Procurement needs to focus on the outcome, the why, of every conversation it has with suppliers and stakeholders.
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.
Focus on the Outcome
How can procurement professionals drive value for their organisations? For a start, they need to focus on the outcome of their conversations and supplier engagements before they have them.
Chris Cliffe, Director at CJC Procurement, believes that an outcome focus can help procurement in a number of ways. From inspiring their suppliers to wanting to work with them, and also understanding the needs of the other party, it will all ultimately drive a better relationship.
Pharmaceutical procurement teams need to change their approach to alliance management. Is trust the key to success?
A few years ago I had the opportunity to be part of a ground-breaking initiative with our suppliers. We sent a team to the boards of some of our major suppliers and asked a simple question: “Why is it that you are always late and come in over budget?”
To which they said: “Why is it that you always change your mind about what you want and interfere in the way we deliver it?”
It was then logical to respond: “If we promise to not change our mind and to leave you in control, will you deliver on time and budget?”
They agreed and so a new contract was created.
20 years on and the same questions still seem to remain, and now, more than ever there is a need to change our approach.
I believe that the solution to the challenges of clinical development today do not lie within our own organisations, but between our organisations, and should be accessed through increased collaboration unpinned by deliberate trust
To investigate this, it’s useful to consider three questions:
Why do we need to change?
Why should we collaborate?
How can we trust someone outside our own company?
Why do we need to change?
The pharmaceutical industry has seen the need for change for years, and the same underlying factors remain:
A clear constraint on resources;
The number of NCEs per year decreasing dramatically; and
R&D costs rising, reportedly having doubled in the last decade alone.
Meanwhile, we need more specialised patient populations, there is a lack of easy wins as drug targets, and we face the continually tougher regulatory environment. All of these have contributed to longer development times and rising costs.
These same problems are threatening the level of potential investment. We have witnessed the death of the blockbuster as the magic answer, while at the same time seen cost pressure on sales. The patent cliff is a real problem in many companies, there is generic competition, and sadly mega-mergers have been ineffective, cutting staff costs without delivering efficiency.
If we do what we have always done, we will get what we have always had.
Why should we collaborate?
Basically there is no alternative! In a world of increasing communication, it is hard to keep knowledge secret. Employees no longer stay decades at the same company, and staff turnover is far higher than it was.
The Internet allows for very quick sharing of data. It’s also a reason why information leaks. So let’s stop keeping so many secrets and start to share information first.
The market place is very complex. The top pharmaceutical companies hold only around 6 per cent of market share, while the top 7 Contract Research Organisations (CROs) combined hold only around 50 per cent of the market.
In this situation innovation is critical and anyone (regardless of size) is a potential source of the answer. This includes totally new players, as any quality questions can be managed. Someone else knows something you do not. If you want something, it is out there!
How can we trust someone outside our own company?
We have to start by wanting to trust – trust is necessary to access new solutions. This means that we have to be open, to accept others, to make sure that we are reliable in ourselves, and live congruently with our values. In this way we communicate trust.
Of course it is also important to have a right worded contract. After all, incentive is better than enforcement, and a new way of working may need new contract wording.
In this we should look carefully at what is being bought and make sure this is reflected in the T&Cs. For the lawyers – a standard template may not be appropriate. In any contract, payment should be linked to goals and should incentivise both parties. There are many other relevant contractual matters.
There is nothing wrong with walking softly and carrying a big stick.
Trust is the only way forward. But this is not a short path, we need to be ready for the long term, trust takes a while to establish and can too quickly be lost.
We need to do something different. We need to access new innovative solutions. It is time for increased collaboration with partners, underpinned by deliberate trust.
On Day 2, the true love gifted two turtle doves. This festive season, be like the doves, and spread the love with suppliers and customers.
The traditional 12 days of Christmas might not start until the 26th of December. But this festive season, we’ll be bringing you the 12 days of procurement Christmas in the run up to the big day. Catch up with Day 1 here.
