Supplier Management in Indirect Procurement

 

Supplier Management

 

Supplier management ranges from supplier qualification to supplier performance and risk management.  Starts with identifying the right suppliers who can give the desired quality. Suppliers must be checked against workplace safety, child labor and other social menaces. Next is to manage the performance once they have started working in the organizations.

 

Identifying and Onboarding New quality Supplier remains a challenge

All companies would like to keep adding quality suppliers who can provide best value for the buck but are limited by their knowledge of the outside world. For items under indirect procurement the huge time and effort spent on continuously searching the vendors often justified for the advantages which are actually realized. Plus the vendor base is often large and scattered across geography. The ability of companies and bandwidth of managers to identify and onboard new suppliers are also limited. Not to mention the time it would take for a manger to search, contact, negotiate and onboard a new supplier. The new supplier also has to be brought upto speed with practices of the company. Every company is different in its processes, payment terms, hierarchies and turnaround time. A new vendor has to learn all this and adjust. Research shows only 25% of the suppliers a company adds for indirect material are able to sink in with the practices of the company. Others may not be convenient with the process and try to compensate the friction by increasing their quotes.

Child Labor Audit

Apart from onboarding there are some other filters which every supplier should be put through. Social Audit is one of the important parameter. It includes an audit for child labor and worker’s safety. Many of the small indirect material supplier use child labor especially in the warehouses. As a socially responsible organization your company should not promote this. Periodic mystery audit for child labor should be done to prevent your organization becoming a party to a social menace.

 

Worker’s Safety

Worker’s safety is another parameter to evaluate your suppliers for. Best Of the organizations hire external consultant who audit the suppliers against following major work hazards:

Workplace Construction

Poor Equipments and Housekeeping,

Electrical – Wiring and Chords,

Fire,

Lockout/ Tagout

Chemicals,

Confined Spaces

 

Performance KPIs

Supplier performance part remains a challenging aspect for solution providers and organizations. Top management often wants supplier performance management to take place in the procurement system, because it creates transparency and removes the non performers.

Certain KPIs can be used to evaluate all suppliers (e.g. safety KPIs), but there should always be room for category- or supplier specific KPIs. Especially if an organization has very diverse business groups, a one-size-fits-all approach for supplier performance management is not ideal. Over the years many organizations have built their own category-specific dashboards and scoring methods. These should not be simply thrown away and replaced by the information in the system. It is best to work with the individual categories to design and configure the correct reflection of their performance management approach in the procurement system. Only by taking this approach it is possible to truly manage your suppliers and be able to work together with them, achieving higher performance.

 

Indirect Procurement – Key Challenges

Indirect procurement is often referred to as “general costs”, “unclassified expenditure”, or “non-market procurement” and covers a very wide range of product lines and services, which are distributed diffusely in organizations. These include marketing collaterals, uniforms, consumer giveaways, communication, intellectual services, equipment and supplies, travel and transport, IT, HR, facilities and utilities, transport and logistics, etc.

Indirect procurement is often considered as “Children of A lesser God” compared to the direct procurement function which gets all the attention within the company and from the management. Organizations consider it to be less important and less strategic and so its not well catered for in terms of human resources and skills.

However, it’s changing now and organizations have started focussing on this. Many organizations have taken sincere steps towards identifying the real challenges, recognizing the savings levers and activating them.

The challenge is often decentralising procurement

In indirect procurement, processes are often managed by individual departments rather than being centrally directed by the procurement department. Departments such as marketing, logistics, facility management and IT mostly source their required goods and services independently, detached from the procurement department.

This means that procurement competence often remains untapped, as it is either included in the procurement process too late or not at all. There is a lack of indirect procurement capacity in many companies, especially in terms of developing and introducing new, efficient procurement processes.

Volumes of indirect procurement continue to be high year-on-year until they become “strategic” (IT, communication, etc.) and are often left in the hands of decision-makers, who do not have adequate awareness of cost issues, and are not procurement method professionals.

Love Thy Vendor Problem

No one wants to rock the moving ship. There is a huge tangible and intangible cost of searching a new vendor who can provide the desired quality. The managers involved have a limited knowledge of the vendors available out there. This forces the organizations to stick to the limited set of vendors they know.  Mangers also over course of time develop personal relationships with the vendors.

The vendors know this and charge exorbitantly for their services. The irony is that even though there exists a large number of quality vendors in the market at better prices, the organizations end up sticking with the same set of vendors and overpaying.

The solution

Careful steps are needed to reduce the procurement costs for the long term and offer efficient models to develop the organisation and achieve better cooperation between procurement and other departments.

Procurement for indirect spend and non-tradable goods or services typically has a high potential for savings. When focusing on reducing costs in your company, indirect purchasing is often neglected. Optimization makes a noticeable difference and often improves profits within a very short timeframe.

Depending on the business sector, indirect procurement can account for 5 – 25% of the company’s procurement expenditure. It therefore offers very high potential for savings, which can directly affect Profit and Loss (P&L) within a very short period of time: saving 10% on indirect procurement could allow the company to generate 1-2 EBIT points in just a few months.