Tag Archives: supplier management

The Pareto Principle Has An Expiry Date

Has the Pareto Principle finally reached its expiration date after 110 years? Why the tail wagging the dog heralds the end of the 80-20 rule in procurement.

Pareto Expiry Date

This article was first published on EBN Online.

When Vilfredo Pareto observed in 1906 that 80 per cent of the land in Italy was owned by 20 per cent of the population, little did he know that this 80-20 rule (or Pareto Principle) would be enthusiastically embraced by the procurement profession and still be applicable 110 years later.

The term was popularised in the 1940s by the engineer Joseph M. Juran, who famously wrote of “the vital few and the trivial many”.

In procurement terms, the Pareto Principle means that 20 per cent of the average organisation’s suppliers account for 80 per cent of spend, and vice-versa. I’m a big fan of explaining procurement concepts with relatable imagery, so let’s picture your supplier base as something that we’re all familiar with – a dog.

The Tail Will Soon Be Wagging The Dog

Picture a Labrador. Or an Alsatian, or a Sheep Dog if you prefer – whatever takes your fancy. The head of the dog could be said to represent your top 1 per cent strategic suppliers. This is where you commit most of your time and energy.

Your procurement systems are optimised to work with the head of the dog. You make a significant effort to communicate face-to-face, and you spend a large amount of time worrying about what’s going on inside that head.

Let’s move down the neck to the dog’s body. Think of this as the next 19 per cent of your strategic suppliers. While the body isn’t nearly so important as the head, you recognise that this group accounts for the majority of your spend and deserves almost as much attention. As such, you dedicate time and resources to ensuring the body is in optimal health, and these “vital few” are being properly looked after.

Finally, the tail. Depending on the amount of suppliers you have, this could be a short stubby tail, or an extremely long one that tapers to a tip. Into this tail you’ve crammed 80 per cent of your suppliers – Juran’s “trivial many” who represent only 20 per cent of your spend.

You’re so busy looking after the dog’s body (and especially its head), that you’ve adopted a set-and-forget approach to the spend tail. You automate what you can, and call upon the smallest suppliers only when you need them.

And that’s a mistake, because in terms of innovation potential and risk profiles, the tail will soon be wagging the dog.

Procurement Systems Optimised For Large Suppliers

At ProcuriousBig Ideas Summit in May this year, Coupa Software’s Gabe Perez told the assembled group of Procurement thought-leaders that there are untold millions of suppliers in the world.

And yet most of our systems, or proprietary networks, only give us visibility of a few hundred thousand. We need to develop open networks to give unhindered access to all these suppliers who could potentially be the source of game-changing innovation.

The problem is that our processes and systems are set up to work with the big players at the expense of SMEs. “We can’t have our bureaucracy, our complexity, our layers of organisation impact suppliers’ businesses,” says Perez. “The cost of business goes up”.

Yet, that’s classic procurement, and it takes a culture shift to change the way we do business and encourage a truly open network. Think about the hurdles your organisation is putting in place for SMEs; whether they’re prohibitive insurance requirements, or crippling contractual terms that could bankrupt a small player.

Are they really necessary? Are you closing the door on opportunity because you see yourself as too big to play in the small supplier space?

Building Culture Of Agility And Innovation

Have you ever requested a last-minute change from a large supplier and watched in frustration as the creaky wheels slowly begin to turn? By the time the suppliers’ emails have bounced around to tick all the bureaucratic boxes, a smaller supplier may have found and implemented a solution.

What you want is agility. And small suppliers will expect you to be agile in return.

In her workshop on innovation in procurement, former Deutsche Telekom CPO, Eva Wimmers, stressed the need for nimbleness when working with SMEs. She discovered that the existing processes at her organisation were skewed towards the largest suppliers. 

Processes were changed to encourage innovation through diversifying the supply base to include more SMEs and start-ups, cutting new contracts down to a maximum of five pages, and holding supplier meetings exclusively around innovation.

Eva also implemented what she called “dialogue-rich procurement”. This encouraged her team to greatly increase their communication with both internal stakeholders and with suppliers. Her team discovered that SMEs, in particular, were very eager to share their ideas when they found that procurement was willing to listen and learn.

In Eva’s words, “We do not care how big an organisation is, as long as both the solution and the organisation are scalable and financially solid.”

