Procurement must avoid making the “same mistakes again and again” when it comes to running supplier management programmes.
Jamie Ogilvie-Smals, VP at consultancy GEP, told SM discussions around the creation of supplier management programmes to foster collaboration and innovation had been held for a long time.
“In practice, we see the same mistakes again and again where supplier management programmes are often a blunt instrument used to manage supplier performance and contractual compliance,” he said.
While procurement will always have a focus on cost and service, the Covid pandemic has highlighted limitations of the “cost-optimised, just-in-time global supply chain”.
Ogilvie-Smals shared five key pitfalls that would “undermine the best, well-intended supplier management programme”.
1. Failure to recognise that not all relationships are equal
Ogilvie-Smals explained procurement often uses the “2x2 Kraljic matrix” to classify suppliers into four categories: strategic, bottleneck, leverage and routine, with two parameters; business impact and supply market complexity.
“The problem is that this segmentation simply isn’t sufficient and often leads to execution errors and poor ROI. Too many of the suppliers end up positioned in the ‘top-right,’ and undermines our ability to prioritise the key relationships,” he said.
Procurement should look to apply an additional lens, such as long-term compatibility. By identifying the most important, strategic suppliers, it “prevents being under-resourced, time constrained, and not having the right focus,” he said.
“Effective supplier management should be treated as a hierarchy, with the building blocks of category management, strategic sourcing, risk, contract and performance management.
“Relationship management should sit firmly at the top of the pyramid, characterised by an effort to work collaboratively to maximise mutual-value and build trust with the suppliers that are crucial to your organisation’s success.”
2. Losing value by not doing the right things with the right suppliers
A crystal clear understanding of how each supplier directly contributes to your organisation's overarching strategy will provide a greater ability to drive the most value by “doing the right things with the right suppliers”, Ogilvie-Smals said.
Once this awareness is in place, organisations will be able to identify the supplier relationships that need the additional layer of relationship management beyond contract, performance and risk management, he said.
“This is where the added value, that goes above and beyond the terms of the contract, will be realised,” he added.
3. Lack of cross-functional collaboration to drive business involvement
Many organisations view supplier management as a procurement-specific programme, but to be truly effective, it should be procurement-led with engagement and participation from stakeholders across the organisation, Ogilvie-Smals said.
“It is common to come across instances of negotiations with suppliers on a supplier management initiative falling through in the last stage due to lack of inter-department communication and coordination.
“For such initiatives to be successful, procurement should build a cross-functional working team consisting of direct stakeholders, and use its data and team to coordinate and drive the initiative to ensure ‘localised execution’,” he said.
4. A lack of appropriate governance, reporting and actionable insights
Ogilvie-Smals said it is common for organisations to underestimate the size and level of change required to deliver on objectives. They should use a centralised-management and localised-execution approach to ensure this doesn’t happen with supplier management.
“The core committee is responsible for programme management and execution, and the localised cross-functional team is responsible for the supplier-specific initiatives. To ensure alignment across initiatives and the wider business strategy, create a steering committee of senior executives to provide timely strategic direction, and closely track impact and value,” he said.
“Establish appropriate forums to foster interaction and ensure information flows both horizontally and vertically within the organisation and with suppliers, and make sure the reporting that drives these interactions is timely, accurate and above all, provides actionable insights.”
5. Measuring the wrong thing
Many organisations fail to measure the benefits from supplier management initiatives objectively, resulting in the programme being “abandoned midway or dragging on unfulfilled on the procurement agenda without any gain or sign of real benefits”, he said.
Greater transparency and alignment on incentivisation can help organisations position themselves more favourably with suppliers.
“We leverage benefits, from the day-to-day operations to collaborating with suppliers on the next big thing, and bringing supplier’s expertise and creativity into organisations to gain competitive advantage. It’s right to reward and develop a mutual mechanism to incentivise innovation.”
Ogilvie-Smals said: “In procurement, we often complain about business partners not recognising the value of procurement, but we need to start by recognising the value that suppliers bring and have a clear, compelling value proposition that engages the business, beyond procurement.
“Only then will we avoid the common pitfalls, to embrace a more holistic approach with our suppliers and drive supply chain resilience and competitive advantage.”
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