Creative Supplier Governance: Key Points From a Sourcing Leaders’ Lunch & Learn

At a recent Chicago Sourcing Leaders Lunch & Learn, one theme was clear: The sourcing department includes the “cool kids” of the enterprise.

Hosted by e-sourcing provider Scout RFP and Zebra Technologies, pioneers of barcode scanning technology, the Lunch & Learn featured a sampling of the Zebra product line and a practical presentation from Dawn Tiura, president and CEO of the Sourcing Industry Group. She described the qualities of the “cool kids” and shared her insight on the importance of having a formal supplier governance program.

So why is sourcing so cool? Unlike most departments, sourcing’s responsibilities extend across the entire enterprise. An ethical responsibility to achieve savings means that governance has now moved down into the supply chain — because of risk. Events that occur halfway around the world affect sourcing, and the most advanced companies are well aware of the ways to combat risk before it creeps into the supply chain. Here are a few lessons learned for getting the most out of your suppliers and, crucially, getting key stakeholders to buy in to your sourcing strategy.

See savings as a share of revenue

Take a page out of Target’s playbook. On the receipts given by some department stores, the largest, boldest number is not the amount you have paid, but rather the total you saved by choosing items on sale and applying coupons. It’s more positive — and your CEO will view savings more positively if you present them as a share of revenue. For example, saving 19% on a commodity annually is nice, but it can be more impactful to describe the same value as 7% of total revenue. This is top-line impact.

Don’t let your suppliers use benign neglect

If you have no formal supplier performance management program, it is easy to fall out of touch with your suppliers. Some of the more nefarious ones will add in upcharges in the hope that you will not notice. Some will add in contract creep, like annual rent prices increasing. These are symptoms that appear in the absence of supplier governance; they have no reason to perform well if you are not tracking their performance.

Manage supplier scorecards carefully

Used properly, scorecards can provide suppliers all the incentive necessary to step up their game. Used balanced performance scorecards and create your own; do not take the easy way out and copy from a template. Know the priorities of your organization and craft the scorecard accordingly. Be wary of the “watermelon scorecard” (green on the outside, red on the inside), which results when a supplier meets requirements but does not work to drive long-term value. Do not let suppliers fill out the scorecards for you; they should not be composed of supplier data.

Be creative with your suppliers

The key takeaway from the event was the necessity of staying engaged — formally — with suppliers. Within 18 months, 75% of a contract’s value wastes away in the absence of a supplier governance program, studies have shown. Have conversations with your suppliers; find creative ways to incentivize them. Tiura’s great example was on-time delivery. If your organization has deep inventory and can get by with a late delivery here and there, eschew the 99% on-time rate when drawing up the contract. Settle for 80% instead, but ask for a discount as compensation. Many suppliers will be more than happy to collaborate with the cool kids, rather than simply handing over their lunch money.