Supply Chain Essentials: Planning & Procurement (Part III)

Suppliers / Vendors Selection

One of the crucial functions of Procurement Professional is Vendor selection. In practice, it is not just about finding the cheapest option in vendors, but about building a strong relationship with a supplier that can consistently provide quality goods or services. Depending on the needs of an organization, vendor selection can be categorized thus:

   Direct – these are the suppliers that are into manufacturing of either raw or packaging materials, being used by an organization in the production processes.

   Indirect – these can be classified as stockist, traders, merchants, media agencies, recruitment firms, consultancy, etc.

   OEMs (Original Equipment Manufacturers) – this is a situation whereby options are limited for alternative sources. The repair or service of the equipment is carried out solely by the manufacturer or its licensed / authorized representative. In this case, SLA (Service Level Agreement) and AMC (Annual Maintenance Contract) works better for both parties.

Regardless of any categories, the concept of Supplier / vendor selection is aimed to achieve the following importance, among others:

·        Reduced Risk: Choosing reliable suppliers minimizes disruptions in your supply chain and ensures a steady flow of materials or services you depend on.

·        Enhanced Value: Going beyond just price, supplier selection looks for partners who offer good quality, timely deliveries, and potentially even contribute to your innovation efforts.

·        Improved Competitiveness: Strong supplier relationships can give you access to better materials, favourable pricing, and faster turnaround times, making you more competitive.

Processes in Supplier Selection:

Identifying Needs: This involves understanding what you need from a supplier. This could be raw materials, finished goods, specific services, or a combination.

Selection Criteria: Define the factors that are important to you when choosing a supplier. Common criteria may be:

• Pre-Qualification
• Price: Cost is obviously a factor, but not the only one.
• Quality: Consistent delivery of high-quality products or services is essential.
• Reliability: On-time deliveries and dependable performance are crucial.
• Capabilities: Does the supplier have the technical expertise and resources to meet your needs?
• Financial Stability: A financially sound supplier is less likely to disrupt your supply chain.
• Communication: Clear and open communication is key to building a strong relationship.

Supplier Evaluation: Once you have identified potential suppliers, you need to assess them based on your defined criteria. This might involve requesting quotes, conducting site visits, and checking references.

Selection and Negotiation: After evaluating your options, shortlist the best suppliers and negotiate contracts that meet your needs.

Additional factors in supplier selection:

• Supplier Diversity: Having a diverse range of suppliers can mitigate risks associated with relying on a single source.
• Sustainability: Many companies consider a supplier's environmental and social responsibility practices when making selections.
• Technology: Look for suppliers who utilize technology to streamline communication and improve efficiency.

A well-defined supplier selection process assists businesses to build strong relationships with vendors that contribute to their overall success.

Supplier Relationship Management (SRM)

SRM in another critical function of in the field of Procurement. It is a strategic approach and set of practices that organizations use to effectively manage their relationships with suppliers. SRM aims to build long term and mutually beneficial relationships that drive innovation, efficiency and competitive advantage. It goes beyond transactional interactions

Supplier Relationship Management involves developing and maintaining collaborative alliances with suppliers to maximize value, mitigate risks, and achieve mutual goals.

Effective Supplier Relationship Management helps organizations to build strong collaborative connections with suppliers, drive operational excellence, reduce risks, and enhance overall supply chain performance. It requires proactive communication, strategic alignment, performance measurement, and continuous improvement to create value for both parties involved.

While SRM objectives may differ from company to company, the key ones are as enumerated below:

