Andrew Bartolini, Chief Research Officer Ardent Partners May, 2014

Seven Keys to Better Sourcing and Supplier

Management

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Seven Keys to Better Sourcing and Supplier Management

©2014 Ardent Partners, Ltd. www.ardentpartners.com

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REPORT SPONSORSHIP

The views and opinions in this report represent those of Ardent Partners at the time of publication. While the report topic was agreed upon in advance, Ardent singularly determined the research approach taken and the report’s final content including its ideas, strategies, case studies, and recommendations. The contents of this research report are the exclusive property of Ardent Partners. Please direct any comments or questions regarding our research sponsorship policy to Ardent’s Chief Research Officer, Andrew Bartolini at abartolini@ardentpartners.com and/or 617.752.1620. Sponsor:

Zycus is dedicated to positioning procurement at the heart of business performance. With our spirit of innovation and a passion to help procurement create even greater business advantages, we have evolved our portfolio to a complete Source-to-Pay suite of procurement performance solutions which includes - Spend Analysis, eSourcing, Contract Management, Supplier Management, Financial Savings Management, and Procure-to-Pay. www.zycus.com

Contact:

For further information, please email information@zycus.com.

Seven Keys to Better Sourcing and Supplier Management

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How and what you communicate during the sourcing process sets the stage for the resulting supplier relationship. And while that relationships may never become a true marriage of equals, there are several things that sourcing and supply management professionals can do to get things started on the right foot. This report highlights seven important strategies and tactics that procurement organizations can use to drive savings while also maintaining and improving key supplier relationships.

Seven Keys to Better Sourcing and Supplier Management

The past few years have been very good to procurement organizations with their stable supply markets, limited price volatility, few global disruptions, more executive support for procurement programs than ever before, and an easing of internal pressure to deliver savings. But, procurement leaders must be wary of complacency and the risk of being left behind or caught unaware by the next market shift. Now is a great time for procurement teams to stave off boring, business-as-usual approaches and sharpen their soucring and supplier management skills. Ardent Partners offers seven keys to help facilitate that process.

1. Knowing Your Spend

Simply put, a procurement department cannot claim to be a strategic function if it does not understand its spend: what it is buying from whom, and at what terms and cadence. And yet, in 2014, far too many procurement organizations continue to operate without good visibility into their spend. Like a sales organization that does not track its pipeline or an accounting team that does not understand basic reporting requirements, procurement groups that are literally sourcing "blind" should be considered functionally inept.

After all, the foundation of operational excellence within the procurement function is spend visibility... and an ability to take action on it. When a sourcing team has the ability to leverage spend visibility across its operations, it can improve results by making better, more-informed decisions to help build better sourcing pipelines, optimally allocate resources, and engage and support business stakeholders. For example, procurement organizations manage, on average, just over 60% of total enterprise spend, leaving nearly 40% of all spend beyond their influence and control. To place more spend under management, most procurement teams must seek out and engage new stakeholder groups. To attempt to do so without a clear understanding of what each group is spending limits procurement's credibility and the likelihood that any new group will want to collaborate.

2. Early Engagement

Industry research has shown that the timing of when procurement gets involved in the sourcing process has a direct impact on results. Sourcing projects save more money when procurement is engaged at the front end of the process rather than later. The difference between serving as an

Seven Keys to Better Sourcing and Supplier Management

©2014 Ardent Partners, Ltd. www.ardentpartners.com

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order-taker or as a strategic partner is not subtle so, the challenge for CPOs and their teams is to figure out how best to engage the budget-holders in proactive planning discussions and formalize their levels of interaction and support. One recommended strategy is for CPOs to "embed" their staffs in the business by sending them into the field for a period of time to engage and work side-by-side with the large teams

and key business stakeholders. When procurement professionals are able to sit in business staff meetings and planning sessions, become active participants in the budgeting process, and understand the objectives and priorities of the business and how its staff is rewarded, they develop a much better understanding of the business’ needs and how to support them. By increasing the level of professional and personal interaction via physical proximity, higher levels of trust and communication are established, bridging the way for procurement to be engaged on more sourcing projects from the beginning.

