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Healthy paranoia drives investment in supply management – Part 2

In Part 1 of Healthy paranoia drives investment in supply management, I explored issues in supply management as illustrated in Global Logistics & Supply Chain Strategies Magazine (online version) – an article in their recent edition is on Investment in Supply Management. The article was authored by Jean V. Murphy.
In the previous part, I explored what firms view as supply management and what solution providers view as Supplier Relationship Management (SRM). In this part, I will explore how firms think about supplier management and supplier networks and the steps that firms could take to structure their relationships vis a vis their suppliers as outlined in the article.
Jean outlines the steps that comprise supplier management as follows:
Core Suppliers
Jean notes that the first step is,

identifying key suppliers that are core to a company’s operations and that warrants establishment of joint processes and communications.

And,

So the first step in formalizing a supplier management program is having visibility to your suppliers and how much of your enterprise they supply.

What I find surprising is that when it comes to supplier management, firms are sometimes clueless about where and how they spend their dollars. This point would not have arisen if firms had a firm idea of the power of their suppliers (harkening to the Five forces model from Michael Porter).


So what should the firm focus on?

Identifying core suppliers requires looking at more than price and delivery performance, says Moore. “You also need to consider such things as what joint development opportunities might be available with this supplier or whether this supplier can offset your own R&D costs by providing engineering talent and resources.

Jean further notes Moore’s estimate that such suppliers of interest will not exceed 15% of the supply base.
Jean provides a further point about how best-in-class companies and laggard performers fare on this criteria of supplier relationships,

Interestingly, the Aberdeen study found that there is no middle ground on this subject. Best-in-class companies either focus on the top 10% of their suppliers or they connect and share information with 100%. “A very common trait of industry average and laggard performers is that they share information with 50% of their suppliers,” Bharadwaj says.

What about new suppliers? How does one go about making the decision to engage new suppliers, on what basis and with what metrics?

… the ability to evaluate thousands of line items on multiple price and non-price factors
the ability for suppliers to offer alternative bids or bundles to differentiate themselves and perhaps offer better value and
constraint based scenarios that take into account various business concerns.

Supplier Networks
Next, Jean takes up the case of supplier networks which are often provided by third parties. Examples of supplier networks would be Ariba, E2open, Oracle etc.

“Automating core suppliers clearly has become an industry best practice,” says Crandell.

So what are the advantages of using supplier networks and the automation therein?

“Automation not only allow companies to streamline and enforce consistency in processes, it also enables functions like contract compliance.”
“Automation of basic processes provides value on both sides of transactions, in terms of reducing headcount and having accurate data…”
“But the real value of automation is that it allows timely information so companies can practice exception management.”

Jean takes the example of Kinaxis which markets a product called RapidResponse which is aimed at managing the response to problems that inevitably arise in operations.

Within this application environment, they also can run a variety of “what if” scenarios to determine, for example, whether supplier inventory and production can support new order demand. They are able to create a private plan within RapidResponse and, if it is feasible, immediately make order commitments against that inventory.

The third method of communicating with one’s suppliers is through supplier portals.

The portal is a very structured environment, where a supplier comes in and provides information that a buying organization needs. This eliminates situations where you have buyers or supply chain folks running around and trying to identify all this information.

Based on the information that is maintained in the portal, the system is able to alert the users of the portal about upcoming events or situations that warrant closer attention according to pre-established business rules. Another use of portals is described below,

Oracle also uses its portal to give suppliers visibility to their performance scorecards. “This really puts supplier management into the hands of the supplier.”

Performance Management

The Aberdeen study found that use of spreadsheets for supplier performance measurement will drop by 66% within two years and use of in-house applications will drop by 32%. Companies will instead use ERP or best-of-breed systems or will outsource this function.

Jean recommends that when it comes to effective performance measurement,

Companies need to see that performance measures are built into the contract during the negotiation process.

However, coming up with a measure as to how the supplier is doing is not an easy task,

because there are qualitative measures as well as quantitative ones

So what might be a solution to appropriate combine qualitative and quantitative measures for evaluating supplier performance?

Emptoris uses a supplier assessment to help with this task. “We create a decision tree with a significant number of questions related to the supplier’s specific domain area, ” says Schneur. These questions are submitted to different people in the organization in different ways, to make sure that the supplier is meeting all of the organization’s various needs.

Jean concludes that supplier performance measures are an important factor in achieving continuous improvement. And further,

It is documented in the Aberdeen study by a widening gap between high and low performers the longer a supply visibility and performance program was in place. “Follow-up interview with various enterprises confirmed that the more mature the program, the more value it delivers, ” says Bharadwaj.

In summary,
When it comes to supplier management
1. Firms should focus on some degree of partnership with a select stratum of important suppliers
2. Firms should have a mechanism in place to evaluate new suppliers and optimize their procurement process based on some clearly identified metric

When it comes to supplier networks
1. Automation allows companies to streamline and enforce consistency in procurement processes as well as create a consistent and accurate dataset
2. Automation transmits timely information which allows companies to practice exception management and plan proactive resolution of issues.

When it comes to supplier performance management
1. Companies need to ensure that performance measures are built into the contract during the negotiation process in order to create a contractual commitment to the process.
2. Keep in mind that measuring supplier performance management is an art i.e. a mix of quantitative and qualitative measures should be used.

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Category: Strategy, Supply Chain Management

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One Response

  1. In today’s competitive market, supply chain management is a crucial factor that decides the fate of profits for a manufacturing organization. Accelerated time to market is one of the key benefits that can be drawn from this process, if managed efficiently. And to ensure this, it is necessary to use supply chain solutions from a reliable and experienced supply chain consulting firm.

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