Technology and Emphasis on TCO Shape Supplier Management Programmes

In an effort to understand current thought when it comes to managing supply chains, Emptoris partnered with CFO Research Services for ‘Managing Strategic Suppliers and Customer Relationships’, a benchmark survey of senior financial executives at Fortune 1000 companies. We examined the opinions of 144 senior finance executives at companies in North America and the UK with revenues of US$1bn/year or more. The results point to some major inroads in supplier management efficiency, a few areas for improvement, as well as what we believe are indicators of a major shift in supply chain thought that will likely directly impact decisions related to recent international and political events.

Finding: TCO Trumps Raw Price in Supply Chain Decision-making

While it comes as no shock that finance executives listed ‘price’ (51%) as one of the top three factors with the greatest impact on their companies’ business performance, the fact that it ranks behind ‘ability to meet commitments’ (58%) and ‘quality’ (54%) indicates a major shift in thinking away from fixation solely on price to a holistic focus on total cost of ownership (TCO).

This substantiates anecdotal evidence we have observed with our own customers, many of whom are now likely to view the ability to meet delivery deadlines as trumping raw price in importance, when making supply chain decisions. Additionally, we’re seeing this play out as companies confront China-related issues such as inflation, potential shifts in currency value and threat of tariffs. While raw price may have been the key factor initially driving US companies to China, companies are looking at a much wider range of factors in 2010 as they decide how to adjust their supply chain strategies.

Finding: Growing Emphasis on Supplier Relationships

The survey also affirms a growing trend that we are seeing towards emphasis on collaborative relationships with suppliers, with companies viewing them not as mere vendors but strategic partners. While not a majority, a substantial percentage of respondents (40%) view the impact of the suppliers’ ability to contribute to product or service innovation as having the greatest impact on their companies’ performance. Similarly, 36% rated suppliers’ compliance with regulatory requirements and 32% rated the internal cost of doing business with a supplier similarly. It is also worth noting that few respondents say these factors have a ‘limited’ impact on business performance.

This may be particularly relevant because, as the economy rebounds, we will likely see the power in the bargaining relationship shift back from the buyer – who has for all intents and purposes been holding the cards for the past few years – to the supplier. For the buyer, this may mean scarcity of supply, reduction in production capacity and upward cost pressures. For the consumer, this may mean higher prices and lengthened time to market (which we’re already beginning to see for some electronic goods). Companies with effective supplier collaboration strategies will be better positioned to deal effectively with such challenges as the economy shifts back into gear.

Interestingly, respondents report that it’s currently feasible to extend net terms payable to suppliers by 10 days – 70% of respondents say this would have a material effect on their working capital requirements. This may exemplify the view that tighter supplier relationships can serve both organisations’ goals, and illustrate that flexibility within those relationships can yield savings. Or, it may indicate awareness on the part of finance executives that the economic downturn as a buyer’s market in which they can extract more favourable payment terms from their suppliers. Either way, moving forward, companies will need to work more closely with their suppliers as demand begins to outpace supply.

Finding: Procurement Technology and Centralisation Yield Significant Savings

A strong majority of Fortune 1000 companies – 57% of survey respondents – reported overall procurement/spend savings of 5% or greater in cost of materials and services through new procurement technology programmes. Similar, though less pronounced results were associated with efforts to increase centralisation of procurement functions (43% of respondents who completed a centralisation campaign reported savings of 5% or more in materials and services).

It is interesting to note that this finding coincides with a recent rebound in positive earnings by US companies. Despite a continuing lag in the job market, companies’ most recent earnings reports indicate that large companies, for the most part, are running profitably once again. Considering the severity of the recession, this is no small feat – one that the media has largely attributed to workforce cuts. However, in light of these findings, we would assert that technology and centralisation of procurement functions have also played a role.

The central goals of a strategic supply management programmes – which would typically include technology components and centralisation – include efficiency and supply chain flexibility. It’s no surprise that many of the companies that faired best during the recent economic downturn are also employing programmes that would have given them the ability to more quickly adjust their supply management strategy to realities on the ground.

Finding: Supplier Management Typically Ad Hoc and Unstructured

The survey revealed room for improvement in supplier management. On the positive side, 85% of respondents say their executive teams participate in strategic supplier evaluations and decisions, a similar proportion say executive teams evaluate companywide supplier strategy, and 70% say they conduct a regular, documented review of suppliers.

Supplier management also appears to have a presence in overall company strategy. When preparing plans, budgets, and forecasts, companies frequently include projections of cost and their impact on profitability (61%), risks to business performance (55%), and alternative sources of supply (50%), although they are less likely to do so at the individual vendor level (45%).

However, a closer look reveals that, when it comes to reviewing suppliers, the majority of respondents rely on ad hoc, rather than structured, procedures. In practical terms, this means that the majority of respondents’ companies do not have standardised procedures and criteria set for determining the effectiveness of supplier relationships.

So, while they may very well benefit from a higher level of supplier oversight, they are likely failing to connect the dots in numerous ways that affect bottom-line performance. For example, they may be missing out on savings due to a lack of visibility into overall spend, as they likely do not have the means to analyse supplier performance organisation-wide, or compare one supplier’s performance to another’s based on set, objective criteria. In our experience, in such situations organisations are often purchasing from the same supplier at varied prices, overlooking opportunities to benefit from volume discounts, and experiencing a host of other setbacks that could be alleviated through implementation of structured evaluation procedures.

Additionally, reliance on ad hoc procedures may increase exposure to supplier-related risk, as those conducting evaluations will be prone to miss many red flags, and will lack ability to strategically diversify the company’s supplier base. Once again, a lack of standardisation may make it virtually impossible to protect the entire organisation from the effects of reliance on unstable suppliers.

Similarly, a strong majority of respondents say their executive teams participate in strategic supplier decisions and company-wide supplier strategy (frequently including projections of cost, performance risks and alternative sources of supply in business planning). However, they are less likely to do so at the individual vendor level, and measurement of procurement costs and risks to profitability is poor or adequate among a majority of respondents.

Finding: Finance/Procurement Relationship Moving in Positive Direction

We have found that the overall success of any supplier management effort relies heavily on the relationship between the company’s finance and procurement arms. Unfortunately, we’ve also found that communication between these two functions tends to be disjointed at best. While plenty of data is typically exchanged, it is often expressed and interpreted so differently that there is little, if any mutual understanding regarding its meaning.

With that said, the fact that two-thirds of respondents say their finance and procurement groups usually work together effectively may indicate at the very least movement in a positive direction. Not surprisingly, however, the survey revealed that only four out of 10 finance executives say their companies are very good at measuring the performance of the procurement function or the risk posed by suppliers. In our experience, this is often a direct result of data being looked at from very different levels of granularity by the two departments. Information expressed from a procurement-centric point of view – which revolves around commodities – has little meaning to finance executives, who typically look at information from an accounting world view – through general ledger codes, etc. The reverse is equally true.

Improvements in this area, however, will enable finance groups to more fully integrate critical supplier information into business planning, reducing spend and aiding in risk management. Accomplishing this will entail a mutual effort on the part of finance and procurement to understand each other’s ‘language’, so to speak, and an agreed-upon descriptive criterion. Generally speaking, we have found that this requires enriching supplier spend data before it is exchanged between the two parties.

Although this may not be what finance executives want to hear, experience has shown that a procurement-centric view of spend data is much more meaningful than finance-centric one when it comes to supplier management.

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