August 19, 2013

Top 10 Justifications Organizations Use When Buying Supplier Lifecycle Management

Long past are the days where Supplier Management is an afterthought. From optimizing working capital, to ensuring regulatory compliance, to closing the gap on product time to market, the stakeholders permeate throughout the organization.

Albert Einstein quipped that the definition of ‘insanity’ is, “doing the same thing over and over again and expecting different results.” Now, more than ever, organizations are breaking away from the same routine, and doing something different. Maybe it is because Supplier Lifecycle Management has matriculated into the ‘enterprise’ class; maybe it is because existing systems haven’t been able to adapt to today’s supplier management needs; or, maybe it is because Albert Einstein’s definition has become too relatable.

So… what are some of the justifications for Supplier Lifecycle Management we hear most often?

1.     To sustain year-over-year cost savings

Procurement organizations, with a large portion of spend under management, are finding it difficult to sustain their cost savings performance, as “low hanging fruit” of spend consolidation have already been picked. To maintain high performance, organizations are seeking to leverage all procurement value levers, beyond Strategic Sourcing, such as: Demand Management; Processing Efficiency; and, Supplier Relationship Management. Effective Supplier Lifecycle Management has been universally found to simultaneously both increase, and sustain, the returns on each sub-initiative (e.g., engagement, performance, audit, etc.).

2.     To lower operational costs

The average hard-dollar cost savings achieved, upon implementing a supplier management initiative, is 12% (Aberdeen, survey of >130 organizations). Notwithstanding the substantial soft-dollar savings, operational costs are often too high due for a variety of reasons, such as: inefficient registration and/or onboarding systems; difficulty managing diverse and small business profiles; or, the lack of consistency, and single point of contact, for invoices, spend, supplier profiles, communication, etc. Supplier Lifecycle Management streamlines these processes, instills governance, and enables organizations to “manage by exception”.

3.     Because an ERP implementation, and any ongoing configuration, is too costly

Stunningly, the ERP market (software license only) is estimated to be $24.5 billion (source: Market Share Analysis: ERP Software Worldwide, 2012). The consulting associated with implementing an ERP system, however, makes that number seem small. According to Nucleus Research’s “The Real ROI”, with an average license of $1.85m, and average implementation of $3.64m (roughly 1.96x license), one can estimate the ERP consulting market at over $48b – and that doesn’t take into account internal resources.

Further, according to Panorama Consulting’s “2013 ERP Report”, 56% of implementations go over budget, and by an average of 25% (no small number) – and 29% of respondents claim that they have yet to realize the payback hoped for.

Even if they think it is possible, many cannot take the chance of trying to configure their ERP system(s) to manage suppliers – especially in light of these costs.

4.     Because the ERP system(s) lack the flexibility needed to manage supplier “relationships”

Leveraging shared services, and outsourcing transactional activities, in an attempt for cost reduction, has resulted in a clear shift towards a more centralized procurement organization model. With a multitude of downstream systems (Oracle, SAP, etc.), combined with scores of different process requirements (by geographic unit, by business function, by customer, etc.), traditional systems struggle to properly support management of these requirements, and supplier relationships, at both a central and local level, with an efficient and tailored approach. Whether due to poor data modeling, or an inability to harmonize the required workflows/processes, the issue transcends well beyond procurement, into supply chain, finance, compliance, and more, and is costing organizations millions due to inefficiency.

5.     To manage supplier costs

Whether supplier costs, direct or indirect, are too high due to off-contract spend, lack of market insight, poor performance, or an inability to create and capture early payment discounts, the savings that Strategic Sourcing created on paper often doesn’t become reality. Supplier Lifecycle Management empowers organizations to ensure that every potential dollar saved drops directly to the bottom line.

6.     To mitigate supplier risk

Though many view supplier insolvency as the supplier risk to manage, as it is easier to get one’s arms around financial risk, only 11% of disruptions are attributed to insolvency (BCI survey of 500+ respondents). The reality is that roughly 85% of companies experience supply chain disruptions, across a wide range of factors – and the average hard-dollar cost of each disruption is $310,000 (survey of 500 businesses with revenue between $7.7m and $465m).

Today’s Supplier Lifecycle Management solutions help organizations mitigate risk by: providing timely supplier risk information (whether financial, weather-related, performance, etc.); visibility into 2nd and 3rd tier supplier risk (and even the “arches” between them, such as ports used); access to the actionable information, regardless of source or source system; and, an ability to react to incidents quickly.

7.     To leverage timely and accurate external supplier intelligence

Beyond gathering information directly from suppliers and/or internal personnel, the appetite is increasing for actionable intelligence, which can originate from limitless sources. Whether real-time notification of weather-related incidents, port closures, financial risk, or market/industry shifts, actionable intelligence has become the mandate for the next-generation of supplier management, yet… very few systems have the ability to adapt to the various demands.

In fact, the average ROI-driven business case highlights that the lack of consistent, high-quality supplier information is costing the typical Global 2000 organization tens of millions of dollars annually.

8.     To manage compliance requirements

New regulations and compliance initiatives are rising daily – and many have found it difficult to efficiently streamline, govern and monitor these programs, whether FCPA, CSR, RoHS/REACH, CMR, HSSE, small business, data privacy, or other. Supplier Lifecycle Management systems intelligently segment suppliers by initiative, manage the process, provide full insight and auditability, and ensure compliance.

9.     To handle the larger procurement mandate, while consuming less resources

In parallel to procurement’s commitment to bottom line cost savings, organizations are being challenged to manage an increasing level of new forces affecting their supply chain. Yet, while maintaining (or downsizing) headcount, the demands of a growing global supply chain, increased outsourcing of activities, tough market conditions, and growing compliance regulations have many organizations seeking new efficiencies. Supplier Lifecycle Management helps organizations to maximize production per headcount.

10.Because the “time to market” on other systems is too lengthy

Within supplier management, the pace of change is rapid. Often new requirements and needs arise before the prior initiative has been closed – and any initiative is dependent on more than simply implementation time to deploy, but includes planning, training, and change management.

Unlike those projects within ERP systems, where 54% of those initiatives go over schedule (source: Panorama Consulting, “2012 ERP Report”), Supplier Lifecycle Management platforms are built from the ground up to manage suppliers and to rapidly adapt to new requirements.

In my last communication, I highlighted the ‘excuses’ organizations have used to avoid Supplier Lifecycle Management. Often these excuses come from ‘specialists’. As Walter Gropius stated, “specialists are people that repeat the same mistakes”, and there is now a new way of thinking. The reasons for departing from the same routine, and embracing change, are clear.

At HICX Solutions, we help our customers significantly reduce the costs and risks associated with managing suppliers – and have a history of aggressively meeting the needs of today’s most complex, global, and evolving purchasing/supply chain organizations. Click here to learn more about how our Supplier Lifecycle Management solution can bring significant positive impact to your organization, and how you can help lead your organization into the future.

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