as high levels of obsolescence.
Summary
Close relationships between buyers and suppliers does bring its own challenges (for example differing cultures, well established supplier networks). Companies must ask themselves how easy is it to revisit existing supplier contracts. Perhaps the key issue is that SRM must be approached from both perspectives. It is no good if the supplier retains an adversarial position focused purely on protecting margin where the buyer may want to form closer working ties. The skill is of course spotting and developing the opportunities and developing back office processes including sourcing and contract negotiation and ownership that compliment the strategy.
May
26
Supplier Scoring – The Importance Of Ranking Your Suppliers
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Suppliers are an intrinsic part of your supply chain, poor performance can hinder your business and selecting the wrong supplier at sourcing stage can result in challenges later on. Supplier evaluation should be a cornerstone process for your organization as it provides you with an in-depth assessment of performance set against objective and detailed criteria.
Scoring Your Suppliers
The first part of this process is the scoring of suppliers. This is a means of evaluating your suppliers, measuring their performance against a set of targets. The targets have to be of importance to you and can include how they perform in terms of delivery, their lead time, the quality of items supplied, the price, service levels and so on. This process of scoring is helpful because it assesses all of the suppliers against a very standard set of criteria. The result of this is an independent and objective assessment of how well the supplier is performing and whether they are meeting your needs in a way that is acceptable.
Some scoring systems offer the opportunity to utilize weighting according to the importance of certain criteria. For example, if price is viewed as very important, then that will be given a higher weighting than something that is viewed as less important, which could be invoicing procedures etc.
Often there are various sub-divisions within any one measure. For example, the price of the product is not just about who much it costs, there are often more factors to be taken into consideration. These could include the stability of the price, whether invoicing procedures are acceptable and the invoices accurate and how much notice is given about any changes to the price etc. So this is about much more than simply how much each unit item costs, there are other ‘hidden’ factors that need to be taken into consideration.
All the points that will be used to rate or score a supplier will have the same variances, especially complex issues such as quality issues and service factors. This makes the whole scoring system quote an in-depth analysis of how the supplier is performing.
The system can also be used with potential suppliers to see how they could meet supply demands in the future.
Ranking Suppliers
To complete the analysis it is important not just to score the supplier, but also to rank them. This provides the customer with a real insight into who is performing well, who is average and who is languishing at the bottom of the league.
This format is very clear to understand and can also be used to share information with suppliers, so that those who are performing poorly can work towards improving their performance. Often details of other suppliers may not be shared, but individual suppliers will be furnished with details of how they scored and what their ranking was in the overall table.
Once ranked suppliers can be grouped (typically into A, B, C groups). Specific groups may then result in targeted action (often along the lines of Develop, Maintain or exit).
Objectivity Is Key
Key to this process is objectivity. There are times when personalities creep in or even personal bias, so if no objective scoring or ranking system is used, then it can be easy to use memory or even prejudices to rank a supplier as ‘good’ or ‘bad’ but with an objective tool to analyse performance and assess each supplier ‘against’ each other, a true picture emerges of exactly who is performing well and who is to some extent ‘the weakest link’.