“On the second day of Christmas, my true love gave to me…two turtle doves.”
Turtle doves traditionally represent love and faithfulness because they mate for life, and work together to build nests and raise their young.
What’s that got to do with procurement, we hear you cry? Well, if you’re looking to build world-class procurement performance, you need to value your relationships. Be it your suppliers, customers, or internal and external stakeholders, they should be the focus of your attention.
Take the Lead from the Turtle Doves
If you’re not feeling the love in your supplier relationship, you’ll need to put some hard work in. As Tania Seary says here, there will come a time when the romance fades. But you can bring it back to make sure that you and your supplier are working in tandem.
It takes time and commitment to build this relationship, there are no short cuts. And once you have built trust, you’ll need to work even harder to maintain it. This is where good Supplier Relationship Management comes in. Here’s a brief refresh:
Building the relationship (much like our turtle doves) helps build that feeling of faithfulness, and both parties are less likely to drop the relationship at the first sign of trouble.
So what are some of the tactics you can use to keep you relationship fresh and mutually beneficial:
Spend time with your supplier, and make time to visit their offices/factories/premises. They’ll appreciate it.
Give due reward for good work. Often a simple thanks will work best, but how about letting them in on the ground floor of future contracts?
Be open, honest, and truthful. Nothing destroys a relationship quicker than a lack of trust.
Got a problem? Invite them into see if they can help with a solution. You never know, you might just get a great gift of innovation from them.
Can You Feel the Love Tonight?
And it’s not just your suppliers that you need to build strong relationships with. Your customers, internal and external, are just as important for procurement. The customer is always right after all (even when it seems like they aren’t!).
Customer (or stakeholder) engagement comes down to three critical skills for procurement professionals:
Much of this can be linked back to the well-known, and oft-trodden, procurement process. Stakeholder engagement should underpin the entire process – we used this example yesterday when we talked about creating a specification.
People naturally want to be kept in the loop, and don’t like unexpected surprises. But, at the same time, most people will be more understanding of issues if they are made aware of them. So, much like your supplier relationships, open and honest communication will take you a long way.
Although we’re on Day 2, consider this as step 1 in the process. Get everyone onside at the start, and you’ll save yourself a lot of pain in the future. And, with any luck, you’ll manage to build a lasting relationship.
Do you still feel like you’re speaking a different language to the rest of the business? Still struggling to communicate procurement’s value. We’re talking Three French Hens on Monday.
This Christmas, why not turn your advent calendar into a supplier engagement challenge? Sorry, there’s no chocolate involved…
An idea came to me during a recent commute. With the shopping days to Christmas rapidly counting down and as we start to look forward to the season’s festivities, I thought about my son’s advent calendar and the treats he’ll find behind each door.
Then I thought about a way to turn this into a powerful and productive challenge to build, reinforce and develop relationships with suppliers.
Here’s my idea. There are 17 working days this December – 17 doors. Behind each day’s door could be opportunity, problem resolution and innovation!
The challenge is simple – to call a different supplier each day and have a conversation. Simple. Too simple perhaps. So there’s a Beginner, Intermediate, and Advanced challenge depending on how comfortable with supplier engagement you are.
The easiest suppliers to speak to ‘should’ be the ones you currently do business with.
Call one of your current suppliers each day during December. Thank them for their help this year. Tell them what they’ve done well, how they’ve helped you and your business. Also, tell them what you’re looking forward to improving on with them in 2017.
Practically too, this is a great opportunity to find out what the supplier’s business hours will be over the festive period to ensure that contact arrangements and any contingency plans are in place if required.
Be interested in their plans for the festive break. Finally, make sure there’s something in the diary for 2017 to continue the conversation.
The intermediate level is to call a supplier you’ve never spoken to before (but which might be relevant to your business of course).
Find out what they do and how they do it. What have been their biggest achievements this year and what have they got planned for next year. By this stage you are likely to have either ruled them in, or out, as interesting for the future.