•   Strategic Alignment – this is an objective of aligning supplier relationships with the organization’s goals and objective. It involves selecting suppliers that can support the organization’s strategic priorities and developing partnerships that contribute to long term success.
•   Supplier Selection – assessing and selecting suppliers based on their capabilities, quality, reliability, financial stability, credit worthiness, and alignment with the organization’s requirements. It is worthy of mention that Supplier selection is a critical step in building strong and virile relationships from the inception.
•    Performance Management – establishing performance metrics, key performance indicators, and service level agreements to measure supplier performance. Regularly monitoring and evaluating supplier performance against these metrics helps identify areas for improvement and facilitates data driven decision making.
•   Collaboration and Innovation – encouraging collaboration and joint problem solving with suppliers to drive innovation, improve processes and create value. This may involve sharing information, conducting joint research and development, and engaging in continuous improvement initiatives.
•   Risk Management – identifying, assessing and managing risks associated with supplier relationships. This includes understanding potential risks, developing risk mitigation strategies and implementing contingency plans to ensure business continuity.
•    Contract Management – effectively managing contracts with suppliers to ensure compliance, clarity of expectations and fair terms. Contract management compliance, handling disputes and addressing any changes or amendments.
•    Continuous Improvement – promoting ongoing improvement in supplier relationships and supply chain operations. It includes conducting periodic reviews, seeking feedback from suppliers and implementing process enhancements to increase efficiency, quality and collaboration.
•    Supplier Development – investing in the development and growth of suppliers to enhance their capabilities, quality standards, and performance. Supplier development programs may involve training, knowledge transfer, sharing best practices and providing resources to help suppliers improve and meet the organization’s evolving needs. This may take the form of periodic supplier’s audit, vendor re-evaluation processes, etc.
•    Supplier Recognition and Rewards – recognizing and rewarding suppliers for exceptional performance and contributions. This can include supplier awards, incentives and recognition programs that motivate suppliers to excel and foster a positive working relationship.
•   Relationship Governance – establishing governance structures and processes to oversee and manage supplier relationships effectively. It may include defining roles and responsibilities, establishing communication channels, and fostering transparency, trust, and accountability.

Procurement Spend Analysis

This is the process of examining and analyzing an organization’s spending patterns and data relating to procurement activities. The process involves collecting, categorizing and analyzing procurement related expenditure data to gain insights into how money is being spent, how funds are being utilized, identify cost-savings opportunities and make informed procurement decisions.

The procurement activities are to cover all forms of procurement be it direct materials, indirect materials, consumables, direct services, indirect services, capital goods and services, etc.

Procurement spend analysis should be regularly monitored to track changes in spending patterns, assess the effectiveness of cost savings initiatives, and drive continuous improvement in procurement operations. The process helps businesses to optimize their procurement strategies, reduce costs, enhance supplier management and make data driven decisions to achieve better overall procurement performance.

There are various steps involved in procurement spend analysis, including the follows:

Data Collection

The first step is to gather relevant data on procurement expenditures. It may include data from various sources such as purchase orders, contracts, expense reports, invoices and other financial systems. The data should cover a specific period and include details such as supplier names, purchase amount, item descriptions, expense category, date of transactions, etc.

Data Cleansing and Categorization

To ensure accuracy and consistency, the collected data needs to be cleansed and categorized. This process involves removing duplicates, data validation and checking for and correcting errors in order to standardize the data. The data is then categorized based on different dimensions, such as suppliers, products or services, departments, cost center, projects codes, expense sub-category, group head, etc.

Data Analysis

After cleaning and categorizing the data, analysis techniques are applied to gain insights and identify spending patterns. Some of these data analysis techniques are:

·        Spend by category – this is a situation when spend is analyzed across different categories of goods and services to understand which categories account for most of the procurement expenditure.

·        Supplier analysis – this is the system of evaluating spending patterns by suppliers to identify key suppliers, assess their performance, negotiate better terms and consolidate their relationships.

·        Cost variation analysis – to identify cost variations and potential opportunities for cost savings or better negotiations, costs are compared for the same or similar items.

·        Maverick spending analysis – identifying instances of maverick or unauthorized spending outside of established procurement processes. This helps to identify areas where procurement policies or compliance measures requires improvement. In practice, these may be in the form of frequent emergency procurement or those procurement without following procurement processes.

·        Spend forecasting – using historical spending data and demand forecast to predict future spending patterns, anticipate procurement needs and support strategic planning and budgeting processes.

