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This whitepaper will focus on the 5 key steps to effective supply chain management and the role technology plays in achieving these imperatives.
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5 Steps for Effective Supply Chain Management We live in difficult times where volatility is the norm. For any business leader today the top challenge is cost. As business leaders across industry sectors work towards realizing cost efficiencies, with millions of dollars at stake, the role of sourcing has become very important. Coupled with fears of W shaped recession, financial crisis in leading economies, fiscal cliff in US - cutting the gross domestic product (GDP) by four percentage, and political and natural uncertainties, CPOs today are compelled to go back to the drawing board to rethink company's sourcing strategy. Facts: • US economy likely to have a negative growth rate in 2013 on account of impending fiscal cliff i.e. implementation of the Budget Control Act of 2011 • Greece's ongoing economic contraction increasing the unemployment rate to 21.9% in March 2012, while the unemployment rate in Spain was reported to be 24.6% for May 2012 • Peter Morici, an economics professor at the University of Maryland's Smith School of Business, estimates Sandy will result in $35 billion to $45 billion in total losses • Other costly storms are Katrina causing damages more than $46 billions, Andrew resulting in loss of nearly $25billions and Ike with more than $10 billion loss
“Supply chains cannot tolerate even 24 hours of disruption. So if you lose your place in the supply chain because of wild behavior you could lose a lot. It would be like pouring cement down one of your oil wells.” - Thomas Friedman, American Journalist, Columnist and Author Given the events of the past five years financial crisis, natural disasters and massive supply chain failures, to name just a few procurement will need to push aggressively for the inclusion of supply chain risk on the broader business agenda in order to protect the business from uncertainties and turbulence. Today with supply base having gone global, the procurement function has become too complex to be handled efficiently through traditional manual processes. With so many uncertainties, defining company's sourcing strategy and becoming the customer of choice for the suppliers during difficult times is a challenging task. Companies have started to focus on technology to simplify this complex process of sourcing and supplier management. However, the technology adoption rate in procurement is still low.
As per a recent study conducted by Zycus including nearly 600 procurement professionals, • Companies in the lowest savings performance tier score technology adoption and use between 4 and 5 on a scale of 0 - 10 • Companies in the top savings tier score it at 7 on a scale of 0 - 10 • Average technology adoption is at 6 on a scale of 0 - 10 The unprecedented increase in supply chain risks has forced organizations to bring in more agility into their supply chain processes. Agility enables organizations to prepare in a much more proactive manner to avert huge financial losses arising out of costly supply disruptions.
This whitepaper will focus on the 5 key steps to effective supply chain management and the role technology plays in achieving these imperatives. SUPPLIER DISCOVERY Finding a suitable competitive supplier is fundamental to the success of a sourcing strategy. With globalization, it is no longer efficient to limit your supply chain to one country or location. An effective supplier discovery process helps to find a new supplier which increases a company's sourcing leverage and gives an opportunity to evaluate different suppliers across markets / geographies based on their capabilities. Company can follow multiple best practices. Traditionally companies referred to supplier registry or external networks to scout for suppliers. Using these traditional methods for selecting a supplier can be tedious, complex and time consuming. Today companies are using sourcing tools and also, engaging with the suppliers early through supplier portal. With advanced sourcing tool the benefits are multifold. Along with drastic reduction in time to search suppliers, companies are able to get the right suppliers based on the parameters they set.
The natural disasters of the recent time affected the facilities of numerous suppliers which impacted businesses across vertical which depended on suppliers from the affected areas. An example here is the impact the electronics industry faced with the earthquakes in Japan. With supplies shut down, businesses needed to identify alternative supply sources within a short time period in order to ensure business continuity. The common challenges faced in this case include: • Long cycle time for building supplier list • Cumbersome process of supplier validation and evaluation Implementation of a supplier management solution would enable sourcing managers to create and manage a centralized supplier data repository. This would facilitate screening of potential supplier's based on pre-defined criteria and maintain a list of pre-qualified supplier's for new/existing sourcing initiatives, which we will discuss in our next step.
SUPPLIER QUALIFICATION The sourcing team should be aware of unscrupulous suppliers entering the supply chain and providing substandard raw materials. In recent times there have been multiple cases of companies having to face the heat on account of wrong supplier practices. A few examples are, • H&M, a fashion retailer was asked to sever ties with suppliers sourcing cotton from Uzbekistan where child and adult forced labor is prevalent. • Levi's and GAP, clothes manufacturers had to scrutinize their supply chain in China as their manufacturing process was polluting watersheds in China with hazardous cancer causing chemicals. This situation signifies the need for supply quality and cost assurance by implementing a preliminary round or a qualification stage to screen the suppliers. Sourcing teams should have a predetermined screening process that every supplier registering on the supplier portal should go through. This helps in eliminating suppliers who do not compliment company's purchasing policies.
