Spend Matters welcomes a guest post from Hani Alexander of Alvarez & Marsal.
High-profile gaps and weaknesses in a company’s operations, processes, and controls make the front page of the Wall Street Journal on a regular basis. When those companies’ gaps represent key extended operations with strategic suppliers, the suppliers’ weaknesses – as well as the clients’ use of those suppliers -- are often co-mingled from a media and reporting perspective.
For years, supplier management, particularly for service-based organizations, has been de-prioritized in favor of immediate bottom-line impact delivered through strategic sourcing activities. The primary driver or perception has been that supplier management did not have the clear “pay-back” or deliver the “value” that strategic sourcing activities drive.
Additionally, given the constraints organizations face on hiring, allocating resources to supplier management as opposed to strategic sourcing has affected the focus on these activities further. But over the past few years, Alvarez & Marsal’s experience confirms that service-based organizations (particularly those that are heavily regulated – financial services, insurance, healthcare) and manufacturing organizations have increased this focus (both in terms of resources and investment) and now consider supplier management as just as critical, if not more so, than strategic sourcing and procurement processes.
What is supplier or vendor management? For reference, take a look at those sets of supplier management activities that occur after an agreement has been executed with a supplier (“Post-Deal” activities).
Key Enabling Supplier Management Activities
Supplier Segmentation – One of the most critical activities as part of establishing a supplier management program is to properly segment suppliers. In general, the number of suppliers in each tier should resemble a “pyramid” – namely, a very small number of suppliers at the top are considered “critical” or “Tier 1,” a larger number considered “Tier 2” and the majority of suppliers in terms of numbers should reside in the bottom 1 to 2 tiers.
To develop a good segmentation model, an organization should consider all of the elements or attributes that define “strategic” for your organization as well as “inherent risk” for your organization. These attributes should become the basis of a formal segmentation model that can also be weighted based on relative priority of each attribute.
Resource Allocation (Budget, Time, People, Activity, Technology) – Allocating resources in terms of time, people / activity, systems, and technology should mirror an “upside-pyramid” or opportune to the segmentation.
Ongoing Monitoring – For critical outsourcing agreements (typically IT outsourcing or business process outsourcing), an ongoing monitoring capability is required to ensure all supplier expectations are being met. This should include both real-time activities as well as regularly scheduled check points such as supplier audits.
Developing the Business Case for Supplier Management
As mentioned earlier, companies often struggle with developing the internal business case to allocate resources (budget, people, time, technology, other) to creating a supplier management program for the long term. Leaders in their respective organizations must come up with quantitative and qualitative benefits to implementing that program. When creating the business case, organizations should quantify or at least qualify the following:
Cost Savings Realization – Commonly, strategic sourcing and procurement organizations report on “savings forecasted” or “negotiated savings,” but do not follow up to see if the savings were actually realized. Implementing a contract compliance capability as part of a broader supplier management program is one way to quantify the benefits.
Supplier Risk Management– Inherent risk is what is identified based on risk attributes from an activity or relationship. Residual risk is that risk that remains after due diligence and mitigating controls has been implemented to reduce the inherent risk. A well-defined supplier management program can add value by first measuring and quantifying inherent risk and mitigating it to generate a lower perceived residual risk.
Supplier Performance Management – A long-time cornerstone of supplier management programs, measuring the performances of your Tier 1 and Tier 2 suppliers provides a quantifiable opportunity to measure ongoing performance and improvement over time.
Continuous Improvement and Innovation Programs – A more “mature” practice but one that is becoming a core activity in supplier management programs is driving continuous improvement initiatives with suppliers. This could include incremental improvements over time in cost, service, quality, processes, productivity, systems, or automation. Additionally, consider collaborating with key strategic suppliers to drive joint innovation programs (programs that help develop new products, services, or solutions in the market).
Designing and implementing a supplier management program is critical to ensure that risks are understood, mitigated, and/or accepted as a course or conducting business. Additionally, full realization of an organization’s investment in sourcing of goods and services is ultimately realized through a comprehensive, ongoing supplier management program. Qualified external resources can often assist organizations facing challenges with positioning or implementing a supplier management program.