It’s very easy to get caught in the numbers game early on in the procurement cycle, especially when cost reduction is a strong business priority for companies everywhere. As a result, procurement teams choose to focus on the transactional aspects of signing a supplier, such as pricing, contracts and negotiations, so much so that the overall value that a supplier brings to the organisation – by helping them achieve their unique business goals – is overlooked, or pushed back to concentrate on supply costs, the terms and conditions of the agreement, and product specifications. This myopic focus on price reduction is not only short-sighted, but can also be harmful to a company’s reputation and image, as it usually mean that product quality or service efficiency is overshadowed by cost considerations.
Procurement professionals must understand and communicate to management the value that could be derived from a solid and reliable procurement supply base. Suppliers play a huge role in an organisation’s daily operations and ultimate success, and good supplier relationship management can help both the buyer and the supplier achieve their respective business goals and create value. However, without a set of guidelines for reference and best practices to adhere to when it comes to the procurement cycle, a business would be hard pressed to derive real value from its suppliers. So, how do you know if you’re getting the most out of your procurement supply base?
Communicate key performance indicators early
As with any deal, it’s important to lay down the terms and conditions before entering into an agreement to ensure that both parties are on the same page when it comes to expectations. Similarly, inform your procurement supply base of the qualities they need to demonstrate and maintain to ensure a healthy and fruitful business relationship early on in the procurement cycle.
It’s helpful to develop in detail the performance criteria for monitoring and evaluating suppliers from the outset, and carry it out on a regular basis, being careful to take into consideration the supplier’s size, quality management systems, complaint history and financial stability. Subsequently, be sure to outline a communication plan to ensure that your procurement supply base understands how they will be evaluated, allowing them to take the necessary steps to meet those key performance indicators. Be sure to also emphasise the importance of complying with the procurement policy. Additionally, instead of an annual performance review, have quarterly meetings with your procurement supply base to review their performance to date, giving them adequate time to correct any mistakes or come up to par in the event of poor performance levels.
Develop an evaluation process
Without a robust system to evaluate supplier performance, it’s hard to determine if you’re getting your money’s worth when it comes to your procurement supply base. Putting in place a system for evaluating, selecting and re-evaluating your current pool of suppliers keeps you up-to-date and in-the-know about your procurement supply base, and provides you with the necessary data to make sound decisions when deciding whether to retain the services of a particular supplier, or to bring your business elsewhere.
Several methods that can be used to evaluate the performance of a supplier include the use of evaluation forms, surveys, system metrics, and software, all of which can give you deep insight into whether your current pool of suppliers live up to your business expectations, or not. Some of the key considerations to take note of include the number of late deliveries, incidences of non-compliance with the procurement policy, and whether there were any customer complaints received due to poor service. Alternatively, you could also develop a customised method by having the procurement team rate the suppliers. Ratings from unbiased parties are important to obtain a clear picture of the state of play with your suppliers, allowing you to chart the next course of action for your procurement supply base.
Classify your suppliers
The next step towards optimising your procurement supply base after the evaluation process is to classify your pool of suppliers according to performance, importance and reliability. In the case of supplier performance, it’s helpful to segregate the suppliers using the ABC Analysis, with those in the A group being high performing suppliers, those in the B group being suppliers who are falling short of performance goals, and those in the C group being suppliers who are totally incapable of meeting current and future performance goals. By way of importance, you can classify your procurement supply base according to how greatly they affect your business operations. For example, suppliers of stationery would probably have less impact on your daily business operations compared to a supplier of sugar if you are in the business of manufacturing soft drinks.
Segregating your procurement supply base by criticality allows you to spend more time measuring the performance of those key to your organisation. In terms of reliability, take note of whether your suppliers deliver products and services within the agreed time frames and dates, and whether they comply with the procurement policy. Segregating your procurement supply base according to their reliability lets you have a clearer picture of their work ethics. Supplier relationship management best practices emphasise the importance of value creation and maintaining a relationship that is mutually beneficial to both parties, so if your procurement supply base is falling short in the reliability department, it just might mean that they are less than worthy of continued business dealings.
Established organisations understand that a solid procurement supply base is the key to success, and will naturally emplace best-in-class supplier relationship management processes to meet business goals. A robust supplier value management approach creates value and is mutually beneficial to both the buyer and the supplier, and taking a win-win approach will surely giving both parties a competitive advantage.
ThunderQuote is the most comprehensive business services portal in Singapore, Australia and ASEAN , where hundreds of thousands of dollars of procurement contracts are sourced every month by major companies like Singapore Press Holdings, National Trade Union Congress and more.