The Cost of Supplier Engagement

Charlotte Sutton
Charlotte Sutton,
Whether you are a private, public or not-for-profit organization, engaging "well" with suppliers is critical for the lifeblood of your organisation, to:
  • serve the needs of your customers and constituents
  • differentiate your supply chain from the competition
  • increase margins, Earnings per Share (EPS) or value from budget
It also consumes a large percentage of cost of operations (staff time, effort, etc.)
The challenge is to put in place an effective, efficient supplier engagement strategy that allows you to streamline processes, remove duplication and human/finance error.

Supplier engagement process
Supplier Engagement is a broad range of activities that take place every day.  Your Procurement and Finance departments interact continually with suppliers to:
  • Recruit and qualify potential new suppliers
  • Solicit bids and proposals, accept responses, and collaborate on solutions
  • Maintain important supplier information
  • Update supplier catalogs
  • Perform supplier reviews
  • Send purchase orders
  • Receive and process invoice transactions
  • Respond to supplier inquiries about invoice and payment status
That's a lot of activity performed by a lot of different people. And in most companies, much of that activity is still done in an unstructured manner using paper, fax and email. That means a lot of inefficiency and very little process standardization or control.

The cost of trading with suppliers
As a result, the cost of supplier engagement can be extremely high - even higher than financial and procurement executives sometimes realize. There are direct and indirect costs of doing it poorly.
  • The cost of the Procurement and Accounts Payable manpower consumed everyday just performing the "mechanics" of all this interaction can be huge. Experts say that it typically approaches 70% of the total cost of the Procure-to-Pay process. 
  • The opportunity cost is even higher when you consider the results that could be realized by applying more of that time to activities like supply base development and working capital management. 
  • The duplication of effort in having to define individual standards and processes for engaging with suppliers.
  • When cumbersome internal processes result in missed supplier reviews and too few competitive sourcing events, there is added risk that suppliers will fail to perform or even transfer liability to your organization, adding unexpected cost.
  • When poor communication processes make life harder for suppliers, it adds to their cost of doing business with your company - cost that is ultimately passed on to you in some form.
  • When purchase orders and invoices are paper-based and manually processed, time is lost, errors are made, and considerable manpower is wasted on non-value-add activities.
  • …the list continues.
The impact of effective, efficient supplier engagement
The impact of effective, efficient supplier engagement can be clearly seen in your organization's bottom line and competitive position. Doing it well makes your company "easy to do business with" for suppliers, resulting in strategic benefits ranging from reduced supplier risk, to lower overall costs of the goods and services you purchase, to the improved agility you derive from a strong, responsive supplier base. Doing it efficiently reduces waste, lowers operational cost, and accelerates business processes.

In a nutshell... Supplier Engagement is a critical, far-reaching activity. Good companies do it well. Leading companies do it well, and do it at far less cost.

Next action - high level assessment
If the issues in this article resonate with you, the next step is to perform a high level assessment of your supplier engagement process; identify issues and their causes, and understand how this is impacting performance?

Start today - download this free "15 minute health check" guide.