As the author of APICS magazine's "Ask APICS" department, I receive numerous reader inquiries--many more than can be answered in the pages of the magazine. So I chose to make use of this edition of APICS Extra to respond to a recent question about procurement processes. Reader T.M. wrote, "Off-contract spending by suppliers and the potential for reputational damage has caused the managers at my company to task me with improving our procurement. What do you recommend?"
T.M. should begin by defining or updating the criteria of an ideal supplier, and then measure suppliers against these standards. To do this, it's necessary to gather input on how to measure a supplier from the following resources:
- Key stakeholders--typically, professionals from finance, marketing, customer service, and logistics, as well as strategic alignment experts--should provide information on vendor performance and expectation.
- The business's legal experts should discuss any changes in law or regulations that require specific review or investigation. Manufacturers are increasingly responsible for investigating, evaluating, and storing information from sources, including suppliers, that affect the health, safety, or basic function of products.
- People involved in preferred supplier programs also should be included in these discussions.
The supplier criteria should establish a standard measuring process that includes marketplace reputation, pricing, responsiveness, quality, and commitment to areas of value, such as business leadership, cost containment, or philosophy of continuous improvement. The standards must be able to be scored in order to create a comprehensive, measurable, and trackable reflection of the suppliers.
The suppliers first are scored using the company's predetermined criteria. Then, the suppliers should score themselves. The key here is to identify gaps in the results.
The next step is to examine the scores in real word application. A physical examination of supplier facilities, processes, and working conditions is invaluable. This is the time to answer the following questions: Does an on-site visit support the supplier's scores? Does this visit enable accurate understanding of daily operations? In what ways might a competitor of the supplier be different? Does the supplier expose its clients' businesses? How important are these risks? Are the supplier's criteria complete? Would the supplier's scores be adjusted after going on-site?
The next step is to consider customer and stakeholder perspectives. How would they react to the supplier's site? Remember: What the client perceives about its supplier's site may be exactly what customers and stakeholders perceive about the client.
Problematic off-contract spending should trigger an investigation. It's crucial to identify the cause and expectations for resolution. Off-contract spending may be a symptom of a larger problem in communications or compliance or lack of effective supplier relationship management.
Determine if it's possible to trace supplier off-contract spending to demands from the production and inventory sides of the organization. For example, does a surprisingly large number of jobs labeled "high priority" lead to accelerated delivery? Is intermittent vendor quality forcing rework and increasing production expenses? Procurement, like any area of operations, can fall victim to competing short- and long-term priorities in communication and decision making.
Another cause can be in-house staff people not specifying the best supplier. A study on AllBusiness.com revealed that the "categories worst affected include travel and maintenance, repairs, and operations." Only 26 percent of purchasing heads thought employees placed orders directly with external suppliers; but managers and administrators from the same companies told a different story: 74 percent said they did. About two-thirds of employees who knew their company had a preferred supplier list could not name suppliers for routine items.
In some cases, it may be wise to employ the services of a procurement service provider (PSP). The APICS Dictionary defines a PSP as "a company that has product, sourcing, and supply management knowledge and acts as an outsourced process by other companies providing procurement help. They most often are used by companies where procurement is a significant part of business, but the company lacks the expertise to effectively manage the process."
A NelsonHall survey revealed the top three reasons global companies choose to outsource indirect procurement. They include
- reducing process costs (84 percent of companies)
- accelerated sourcing times (79 percent of companies)
- improved ability to manage supplier performance (78 percent of companies).
The report's authors say the first issue to be addressed at the majority of organizations is improved supplier management. Typically, organizations aim to reduce the cost of goods, services, and procurement in order to accelerate sourcing cycle times and improve vendor management. Many achieve this through better spend visibility and the ability to manage supplier performance through a single interface.
I wish T.M. all the best in improving procurement processes. Jonathan Thatcher is director of research for the APICS professional development division. Contact firstname.lastname@example.org with comments on this article or with your operations or supply chain management question.