If of no interest, that’s fine – but maybe they’ve got something very relevant to offer you in 2017 and they could help you. If that’s the case, book a follow up meeting for January! And yes, Public Sector friends, this is ok!
The hardest group of suppliers to pick the phone up to might be those that have responded to your RFx and Tender processes this year, but which have not secured any of your business. Or suppliers whose contracts have expired and you’ve gone your separate ways.
Call one of these suppliers each day during December to thank them once more for their participation in your process or previous contracts. Find out how business has been for them this year, and whether the feedback you gave them has been useful to them and how they have developed or improved.
Ask them what they are looking forwards to next year and think about whether there might be an opportunity to re-engage in future.
Whilst an advent calendar themed challenge is a bit of fun, the benefits of this challenge I hope are obvious.
From practical information like opening hours over Christmas through to discussing, and potentially solving, real business problems. From identifying potential innovation opportunities to just finding out what your account manager is doing for Christmas, these conversations could add real value to you and your organisation.
Remember, as you walk past shop windows at this time of year, that you are your own personal shop window. And you are your company’s shop window to its suppliers, past present and future.
These conversations will build your personal brand and your company’s brand too. You might even have a list of ideas and opportunities to look forward to on that difficult first working morning after New Year too!
Share your Stories!
As it is the season for sharing. Please comment or reply and share your feedback on this challenge and on some of the conversations you’ve had. No one is going to check you’ve made 17 calls, but if everyone makes some calls, I’m sure there will be some direct value from it.
Enjoy connecting, and Season’s Greetings to you all!
Extended payment terms can be a huge burden for buyers and suppliers. Not to mention the negative press. But there is a solution at hand.
In response to the financial recession of 2008, many supply chain and procurement departments began pushing their suppliers for extended payment terms as a means to improve cash flow and limit the need to acquire credit, which was in short supply.
This push for extended payment terms makes sense for buyers. Extra cash in the coffers can be used to fund R&D, buy back stock, and invest in strategic initiatives. It also never hurts to have more free cash as working capital.
However, while buyers benefit greatly from extended payment arrangements, they can pose a tremendous burden to suppliers – especially small- to medium-sized businesses (SMBs).
How Extended Payment Terms Hurt Suppliers (And Buyers)
Extended payment terms can be detrimental to suppliers for a variety of reasons, including:
1. Curbed Productivity
Many SMB suppliers have limited resources in terms of manpower and production capability. As a result, they can only take on so many projects and contracts at a time before reaching capacity.
When funds are tied up waiting for cash to come in, these companies are precluded from investing in new equipment, replenishing stock or adding to their workforces. This brings the company to a standstill, and could put it out of business altogether.
2. Lack of Financial Flexibility
While large corporations and buying teams have the purchasing power to demand extended payment terms, smaller suppliers do not.
As a result, these suppliers are forced to receive payments late while paying their own suppliers early. This creates a cash flow crunch in working capital that many can’t escape.
In addition to the financial consequences of extending payment terms, the practice takes a human toll as well. Going three-to-four months without receiving payments from buyers makes it difficult for businesses to make their own payroll – usually the largest expense for a SMB.
As a result, small suppliers suffer from reduced morale and engagement. This can, in turn, lead to a decline in quality and production delays.
In the end, buyers end up paying the price for extended payment terms as well. That’s because it introduces risk into their supply chains. If a trusted supplier is forced out of business or suffers a decline in productivity, it hurts the procuring organisation.
In addition, suppliers have long memories. Many will compensate for extended payment terms with higher costs, while others include steep late-payment penalties in their contracts.
Lastly, a high quality supplier whose products or services are in-demand supplier may simply choose to work with other companies that offer friendlier payment terms, and forego bidding new opportunities that come with onerous payment terms.
Reverse Factoring May Be The Solution
Reverse factoring allows a buying organisation to leverage its strong credit rating to acquire favourable financing, which is used to pay suppliers in a more timely manner.
