March 14, 2013

The Value of Supplier Information Management for Sourcing

In continuing last week’s discussion to further upstream processes, we can see that the value of supplier information management can actually start with sourcing. Sourcing at its core is the beginning of how organizations engage with their suppliers in activities from supplier discovery through to contract execution. Because it is involved in the early stages of a supplier relationship, sourcing can also become the root cause of many of the supplier related problems that occur downstream in procurement and accounts payable.  Let’s explore the value of supplier information management for sourcing.

While strategic sourcing often starts with spend analysis and leads into a sourcing event like an RFP, in many cases organizations are lacking the essentials of supplier management. Due in part to the problem of bad data, processes and time pressures, many organizations may end up selecting suppliers based almost exclusively on price, and taking less time in performing the necessary due diligence. This creates a major justification for implementing a supplier information management solution.

For instance, getting a complete supplier profile  in preparing for a RFP is often dependent on the ability for sourcing stakeholders to trace their footsteps from similar or past events based on the organizational requirements (e.g. business unit, category, country, geography).  Without a supplier information management platform, this  information is likely stored in a number of different systems including PLM, ERP, legacy systems. To complete the supplier profile,  information such as existing contracts and other supplier information related to onboarding / credentialing, surveys, risk scores and/or performance scorecards is also required. In addition, enriching supplier profiles with data from external systems is crucial for understanding how a supplier’s credentials may have changed (for the better or worse) due to economic, geopolitical or other areas of risk  measured and monitored from outside third party sources  (e.g. D&B, LexisNexis, Rapid Ratings, etc.).

So in going through a RFP process,  where supplier information collection processes are fragmented, sourcing becomes a more time-consuming and expensive exercise than it needs to be. Furthermore, in many cases, suppliers end up feeling beat up, resulting in a lack of trust in the sourcing process because of the inconsistencies or the tedious nature of data collection (e.g. asking for the same information more than once).

Hard and soft dollar costs that result from inaccurate supplier information collection and sharing include:

  • Extra time spent on existing supplier research when it was collected once before
  • Time wasted on engaging with walk-up suppliers and unqualified suppliers
  • Time spent on ad-hoc spend analysis aggregation due to inconsistent supplier information
  • Inability to manage off-contract spend to lack of sourcing visibility post-event and contract execution

As in previous blogs in the series, what is it truly costing your business to manage sourcing and the value of adopting a Supplier Information Management system to improve it?  Again, perhaps the XYZ example can shed some light.

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XYZ Company

In continuing their evaluation of supplier information management, the Sourcing team at XYZ company looks at their own inefficiencies in their current sourcing efforts and realizes certain areas are misaligned.

One area that has always plagued their sourcing efforts in the past is the time spent on supplier research. This has been a core issue, since they do not have one system source to view supplier profiles – this is true for both potential and existing suppliers, causing pain for the sourcing team in their time management for getting events completed on time.

Getting information on existing suppliers profiles such as contacts, items purchased, locations, past spend, and internal buyers is difficult.  Again because of the lack in visibility, XYZ’s spends about 5% of their time collecting and gathering this information. With 5 FTE resources at an average fully burdened cost of $95,000/yr, this costs them $23,750 annually for this effort.

On the other hand, the Sourcing team is always looking to identify “potential suppliers” that may have already submitted their credentials from a previous event, but are being overlooked since they lack one system to bring this information together. Overall, XYZ’s sourcing department spends about 10% of their time on looking for qualified suppliers. With these same resource, this effort results in costs to XYZ of $47,500  annually.

Certain challenges also exist in updating supplier information in preparation for a sourcing event or in retrieval of data from their spend analytics tool. For instance, Sourcing currently uses an outside service to manage the enrichment of supplier data for understanding information related to organizational structures (parent/child), financial diversity/small status and other supporting documentation for enriching supplier information. This service is costing XYZ $80,000 annually. However, this enriched data is only updated every six months, which has become a cause for concern due to increased risk in certain commodities areas.

Finally one of the biggest issues areas frustrating sourcing is the lack of visibility for sourcing’s input and other stakeholder input into the onboarding of suppliers.  Sourcing’s concern is that suppliers are being “maverick” on-boarded by various business units in areas where contracts have already been negotiated.  XYZ estimates that of the $1.7B of sourced spend, Sourcing has identified an average of 7.0% savings.  However, even with that, 6.0% is being eroded due to off-contract spend from various business units, that translates into off contract spend of  $7.1M annually for the company.

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Supplier Information Management adding value 

Now imagine in using a supplier information management solution, Sourcing has a central repository of supplier information where it can leverage a complete supplier profile with data coming from its various ERP systems and external systems.

With the supplier dashboard,  the Sourcing team can understand supplier relationships such as organizational structure (parent/child), and diversity/small status that comes with the suppliers even providing their own supporting documentation, commodities and coverage and financial data via a Supplier Portal.  The system allows Sourcing to quickly drill down into each existing and potential set of suppliers, across even subsets of suppliers from one location  As a result Sourcing can now easily identify and prequalify potential new suppliers before initiating an RFI. XYZ estimates 40% of Sourcing’s time can be reduced translating to a savings of $21,275.

Furthermore, as a result of supplier now being able to enter their own information enriching supplier data elements is now either minimized or eliminated translating into a potential savings of $20,000 at a 25% reduction in the use of the service, and a maximum of $80,000, if it is completely eliminated.

Finally, as a part of the larger effort of establishing spend optimization, XYZ sees one of true value drivers is the ability to reduce maverick spend through supplier information management.  With the new supplier information management system, there is an ability to truly govern the process of supplier onboarding. What this means, is that upon supplier add requests, the details of supplier and commodity information are now routed to Sourcing, who in addition to other relevant stakeholders, can now review onboarding requests from business units against existing preferred suppliers. Through this process further reasoning can be provided before a new supplier is on-boarded, or an existing one with a negotiated contract can be recommended.  As a result of this process, XYZ estimates a 50% decrease in off-contract spend of $3.6M.

Based on the examples presented, it is clear supplier information management can act as a catalyst for not only improving insight for sourcing activities, but also as a value enhancer down through to the procure-to-pay process.

Next week we at HICX Solutions look at supplier information management from the standpoint of Legal and Compliance…

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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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