Supplier engagement: "Why it consumes time, effort and cost" (more than Finance and Procurement realise)

Organisations are on the hunt for techniques and technologies that will help them to reduce the cost, inefficiency and risk in trading with suppliers. But why?

Let’s take a typical case study - what we routinely see:
  • The organisation tends to equate ‘suppliers’ to ‘creditors’, meaning they register and maintain details in the corporate ledger to pay invoices. This is what we call “spent” control not “spend control”.
  • Each year the supply base changes by up to 50% with as little as 10% of the new suppliers being actively used in subsequent years.
  • Less than 10% of current suppliers will account for 80% of their total spend.
  • Around 20% of their current suppliers will account for 80% of the invoices processed.
  • A moderate percentage of suppliers will trade with more than one service area or department within the organisation.
  • A high percentage of subjective general ledger codes will account for spend.
  • Little effort is made to categorise suppliers (e.g. high risk, routine, sundry etc.), manage performance and co-ordinate information across departments.

The challenges
This presents a number of challenges for Procurement AND Finance. Without a clear and formalised strategy for identifying and engaging with suppliers, it is difficult to:
  • Share information to improve planning and collaboration.
  • Engage appropriately with the right suppliers that can deliver value.
  • Understand the optimum trading mechanism with suppliers.
  • Adopt the right risk reduction strategies.
  • Manage the performance of suppliers to achieve business objectives.
This is even more problematic when you consider the types and range of suppliers across all your purchase categories:
  • Suppliers of direct and indirect goods.
  • Suppliers of ongoing, periodic, and one-time services.
  • High volume/low value and low volume/high value suppliers.
  • Huge global corporations and small companies.
  • Companies with sophisticated IT capabilities and companies with little.
  • Local, regional and global suppliers.
Plus, you may engage with some suppliers as a single or sole source and others you will have a strategic relationship with. Clearly, a “one-size-fits all” approach will not work effectively across your supply base.

What is required?
Effective supplier engagement should address a broad range of activities that takes place every day with suppliers. Your Procurement and Accounts Payable departments interact continually 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 enquiries about invoice and payment status.
That’s a lot of activity performed by a lot of different people. And in most organisations, much of that activity is still done in an unstructured manner using paper, fax, email. That means a lot of inefficiency, many opportunities for human error, and very little process standardisation or control.

Effective supplier management should incorporate a comprehensive, phased approach to managing, communicating with, and trading with your suppliers.

Phase 1
Gain a clear picture of what you’re buying, and from whom. Undertake a rapid and high level procurement review to identify areas that can deliver immediate cost savings and efficiencies.

Once the base information is gathered, you can categorise suppliers, outline the various communication and eCommerce methods you will need for different types of suppliers, and highlight candidates and methods for invoice volume reduction. Ultimately, you will be able to identify the opportunities that will make the greatest impact, fastest.

Phase 2
Once you understand your environment, develop your strategy and collect essential information. Adopt eProcurement technology and implement a framework to streamline and automate key aspects of Supplier Engagement in the sequence that provides the most value to you. This framework should include the tools you need to:
  • Maintain accurate, up-to-date supplier information (supplier directory, recruitment, qualification and adoption, eCatalogue management).
  • Effectively communicate and collaborate with different types of suppliers (self-service profile and catalog management, RFx and quotation posting and response and account enquiry).
  • Streamline commerce transactions (orders and invoices).
Phase 3
Once you have the supplier management framework in place and address initial “quick win” opportunities, you will be ready to work your larger strategy with incremental expansion and refinement.

Why bother? The benefits of supplier management (and engagement)

For the CEO:
  • Improved profitability through reduced costs.
  • Improved competitive position through a stronger supply chain.
  • Reduced risk.
For Finance:
  • Reduced capital employed in the business
  • Reduced operational cost in AP, Procurement and across the enterprise.
  • Reduced cost of purchased goods and services.
  • Improved cash management.
For Procurement:
  • Stronger supplier relationships.
  • Better value; lower risk.
  • More time for strategic sourcing and supplier development activities.
Gain full control of the supplier lifecycle - and enrich procurement with Supplier Relationship Management software.