Here’s how it works:
Supplier submits the invoice to the buyer.
Buyer approves the invoice and submits it to a 3rd party financial institution or factor, who bases interest terms on creditworthiness of the buyer.
Financial institution pays the supplier at their desired early term of net 30 days, discounting the invoice payment by the agreed-to discount rate.
Buyer pays the financial institution the face value of the invoice at their agreed-upon date, say net 90 or net 120 days.
The concept is fairly new, but it is already proving to be a great solution for buyers that want to reap the cash flow benefits of extended payment terms without putting their suppliers in jeopardy.
That’s because it is beneficial to every participant in the process. It allows both buyers and suppliers maintain cash flow while forging positive working relationships in the supply chain. The financial institution also benefits by generating a return on the funds lent to the supplier and reimbursed by the buyer’s payment.
Ed Edwards is Audience Outreach Manager at THOMASNET.com. He leverages his extensive experiences in engineering, manufacturing and procurement, to educate procurement and engineering professionals on how to streamline and improve their work.
Ed provides customised training to organisations’ engineering and sourcing teams and helps buyers with their challenges and finds them new opportunities.
Now we have our KPIs agreed, how do we measure our data in order to ensure success in supplier relationships?
Catch up with part one and part two of this three-part introductory overview of the role and relevance of KPIs to support Supplier Relationship Management (SRM).
So, we’ve established the why, the what, and the how for setting KPIs. Now we need to understand how we are going to measure the KPIs in order to provide meaningful reports, and set a recipe for success!
Systems for Capturing KPI Data
In a perfect world, KPI data should come from automated systems. However, when you receive the data from the supplier, you may want to corroborate some of it with your own.
Commercial software vendors like SAP-Ariba, Coupa, Oracle, Emptoris and others have features that monitor and track some KPIs. The base functionality comes through the core purchasing systems. Some organisations, however, choose to develop their own reporting systems to ensure they have the features and flexibility they need.
Another option is to use manual systems and processes. This could include disseminating data through spreadsheets, email or any other format that users have access to.
These methods are simple and can be very effective if applied consistently, but obviously take a lot more time than automated reporting. One concern with manual systems is the higher potential for human error.
Typical Data Points for Measuring KPIs
The types of data points you can collect depend on the system you’re using. Below is a sample list – keep in mind that your list will depend on your organisation’s tools, systems and reporting requirements.
At the point of ordering: you can check the order against the contract to track compliance.
At the point of receipt: you can verify whether goods are delivered in full or delivered on time.
At the point of invoicing: you can check invoice accuracy and blocked invoices.
At the point of inspection or usage: you can collect quality metrics, including defects and out of specifications.
At the completion of the order: you can poll end-users to gather feedback on the ordering process and the goods or services delivered.
Multi-Supplier Performance Dashboards
These dashboards can be used to compare several suppliers across the same or multiple categories, depending on your objectives.
Comparing the suppliers in this way can be powerful motivator. For example, you could use the comparison data to push your suppliers towards best practice.
Alternatively, you could identify the least competitive suppliers for elimination, or identify other improvement opportunities. If your objective is to reduce your number of suppliers, KPI data could help you make a decision based on the suppliers’ ranking.
Recipe for Success
Keep the following five tips in your procurement toolkit for the next time you’re drafting KPIs and thinking about how to get the most out of your supplier relationships:
Avoid an adversarial approach. Remember, this is all about relationships – and about people. People are more relaxed and inclined to come to an agreement when they aren’t in an adversarial environment. As a procurement professional, you’re going to lead your supplier to success through innovative and progressive means. Essentially, you are the champion of their cause to your senior management.
Work collaboratively with your supplier to develop each KPI and agree on how it will be used. Let the supplier know which KPIs are critical to your organisation – the ones you’ll be listing on the dashboard and sharing with senior management. This enables the supplier to work with you to develop the best approach for success.
