How to boost operational efficiency, lower costs, reduce risks and get more value from your suppliers
Growing a small or mid-sized company comes with many challenges. One of the top challenges is to get key processes into good shape. That’s because you don’t want process inefficiencies to magnify as the business scales. Worst case, that could pose an existential threat to the business. So, it’s best to get key processes optimised before you pursue rapid growth. A growing business gradually spends more money with suppliers and becomes more dependent on these vendors. Focusing on optimising processes related to procurement and supplier management, therefore, represents a very attractive Return on Investment. This article gives you four steps you can take now to boost profit and prepare your company for growth.
Step 1: Reduce the number of suppliers
Why having too many suppliers is a problem
Having too many suppliers is a problem because it introduces expensive and unnecessary complexity. Monitoring and risk managing your supplier base also become near impossible. The lack of procurement strategy, governance, processes and guidance are key contributors to the uncontrolled growth of the supplier base. Much like cancer, this can be very destructive.
On the surface, the wide choice of suppliers may seem like an advantage. But in reality, what’s happening is that there is too much choice – to the extent where the “flexibility” becomes counter-productive. Having a few backup suppliers in critical areas makes sense, but having ten, 20 or more, just creates confusion and inhibits staff from picking the optimal supplier when the pressure is on.
How to consolidate the supplier base
You first need to understand the scale of the problem. Analysing external spend across the company will give you a high-level idea. You will be able to see how many suppliers you have, who in your company uses those suppliers and what they buy. That will give you an overview of where you could possibly consolidate the supplier base.
You must then explore those possible consolidation opportunities further by speaking to key stakeholders. They can share their views on where it makes sense to consolidate, who the high performing suppliers are, and generally provide insights beyond what the spend analysis reveals. If you ask the right questions, these stakeholders will, for example, be able to give you an understanding of what led to the supplier proliferation in the first place.
Once you have a good grasp of the problem and the opportunities for making improvements, you can start working on developing solutions. These solutions could include any combination of supplier re-negotiations, tailing spend management through a third party, tendering bigger more attractive deals or outsourcing.
Needless to say, once you have fixed the problem you don’t want it to re-emerge. The new ways of working with a reduced supplier base must be properly embedded and reinforced. That can be done by enhancing existing procurement processes, controls and governance, as well as introducing new ones when required.
For more details on how to consolidate the supplier base, read the article Is Having Too Many Suppliers Slowing Your Company Down?
Step 2: Optimise your procurement processes
The damage sub-optimal procurement processes can cause
Ineffective or non-existent procurement processes may not have been a big enough problem to warrant management intervention when your company was relatively small. But it could cause serious problems as the organisation leapfrogs in size, e.g. through a merger. Whatever process inefficiencies exist will simply be magnified as the company grows. So, it’s easier, less costly and less risky to address these issues before the company enters a phase of rapid growth.
Another negative consequence of dysfunctional or absent procurement processes is that the workload of your non-Procurement staff is unnecessarily increased. These are people that should be spending all their time growing your business. Instead, they are spending time selecting, negotiating with and managing (or worse – not managing) suppliers.
Most non-Procurement staff would rather stick pins in their eyes than spend their precious time on trivial sourcing tasks – it’s not what they signed up for and it’s not why you hired them. That has a negative impact on staff morale and, therefore, on staff retention. The knock-on effect of higher staff turnover is unnecessarily high recruitment and training costs.
How to make your procurement processes fit for purpose
The first step in fixing anything is to properly understand the thing you are aiming to fix. So, start by mapping your current procurement processes. These processes may include:
- Requirement to buy off an online catalogue for low-cost commodities
- A requirement to obtain multiple quotes
- Going out to tender for spend above a certain threshold, and rules for when to re-tender
- Requisition-to-Pay process with built in approval limits, PO generation, invoice reconciliation, receipting and payment
If you have all of these in place, you may find that the first three processes referenced above are sub-processes of the last one – the Requisition to Pay process. So, depending on the nature and value of a requisition (a request), the item or service will either be sourced via an online catalogue, based on 3 quotes, or through a tender process.
The Requisition-to-Pay process can be broken down further into sub-processes. Once you understand what all your procurement sub-processes look like, you need to assess how effective they are and what it costs the company to run those sub-processes. Visually representing “cost” vs “effectiveness” in a 2×2 matrix (a 4-box model), as shown below, will help you prioritise which sub-processes to spend the most time and effort on optimising.
When assessing the effectiveness of sub-processes, you will want to look at things like how consistently the process is complied with, and to what extent the process achieves its intended purpose. When assessing cost, look at the wider cost implications for the company in addition to the resources required to operate the sub-process.
