Are you really managing your suppliers effectively?

4 May 2012
I am often asked about supplier relationship management (SRM) and how to maximise results in this area. It is a topic of much debate and a Google search finds over six million results, so it can be hard to know where to start. Organisations often fall into the trap of improving their SRM meeting structures and reporting processes without actually focusing on the accuracy of their underlying KPIs. It is important to remember these KPIs are not only performance indicators, but also fundamental indicators of supplier risk. For example, you may have a KPI for supplier invoice accuracy but how far do you truly test this? Do you conduct random spot checks and annual audits? Post-event reviews and remedial action are not ideal. Upfront risk mitigation via embedded end-to-end process controls around your procurement activities is a much more efficient way of managing your requisition to pay risks. Consider a manufacturing company that engages multiple logistics carriers across its multinational business. In order to ensure that freight services are received in line with expectations, the upfront controls are as important as the KPIs. For example, in the case of controlling freight services spend:
  • How would you validate that the correct service was agreed in the first place, to avoid costly ‘gold-plating’ of requirements by internal customers (for example standard freight services versus unnecessary requests to expedite shipments)?
  • How would you validate you were charged the correct rate for every service (rate card version control, fuel and risk surcharges, additional exceptional charges and exchange rates for instance)?
  • Are you confident that you are not receiving inaccurate or duplicate invoices from the supplier?
Your supplier’s ability to provide data that demonstrates ‘due process’ will be an indictment itself of the level of control. The ability of your own underlying data to cross-check products and services you have received will also indicate the health of your overall business controls. Supplier control challenges are not insurmountable and will require a critical review of processes from requisition to payment. ☛ Paul Bakstad is advisory director at Ernst & Young
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