Have regular reviews with the supplier – both formal and informal. Always keep the lines of communication open.
When issues do arise, address them as soon as possible. Workshop with the supplier on how to best solve the issue. Remember, don’t focus on the symptom, but try to identify the root cause of any problem and find a solution that will work for everyone.
Let your supplier know how they’re performing compared to others suppliers, while keeping their identities anonymous. This is a form of benchmarking and can help motivate suppliers to improve.
That wraps up our three-part series on setting Key Performance Indicators! Hopefully this will set you on the path to KPI success, but if you have any comments or questions, you can ask them in our new Procurement Tools and Templates Group.
We know the why in the role of KPIs in Supplier Relationship Management. But we also need to be able to identify which type of KPI will bring the best results.
Catch up with the first part of this introductory overview of the role and relevance of KPIs to support Supplier Relationship Management (SRM).
So now we have established the role of the KPI in the SRM process, we need to think about the type of KPI we’ll use. Much of the decision making around this will be based on what procurement is measuring with the KPIs.
Remember – procurement should discuss KPIs with other stakeholders and, where possible, involve suppliers too. This engagement could make the difference between success and failure.
Types of KPI
Here’s an overview of the three different types of KPIs:
Quantitative – these are measurable, numeric and objective, like rating on a scale of 1 to 10. An example of a quantitative KPI would be the number of late deliveries per quarter.
Qualitative – these KPIs are more subjective. An example could be how responsive the supplier is to a request – let’s say you have a special order that needs to be delivered to an unusual location. It’s a one-off request, but if the supplier makes the delivery it would save you significant costs in transport and you know they make deliveries to that location for other customers. Is the supplier reluctant to change the delivery location, and is there a fee involved? Is the fee reasonable?
Cultural – are the KPIs aligned with your organisational values? Let’s say your organisation has a drive to always buy locally-made products. You want KPIs to capture whether your suppliers are buying locally as well.
Remember, there’s no one-size-fits-all set of KPIs. Whether you are working on direct or indirect categories, manufacturing or distribution, you need to match the KPIs to the supplier.
For your Toolkit: KPI Checklist
This checklist is a quick summary to confirm if your KPI will stand up to scrutiny.
Is it measurable? If it’s not measurable, than what good is it? How will you know if your supplier is meeting the required standards?
Is it meaningful? Do you or anyone else in the organisation care about it – if not, why collect it?
Is it actionable by the supplier? There’s no use measuring a data point and feeding that information back to the supplier if the supplier is unable to act on or improve the situation. If it’s not within their sphere of influence, they probably won’t accept the KPI to begin with.
Keep the KPIs simple, easy to understand and easy to measure. Ensure they support your overall business strategy and objectives by aligning them to your customer requirements.
Experience shows it’s better to capture a few vital measures that can be tracked consistently and repeatedly. This is much more effective than measuring randomly and or inconsistently.
Institutionalising the measurement process and regularly reinforcing it with suppliers and stakeholders will provide a common ground and common language, support a collaborative environment and make it easier for everyone to understand, participate and achieve.
Finally, you want to reinforce the value of the data collection to support improved business performance – that is, now that you’ve collected the information, make sure you tell the right story.
Contract Level KPI Reports
The dashboard (or scorecard) summarises your KPIs and measures them against a particular supplier. This tool can be used internally to review a supplier’s past or current performance. It’s also important to share this information with the supplier so they are aware of the data and can act upon it.
KPI status reports should be delivered in a timely manner to enable you to address stakeholder concerns quickly and responsively. The reports need to include all the relevant information your stakeholders require – this includes the good and the bad.
You don’t want the senior management finding out bad news from the inter-office grapevine or worse, the media. This is your chance to deliver important details relevant to the success of the business. It’s your news and you want the kudos that go along with identifying and sharing it first.
