In an increasingly competitive environment, purchasing teams need to continue to deliver additional savings, maintain effective supplier relationships and actively contribute to improving company margins.
Purchasing departments often focus solely on squeezing suppliers to get better prices, even though this can do long-term harm to the partnership.
But is this the most effective way to get the best out of your suppliers ?
While cost reduction is important it must not be the only goal for your strategic supplier relationships. The significant risks of focusing solely on cost reduction are :
Which approach should be favored? What is the best way to improve supplier relationships while getting the best out of them? What are expected short- and long-term results?
Based on the analysis of more than 100 purchasing implementation projects with major international corporations, a fundamental trend has emerged around structuring of the processes, organizations, and systems for assessing supplier performance.
The trend is to deploy a continuous improvement process based on a factual system for measuring supplier performance, on action plans drawn up and implemented in a collaborative manner, and on sharing gains achieved for an overall win-win approach.
This best practice process (recurring generally on an annual or quarterly basis) can be broken down into a number of key stages :
1- Prepare/Create the supplier assessment campaign
2- Launch the assessment campaign and monitor inputs
3- Collect, validate, and consolidate data and produce performance indicators
4- Analyze supplier performance and risk
5- Communicate with supplier and deliver performance review
6- Create progress plans
7- Assess effectiveness of actions and gains
This best-practice procedure, while complicated to manage manually, can be automated using performance management specific software. A software solution that can manage the end-to-end process is preferred because of the amount of information to be collected and processed and the sophistication of the indicators and KPIs and other analyses that need to be generated and shared.
The Ivalua software suite includes a comprehensive supplier performance management solution that is embedded in the supplier relationship management modules.
Rather than requiring IT resources, Ivalua SRM is designed to let functional administrators or process owners to manage the assessment campaigns, the data collection, the production of indicators and reports, and the sharing of these with suppliers or in-house stakeholders. The administrator will be responsible for drafting and monitoring assessment campaigns. In addition, Commodity Leaders and Key Account Managers are generally involved in monitoring, reviewing and analyzing action plans.
Implementing Supplier Performance Management in Ivalua follows this process:
Naturally, the more familiar the company is with supplier assessment, the faster the implementation will move. Depending on your maturity with supplier assessments the implementation can take anywhere from a few weeks to several months.
In our experience we’ve identified some critical success factors: First, the most difficult task is to achieve agreement among all stakeholders on the common questionnaires and the supplier performance indicators; second, it is important for the project to have executive sponsorship to minimize internal wrangling and shorten the decision-making cycles.
To speed implementation tools such as Ivalua have pre-defined processes, templates, and supplier scorecards, drawn from best practice and from feedback with prior projects. In most instances, this means the standard version is easilyadapted to the specific needs of each company.
In order to deliver a useful analysis of supplier performance, various kinds of information must be collected:
All important incidents that influence these qualitative criteria must be noted in the assessment system and taken up with the supplier during the performance review. The more accurate, irrefutable, and factual the information provided by the purchaser (audit reports, photos, etc.), the more likely the supplier will be to take this feedback seriously and do what is needed to rectify the issues.
Similarly, it is a good idea to provide feedback on excellent supplier practices that have been identified for one particular entity or country, and then to extend this to the entire customer/supplier relationship.
A productivity index is then created as a barometer of supplier performance, regarding their direct and indirect costs.
Armed with this deep understanding of your suppliers in the market, purchasers can help their suppliers make productivity gains and become more competitive, while still helping to drive down costs.
The first advantage of this type of process is that it exists and that suppliers are aware of it: feedback from companies implementing this procedure suggests that the simple fact of having a structured, systematic assessment that is shared with the supplier, as well as a regular performance reviews will increase supplier awareness and improve their performance.
The implementation of a shared assessment procedure within the company has numerous other advantages:
The purpose of this business process is to empower the purchaser so that they are less of a price negotiator and more of a partner manager, with the goal being to help the supplier reduce costs, improve operational performance, and control risk.
One of the keys to a successful process is to share the qualitative and quantitative gains between the supplier and the customer. It should be seen as a win-win approach by both parties to ensure its longevity.
This process is typically reserved for strategic suppliers, who generally account for less than 5% of the total active suppliers. This will maximize the return on the time the assessment and purchasing team invests in this process. This should be an well developed, and clearly articulated process that focusses on a limited number of strategic suppliers with maximum leverage, rather than a showy assessment that is attempted for the majority of suppliers.
Over the last 15 years, these principles have largely been adopted in the automotive sector, with some major corporations funding organizational consultants to help their suppliers improve performance and reduce costs. The procedure is increasingly expanding into other industrial sectors, such as aeronautics, electronics, and heavy industry, and it is starting to take hold in services companies such as banking, insurance, IT, etc.