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The Strategic Supplier Management Mandate

by Frank Suetterlin | SAPinsider

January 1, 2012

Supplier management has evolved from basic recordkeeping and scorecarding to a strategic practice focused on the management of supplier information, performance, compliance, and risk. Strategic supplier management programs can improve visibility and collaboration, consolidate spend, and reduce quality issues. In this article, learn the three principles that are essential to strategic supplier management and how to make such a program work within your organization.
 

Supplier management is a broad practice that affects all aspects of the procurement process. Procurement team members invite suppliers to bid on sourcing events, collaborate with them on contract negotiations, and, most importantly, rely on suppliers each day for the goods and services that drive business operations. Because of the pervasive influence the supply base now has, strategic supplier management is a corporate mandate instead of an optional program.

Supplier management has evolved from basic recordkeeping and scorecarding to a strategic practice focused on the management of supplier information, performance, compliance, and risk. By implementing supplier management programs and tools, market-leading organizations across all industries have created deep relationships with suppliers that mutually benefit the parties through cost savings and, in some cases, net-new revenue opportunities. Supplier management programs can improve supplier visibility and collaboration, reduce quality issues, and consolidate spend with more strategic suppliers;1 they can also bolster corporate initiatives, such as corporate social responsibility programs and diversity spending efforts.

How have best-in-class organizations created a level of transparency across their supply base to ensure that suppliers perform to the same standards they expect from their own business units? This article will explore the three principles that are integral to strategic supplier management and provide guidance on how to put them into practice at your organization.

1. Supplier Information Management

The first step toward strategic supplier management is collecting a wealth of information about your supply base. At many companies, supplier data resides in disparate back-end systems, making it nearly impossible to gain a comprehensive, consistent view. For example, supplier profile data, such as primary contact details or banking information, may be tucked away in your contract repository. Performance data, such as the percentage of on-time deliveries or the number of back orders, resides in your procurement system. Qualitative information about a supplier's goods can be found in your supply chain solutions. And details about a supplier's diversity certifications may reside in your strategic sourcing database.

To gain a global view of your supply base, it's imperative to gather these disparate sources in one location, giving you visibility into all supplier data in a single, reliable source. Solutions and services from SAP can facilitate this data aggregation, so don't limit your approach to manual or homegrown methods. And don't overlook the assets that you have in your supply base. Some tools can enable your suppliers to register their businesses in your supplier management solution and maintain their own content over time, contributing to a critical mass of data.

Evaluating Information Completeness

Once your supplier data is consolidated in a single location, it's time to ensure that your information is complete. You'll likely find multiple instances of the same supplier across various departments and business units. And in some cases, you'll have multiple instances of the same supplier under different operating names. This lack of normalized data creates a common scenario in which one supplier is managed under multiple contracts and under different — and possibly conflicting — terms and conditions. Imagine the lowered legal overhead if those supplier instances operated under one global agreement; and imagine the savings you could realize when you've amassed your purchasing power.

In addition to repetitive or inconsistent supplier data, it's also likely that you'll find inconsistencies in the naming of spend categories. Multiple descriptors might be used for the same category of goods or services, making it difficult to track how much you are spending in that category. Normalized spend categories can facilitate the accurate aggregation of the suppliers that serve a given category of goods, creating a holistic view of spend by category and exposing previously hidden opportunities for rationalization.

SAP can assist with the normalization of these disparate data sets and enrich your supplier data. Not only will your resulting data be normalized and de-duplicated, but it can also be enhanced with value-added content, such as supplier diversity certifications and sustainability criteria. As you evaluate supplier information management solutions, consider implementing a centrally managed system that can integrate with all of your business systems that require supplier information. An ideal solution will empower your organization with a single source of the truth that serves all of your supply management needs without disrupting existing systems.

2. Supplier Performance Management

Increased reliance on suppliers for a broader variety of materials and services has elevated supplier performance management from a "nice to have" to a business imperative. The global trend toward outsourcing and the increasingly complex nature of a tiered supplier base have added a new level of requirements, such as international trade standards and risk management throughout the supply chain, which are catapulting supplier performance management from a back-office function to a strategic differentiator.

Selecting Metrics

To achieve effective supplier performance management, it's necessary to first understand the supplier metrics that will be most meaningful to your business. While many supplier performance management programs originate with the procurement department, involving other stakeholders across the business is critical to the program's success.

To get started, set key performance indicators (KPIs) that capture the qualitative and quantitative measures that are important to your operations. While traditional KPIs, such as on-time delivery and quality of service, are still important to measure, recent trends show that many organizations are turning to their supply base for new innovations. These companies are measuring the impact of suppliers on net-new products and services and their contribution to top-line growth. A balance of tactical and strategic metrics will ensure a well-rounded supplier performance management program.

Gathering Data

Once you've determined what to measure, it's time to gather performance data. This can be done in part with survey tools; you can build surveys to analyze suppliers as they are being onboarded, evaluate the progress of current suppliers, and ask your employees about their experiences using certain vendors. In addition to survey tools, analytics applications used in concert with your supplier management system can extract key data points to expose opportunities for supplier rationalization, identify new sourcing opportunities, and take advantage of volume discounts.

To manage your suppliers' performance, leverage a solution that has built-in workflow tools, which can intuitively guide your team and your supply base through supplier onboarding and performance improvement programs. And be sure to integrate your KPIs into the daily operations and communications with your supply base, using dashboards and reporting to keep them informed of their performance relative to the measures you've set.

3. Supplier Risk Management

The challenge of managing supplier risk is intensifying with the proliferation of a global and volatile economy, the popularity of low-cost country sourcing, and the introduction of cost-saving and time-saving initiatives such as just-in-time inventories and agile product development. To avoid the costly impact of supply base disruption, organizations are turning to supplier risk management programs and solutions.

Identifying Risks

At the core of mitigating supplier risks is having an understanding of what risks are important. Begin by classifying your risk categories; they may include concerns over suppliers' financial solvency, price volatility, potential natural catastrophes, or having a limited number of suppliers in a particular spend category. Next, map your key suppliers against your risk factors. Focus on the 10% to 20% of your supply base that represents 80% of your spend. Finally, note how likely your identified risks are to occur according to supplier.

For example, earthquakes and tsunamis tend to happen along fault lines, and hurricanes often hit the US gulf region and eastern seaboard; these examples of forces majeures can affect the ability of suppliers from those areas to deliver goods and services on time. Knowing your risks and where they're likely to occur empowers your organization to put contingencies in place.

To take this concept to new and predictive levels, emerging solutions use the underpinnings of social media and crowdsourcing to leverage shared knowledge about suppliers' performance. Such solutions aggregate collective intelligence from industry peers' experiences and market research sources across key industries and supply bases. Changes in your supply base happen daily; a solution that offers a steady flow of timely information can mean the difference between mitigating a risk and cleaning up after an incident.

Incorporating these powerful data points into your risk management analyses can expose potential problems in your daily operations and deep within your supply base, allowing you to proactively manage them.


Conclusion

A well-positioned strategic supplier management program can help your organization collect and evaluate supplier information, manage supplier performance, and mitigate supplier risk, leading to optimized business operations and significant savings. 

         
     

Frank Suetterlin (frank.suetterlin@sap.com) is the Supplier Management Solution Owner in the Procurement Solution Management group at SAP. Before assuming this role in 2007, Frank was SAP's Chief Procurement Officer. He has held other procurement positions at SAP and various companies. Frank has a degree in economic engineering from the University of Karlsruhe.

         

1 Aberdeen Group, "The Year of the Supplier: Perspectives on Supplier Management in 2011" (2011). [back]

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