You also want to define a clear escalation process to address issues and problems as they arise. For example, in a supplier review meeting you may realise the supplier’s data doesn’t match yours.
The supplier is reluctant to change their process based on your data, when their own data says everything is okay. You need an agreed escalation point to review and resolve this disagreement.
Finally, you want KPIs that will deliver predictive measures, not just historical. This allows you to stay one step ahead by being in a position to identify and act upon issues before they become serious. Predictive measures will also help you to identify targets for the supplier to meet and beat over the course of the contract.
All of this information fits into the reporting documentation to demonstrate how and why you’re spending your organisation’s money. The highlights of this report can be summarised in the dashboard and presented to senior management.
Stay tuned for the third and final article in this series, which explores systems used to capture KPI data, typical data points for measuring KPIs, and multi-supplier performance dashboards.
A disagreement relating to rising supply chain costs has highlighted the importance of supply chain stability.
Early on Thursday morning, the top news headlines weren’t about conflict or celebrity scandal, but the future of a famous British staple. Maligned and loved in equal measure, Marmite was the topic on everyone’s lips.
The sudden interest in the salty, yeast-based spread came about due to a very public spat between Tesco and Unilever over rising product costs.
According to reports, Unilever had requested that Tesco, and other UK retailers, raise the price of their products in store by 10 per cent. However, when Tesco refused to pass on this cost to customers, Unilever stopped supplying certain goods to the retailer.
Tesco responded to this by halting online sales of Unilever products. This sparked concerns of a prolonged shortage of goods on supermarket shelves.
However, by Thursday evening, the situation was resolved and the stand-off ended. It’s expected that Unilever goods will return to the Tesco website in the next few days.
It’s understood that Unilever gave some ground in negotiations, leading to an agreement between the companies. Asda has also publicly commented that it successfully negotiated with Unilever on the price increase.
Rising Supply Chain Costs
Unilever’s reason for the requested price increase was the continuing fall in the value of the pound. This has in turn led to higher import costs for goods into the UK.
While many of its products, including Marmite, are manufactured in the UK, Unilever imports products and raw materials from its base in the Netherlands.
Since the Brexit vote in June, the pound has fallen in value by over 17 per cent. As the pound dropped to its lowest level since June 23rd on Tuesday, it was reported that some airport Bureau du Change had been offering exchange rates of less than one Euro per pound.
Graeme Pitkethly, Unilever’s Chief Financial Officer, was quoted on Thursday morning as saying the price increases were part of “normal business“. But, while the price increases may be a normal part of business, experts have warned that this may just be the beginning.
As the UK’s exit from the EU comes closer, it’s expected that consumers will see rising prices for many products. As the UK imports more than 60 per cent of what it consumes, the FMCG industry will be one of the hardest hit.
Items such as bread, milk, bananas and wine are expected to increase as manufacturers and retailers stop being able to carry the increasing import costs. A rise of between 8 and 10 per cent is expected on clothing, while petrol will rise an estimated 4 or 5 pence per litre in the UK before the end of the month.
Importance of Stability
At a time when margins are being squeezed, the importance of supply chain stability is huge.
A survey published by the UK Food and Drink Federation (FDF) showed that 63 per cent of manufacturers are suffering from decreased profit margins. As well as this, 76 per cent a seeing higher ingredient costs too.
With 96 per cent of the UK’s food and drink businesses small or medium-sized, larger organisations need to be aware of the impacts of margins throughout their supply chains.
Some organisations will try to put increasing costs back on to manufacturers, without taking into account the long-term impacts. Any further supply chain disruption on top of what is happening already could potentially drive prices higher again.
While prices rises for consumers are probably inevitable, increasing supply chain efficiencies and demand forecasting can help to limit the damage.
Helen Dickinson, Chief Executive of the British Retailers Consortium, said: “Retailers are firmly on the side of consumers in negotiating with suppliers and improving efficiencies in the supply chain to control the inflationary pressure that is building through the devaluation of the pound.