She used Dropbox.com as an example of a small organisation with fewer than 50 staff that wouldn’t even have shown up on many organisations’ radar. And yet now it has world-wide take-up.

Compression Of The Supply Chain

Paul Markillie, Innovation Editor at The Economist, talked at the Big Ideas Summit about the compression of the supply chain driven by recent technological megatrends.

Robotics, 3D printing and computer-aided design are demolishing the old economies of scale, and separating a big supplier from an SME. This is ushering in no less than a “Fourth Industrial Revolution”. What this means for procurement is that third or fourth-tier suppliers can find themselves rapidly rising to first-tier producers of end-products.

“There will be huge opportunities for companies further down the supply chain to innovate,” Markillie said. “Second-generation robots are more affordable for medium and small companies; 3D printing processes are less wasteful of raw materials and allow greater production flexibility at lower volumes.

“I think we will see some companies grasp these opportunities, which could re-order supply chains, and lead to some companies that were previously suppliers of components making the leap to become producers of final products.”

Lots Of Risk In That Spend Tail

The dilemma many procurement professionals face is that although you can’t afford to spend much time with suppliers beyond your top 20 per cent, every single vendor in your supply chain presents a significant risk to your brand, reputation and bottom line.

Think about a small supplier that you only use sporadically. Have you investigated their suppliers to ensure compliance to standards? What are their second-tier suppliers up to? What about the third, fourth and fifth tier?

Even though your spend with this supplier may be minimal, it can cause just as much damage to your organisation as the top 20 per cent. Child labor, slavery, cyber security, unsafe practices – the list is endless, and frightening.

My point – apart from trying to scare you – is that your risk mitigation and audit processes that are in place for the top 20 per cent, should be extended to the remaining 80 per cent.

End Of The Pareto Principle?

So, does this mean that the Pareto Principle has finally reached its expiration date after 110 years? In my opinion, yes it does.

If you measure the importance of suppliers purely by spend (and that’s very old-fashioned thinking), then you should indeed spend the majority of your time with the 20 per cent.

But modern CPOs know how badly a bottom line can be hurt by a risk event, and the huge potential of disruptive innovation to grow a business. And both of these factors reside in suppliers of every size, including those in the tip of the tail.

5 Key Trends Driving Supplier Management and Due Diligence

Can you afford to take the risk? We assess the key drivers behind increasing supplier management and due diligence activities in supply chains.

Supplier Due Diligence

This article was first published on Greenstone.

First, we would like to take the opportunity to thank the Procurious members who took part in this survey. Your input is very much appreciated.

In the current non-financial reporting landscape there is a heightened focus on understanding your supply chain. As a result, organisations are increasingly evaluating the performance of their suppliers against a wide spectrum of non-financial criteria and monitoring the associated risks.

In order to better understand what is driving this behaviour and how companies are identifying and mitigating supply chain risk, Greenstone conducted the ‘State of Supplier Management 2016 survey.

We asked 1000 senior decision makers from mid-to-large organisations about the perception of supply chain risk and due diligence at their organisation. We also asked about the drivers for collecting supplier information and key factors in shaping their supplier engagement programmes.

We have identified five key insights into the state of supplier management from this study. These are listed below and expanded on in this report.

  • Supplier due diligence processes are a growing requirement for most businesses.
  • The majority of businesses are collecting non-financial information from their suppliers at some level.
  • Regulation and reputational risk are the strongest drivers for collecting supplier information and help to shape supplier engagement programmes.
  • Procurement teams are much more likely to be responsible for the collection of supplier data than Sustainability teams.
  • There is a growing trend of companies adopting online solutions to gather and analyse supplier management data.
Supplier Due Diligence

As you might expect, given the increasing global focus on supply chains, more than three quarters of respondents see supply chain risk, and the resultant need for supplier management and due diligence processes, as a growing requirement in their business.

Supplier Management Survey - Fig 1

In line with this perception, 72 per cent of responding companies are already trying to address supply chain risk by collecting non-financial information from their suppliers.

Supplier Management Survey - Fig 2

Data Collection

The necessity to collect non-financial information from suppliers appears to have become accepted across multiple sectors. However, the level of detail, method, and frequency of data collection differs greatly.

It was found that 43 per cent of respondents only collect supplier information as part of a tender process, or in the initial stages of supplier contracting. Therefore, these organisations are not conducting ongoing supplier due diligence. They cannot be sure that suppliers remain compliant throughout the period in which they deliver services.