Companies can have a questionnaire to judge the suppliers. The questions can vary depending upon the project requirement. Each question can be given weightage depending on the project needs and complexity and can be assigned score ranges. Some of the qualification questions can be, • What is your employee strength? • Do you have a formal framework of risk assessment and improvement? • How often is this tested? • Do you have your own data centre? etc. Depending on the answers, qualification score is calculated and as per the benchmark set, the supplier is either qualified or disqualified. Apart from the questionnaire, the suppliers also need to satisfy credential requirements like mandatory certificates, audit requirements etc.
SUPPLIER SELECTION It is imperative for companies to select the right suppliers who not only provide items/services at a competitive cost but also possesses the ability to reduce impact of economic uncertainties/natural disasters on the organizations supply chain/sourcing strategies. All stakeholders should be involved in the supplier selection process to ensure transparency and make evaluation process more objective. Standardizing the requirements and specifications in the form of a template, makes the process more repetitive and effective. The shortlisted suppliers after the qualifying round are evaluated on different parameters or scenarios like choosing a supplier from a particular geographic location or working with minority suppliers (women, backward class etc). Implementation of a sourcing tool allows sourcing managers to run custom scenarios on the bids received from suppliers based on the business constraints. Sourcing managers can optimize bids not just based on the lowest price but on a host of non-price parameters like service delivered, reputation etc to arrive at the best possible supplier to award the contract. After performing the required analysis the most competitive supplier complying with the company's purchasing policies is awarded.
SUPPLIER ONBOARDING Supplier onboarding refers to the process where finalized suppliers are equipped with the necessary knowledge and behavior to become a part of the company's supply chain. A supplier is required to submit various mandatory certificates and documents related to company registration, insurance, diversity certificate, quality certificate etc. The supplier portal makes the onboarding process simple and less time consuming. It helps the supplier to upload the required documents and for the buyer company to keep a track of it by installing approval workflows. It also enables maintaining an audit trail to check compliance requirements. For instance, submitting the tax documents before starting the business or a background check of the supplier. Thus automating the onboarding process reduces the overall cycle time and helps buyer companies to track compliance of the process.
SUPPLIER PERFORMANCE & EXPECTATION MANAGEMENT The potential supplier has cleared the qualifying and selection stage, the contract terms and conditions have been negotiated and agreed upon and the supplier has now become a part of the company's supply chain. It is now very important for the company to keep a check on the suppliers' performance vis-à-vis the set benchmark or Key Performance indicators (KPIs) viz. product quality, innovation, on-time delivery, carbon emission etc. Companies should have a supplier segmentation strategy to bucket the suppliers based on for instance, criticality in the supply chain or total spend. After the segmentation, KPIs should be determined and assigned a particular weightage for each bucket and the supplier performance must be reviewed based on the scores generated.
If the performance of a supplier is not satisfactory, the suppliers can be put through a development program to ensure the suppliers move towards the preferred score and meet the objective of the organization. The supplier management tool must enable the buyer company to develop and manage supplier development program to drive the suppliers towards a preferred score. Through supplier performance and expectation management, companies can build a strategic relation with their suppliers whereby they become the customer of choice for the suppliers. Conclusion: For effective supply chain management, companies should follow the 3 tenets Transparency, Accountability and Continuous Improvement. A CPO wanting to create advantage from the supply chain needs to leverage on technology to account for the uncertainties while determining the strategy - to find potential suppliers, sort them, and determine the relationship with the supplier transactional, collaborative or strategic; evaluate the supplier performance on pre determined key performance indicators and decide whether to drop the supplier or nurture the relationship.
About Zycus At Zycus we are 100% dedicated to positioning procurement at the heart of business performance. For more than a decade we have been the world's most trusted leader in Spend Analysis. With our spirit of innovation and a passion to help procurement create even greater business advantages, we have evolved our portfolio to a full suite of Procurement Performance Solutions — Spend Analysis, e Sourcing, Contract Management, Supplier Management, and Financial Savings Management. Behind every Zycus solution stands an organization that possesses deep, detailed procurement expertise and a sharp focus on being responsive to customers. We are a large — 600+ and growing — company with a physical presence in virtually every major region of the globe. We see each customer as a partner in innovation and no client is too small to deserve our attention. With more than 200 solution deployments among Global 1000 clients, we search the world continually for procurement practices proven to drive competitive business performance. We incorporate these practices into easy-to-use solutions that give procurement teams the power to get moving quickly — from any point of departure — and to continue innovating and pushing business and procurement performance to new heights.
