Part One: First Five Recommendations
1. Identify and quantify Supplier Risk and develop Response Options.
The supplier base represents the largest controllable factor, Risks. Changes to the suppliers’ environment often dictate changes to your environment. Change is a potential risk, especially when not foreseen. Risk events are not limited to just the few major critical suppliers, disruptions from a wide range of secondary suppliers can also impact operating environment and jeopardize daily revenue.
Who are the specific suppliers, materials, and services that are at Risk, especially those global sources of supply?
Supplier measurement is Risk Management; it is a systematic approach to reduce risk by establishing both quantitative and qualitative factors that rank and compare the Supplier against existing or unknown risks.
In the current environment can we still have confidence that our global and extended sources of supply will continue as business-as-usual?
Now is the time for those answers, not when the disruption occurs. Risk may not be the prime responsibility of procurement, but the continuity of supply is!
2. Monitor how well Supply Management provides the materials and services—on time.
No other measure has the significance of the basic fulfillment responsibility of Supply Management. Subsequent responsibilities such as cost, quality, control, and standards, while valid, are meaningless if delivery is not accomplished. One innovative and realistic approach is a monthly graphic display of how well those goals were accomplished. Supply Management must be held accountable for managing the trade-offs. Current measurements do not effectively monitor that responsibility.
3. Use the PPV approach to develop a market-basket approach to evaluate the competitiveness of purchase cost—not individual item or service savings.
Purchase Price Variance (PPV) only reconciles the overhead account. It is not a measure of performance effectiveness, but it could be and is generally accepted by the financial community as a measure of purchasing effectiveness. Supply professionals lose credibility with savings reports that identify unrealistic cost savings while the finance department is issuing negative Purchase Price Variance reports. Rather than continue to fight or ignore it—use the concept. An effective solution is to develop a “Market Basket” concept to identify the total impact of competitive pricing. The basket consists of the Top 20 to 25 purchase commodities (materials or services) which collectively account for in excess of 80 percent of the total annual externally (excluding interplant and divisional purchases) purchased costs of materials and/or services. For each commodity and collectively for the entire basket, statistical process control charts are developed and tracked against the targeted range. The targeted range is developed quarterly by the head of supply and concurred with by the heads of finance and operations. The target range represents historical projections and engineered or benchmarked goals that recognize the estimated total usage. This is the new PPV.
It is estimated that over 25% of all purchases by-pass the formal procurement processes. The User is sending a clear message “…either you get it on time or I will.”
4. Measure the impact of suppliers on the financial chain and working capital and the validity of financial reporting
Typical billion-dollar companies today spend $32 million annually for unnecessary working capital and inefficient processing functions, because they lack visibility into the FSC and receivables. By optimizing their FSCs, companies can:
Reduce their working capital needs by as much as 20% to 25%, saving nearly $15 million annually.
Lower financing rates on required working capital by more than $4 million each year.
Gain early warning into problems.
Eliminate expensive, non-productive float.
5. Insure the effectiveness of Talent within Supply Management—impact of training.
No set of managers has the pivotal position of managing more internal and external relationships than the executives who oversee the Supply Management functions. To under-invest in this human capital is foolhardy.
Historically, in many companies, the Supply Management personnel were the oldest, longest functional service, least educated, lowest grade level, and lowest salary scale of any other functional grouping. With such an underinvestment in Supply Management human capital, companies should not expect to optimize Supply Management.
Executive Management cannot afford to ignore these issues. Supply Management’s success or failure directly impacts the profitability and long-term success of the enterprise.
The current educational system is failing to produce qualified employees— where will your competitive talent come from?
In the future, successful Enterprises will take responsibility and investment for educating employees—even in the basic skills.