Spend Matters welcomes this guest article by Brian Miller, vice president of services at Intesource.
CPOs have plenty of strategies in their sourcing toolbox to mitigate risk-taking the time to fully understand suppliers’ business operations, conducting regular audits, monitoring inventory, market and supplier performance, having a plan of action at the ready and diversifying the supply base. All of these tactics fortify the supply chain against the unpredictable and contribute to a well-rounded risk management program.
But which strategy gives CPOs the most bang for their buck? Which tool fosters the most business growth while mitigating risk in the process?
While it certainly depends on the unique circumstances each organization faces, an argument can be made for supplier diversification as the key to sourcing innovation and long-term success. There are many business objectives that supplier diversification can help reach – here are just a few.
When a business’ supplier relationships are fully diversified, procurement teams gain an indispensable agility for reducing risk factors. Every procurement professional knows that it’s risky to only have a couple of suppliers for a sourcing category – if a main supplier is forced to stop production for whatever reason, procurement teams will have to scramble to find new supply sources at the last minute and are often forced to forfeit fully desirable contract terms, or worse – not have the right amount of product to meet consumer demand.
To protect against a shortfall of this kind, sourcing teams need more insight into the marketplace. Too often, organizations only have relationships with a few select suppliers in each category and lack visibility into the prices, terms and products that other suppliers in the marketplace can offer. In the event that a key supplier falls through, the procurement team is often forced to source quickly and sometimes blindly. E-sourcing plays an integral role in reducing this kind of risk. By regularly taking categories to auction – even just to gauge the market – organizations gain unprecedented access to a diverse pool of qualified suppliers that they can confidently choose from should a major disruption occur.
Capturing a Competitive Advantage
The highest performing organizations understand that suppliers shouldn’t solely be suppliers – they should be partners. Fully aligning with and treating suppliers as strategic business partners ultimately brings higher success rates, reduces risks and fosters innovation for both parties, delivering higher-quality products and reducing costs for a competitive advantage – something that would be hard to accomplish operating independently.
While price and contract terms will always be critical, the real sourcing and supplier management objective needs to be value creation. Today, businesses – especially retailers, grocers and restaurants – are experiencing a rapid shift in consumer expectations. Affordability is still (and always will be) important – but customers also want quality, sustainability and innovation and to align themselves with a brands that have strong reputation.
For example, take a look at the restaurant market. More consumers are moving away from massive chains with reputations for being unhealthy and low quality, like McDonalds (which just happened to suffer one of its worst financial quarters in years), to brands that offer more unique, higher-quality and responsibly-sourced menu items, like a Chipotle or Panera. A similar trend can be seen in the grocery market, where brands with reputations for having vast, healthy and innovative products choices – like a Wegmans or Trader Joe’s – are capturing more consumer attention than ever before.
Transforming to this level can only be done through cultivated, strategic supplier relationships. The more collaborative CPOs are with their suppliers, the more loyal they will be to the procurement team and their goals and the more they will invest in innovation in design, quality, speed to market and customer satisfaction. Having a pool of trusted suppliers to collaborate with ultimately leads to having more cutting edge products, putting the organization ahead of the market.
Opening New Doors
Another key for getting more value out of supplier relationships: transparency. Transparent communication, such sharing information around internal costs, consumer demands, market trends and business objectives, can open up new doors for maximizing financial value. Collaborating with suppliers and giving them the knowledge necessary to develop innovative value propositions that work for both organizations is critical for improving cash flow.
In light of a strong and mutually beneficial relationship, strategic sourcing partners will be more willing to help with additional financing when it’s needed. Extended terms on new purchases, timely deliveries, loans or investments in the company can all contribute to long-term financial success. This type of 2-way transparency also helps reduce risk by giving CPOs visibility into the financial performance of a supplier so they can take action, if necessary, before experiencing a major disruption.
What risk mitigation strategies do you use? Which have been the most successful for overall business growth?