Insight

Supplier management: The art of the possible

Creating maximum value through effective governance – and simply asking the right questions

Sean Heston

Sean Heston

Manager Advisory, Procurement & Business Services, KPMG US

+1 816-802-5228

Supplier management is sometimes art, sometimes science. When done effectively it’s always an ongoing integrated process involving active, two-way communications with a long-term, holistic view of an organization.

If you’re questioning why good supplier management is so important, then you’re certainly not alone. Companies are spending as much on their suppliers as they are in paying their personnel or in real estate costs. Areas like these with large amounts of spend benefit from establishing agreed-upon ways of working and tracking value. 

Supplier management is uniquely positioned to drive value across both Indirect and Direct spend areas. With external spend often exceeding 50% of revenue it is critical that effective supplier management capabilities are developed to drive increased value from this spend.

So far, so good.

Managing the long-term value that suppliers can generate, however, is a strategic control lever that almost every company overlooks. Companies may have entire departments dedicated to a specific function or area of the business. But when it comes to supplier management, most have a hard time defining it, let alone identifying who should be accountable for it, the policies that need to be written and how those policies should be enforced.

Those organizations with a strategic view of key supplier relationships can better influence their suppliers beyond sourcing and contract awards to increase value from quality, service and timeliness.

How does supplier management create value?

Many procurement organizations have developed category management and sourcing capabilities that lead to realizable value at the time of contract. But what happens after procurement declares victory and the contract is signed? Few companies have an “intentional” view of how to manage their ongoing supplier relationships, especially in the post-contract phase. That’s often when the process breaks down but also where the real long-term benefits begin. It is usually left to the business users as part of the contracting organization to maintain anticipated value.

Businesses often see contractual savings leakages of 15%* from factors including, but not limited to, supplier non-performance, invoice and credit memo errors and redundancies, missed SLA penalty payouts and process inefficiencies. Having a structured supplier management framework in place can allow organizations to capture this additional value by focusing on the “value beyond cost.”

A mature supplier management program also focuses efforts on key strategic suppliers to brainstorm, crowdsource and innovate new ideas that can often yield both cost savings and revenue generation ideas.

From the best intentions…

Taking an intentional approach to supplier management can absolutely help companies derive value from their supplier base. By segmenting suppliers – either within a sub-set of suppliers or across the entire supplier portfolio – it’s possible to develop a view of each supplier’s value: How strategic are they? How much do you intend to spend with them? How much risk are they introducing into your business?

By taking these variables into account, an organization can start to look at what type of relationship it wants to have with each supplier, what are the expectations of each supplier and what are the internal expectations of the company?

Chasing the art of the possible

All this may sound daunting, but when supplier management is pursued logically as a business process the steps become much clearer. Early on, it’s critical to assess the current organizational status, develop the case for change and get the necessary buy-in from management. From there, you need to establish a target operating model that takes into consideration future goals, metrics, supplier segmentation, technology needs, strategic objectives, costs and success criteria. Finally, you can start drawing a road map with a value case to get you where you ultimately want to be.

From there, the organization continues into implementation, taking the planning and value case and putting in into action. A strong implementation plan with tracking of successes, issues and changes is critical to putting your supplier management function into place in a timely and cost-efficient manner.

So what does “good” look like?

When done well, supplier management comes down to a mix of cross-functional teams assembled to encourage enterprise-wide diversity of perspectives, with potential representatives from appropriate teams like procurement, risk, legal, finance and the business that will work with a particular supplier. These supplier “super groups” should be tasked with working together to provide enterprise-level supplier management with the key goals of clarifying roles, reducing redundancies, optimizing costs and improving supplier output and relationships.

“Good” SM teams work through agreed-upon standardized processes and use an integrated toolset capable of contract management, supplier relationship management, enterprise resource planning and risk management. These teams are working with the good of the overall enterprise in mind. They are empowering key relationships, tracking benefits realization, managing contractual agreements, measuring performance and taking a collective view of the supplier portfolio as they administer a program.

In short, they’re being “intentional” about the whole process.

On the flip side …

Now that we have a snapshot of the good, it’s important to recognize the traits of bad supplier management. It usually results when there’s no governance model in the contract. In other words, there are no specified service levels to meet, no metrics or obligations and no agreed-upon way of how a supplier will be managed. Even worse is the mindset of “we can manage all our suppliers in the exact same way” leading to contracts that simply outline the basics – a list of supplier services to be provided and their fees.

Bad doesn’t always mean irreversible, though. If you involve the right enterprise team, such as the sample group mentioned earlier, then they may be able to work a relationship to the degree of convincing a supplier it makes sense to re-open the contract and make necessary updates to limit, expand or level the playing field.

The moral is: companies with good supplier management can actually take a bad contract and spin gold out of it.

It’s a marathon, not a sprint

Building an effective supplier management program can be a multi-year journey for many companies. It can also support a number of other business decisions companies need to make to achieve their objectives. No company can create supplier management or improve it substantially overnight. KPMG has helped a number of organizations evaluate their supplier management effectiveness and put roadmaps in place to mature the function and drive value. We can help you decide if you should keep doing this yourself – and if so, how you can improve – or if it’s better to evaluate third-party managed services options.

With so much cost and service on the line, effective supplier relationship management is critical to the success of an enterprise, but also often one of the most overlooked processes.

Is it us? Is it them? Are those even the right questions?

Many companies are not asking the right questions, either because they simply don’t know what to ask or they aren’t comfortable asking themselves the tough questions.

They focus on third-party risk or strategic sourcing only, for example. They may come up with great answers to these problems, but in the end, they are only solving a single problem. This creates other issues upstream and downstream because they did not take into consideration what the actual lifecycle of the supplier looks like within their organization. It is important to establish the type of relationship you want to have with your suppliers and then figure out how to tangibly make that a reality.

Finding the right answers to the right questions – early – will help companies and their suppliers take the right steps forward together toward a successful future.

Learn more by listening to the podcast, COVID-19 and supplier segmentation: What now. What next. and by viewing related content on our website.

Footnotes

Source: World Commerce & Contracting and SirionLabs. Faster contracts. Better contracts. Eliminating the friction points in contracting; January 2021, page 8.