“However, years of falling shop prices and higher costs have left limited scope for retailers to continue absorbing this pressure. Everyone in the supply chain will need to play their part in maintaining low prices for consumers.”
By building a greater understanding of the costs through the supply chain, retailers and manufacturers can try to overcome a lack of stability collaboratively.
Do you work in procurement in retail or FMCG? What are your experiences of the recent price rises? Let us know below.
Away from the worries of empty shelves, we’ve stocked up on the week’s big procurement and supply chain headlines.
GM in Court Over Price Bargains
A court in Massachusetts will heard a case last Friday, brought against GM by a now bankrupt supplier.
Clark-Cutler-McDermott, alleges GM knowingly led the company into a bad faith deal, and encouraged them to take on more debt.
GM have requested the case be dismissed, arguing CCM is trying to pass the blame for poor management.
The case will help to shed more light on the highly-criticised bargaining practices allegedly happening in GM’s supply chain.
An introductory overview of the role and relevance of KPIs to support Supplier Relationship Management (SRM).
In this three-part article, we discuss some of the different KPIs that are used specifically for SRM. This list is by no means exhaustive; it can’t be, as performance indicators must be relevant to your own organisation, customers, and requirements. However, this list can be used as a guide and can become an essential part of your toolkit.
We’ll also review some of the popular ways people measure and monitor KPIs through systems and reports. Again, this won’t be an exhaustive list because of cultural and technical requirements unique to every organisation.
You’ll also find some key tips for implementing KPIs successfully, including a checklist (more tools for your toolkit!).
We will explore how dashboards can be a fantastic tool for procurement professionals to use when communicating to stakeholders and promote hard-won benefits to the business. An effective dashboard will include KPIs that demonstrate how suppliers or categories are being managed and their impact on the business. Remember, the KPIs you set may influence senior management decisions. Therefore, you need to get it right.
Why bother with KPIs?
To get started, let’s talk about why we use KPIs.
As procurement professionals, we’re responsible for making smart purchasing decisions that support the values and principles of procurement, such as probity and value for money. These decisions must also support the philosophy and strategy of individual organisations. Importantly, we need to be able to justify and document how (and why) we’re spending money.
KPIs can help us justify spend. In fact, KPIs can be used to identify risk, cost savings, innovation opportunities and successes, value-for-money initiatives, customer satisfaction and any number of other factors that we or our customers feel is important.
The role of a supplier KPI is vast. They set the performance standard and have measurable features used to identify areas of improvement, such as establishing a baseline, identifying where you want to be and developing a path to get there. But it doesn’t stop there – KPIs can also be connected to payment milestones, credit payment and liquidated damages.
The important point to remember is that supplier KPIs must be agreed upon by all parties involved. If your supplier doesn’t know what is expected of them, they won’t be able to comply, let alone excel. That’s just one side of the relationship.
The other side of the relationship involves the professionals within the buying organisation. How do you, the procurement professional, know which KPIs to use? Are cost savings important? Delivery times? ISO standing? Inventory reduction? You won’t know unless you ask your customers about their requirements.
So, why are KPIs important?
What gets measured gets done. KPIs are a way of ensuring your supplier focuses on your fundamental business needs. We can do this through:
Incorporating our customers’ requirements into the KPIs to align supplier performance with organisational goals.
Providing constructive feedback (rather than punitive criticism). Why? Because the end goal is a win-win situation where you get what you and your customers need, while the supplier gets to improve its reputation and build its business.
Promoting a continuous feedback loop using KPIs to drive supplier performance, initiative and improvement. KPIs should be linked to the terms of the contract but remember, the focus is on the relationship. Indicators should therefore reflect the “spirit” of the contract as much as the “letter”.
Bringing clarity to overly generic contract requirements to drive meaningful performance.
Challenges in KPI management
Here are some common challenges that we’ve seen through our own experience:
Capturing the data – identifying the relevant data and accurately acquiring the data points.
