Exciting times are on the horizon for finance and procurement professionals. 2012 is already bringing continued globalization and organizations have a need to drive optimal financial results while proactively mitigating commercial risks. The supply base has become even more critical to organizations' success and 360-degree visibility into supplier relationships is no longer optional.
Following are some key supply management trends that will impact (and help) finance professionals in the coming year.
1. Shifting Focus from Unit Cost to Total Cost
Companies are realizing that the purchase price of a product or service doesn't represent the comprehensive cost to their organization and are taking steps to proactively capture these other supplier-related costs. Additional costs often range from direct material costs and manufacturing-related fees like delivery, storage and packaging to indirect goods Cap Ex costs like installation, maintenance and adding new workforce skills, but this is just the tip of the iceberg. Other factors that can severely impact the bottom line can include:
- costs based on a change in supplier shipping locations or late shipments;
- expenses incurred from supplier quality failure—for example, costs to hold additional inventory to cover quality issues or costs to mitigate problems if a low-quality product makes it to the end of production; and
- penalties associated with production delays (also resulting in lost revenue) or sub-optimal performance (e.g., a supplier's oil platform only yields 100 barrels but should be producing 150 barrels).
Because companies typically track and assign these types of costs by department (e.g., installation may appear on one budget and item cost on another), they often miss the opportunity to view the comprehensive organizational impact. To solve this issue and gain visibility into the total cost landscape, companies must take measures to map these types of costs back to their supplier base for making more informed supplier decisions. A good starting point is to develop a total cost model for direct materials categories with complex structures (e.g., packing, assemblies, large volume purchases with multiple cost components). The company must then establish an integration framework to capture and normalize data from internal ERP, budgeting, logistics, sourcing and vendor data systems. All spend data from these seemingly unrelated categories can then be analyzed across the various vendors, geographies and business units and fed into cost models to arrive at the best negotiation scenario. Using an e-sourcing tool, companies can leverage the vendor cost data to evaluate different product/service combinations and supplier responses to determine the lowest total cost option.
2. Moving from Risk Reaction to Risk Avoidance
While many companies are beyond pure risk reaction, more are moving the needle to prevent greater risk and compliance issues. The challenge is the sheer volume and widespread types of complex risks. For example, disruption of supply can wreak havoc if materials needed to produce a product/service aren't delivered on time, a product doesn't make it to market on time, or a piece of equipment or regulatory approval isn't in place to deliver the planned product/service. These problems can elevate logistics, personnel and inventory costs, which often result in loss of revenue or market share. Loss of property, life, product or personal injury represent other risks—for example, an accident occurs on the job, costs mount for repair, disruption and litigation, which results in government sanctions, litigation or total shut-down of operations. Brand damage risk must also be considered as a company can become associated with a socially unacceptable situation (e.g., child labor, or food tainted by a supplier that causes sickness or death). Lastly, companies must evaluate sanctions or penalty risks in the event that their processes or those of their supplier are in violation of a company, customer or government standard. This situation could result in significant penalty costs, loss of customers, or government license revocation. Using supply management, companies can efficiently consolidate and categorize pertinent qualification information about their suppliers, categories, geographies and business units to identify major risk areas and determine how best to mitigate them. As many companies are using multiple ERP and other data systems, being able to pull all supplier information into one repository and streamline that data is critical to achieving real visibility into risks. For example, a unified system can help identify a history of supplier performance issues or sole/single source situations and determine the impact of supplier failure and cost exposure. It also helps companies validate that suppliers' operations are capable of delivering the desired volume of quality products/services on time and allows them to confirm whether suppliers are approved to service particular categories in their geography or within the company's business units. Taking this a step further, utilizing sourcing strategy, data and analysis applications can help identify alternative sources for at-risk components or services. It also enables the company to map suppliers' contractual commitments to performance indicators, which can then be used to identify patterns of poor performance for escalation and trigger supplier improvement outreach. Overall, this approach empowers companies with supplier data transparency so they can make the best business decisions while minimizing risk.
3. Staying a Step Ahead with Compliance
While most companies aim to be compliant with their commercial agreements (e.g., payment/pricing terms and discounts, performance elements, channel partner obligations), and respective government regulations (e.g., FCC, FTC, SEC, FDA), many struggle with maintaining compliance across all contracts and end up fighting fires when issues crop up or inefficiently running every single contract through the finance or legal department. Also, compliance oversight is typically scattered across multiple departments with limited centralized auditing, which can make identification of data and compliance verification seem like forensic analysis. As a result, companies are establishing contract management programs to automate more of their contracting processes and streamline proper compliance across all agreements.To fully leverage contract management, companies must first create a consensus savings and compliance plan and establish a central repository of reviewed and approved legal language that represents the company's position on regulatory, policy and commercial compliance standards. This enables them to use contract and sourcing templates to create a contract that reflects the company's starting point for compliance standards with any external entity (e.g., supplier, customer, channel partner, contractor).Data from supplier management tools should be pulled in to map supplier qualification and certification data back to the latest contracts. This ensures all suppliers are up to date on all qualifications and certifications required to perform their service at desired quality levels in specific geographies. To guarantee proper contract review and approvals, the contract management system should incorporate the company's workflow. It should also automatically monitor commercial contract terms and initiate notification for any expirations or pending obligations, as well as integrate with ERP systems to share commercial terms and performance requirements. By putting these processes in place, a company will be able to analyze and reconcile all transactional spend data with negotiated commercial terms to ultimately ensure realization of savings goals. It also alleviates headaches when an audit is needed and gives finance professionals peace-of-mind regarding major issues like including proper contract clauses for revenue recognition and ensuring all international contracts reflect the local jurisdiction and language, as well as corporate governance policies.It also helps facilitate contract enforcement so suppliers are held accountable for their contractual commitments and keeps companies on track regarding overall internal governance programs for streamlining manual contract review instances, such as automatically escalating contracts worth more than $1 million or those requiring cross-border purchase decisions for a finance, procurement or legal manager's review due to increased organizational risk.
4. Taking Productivity Up a Notch
Even if a company uses technology to monitor and control its overall spend, sourcing events and contracts, chances are that productivity drains are occurring regarding how employees are working with the data. To introduce more efficiency into the process, companies are now deploying more advanced program management and relying on tools that pull all relevant supplier data from all systems into one repository. For example, electronic program management tools help companies manage the multi-step sourcing process by establishing centralized communication among category managers who may be dispersed across the globe. Each category manager may be concurrently running multiple sourcing events, each with varying lengths, sizes and savings objectives, but the system allows them to track all comprehensive data including capturing stakeholders' savings objectives and tracking progress toward sourcing event savings milestones. Companies are also deploying spend data management, which enables them to capture spend data from multiple information systems, as well as cleanse, categorize and enrich the spend data for quick identification of organization-wide savings opportunities. Other program management tools help companies automate electronic sourcing, contract execution and management of supplier data capture. Essentially, these tools allow companies to do more with less and evaluate real-time spend and sourcing data to make supplier decisions without spending hundreds or thousands of hours tracking the information manually.