3. Tighter Specifications

One of the many benefits from the 'early engagement' in sourcing projects discussed above is that it gives sourcing teams more time and a better opportunity to shape and rationalize end-user specifications. A better understanding of the business need and use of a specific good or service allows for sourcing professionals or teams to exert greater influence on the bid package which can result in improved pricing, better quality or service levels, and frequently all of the above.

With enough time, sourcing teams are better able to engage internal stakeholders to clearly define the business need and desired outcome from the sourcing project and help the team discern between "must have" and "nice-to-have" requirements. Additionally, more time allows a sourcing team to better research the category and underlying supply market. For example, a sourcing team may choose to begin the process by sending an RFI (request for information) to the suppliers in the hope of discovering a new trend, delivery approach, or innovation that could significantly change the final bid specifications. Whether guiding internal stakeholders or collaborating with suppliers, getting better specifications does not have to mean dialing back requirements to focus on cheaper or inferior items/services. In fact, by spending more time with internal and external constituents, a sourcing team could discover new information that leads to a more expensive, but also, more valuable supplier contract.

4. Clear Communication

It is one of the procurement industry's dirty little secrets that some buyers and sourcing professionals run sourcing projects even though they have predetermined which supplier (generally the incumbent) will win the award. Unfortunately for these buyers, suppliers can usually sense when the playing field is not level and as a result, spend much less time focusing on the opportunity and delivering their best bids. Retaining an incumbent is frequently viewed as a

" The procurement function’s relationships with its suppliers are typically the foundation

of how sourcing and supply management programs perform. Utilizing the seven keys in this report can serve as a catalyst to a series

of processes that have a risk of becoming stagnant and repetitive over time."

Seven Keys to Better Sourcing and Supplier Management

©2014 Ardent Partners, Ltd. www.ardentpartners.com

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'low-risk' strategy but in this age of innovation and heightened competition, market leadership is difficult to sustain so failing to consider new sources of supply is actually quite-often, a high-risk strategy. Take, for example, the consumer electronics market where industry leadership can completely change within a three or five year window and one-time market share leaders can quickly find themselves on the brink of bankruptcy. Be forewarned that similar shifts are pervasive in most supply markets, even if the speed of change varies.

One way to ensure that teams are fairly engaging the best potential qualified bidders/suppliers in the process is to standardize and centralize supplier communication during the bid process, and, in particular, do a much better job in supplier communication upfront. Clear, upfront communication helps level the playing field and as a result, is more likely to engage and attract the highest-value suppliers. Once the right suppliers are engaged, the sourcing team must work to ensure that the RFx (industry term used to describe buyer requests for information/proposal/quote/etc. from suppliers) process flows smoothly. They can greatly aid their cause by clearly explaining their bid process requirements and providing detailed specifications for the category being sourced. Remember, when suppliers lack clarity and details for a bid opportunity, they will mitigate the "risk of the unknown" by submitting less aggressive bids.

5. Efficient (and Robust) Evaluations

Before it launches a competitive bid, a sourcing team should have some established or general criteria and/or methodology for evaluating bids. It is possible that new information will arise along the way that will necessitate process and priority shifts. But, within the general framework, the team should understand what it is trying to achieve, what it is looking for in the supply base, and the general timeframe in which it will make its final decision. There are very few reasons this information should be withheld from the bidders.

Perhaps even more important than communicating the evaluation process to prospective bidders is the need for the sourcing team to conduct the evaluation process on the timeline and in the manner that was originally communicated. Easily one of the most frustrating things for suppliers involved in responding to an RFx is when, after investing significant time and effort in preparing a bid, they fail to receive timely feedback or status updates from the buyer, much less a confirmation of bid acceptance. Those suppliers who have been frustrated in the bid process are much less likely to participate in one with the same group again.