SRM fatigue – motivating yourself, your team and your suppliers to continue SRM activities over the life of the contract, which can be months or even years. Activities can easily become stale and sometimes you’ll need to push them along.
Comparing and contrasting suppliers – supplier performance will be very different depending on their size, sector and region. Ensure you’re comparing apples with apples.
Engaging end-users is important
When driving supplier performance over long-term contracts, we want to keep things moving so end-users don’t feel that nothing is happening. Keep end-users in the loop, ensure their voices are heard and let them know how things are progressing.
We often focus on senior management as our primary “customer”, but the end-user is arguably more important – especially when it comes to compliance. After all, they’re the ones who will use the product, system or tool that is being purchased.
Stay tuned for Part 2 of this series, which will explore the different types of KPIs, complete with a KPI checklist and contract-level KPI reports.
With an estimated 200 million suppliers operating around the world, how can you be sure you have the perfect partner? Fortunately, here’s where technology can lend a hand.
Recent estimates put the total number of suppliers operating around the world at a staggering 200 million. To put this in context, that’s like having every person in the UK operating a supply business. Three times over.
The risks for procurement in this scenario are there for all to see. With an enormous number of potential suppliers, how do you know you are dealing with the right ones? Are you getting the best deal you could?
And with the suppliers you do have on board, how are you driving contract compliance? As well as being expected to deliver the value in the contracts, procurement needs to ensure that objectives are aligned with internal stakeholders, including the CFO.
Innovation in ‘Tail’ Suppliers
Common thinking in procurement now is that the profession can no longer ignore small- and medium-sized suppliers. By continuing to use the same suppliers, procurement misses out on innovation opportunities, as well as savings opportunities.
Traditionally these suppliers have been dismissed as ‘tail spend’, and ignored in terms of strategy. As we experience a period of unprecedented market change and volatility, procurement is now looking to these same organisations to help drive efficiencies, and competitive advantage.
The other factor procurement must take into consideration is how to measure the risk within their supply chain. One slight issue from a first, second, or even third tier supplier, could have drastic consequences for an organisation’s reputation.
Technology as Competitive Advantage
If organisations want to thrive in increasingly volatile climates, they need to leverage their technology. Effectively using IT capabilities and procurement technology can help develop a competitive advantage.
More and more organisations are streamlining traditional procurement activities, and freeing up resources for strategic projects. The ability to do this, while sourcing and managing suppliers, requires up-to-date IT capabilities and analytics, as well as best in class procurement technology.
Oracle’s aim is to provide its client with complete, open, and fully integrated solutions which help to reduce both the cost, and the complexity, of the IT infrastructure.
David Hudson, Business Development Director at Oracle Cloud Solutions, believes procurement needs to realise that the future is now.
“Delivering the right capabilities for Procurement professionals to drive greater collaboration, process standardisation, increased efficiency at a reducing cost remains a big challenge.
“At Oracle, we aim to help our customers achieve great cost savings and overall value, while reducing supplier risk, and increasing compliance. Technology, such as our Strategic Procurement portfolio, can help to deliver these key benefits, particularly when integrated throughout the process, as part of a modern Cloud solution,” says David.
Build Your Competitive Advantage
Procurious Founder, Tania Seary, has previously stated that, “Today’s supply chain executives must be brave and bold. They are expected to handle cataclysmic events and act with extreme agility.
“There’s one qualification – and I would go so far as to say that it’s the defining qualification for today’s supply chain leaders – that separates the highest performers from the herd. And that’s courage.”
This courage can be bolstered by understanding the role and benefits of technology, especially Cloud software and platforms, in procurement strategy, planning and decision making. By being more informed, procurement leaders can make these bold decisions, and ensure they are staying ahead of the competition.
To find out more on how procurement can better manage risk and complexity, and integrate technology to help them thrive in a changing world, join Tania Seary and David Hobson for a free webinar on 7th November. Find out more information and register here.