October 17, 2012

Supplier Management: A fool’s errand without Harmonization

Sitting with my daughter Sophia playing with GarageBand app on our iMac  got me to thinking about supplier management. Yes it’s true – hear me out….The app is an amazing learning tool.  It provides a great way for the novice to expert musicians to experiment with building different music streams based on dozens of different instruments. The genius of the app makes two things clear as it relates to music:

  • Depth and beauty of a musical arrangement is not the melody or rhythm (that most of us can whistle or play air guitar to) but in the harmony. Harmony is the arrangement, harmony is the combination of sounds  – it’s what puts it all together (woodwinds, percussion, brass, strings) or (bass, guitar, keyboards, drums, vocals, etc.)
  • Each instrument contributes to the music stream, but can be customized and edited individually without having to impact the other streams. Each instrument therefore contributes to the entire composition that can be different depending on the type of song you are looking to compose.

Now look at this in the context of supplier management best practices. A dynamic organization chart, like the app, provides insight into who plays what role and can determine whether or not an organization can harmonize its supplier management processes.  While no organization is exactly same as to how they manage suppliers, each part of an organization needs to have a common understanding of what different departments are involved in for keeping some sense of “order” or “agreement” in managing the relationship. In other words, every part of the organization has its own function as it relates to supplier management and works independently from each other, but collectively “harmonizes” an entire process.

Consider the objectives, pains and needs as it relates to following parts of an organization managing supplier management related to processes for managing purchase from Small and medium sized business (SMEs)-

EXAMPLE: Supplier Management needs based on SME requirements

Each organization has its own needs and requirements with regard to managing small and medium sized businesses.   But even if each part of the organization is doing their part in managing suppliers, as soon as one or multiple groups within an internal supply chain (i.e. based on category, geography, etc.) deviate from a common approach without understanding it’s impact on the others, the results can be consequential and costly to the organization – the result is “discord in supplier management”.  (I alluded to this in an earlier post related to Deming and the Appreciation of a System concept)

Anything from a natural disaster to political unrest can obviously raise awareness and change internal processes related to managing a category or set of suppliers impacted by such events. In other cases merger and acquisitions can disrupt otherwise functioning supplier management processes by introducing a number of other new systems thus creating potential duplicate suppliers that need to be integrated, enriched and consolidated into the existing supplier management infrastructure.

However, other items that can initially be perceived as even a small change (i.e. a new IRS form) may completely change the processes and type of new data needed for managing a supplier or set of suppliers. For instance, what if a threshold on a defining a small business changes for a particular category? How does this change get updated throughout the organization?  What is the potential impact this has on existing supplier contracts?

Without an enterprise supplier management platform, which can dynamically collect the pertinent data from the client streamlining and harmonizing, this new requirement will either fall upon IT to reconfigure the existing ERP and Procurement systems (e.g. new fields, new workflows, etc.) or fall on Accounts Payable to manually collect and review the required forms taking more time and effort than before.

So whether it’s the CPO, VP of Supply Chain or Chief Compliance Officer leading the charge on supplier management, lack of a harmonized supplier management approaches creates inefficiencies that leads to additional costs. The costs for the lack of harmonization are all over the map. And unfortunately, there is not just one metric that organizations can point to for how harmonization can improve performance, but these can range from the negative of not realizing potential contract values to positives of identified savings. For instance –

–       CPO Agenda article shows that organizations recognized only 54% of their potential contract value due to lack of a supplier relationship management program.

–       Supply Management points to 3% of annual supplier spend as “hard cost savings” achieved due to supplier relationship management initiatives.

–       Supply Chain Management Review notes that of companies reporting financial estimates of benefits was more than $100 million in incremental value from supplier relationship management.

Therefore even if each department is playing their part, it is as one client contact put it – “a fool’s errand” – and near impossible to establish transparency without best practices and proper technology for tracking the various activities surrounding suppliers.

To adapt to changing market needs and begin the process of supplier management harmonization, organizations need to consider the following –

Steps to Harmonizing Supplier Management

  1. Establish a core cross-functional teams representing each organization involved with specific supplier management activities or workflow
  2. Document current processes the current state supplier management and organization’s collective perception (e.g. supplier onboarding, performance, risk assessment)
  3. Document interdependencies on specific workflow – if one department changes their process what’s the impact on the others
  4. Review potential savings (incurred and avoided) in specific areas along the supplier lifecycle based on department
  5. Establish quantitative and qualitative metrics for current and future goals to benchmark supplier management harmonization efforts
  6. Build a business case for investment in improved process and technology
  7. Adopt an IT strategy and roadmap for improving the harmonization of supplier processes through automation
  8. Work with Finance to ensure how benefits of the investment getting translated to the bottom-line
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by Grant Watling

Chief Customer Officer

Grant has 11 years management consulting experience specialising in supplier data and analytics advisory services. Grant holds a Master’s Degree (MSc) in International Business, is a Prince2 practitioner and holds certificates from the Institute of Financial Services and the Chartered Insurance Institute.
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