However, a similar number of organisations do keep track of ongoing supplier performance. 17 per cent are sending out questionnaires by email or post, and 22 per cent are using an online supplier management tool.

Where supplier information is being gathered, there are common topic areas of compliance focus. Environment, health and safety and commercial information (e.g. insurance certification etc.) are the top three areas covered in supplier questionnaires.

However, what the study also shows is that a wide range of information is being requested.  As a result, increasingly diverse areas of both the buyer and supplier organisations are required to engage in the process and have access to the data. 

Supplier Management Survey - Fig 3

Drivers for Supplier Engagement

The research demonstrated that non-financial supplier risk and compliance have become key topics for organisations but what is driving this shift in behaviour?

When asked which factors are driving the collection of supplier information, 43 per cent of all respondents point to regulation and legislation being the strongest motivating force, followed closely by reputational concerns (32 per cent).

Supplier Management Survey - Fig 4

When asked what factors were important in shaping the structure and focus of organisations’ supplier engagement programmes, risk reduction, corporate sustainability, reputational risk and regulation were all sighted as significant motivating forces.

Specific legislative and reporting framework drivers mentioned by respondents included: Bribery Act, the UK Modern Slavery Act, UN Global Compact and ILO Core labour Standards as the top four frameworks or guidelines used to inform their supply chain practices and reporting processes.

Responsibility for Supplier Risk and Compliance

While non-financial reporting has long been the responsibility of CSR or sustainability teams, the increasing momentum of supply chain reporting is engaging new areas of organisation.

This is partly due to the outward looking nature of this issue and the need to engage with multiple supplier organisations. It is also due to the breadth of topics covered by the requests for information.

The study shows 83 per cent of respondents stated that procurement is the area that manages the entire process, from contacting suppliers, through to analysis of the data.

This is most likely due to the fact that procurement ‘own’ the relationships with the suppliers, have a clear idea of contract status and the commercial scale of the contracts and can therefore identify which suppliers meet the buyers defined risk and compliance criteria.

The level of resource allocated to supplier programmes varied significantly with 40 per cent saying that managing this process was the part-time responsibility of a full time employee and 38 per cent saying that multiple individuals in the business have full time responsibility.

What this does show is that there are clearly defined responsibilities within organisations for identifying third party risk and dealing with non-compliance.

Moving Beyond Manual Processes

The complexity and scope of collecting, analysing and reporting supplier information often calls for solutions beyond the manual processes and repository functions of lifeless spreadsheets.

For those organisations that have not yet automated the process, 61 per cent say they are considering adopting an online solution to gather and analyse supplier information.

It is evident organisations recognise the need for automation in the process, as it is not feasible to manually evaluate hundreds or thousands of supplier responses, and monitor their ongoing compliance.

In addition, the increasing legislative and reporting requirements place an additional emphasis on transparency and audit capabilities.

For more on the ‘State of Supplier Management 2016‘, visit the Greenstone website.

Greenstone’s SupplierPortal solution enables buyers to effectively manage supplier risk and compliance through a secure and private online platform. Buyers have the flexibility to distribute standard framework questionnaires, as well as proprietary questionnaires, to their suppliers and can then manage and analyse this information through a comprehensive suite of analytical tools.

Big Ideas Summit 2016: Big Idea #5 – Eliminating Supplier Enablement

Gabe Perez believes that procurement needs to move towards real-time services, and eliminate traditional supplier enablement processes.

At the Big Ideas Summit 2016, we challenged our thought leaders to share their Big Ideas for the future of procurement.

From ideas that have the potential to change the very nature of the procurement profession, to ones that got the assembled minds thinking about the profession’s impact outside of the organisation, the response we received was amazing.

Gabe Perez, Vice President, Strategy & Market Development at Coupa Software, believes now is the time for procurement eliminate supplier enablement, and move towards the real-time services we have in our personal lives.

Gabe also believes that it’s now time for procurement, and the wider corporate world, to refocus their objectives to place value at the centre of all activities, as well as create and participate in open networks where collaboration can thrive.

Catch up with all the thought leadership and ours delegates’ Big Ideas from the 2016 Summit at the Procurious Learning Hub.

If you want to find out more about Big Ideas 2016, and what we have planned for 2017, you can visit our dedicated website!

If you like this (and you haven’t done so already) join Procurious for free today, and connect with over 15,500 like-minded procurement professionals from across the world.

