Key Takeaways

• Sourcing materials or labor is often the easiest part of the process.
• To truly gain value from relationships with suppliers, multiple departments from your organization must work collaboratively.
• Value realization is achieved through Information, Process, and People coming together.
• Expanded metrics, including historical performance factors and forward indicators, are being evaluated for business risk.
• Breaking down siloes between procurement, ESG, and EHS makes for efficient work and value realization during supplier life cycle management.

Introduction

Over this series of procurement posts, we have covered a range of topics beginning with using forward leading indicators coupled with past performance to gain insight and identify risks and risky suppliers. We covered the power of benchmarking for profiling markets and buyer-seller strength. We discussed continuous improvement, how to use information to discover the root causes of risk, and how to put insight into action to drive better outcomes. Our more recent article discussed how to leverage all this information to drive category and sourcing strategies as well as the role of technology in this process. The focus has been on creating value — including positive financial results, lower risk, higher customer satisfaction, and positive impact on the environment and society — in order to differentiate and drive competitive advantage.

So what is next?

In this post we’ll discuss one of the most important, and under-utilized, parts of any leading procurement strategy: Supplier Life Cycle Management.

Sourcing: The Easy Part

For many procurement and supply chain teams, sourcing — that is translating needs into supplier selection, negotiation, and award — is the easy part of the process.  

The procurement team follows a comprehensive process to select and award business to suppliers that your organization hopes, based on this evaluation and assessment, will perform. The team gathers documentation on safety, quality, production, risk, cost, insurance, and many other elements, including those related to sustainability. This information is used to select suppliers as well as to ensure an orderly onboarding.

But now the real work begins.

Supplier Life Cycle Management (SLCM) and Supplier Risk Management (SRM)

‍“It Takes a Village”

The procurement organization issues the first purchase order, which is the first real opportunity to see a supplier in action and begin building a strong relationship. The goal for this relationship is to provide a win-win opportunity for both parties to demonstrate how and why they are the business partner of choice for driving value to the end customer together.  

Though not all supplier-client relationships are equal, there are some basic common elements for successful partnerships:

• Do both parties understand how value is created and measured?  
• How integrated and how much communication exists between the two parties?
• Are the metrics that will govern the relationship well-defined?  
• Are the metrics that will measure performance and value creation defined and understood?
• Do both parties understand the risks to the relationship and what may impact them?  

Benefits of strong SLCM and SRM include reducing supplier churn, maintaining consistent quality, driving innovation, and ultimately supporting sustainable supply chain resilience.

The old cliche that it takes a village to raise a child may be adapted here. To manage a supplier relationship, reduce risks, and to realize true value requires a village of stakeholders and partners. Suppliers interact with many different parts of your company and vice versa: engineering, operations, quality, finance, purchasing, EHS, and ESG to name a few.  Communication, information, and data flow back and forth amongst the various teams, departments, and organizations of both parties. The ultimate goal is to ensure the right products or services, at the right cost, right quality, and right time for the organization to convert to value.  

Synthesizing Information into Action

SCM & Procurement play pivotal roles acting as agents for synthesizing all the information discussed above into action, and, therefore, for enabling cross-functional collaboration.

To achieve value realization, procurement organizations must leverage a few basic components:

• Information
• Process
• People  

Let’s take a look at each in turn.

Information

Optimizing value out of your supplier relationships requires leveraging information on an ongoing basis to collaborate, reduce risk, and drive impact across a range of metrics. This means focusing on leading indicator KPIs from other organizations within your company including Health, Safety, Environmental, Social, and Governance in addition to traditional inputs such as Total Landed Cost, Quality, OTD, L-T, and Customer Satisfaction.

This information is not a yes or no compliance activity completed once at the beginning of the process — it requires ongoing attention to collect and analyze cross-functional data regularly.

Process

Supplier Relationship Management and its components of Performance and Risk Management are processes that require discipline week to week, month to month, quarter to quarter, and year over year. To realize and drive sustained value creation requires collaboration across organizations, alignment and accountability, and continual attention to KPIs, communication, and risks on multiple levels.

The success of SRM, whether or not value is created or conversely destroyed, requires action, not a passive monitoring of orders and metrics. A useful framework for doing this is PDCA: Plan, Do, Check, and Act.

Following PDCA should lead to a continual improvement SRM process that engages with suppliers in a collaborative manner to share information, risk identification, best practices, resources, and success.  

The author Jim Collins, famous for his two pivotal books Good to Great and Great by Choice wrote in the latter, “We cannot predict the future. But we can create it.” Coupling Information with Processes like PDCA embodies this concept, wherein information informs a continual improvement process that creates a future where value is realized. Instead of merely surviving business cycles, disruptions, and a risk prone world, organizations leverage Process to create their own future and deliver value that generates both financial and non-financial Impacts.

People

The final component to strong a Supplier Life Cycle Management strategy is People. Each collaborator and stakeholder has their own pool of valuable knowledge and insight. For the supply chain to perform, the right information needs to provide input to optimize processes that are used by subject matter experts to drive strategy and execution. In order to access the right information, however, you need the right people involved.

Each stakeholder offers a broad array of input variables that organizations and specifically, Procurement, must synthesize into requirements that guide supplier evaluation and selection as well as the ongoing management of suppliers.

Building robust Category Managment and Sourcing Teams therefore requires pulling diverse members from across the organization, including HSE, ESG, IT, etc. The multiplicity of thought, perspectives, knowledge, and experience support not only the effective selection of supplier partners, but more importantly the informed foundation to successfully build those relationships into long term value over the course of the supplier life cycle.  

For our purposes, this means gathering input from not just engineering and operations or quality, but also from the Environmental Health and Safety team. It means expanding selection criteria and therefore performance criteria which includes these environmental and social elements.  Why? Because it is the right thing to do? It is, but ultimately value realization requires it. Value realization requires low risk, continuity of supply, and efficient processes. This is good business.

Conclusion: Cross-functional Collaboration — Breaking Down Silos

As supplier risk management grew as a core discipline, leading organizations expanded the metrics to include historical performance factors and forward indicators including business risk. Today, organizations with multifactor risk management processes evaluate relationships even further with leading indicators for safety and environment (not just past GHG figures but forecasted goals and trends).  

The reason again stems from good business practices. The power of this expanded information offers organizations an opportunity to assess and forecast risk. Identifying the current and potential vulnerabilities that may impact value, such as availability of raw materials, increased costs related to health, labor, safety, social impacts, increased costs to regulatory requirements, productivity impacts related climate change, among others are integral to risk management.  

The responsibility for gathering and acting on this information falls on multiple groups within clients and their suppliers. The client SCM and Procurement teams, however, represent perhaps the central organizations in this relationship and value creation formula. Working as the central hub to break down the silos between business functions allows procurement teams to succeed through increasing collaboration, alignment, and efficiency among all stakeholders, which ultimately drives value.

Value realization therefore needs integrated collaboration among procurement, ESG, and EHS as well as operations, quality, and finance functions to both gather as well as act on the information that exists within the supply chain. This will drive value by leveraging information, process, and people to avoid fragmented efforts, misalignment, and inefficiency.

Avetta is a SaaS software company providing supply chain risk management solutions. Avetta’s platform is trusted by over 130,000 suppliers in over 120 countries. Visit Avetta.com to learn more about our supplier prequalification solutions.