Supplier Performance Management (SPM) — Lost and Found?

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Speaking about procure-to-pay systems, KPMG’s Procurement and Operations Practice Leader Samir Khushalani recenlty remarked that “P2P seems to be in a perpetual state of implementation.” In the same breath, he reminded us that a focus on transaction management is no longer sufficient. “[Procurement departments] need to be looking at purchase-to-pay as a compliance engine to drive compliance of negotiated contracts with strategic suppliers.”

And what’s to argue? He highlights three simple, connected ideas:

  • Better negotiated agreements
  • Procurement as an organizational compliance engine
  • Treating supplier networks as strategic assets — and managing performance

For companies able to demonstrate that they can actually drive compliance to the right set of contracts, the savings are there for the taking. Simply put, the idea that suppliers reward customers who do what they say — who communicate with certainty — isn’t complicated, and the benefits are well established.

But what about the idea that a network of suppliers would respond even more favorably to a customer that persistently and artfully manages them? Almost all of the analysts who cover the supplier performance management (SPM) solution market agree there is an incremental 5%–15% in contract savings for those who do it well (i.e., for buying organizations that apply a continuous improvement discipline to their SPM practice).

Those are big numbers. So why would it appear that outside of the automotive industry, sophisticated SPM practice hasn’t caught on?

Kent Barnett, CEO of Proformitiv (formerly known as ClientLoyalty), an innovative new player in what truly is a rapidly evolving SPM solution space, spoke in terms of applying a Moneyball mentality to the practice.

“When you consider how transforming initiatives like Six Sigma (and its derivatives) has been, is it a stretch for procurement professionals to accept that such value is available to organizations that approach the performance management of their supply networks with similar discipline?”

SPM Revisited

Sourcing better agreements, driving organizational compliance and applying a six sigma-like discipline to SPM?

Think about it. Companies have addressed how they buy, how much they pay and contract compliance, but when it comes to managing the ongoing performance of their supply networks, most continue to operate in the dark. Current practice is dominated by a combination of freeware, spreadsheets, SurveyMonkey and traditional scorecards. And who owns it? Having seen little evidence of meaningful adoption of the general-purpose SPM solutions offered by the ERP vendors, there’s an obvious explanation as to why modern SPM solutions aren’t mainstream. They either aren’t very good, or no one has been interested.

What we know is that modern SPM is a data-driven process. We also know that optimizing the right supply mix and collaborating with suppliers to achieve mutual advantage is not something that happens in a P2P on-boarding form.

The Irony

The bigger they are, the harder they fall. SPM cannot be effectively practiced episodically or retrospectively, because the ripple effects of a supply problem, especially in a top-performing organization, are often felt more suddenly and severely than they would be in a less efficient setting.

Is it a case of “ignorance is bliss,” or more realistically, is it logical to point out that top performing SCM departments are the ones that can least afford to operate without modern SPM capability?

The truth is, SPM’s potential for reducing risk, cost, improving quality, participation, innovation transfer, market intelligence, sourcing effectiveness and more has been co-opted by systems that address its piece parts. In other words, there’s plenty of headroom, hence, that 5%–15% contract savings figure.

SPM: Procurement’s Project Management Solution

If your current practice is limited to static “scorecarding,” think in terms of dialing up a more comprehensive, real-time view of KPIs that cut both ways — that inform not only buyers but your selling partners, too.

And don’t limit your thinking to dashboards populated with new supply performance metrics. Consider SPM as the vehicle for testing, refining and executing improvement projects aimed at achieving specific organizational performance objectives — or, dare I say, improvements sought by members of the organization’s supply network.

SPM practice is rapidly evolving. The solution innovators are repositioning the practice as a dedicated process. They see it as a natural home for establishing and managing collaboration across modern supply networks.

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