Ardent Partners research consistently finds that suppliers will remain a top focus for Chief Procurement Officers (“CPOs”) and their procurement organizations over the next three years. This makes sense since globalization has and will continue to change the construct and demographics of the average enterprise’s supply base at a fairly rapid pace; it is no longer a given that the highest valued suppliers in the market will share the same time zones, languages, and/or business customs with their customers. For buying organizations, this means that how they communicate, collaborate, and transact with their suppliers and the enabling tools and platforms that they utilize to manage their supplier relationships will take on increasing importance to business operations in the years ahead.
Despite the current CPO focus and the growing importance of supplier relationships today, only a small percentage of procurement departments surveyed year after year have made the required technology investments and begun to achieve basic visibility in several of the key areas that enable successful supplier management: supplier information management, supplier performance management, and supply risk management. Today’s article, the second of two articles on supplier management processes and technologies, will examine supplier performance and supplier risk management – as processes and as tools – and demonstrate how the two are inextricably linked for sourcing and procurement teams.
Supplier Performance Management
While managing supplier information more efficiently and more effectively is clearly on the average CPO’s near-term roadmap, the top CPO strategy to increase, improve, and manage supplier performance is to improve their internal supplier score-carding and measurement capabilities. Forty percent (40%) of all procurement departments currently deploy an Automated Supplier Performance Management (“SPM”), while another 46% plan to take action in this area within the next two years.
Automated SPM systems help enterprises rate and grade a supplier’s performance across all aspects of its products, services, and contractual obligations. Users of automated SPM can develop supplier surveys and scorecards that track performance and collaborate with internal stakeholders and suppliers to improve performance. Standardized processes help drive efficiencies and enable teams to leverage knowledge and best practices across operations.
By linking their SPM with sourcing processes and systems, enterprises are also able to improve the consistency and flow of information and data during the sourcing process and have a built-in mechanism to track process compliance during the contract period. A clearer view into top-performing suppliers can also help procurement departments find the best supplier partners for investment in innovation projects. In turn, performance feedback that can help improve its business can serve as a powerful incentive for the supplier to invest in the relationship.
Supply Risk Management
The flip side of the supplier performance coin is supply risk management. Suppliers may perform well but there can be reasons why that performance is at risk. For example, a supplier’s location may make its production subject to certain geo-political, trade, and weather risks that the buying organization does not itself face. Additionally, a supplier’s business strategy may make it susceptible to financial and quality risk.
If globalization has added layers of complexity to supplier communication and management, the rise of multi-tiered global supply chains has added exponential levels of complexity to the management of supply risk. Supply risk is a moving target that accelerates as a supply chain expands and evolves and the ability to properly identify and prioritize all potential supply risks without the use of tools, external services, and internal expertise is all but impossible. As more supply risk data is captured in the aggregate, solutions that analyze historical facts and evaluate current trends to deliver proactive direction on where the most probable and significant supply risks will occur will emerge more forcefully.
Best-in-Class procurement departments understand that suppliers should be viewed as a source of knowledge and expertise that can be leveraged to competitive advantage and mutual gain. Ardent recommends the following strategies and approaches for CPOs and procurement departments seeking to improve supplier performance:
- Formalize/improve supplier score-carding and performance measurement with automation.
- Promote improved supplier collaboration through open and regular communication.
- Leverage SIM solutions to streamline the tactical and rote elements of a supplier relationship to enable both sides to invest more time and resources on strategic activities.
- Regularly assess supply risk across the portfolio of suppliers; segment suppliers by risk profile and develop specific mitigation strategies to minimize loss and disruption.