As a procurement leader, it is important to ask the following questions: What do I know about our suppliers? What should I know that I don’t?
Most businesses can tell you anything you want to know about their cust
omers. Not only do companies know who their customers are, organisations also know their clients’ wants and needs, purchasing patterns, risks and priorities, contract terms and committed service levels. Businesses are expected to know what a customer pays versus what they are supposed to pay, as well as which type of customer will pay more for specific items and those that will pay less. To put it simply, they understand the detailed financial implications of a change in any customer relationship.
However, these same businesses rarely put the same level of emphasis on understanding their suppliers and many struggle to identify their most strategic relationships. Other than a handful of core vendors, they cannot tell you who their preferred suppliers who have actual contracts in place are compared with those not under contract. Often, these businesses are not even sure what some suppliers do. They do not know who to call when there is a problem because they lack basic information about their suppliers to reference. Without details of their pricing arrangements, service level agreements (SLAs), capabilities and historical performance, they are unable to understand the business impact if a supplier is lost or changes terms.
Yet understanding this impact is critical.
According to a recent study by supply management research firm, Ardent Partners, just 57% of an organisation’s spend is contract compliant.
At Spend HQ we typically find maverick and off-contract spend accounts for 40%-60% of our clients’ expenditure. Most companies only monitor pricing compliance on portions of their direct spend and not at all for their indirect spend. We see organisations, ranging from the Fortune 500 to mid-market private equity firms, where they have vendors with significant spend and strategic importance operating outside of any formal contract. In addition, we come across categories with incredibly fragmented spend, spread across myriad vendors, with no strategic focus on these vendor relationships. Additionally, we may find certain vendors no longer meet the requirements that they committed to during the initial sourcing project. Many critical suppliers are managed without key performance indicators or reviews of existing SLAs. Most are not even monitored for the most basic business attributes, such as changes in executive leadership or failure to meet production goals, revenue targets, or risk criteria.
Vendor management is critical to maintain, and can be the difference between gaining significant financial outcomes for your business or not.
Here are the four main reasons why procurement should not ignore vendor management:
- When procurement does not manage vendors properly, the flow of business is disrupted and revenue ends up being sacrificed. To avoid this, suppliers should be directly tied to the function’s ability to meet the needs of its customers, in terms of reliability and predictability.
- When SLAs are adhered to procurement can maintain a smooth operational flow, decrease risk and benefit from improved vendor relationships. We find that businesses’ delivery chains, manufacturing processes and distribution channels can all be dramatically improved by supplier performance.
- By conducting regular audits, procurement can avoid maverick and off-contract spend and ensure it continues to receive the pricing commitments it first negotiated. When pricing commitments are made, these include assumptions about the buyer’s ability to maintain margins. Those margins are affected by the purchase of direct and indirect products and services. Keeping control of this helps achieve more predictable financial outcomes for the business.
- Finally, procurement can achieve sustainable financial gains and satisfaction by avoiding constant cycles of supplier switching. Margins tend to organically improve over time when working with the same supplier, due to gains achieved through improved expectation management and predictable logistics.
Overall, having greater insight and visibility into the suppliers that are critical to the business is crucial to the success of procurement’s role in any organisation.