Are Your Suppliers Treating You Like a Cash Cow?

Businesses are at risk of being treated like a cash cow by their suppliers if they are not managing their supplier agreements and contracts with complete visibility.

Cash Cow

This article was written and has been shared with Procurious by Daniel Ball, Director at Wax Digital.

We’ve all done it. Stuck with the same old suppliers year after year, because they’re doing the job and, let’s face it, it’s far less hassle to stay put than to make a change. Whether it’s for banking, car or home insurance, or even utilities, as long as prices haven’t risen too significantly, and you’re getting what you pay for, why go to the effort of changing?

For the consumer, a failure to review supplier agreements means that, at worst, you’re potentially missing out on a more competitive deal (and a complimentary Meerkat). For a business it can have much more serious consequences.

A large organisation will typically have hundreds or even thousands of contracts in place. A lack of management of these contracts can have a huge impact on business performance, bottom-line and risk. So what can organisations do to make sure they’re not milked like the proverbial cash cow?

Lack of Clear Visibility

Auto-renewing ‘evergreen contracts’ are a problem we see frequently, and they cost organisations millions of pounds in wasted budgets or unintentional spend. With no system in place to effectively manage contracts, they can easily get ignored or forgotten about, and without realising it, you’re locked in for another 12 months.

Worst case scenario, a high value contract has auto-renewed just as you sign another with an alternative supplier offering a similar service, or decide that you no longer need this service at all. It’s easy to see how missed renewal dates, contract overlaps, timely supplier reviews or intended supplier terminations can be overlooked.

This can be an inconvenient truth for large organisations whether they have a procurement function or not, left grappling to manage the contracts they have in place without clear visibility of them.

Aside from wasting money, with no control over contract terms, how can you be sure that your contracts are delivering what was originally agreed with the supplier? If you’re not in the habit of reviewing or monitoring your supplier contracts, the service you are receiving may have gradually moved away or deteriorated from what was originally intended.

The supplier may have been providing alternative quality products (substitutes), changed services levels or personnel (in the case of professional services), or altered other factors from the original terms agreed. All of this could potentially reduce the value of the original agreement.

Factoring in Change

It’s also necessary to consider the changes that will undoubtedly have occurred in your business since your contracts were first put in place. Throughout the lifecycle of a contract, it’s highly likely that your business will have changed in some way, whether that’s changes to pricing, or other things which may affect the terms of the original contract, or your organisational needs.

For example, the sum you spend with a supplier may have quadrupled since the start of your contract, putting you in a far stronger buying position. This of course should mean you are in a better position to negotiate discounts or lower rates, but it is difficult to do this without having the facts at your fingertips.

The first step towards managing contracts effectively is to have a clear and in-depth understanding of them. This won’t happen if they’re stuffed in the top drawer of a filing cabinet, or indeed held by each department that owns the supplier relationship.

The last thing any department head wants is to be going into a new budgetary period with a legacy of unwanted supplier costs to justify and accommodate. It’s one thing to have to field tricky conversations with your CFO, but another entirely using up valuable budget on historical services that are no-longer essential to you.

Your suppliers’ contracts themselves hold the answers to many of the key things you need to know in order to effectively manage them. How often do you actually review your suppliers’ contracts? And how do you get the information you need to effectively monitor, manage and measure the value they are delivering to your business?

Avoid Being a Cash Cow

Contract control gives you sight of which contracts are up for renewal in the next few months. If you’re unhappy with that supplier then you have the time to put them on notice, or appraise their performance and renegotiate a better deal. Or if you wish to invite new suppliers to bid for the contract, you have time to factor in this work and consider your options.

Effective contract management is an essential part of the supplier management process. It is only made possible if they are held in a central repository so that they are accessible for all key stakeholders.

Such a repository enables all contracts to be reviewed periodically to determine if changes are needed or even if it should be renewed at all. The growing realisation for this process to be automated has led to the adoption of contract management systems.

These systems deliver a simple and secure way to store contracts which are easy to audit and provide automated alerts and reminders if an agreement is due to expire. A full contract management system within an integrated source to pay process can further streamline the process by automatically adding newly sourced suppliers’ contracts to the repository for future tracking.

So don’t risk becoming a cash cow to your suppliers because contracts were signed and filed away years ago. A structured and more formalised approach to contract management is the key to unlocking operational efficiencies, compliance and savings.