Suppliers are Assets

Collins English Dictionary defines an asset as “a thing or person that is valuable or useful.” That description should ideally be applied to all of an enterprise’s suppliers - valuable and useful. An asset is also something that is worth investing in and something that can grow in value over time.

What would need to change for an entire organization to begin treating its suppliers like real assets? How many procurement teams spend time evaluating what should be invested (time, resources, money, training, etc.) to help key suppliers grow in value?

Seven Keys to Better Sourcing and Supplier Management

©2014 Ardent Partners, Ltd. www.ardentpartners.com

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Sourcing professionals can add significant value to the process by keeping their teams on task and making sure that evaluations are both thorough and timely. Since sourcing teams need enough qualified suppliers willing to participate in order to run a successful sourcing project. They should, therefore, respect the time and effort that suppliers invest in the bidding process by being efficient and responsive after all the bids have been received. Finally, it is important to note that efficient evaluations can also be robust and thorough. If an evaluation is expected

to be difficult and time-consuming, simply communicate this fact to the bidders. Teams that build in simple courtesies and interactions into the process can build sizable goodwill with suppliers.

6. Warm Welcome

For better or worse, the sourcing/negotiation process can have a real impact on the post-contract relationship that enterprises have with their suppliers. A "win-win" negotiation is difficult to achieve and, quite candidly, is not the goal for many procurement organizations that pursue the best deals possible in an aggressive way. There is absolutely nothing wrong with taking a hard-line approach to supplier negotiations, however, the aftertaste of a hard-fought and protracted negotiation can make the development of a strong, post-contract supplier relationship difficult to achieve. Ardent Partners believes that there is a fairly straightforward way to improve the tone and tenor of most buyer-supplier relationships - warmly welcoming the supplier and on-boarding them with a process that recognizes, and even, accommodates their needs and requirements. It may take some time for suppliers to move beyond a tough negotiation, but sourcing and supply management teams would be wise to use the on-boarding (or renewal) process as a means to set or reframe the relationship in a positive light.

How much time and effort spent welcoming a supplier should depend on how important or strategic each one is to operations and results. But, even tactical suppliers can be welcomed with simple, standard communications that frame them as partners and assets. Not all negotiations are confrontational or end with hard feelings; but, when they do, procurement departments will find that a little etiquette can go a very long way in establishing a strong supplier relationship.

7. Proactive and Ongoing Supplier Outreach

A collaborative and productive supplier relationship, like any relationship, is built upon trust and good communication. After warmly welcoming (and on-boarding) a supplier, procurement departments should continue working to build and maintain strong and vibrant relationships with their strategic suppliers. When procurement departments are able to view their suppliers as assets and sources of value, this investment is easily justified.

"Establish meetings and calls where the procurement team can interact with their

critical suppliers to discuss ongoing challenges, corporate goals, plans, and

priorities (and how those suppliers can best support those areas), ways to increase and

improve innovation, and the means for improving their communication and overall relationships for the mutual benefit of both

sides."

Seven Keys to Better Sourcing and Supplier Management

©2014 Ardent Partners, Ltd. www.ardentpartners.com

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Develop a regular conversation around topics in which the procurement team can interact with their critical suppliers to discuss ongoing challenges, corporate goals, plans, and priorities (and how those suppliers can best support those areas), ways to increase and improve innovation, and the means for improving their communication and overall relationships for the mutual benefit of both sides. While the level of information shared and the frequency of communication should vary based upon the type of supplier, proactive supplier engagement that seeks to communicate goals and expectations, align mutual interests, and build trust, sets a great foundation for more productive suppliers and better results.

Conclusion

Engaging with and managing suppliers is a key component of any Chief Procurement Officer’s priorities and focus. The procurement function’s relationships with its suppliers are typically the foundation of how sourcing and supply management programs perform. Utilizing the seven keys above can serve as a catalyst to a series of processes that have a risk of becoming stagnant and repetitive over time.

