Healthy Paranoia Drives Investment In Supply Management

Supplier quality, reliability and performance are increasingly critical for companies under constant pressure to both innovate and reduce costs through methods like lean logistics and offshore sourcing. Consequently, managing the supply base and its associated risks has become an industry-leading best practice.

"It's no longer just about buying smarter to save money," says Christine Crandell, vice president of marketing at Ariba, Sunnyvale, Calif. "It's about the role of resource provision in your corporate strategy and how that fits into the whole story of risk management." Companies today are worried about supply disruptions and also supply flexibility, Crandell says.

Best-in-class companies are more than worried, "they are paranoid," according to Sudy Bharadwaj, vice president and research director at Aberdeen Group, Boston, who authored Aberdeen's recent Global Supply Visibility and Performance Benchmark Report. Their paranoia is well-founded, he adds. "Pressures to reduce inventories leave many companies in all industries with only enough inventory for a relatively short period of time," Bharadwaj says. This minimal safety stock-coupled with the long lead times and uncertainties of low-cost country sourcing-means an increased risk of missed delivery dates that can slow manufacturing lines or leave store shelves empty, he says.

Being motivated by fear pays off, however. Companies in the survey that said their policies are driven by fear of disruptions, rather than by actual experience, had far fewer disruptions than their more reactive counterparts, as well as higher overall supply chain performance. "Here we have proof of what many successful business thinkers and authors have long said: only the paranoid survive," says Bharadwaj. These proactive, best-of-class companies met customer-requested ship dates an average of 90 percent of the time, versus 40 percent for lower performers. And they achieved this service level while reducing inventory by 39 percent, compared with a 22-percent reduction for average and laggard companies.

As its title implies, the Aberdeen study cites visibility and performance measurement as two essential ingredients of effective supplier management. Other needed elements are an understanding of the total costs of doing business with a supplier and supplier collaboration. The report says two technologies are key to these capabilities: supplier enablement and supplier portals. With the exception of supplier performance measurement, which already is widespread, the report says that all of these solutions "are in strong growth mode (as) many enterprises are immediately upgrading all segments of a global supply visibility and performance program."

More evidence for the value of supplier management comes in another survey of 229 global procurement executives by Accenture, McLean, Va. "Companies that get supplier relationship management right can typically realize an additional 2 percent to 3 percent savings over and above the 8 percent to 10 percent they would get from typical strategic sourcing," says Accenture partner Randall Moore. Additional savings come from post-contract activities such as contract compliance, supplier measurement and joint process improvement.

Moore identifies four things that companies need to do well in order to have a high performing SRM program. First, he says, "they need to very thoughtfully segment their suppliers in order to understand which ones should be truly integrated into their supply chain." Second is a strong contract management capability; third is supplier performance measurement, and fourth is integration and collaboration.

While there is considerable overlap, these two surveys reflect the differing views and definitions of SRM that exist in the marketplace. "If you were to go out and ask five companies to name the most important thing about SRM, or even supplier performance management, you would get five different answers," says Meg Lloyd, vice president of applications development at Oracle, Redwood Shores, Calif. "That is partly why companies tend to list this as a very high priority but have never been crystal clear about how to focus on it," she says. "Some think the focus should be on risk, others on price, others on delivery performance, others on flexibility."

In addition, it often is difficult to know who owns the supplier management function. "We see a number of companies that are struggling with the organizational issues," says Lloyd. "Is the procurement department responsible or does the procurement department establish the relationship, with the manufacturing plant being responsible for the performance of a given supplier? Who really owns the responsibility?"

This murkiness is reflected in the approach to solutions by both users and vendors. Some include supplier management under strategic sourcing initiatives; others see it as part of product lifecycle management, or spend management, or supply chain management-or some combination of functions from all of these.

Dallas-based i2 Technologies firmly believes SRM is a core part of supply chain management, for example, but its solution set has some PLM-type capabilities as well. "We want to provide an end-to-end solution, which means you really need to start with the design process," says Manish Govil, program manager-SRM group. i2's solution gives engineers the ability to incorporate sourcing intelligence by searching for existing components that meet a new design need. "One of the big value propositions we bring our customers, especially those in high-tech, aerospace and automotive, is the ability to find and use parts that already exist," he says. "That means they are not having to design these parts or carry the inventory or do any of the other associated transactions, which are savings that go directly to the bottom line."

i2 also gives design engineers access to lists of preferred suppliers and their capabilities. "Designers are the people who decide what the company is going to buy, so if we can give them information that helps them make supply-friendly decisions, then we smooth out a lot of vibration and save both time and cost," Govil says.

Core Suppliers
Regardless of approach, one of the first steps in supplier management is identifying key suppliers that are core to a company's operations and that warrant establishment of joint processes and communications.

"The biggest pain point for companies is simply to identify who their most important suppliers are and how important they are," says Lloyd. "So the first step in formalizing a supplier management program is having visibility to your suppliers and how much of your enterprise they supply. Then you need an organizational commitment to standardize as much as possible across all internal buying organizations so that you deal with suppliers in a consistent way."

Bharadwaj reiterates this point. "In today's global economy, suppliers may be servicing an enterprise all over the world," he says. "Therefore, the optimal process is one which is aligned and standardized company-wide." Moreover, he says, a successful program must be repeatable and sustainable-"thus a very disciplined approach must occur."

Identifying core suppliers requires looking at more than price and delivery performance, says Moore. "You also need to consider such things as what joint development opportunities might be available with this supplier or whether this supplier can offset your own R&D costs by providing engineering talent and resources." Companies should not waste effort on suppliers that do not fundamentally impact either their cost structure or their ability to deliver core missions, he says, noting that this will likely be no more than 15 percent of the supply base.

Interestingly, the Aberdeen study found that there is no middle ground on this subject. Best-in-class companies either focus on the top 10 percent of their suppliers or they connect and share information with 100 percent. "A very common trait of industry average and laggard performers is that they share information with 50 percent of their suppliers," Bharadwaj says.

	"We see a number of companies that are struggling with the organizational issues." - Meg Lloyd of Oracle