Data Visualization and Reporting

To make the data more reader friendly and understandable, the analysis results are often presented through visualization such as charts, graphs and dashboards. Reporting tools or business intelligence software can be used to create interactive reports that highlight key insights, trends, and recommendations for procurement decision making. The use of PowerPoint slides, Vlookups, Pivot chart and table, etc are also being used in the preparation and presentation of the data.

Action and Improvement

The insights gained from procurement spend analysis are used to inform decision making and drive improvements in procurement processes. It can include identification of potential cost savings opportunities, optimizing supplier relationships, negotiating better contracts, implementing procurement strategies, and improving compliance and policy adherence.

Various ways in which Procurement Spend Analysis can be used to identify cost saving opportunities for an organization include:

·        Supplier Consolidation – by analyzing spending patterns across suppliers, procurement spend analysis can identify instances where multiple suppliers are providing similar goods or services. Consolidating the organizations spend with a smaller number of strategic suppliers can lead to volume discounts, improved negotiation, leverage and reduced administrative costs associated with managing multiple supplier relationship.

·        Demand Management – this is a design of aligning procurement with actual demand and implementing inventory management strategies, to enable organizations achieve cost savings. Analyzing spending patterns can reveal insights into demand fluctuations and opportunities for demand management. Identifying items with low utilization or excessive ordering can help optimize inventory levels, reduce carrying costs, and eliminate unnecessary spending.

 ·        Strategic Sourcing opportunities – spend analysis can highlight areas where strategic sourcing initiatives can be employed. It helps identify categories with high spending, significant growth potential or limited supply chain visibility. Organizations can achieve better pricing, improved quality and reduce supply chain risks by conducting thorough market research, identify alternative suppliers and implementing strategic sourcing practices.

 ·        Process Efficiency Improvements – using procurement spend analysis helps to shed light on process inefficiencies and bottlenecks that contribute to unnecessary costs. Businesses can streamline their procurement cycle times, reduce operational costs, and improve overall efficiency by identifying areas of process gaps, such as excessive manual interventions, redundant approval steps, or long cycle times.

 ·        Contract Compliance assessment – procurement spend analysis helps assess compliance with contract terms and pricing agreements. It identifies instances where suppliers and contractors are not adhering to agree upon process, discounts and terms. Businesses can ensure receiving the intended benefits and avoid over payment by addressing non-compliance and renegotiating such contracts.

 ·        Price Variance Analysis – procurement spend analysis allows for a comparison of prices paid for the same or similar items across different suppliers. It helps identify instances where there are significant price variations for comparable goods or services. This would allow renegotiation or sourcing from suppliers offering much competitive prices with the same quality thereby achieving cost savings.  

Procurement Spend Analysis Dashboard

A dashboard is an indicator panel that shows progress report of collections of various data visualization. It is a way of displaying various types of visual data in one place as an information management tool that receives signals and data from a linked database to provide status and expected cause of action(s).

A spend analysis dashboard is a visual tool that provides insights into a company's spending pattern and or habits. It aggregates data from various sources to give a comprehensive picture of where the money goes. This information is crucial for procurement teams and business leaders to optimize spending, identify cost-saving opportunities, and make better procurement decisions.

In summary, a spend analysis dashboard is a powerful tool for any organization desirous to gain control of its finances and optimize procurement spend.

Typically, procurement spend analysis dashboard includes the following:

Key Metrics:

• Total Spend: Overall spending amount for a specified period of time (month, quarter, year).
• Spend by Suppliers: Shows which Suppliers or Vendors account for the most significant portion of the budget spend.
• Spend by Category: Categorizes spending based on types of goods or services purchased (e.g. direct materials, indirect materials, MRO Spares, office supplies, Marketing, IT, etc).
• Percentage Change: Tracks how spending has changed compared to a previous period (e.g., month-over-month, year-over-year).

Visualizations: Pie Charts | Bar Charts | Line Charts | Pivot Charts or Table, | etc

Additional Features:

• Drill-Down Functionality: Allows users to delve deeper into specific categories or vendors for a more granular analysis.
• Time Period Selection: Enables users to view data for different timeframes.
• Comparison with Budget: Compares actual spending with predefined budgets to identify variances.