Why An Holistic Approach to Suppliers? Your Questions Answered
- All Industries
- Supplier Management
- Supplier Network
- Supply Chain Management
Last week, Director of Product Management Georg Rösch hosted a webinar that asked the question, “Why is it important to take a holistic approach to supplier management?” His 45-minute presentation outlined the crucial functions of a supplier management approach and the advantages of managing suppliers well which generated a few insightful questions from our audience.
In an effort to provide you with as much an understanding as possible, we’ve compiled some of their questions and answered them here.
Q: You pointed out early in the webinar that companies are buying more and more pieces in their supply chain that they used to build internally. Does this trend only apply to manufacturing, or do you see the same thing playing out in spend on services like IT, maintenance, and security?
A: This trend definitely doesn’t only apply to direct spend categories. In reality we see outsourcing in every part of the business. For example, here in JAGGAER’s Vienna office, we no longer buy IT equipment like printers that we have to maintain ourselves. Instead we lease our printers, which means that one set price includes maintenance, ink and toner, and more, which lowers the burden on our IT and facilities departments. TechTimes reports that IT outsourcing is expecting to pass half a trillion U.S. dollars by 2022, so the trend isn’t slowing down any time soon.
With maintenance, most companies no longer have large numbers of facilities staff on payroll. Instead they contract a separate cleaning or maintenance company who have their own staff. Almost no companies have their own security employees in 2020. It’s just another example of suppliers becoming a larger and larger part of every business.
This is great news for the procurement function! It provides us with more and more opportunity to influence the bottom line of the company. But it also puts more pressure on procurement to make sure suppliers are top quality and won’t open up the organization to unnecessary risk.
Q: You showed a list of some of the objective and subjective risk factors to look at when evaluating suppliers. How should an organization prioritize these? Which are more important than the others?
- Any stakeholders
- Service level
- Quality data
- Logistics data
- Any ERP data
A: I don’t think that it’s really a matter of “importance.” Both objective and subjective criteria are important because they both have a bottom line impact. Instead, think of it as a question of which is most actionable.
In general, subjective factors are either going to be impossible to accurately track with data, or difficult to measure with the data you have access to right now. If you can’t trust the numbers, you shouldn’t be prioritizing those subjective factors. Instead, look at the data you have already and see which risk factors you can accurately measure. From there, determine which might be the easiest to start measuring moving forward, build a plan for how to set up that data processing, and slowly begin prioritizing those factors.
In general, subjective factors are either going to be impossible to accurately track with data, or difficult to measure with the data you have access to right now. If you can’t trust the numbers, you shouldn’t be prioritizing those subjective factors.
Subjective points can be extremely expensive to try to monitor. Without hard numbers, you often have to go to other internal stakeholders, have them answer questions or write reviews of suppliers, and spend large amounts of time on the evaluation, which increases your process costs. So in terms of return on investment, often the objective criteria will win out.
Q: How do you structure bonuses and penalties for suppliers? Do you typically recommend established standard bonuses and penalties for a given category, or do you encourage procurement teams to customize and negotiate these by contract?
A: I think that the category is a good place to start. Your penalties should be defined with a specific dollar value based on the category strategy. Put a dollar value on the problems you anticipate having with the supplier. Those costs tie directly to the category strategy, so it makes sense to approach it on a category level.
Of course, as you become more familiar with your suppliers and the risks or benefits they bring to the table, you can start to adapt your penalty system accordingly. You have to ask yourself, “How much is it worth to me to continue doing business with this supplier?”
It’s difficult enough just to select the numbers. That means both their cost and the threshold for when a penalty or reward applies. Do you apply a penalty of two dollars? Three dollars? When exactly is the supplier no longer worth the cost? This is much more difficult, so I suggest focusing on this at a category level rather than supplier by supplier. The important thing is to establish a penalty system in the first place. According to McKinsey, supplier penalties could add up to more than $5 billion per year in the U.S. consumer goods space alone. Penalties and bonuses are an essential part of the modern supply chain.