With a good understanding of current processes – intended purpose, steps involved, cost and effectiveness – you are ready to re-imagine, re-design and re-engineer your procurement processes. This should be done collaboratively by people who own these processes and people who interact with them regularly.
The new processes should be:
- Easy to understand and interact with
- Free of unnecessary steps
- Difficult to manipulate
- Consistent and transparent
- Holding staff accountable and safeguarding the organisation’s resources
For more details on how to optimise your procurement processes, read the article How to Remove Hidden Costs by Streamlining Your Procurement Processes.
Step 3: Systematically and proactively manage supplier risks
Why things like cyber security and Corporate Social Responsibility matters more and more
Not effectively managing supplier risks dramatically increases the likelihood of both financial and reputational damage. Cyber-attacks can happen anywhere in the supply chain. In fact, cybercriminals often go for the “softer targets” in the supply chain to ultimately reach their main target. Systematically managing this type of risk is crucial to avoid nasty surprises.
Corporate Social Responsibility (CSR) is another risk that needs to be managed beyond the boundaries of the company itself. All stakeholders, including customers and investors, are now demanding that companies don’t just take responsibility for their own CSR, but also take adequate steps to ensure a certain level of CSR throughout the supply chain.
Not managing CSR across the supply chain can be very costly, as Nike found out before the company decided to take supply chain CSR seriously. For a number of years, the sportswear company was publicly targeted by campaigners and consumer activism due to appalling conditions in the overseas sweatshops of their sub-contractors.
Starbucks, on the other hand, made supply chain CSR a priority from the start, which continues to be a key contributor to the success of the company. Starbucks’ success is evidenced by its soaring share price. On 2 January 2009, you could pick up a Starbucks share on the Nasdaq for USD 4.71.
On 2 January 2019, you would have had to pay USD 63.68 for the same share. That’s a 1,252% share price growth over 10 years. For comparison, the average global equity market growth is 7% annually, which compounded over a 10-year period equates to approximately 100%. So, Starbucks essentially outperformed the global equity markets by approximately 1,150%.
Another aspect to consider is that your cost of capital could increase if CSR risks in the supply chain are left unmanaged.
How to manage supplier risks
Cyber security and CSR are only two examples of supplier risks that need to be managed. There are many more. For example:
- Supplier failure
- New supplier technology not working as intended
- Supply delays
- Lack of buy-in from your own stakeholders
- And many more…
These complex risk profiles require a systematic approach to risk management. A cross-functional team should identify key risks and ensure they are captured in a Risk Register. The register must be a living working document. Each key risk should be assigned a Risk Owner, who is responsible for ensuring that particular risk is effectively managed.
Exactly how a risk is managed will depend on several factors. The probability of the risk coming to fruition is one key factor. Other factors are the impact and duration of the risk. Your cross-functional team may decide to ignore risks that are unlikely to occur, as long as the consequences are moderate (low impact). However, risks that could have disastrous consequences may require a fully-fledged contingency plan.
Step 4: Get more value from your suppliers
Don’t leave money on the table
Failure to proactively manage and regularly negotiate and re-negotiate supply contracts is a sure way of leaving value and money on the table. Even when optimal contracts are put in place, any lack of internal compliance, i.e. stakeholders using alternative supply sources, will erode much of the negotiated value. This phenomenon is frequently referred to as “leakage”. According to one study, deal leakage for the worst-performing companies run as high as 40%.
But that’s not all. Missed opportunities to generate more revenue and improve internal efficiencies are other ways sub-optimal value delivery may hurt your business. For most companies, the lion’s share of the innovation they can leverage comes from supply markets. Without a deliberate approach for accessing such innovation, you will be left at a competitive disadvantage.
Leaving money on the table can also take the form of the supplier simply not delivering everything that was promised in the contract. That’s what happens when there are no contract management processes in place. Such processes should, where appropriate, include supplier audits.
How to get more from your suppliers
To ensure your company maximises the value that the supply markets have to offer, a combination of effective and robust processes and ways of working need to be established, including:
- Intelligent commercially astute negotiation of all contracts over a certain value, to ensure value for money
- Proactive contract management of high value and of critical contracts, to ensure contractual commitments are met
- Engagement and buy-in from internal stakeholders to maximise compliance and minimise deal leakage
- Supplier Management strategy and processes to ensure all suppliers are managed in the most resource effective way
- Proactive Supplier Relationship Management of strategic vendors to ensure preferential access to the most relevant supplier innovation
All businesses are different and are, therefore, also at different stages on their procurement journey. No matter what stage your company is at on their procurement journey, there is almost certainly more you can do to:
- Reduce the number of suppliers
- Optimise your procurement processes
- Systematically and proactively manage supplier risks
- Get more value from your suppliers
Any actions taken in those areas will boost profit and prepare your company for growth.