Seven Keys to Better Sourcing and Supplier Management

©2014 Ardent Partners, Ltd. www.ardentpartners.com

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APPENDIX

ABOUT ARDENT PARTNERS

Ardent Partners is a Boston-based research and advisory firm focused on defining and advancing the supply management strategies, processes, and technologies that drive business value and accelerate organizational transformation within the enterprise. Ardent also publishes the CPO Rising and Payables Place websites. Register for exclusive access (and discounts) to Ardent Partners research at ardentpartners.com/newsletter-registration/.

ABOUT THE AUTHOR

Andrew Bartolini, Chief Research Officer, Ardent Partners

Andrew Bartolini is a globally-recognized expert in sourcing, procurement, accounts payable, and supply management. Andrew focuses his research and efforts on helping enterprises develop and execute strategies to achieve operational excellence within their procurement and finance departments. Andrew is also the publisher of CPO Rising, the first independent media site written for and about Chief Procurement Officers and other supply management executives (www.cporising.com).

Advisor to CPOs and leading solution providers alike, Andrew is a sought-after presenter, having lectured and presented more than 150 times in seven different countries. Over the past decade years, Andrew has benchmarked thousands of enterprises across all facets of their sourcing, procurement, accounts payable, and supply management operations and his research is currently part of the Supply Chain/Management curriculum at several US universities. He actively covers the technology marketplace as well as trends in sourcing, procurement, supply management, and accounts payable and has been published or quoted in leading business publications including The Wall Street Journal, Business Week, Investor’s Business Daily, Forbes, and Fortune, as well as the major trade publications focused on supply management.

Prior to becoming an industry analyst, Andrew developed, packaged, deployed, and used supply management solutions on behalf of enterprises in the Global 2000 while working for Ariba and Commerce One. Additionally, his experience in strategic sourcing (where he managed sourcing projects totaling more than $500 million in aggregate client spend), business process transformation, and software implementation provides a ‘real-world’ context for his research and writing.

Andrew has been named a “Pro to Know” by Supply and Demand Chain Executive three times and holds a B.A. in Economics from The College of the Holy Cross and an M.B.A in Finance from Indiana University. He welcomes your comments at abartolini@ardentpartners.com or 617.752.1620.

Seven Keys to Better Sourcing and Supplier Management

©2014 Ardent Partners, Ltd. www.ardentpartners.com

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REPORT METHODOLOGY

Ardent follows a rigorous research process developed from years of experience conducting research on the supply management market. While the report topic was agreed upon in advance with the sponsor, Ardent singularly determined the research approach taken and the report’s final content including its ideas, strategies, case studies, quotes, and recommendations. The views and opinions in this report represent those of Ardent Partners at the time of publication. The contents of this research report are the exclusive property of Ardent Partners. Please direct any comments or questions regarding our research approach and sponsorship policy to Ardent’s Chief Research Officer, Andrew Bartolini at abartolini@ardentpartners.com and/or 617.752.1620. For more information on this and similar topics, please visit www.cporising.com and the research library at www.ardentpartners.com.

Industry Standard “Fine Print:” The information contained herein has been obtained from sources believed to be reliable. Ardent Partners, Ltd. disclaims all warranties as to the accuracy, completeness or adequacy of such information. Ardent Partners, Ltd. shall have no liability for errors, omissions, or inadequacies in the information contained herein or for interpretations thereof. The contents expressed herein represent Ardent Partners’ best analysis at the time and are subject to change without notice.

© 2014 Ardent Partners, Ltd. All rights reserved. Reproduction and distribution of this publication in any form without prior written permission is forbidden. Solution providers and consultancies should take special note that Ardent Partners reserves the right to seek legal remedies including injunctions, impoundment, destruction, damages, and fees for any copyright infringement (which includes but is not limited to usage in company collateral, presentations, and websites) in accordance with the laws of the Commonwealth of Massachusetts and the United States.