Suppliers

Driven by cost, customers are hunting further afield to source cheaper components and out-source non-core (and sometimes even core) processes such as payroll, accounts, internal auditing, logistics, fleet management, sales, IT management, maintenance, building and facilities management.

According to a recent study by IT analysts Ovum, the number of IT staff working offshore for UK industry will double to 130,000 by 2008. Although it is the poor performance of some overseas call-centres that attract the headlines, the extent of outsourcing is much more pervasive for many organizations than that. Previously, organization success was often characterised by large size and scale (British Airways, as an example). However, many organizations now find other attributes such as flexibility, innovativeness and speed give a greater competitive edge (easyJet, for example).

A robust supplier base is thus critical to successful business operations. Running lean operations with a significant amount of the work placed upstream of otherwise outsourced places greater business risk on the organization in terms of its deliverables to its own customers.

Why does business risk increase?

If a task/process is contained within the immediate management system it is subject to all the obvious management and controls such as supervision, provision of resources (budget, equipment, competent people etc) and operational targets. Should there be any adverse issues such as a quality problem, staff shortage or machine breakdown management is on hand to make immediate decisions to resolve the problem.

However, when a policy decision is made to buy goods/services or outsource internal process elsewhere, management is effectively 'transferring' these processes to other organizations. The business reasons are usually quite clear and include:

• lack of competence to perform the task internally
• desire to focus on the 'core' processes only ie what the organization is really good at
• cheaper to source externally at a specialist rather than develop in-house

Unfortunately, business risk increases in proportion:

• loss of direct control and knowledge of that part of the system
• misalignment of values, policies and targets between the two organizations
• incoming supply risk - due to transport problems, fire at the supplier, refusal to supply etc
• greater chance of internal problems (stoppages, shortages, quality problems etc)
• possibility of pricing issues arising
• increased possibility of delivery problems to the organization's own customers as a result of the incoming supply problems

Identifying and managing these and similar risks are a key part of robust supplier management.

Trends in supplier management

Adversarial approach

For many organizations, traditional supplier management was often a power-struggle characterised by annual price negotiations where the customer would threaten loss of business without a fixed price reduction and the supplier would insist on a fixed price increase. One would win the battle but eventually both would lose the war. Driving suppliers out of business generally serves to narrow the choice of supply and shifts the power-balance towards the fewer suppliers in the market place. Not the smartest approach for a customer to take in the long-term.

Mutually-beneficial relationships

In line with developments in quality management systems, a more logical and systematic approach evolved. With the procurement department taking care of the commercial and delivery issues, greater supplier-related responsibilities were given to the engineering or quality functions. Larger companies often have dedicated personnel often referred to as supplier quality auditors or supplier quality engineers who are be responsible for evaluating, selecting and then managing the technical/quality-related aspects of the suppliers. For many larger organizations, this is still the de facto way for effective supplier management - with regular technical contact and supplier visits/audits intrinsic to this.

It is common for such personnel to undergo customer-specific training with attendance on a lead auditor course as a base. Traditionally, the direct costs of this activity (lost-time, travel, accommodation and subsistence) were absorbed by the customer as part of the normal costs of running a business as greater value (including cost savings) could be generated.

Good supplier management - benefits to the customer

• greater mutual understanding by both parties regarding each others isues/concerns
• technical superior suppliers able to contribute to product development
• subsequent reduction in inspection by the customer
• faster throughput time due to the reduction in inspection delays (ship-to-stock)
• greater ability to identify the right supplier in the first place
• reduction in defects and associated costs for both parties
• accelerated opportunities for performance improvement

Of course for this to work well, there has to be a mutual benefit.

Good supplier management - benefits to the supplier

• greater assurance of continued custom as, by default, they are partly satisfying the customer by such cooperation
• greater awareness of intangible customer needs due to the closer working relationship - this is powerful market intelligence that their competitors may well not have access to
• 'free' management consultancy - with hopefully competent customer representatives giving robust gap analyzes and system health checks on their operations
• accelerated reduction in non-conformance costs by faster linking of the effect (found at the customer) and the cause (in their own business)
• continual pressure regarding the need to do things better - a given in today's economic climate but something we all need constant reminding of

Supplier selection/evaluation criteria

It is common to hear individuals in organizations complain that their purchasing function always orders the cheapest items, causing problems to other sections of the organization. Whilst this might appear so, this is extremely unlikely. Both organizations and individuals, whether they realize it or not, order incoming goods and services in a combination of criteria that can be listed as:

• quality
• cost
• delivery
• service

Quality

This means different things to different people (for expansion on this issue refer to Concepts of quality). Here, it can include aspects such as fitness-for-purpose, reliability, technical specification, attainment of licences/qualifications, technical competence etc.

Cost

All the direct and indirect issues associated with money such as unit cost, discounts, lifetime costs and failure costs (rework, returns etc), and late-payment charges.

Delivery

This includes all the time-related issues such as lead-time, on-time delivery performance, delivery accuracy and frequency.

Service

All the intangible or customer-specific issues not covered by the above. These could include aspects such as location, flexibility to work non-standard hours, adaptability, perceived attitude, particular types of labelling/packaging, access, location (within a defined geographical radius) etc.

The above can be represented thus:

In reality however, the four components are rarely weighted equally. Although it might appear that the purchasing function only buys the cheapest parts, the delivery component also exists - it doesn't matter how cheap the item is if it cannot be obtained and most purchasing personnel are usually sufficiently astute to realize this.

So in this example, the weighting might look like this:

Why is this useful to know?

Although larger, mature organizations may have full-time procurement professionals with clear procurement strategies and policies including the above, SMEs are often only able to devote a part-time approach. This, coupled with the lesser bargaining power due to their smaller size, makes a clear supplier management strategy all the more important. An example of how to set up a basic supplier evaluation system is addressed in the members section.

Dealing with personal suppliers

In the UK, there are an estimated 4 million businesses with 99% having less than 50 staff. Large businesses are clearly in the minority - there are only around 6,000 firms that have 250 + employees (source: Dti). The US exhibits a similar scenario, according to recent Census Bureau and Labor Department data there are 12.8 million self-employed individuals (source: National Centre for Policy Analysis). In light of this, it is increasingly likely that organizations of all sizes will be dealing with personal suppliers (individuals, sole traders, small partnerships) in the future.

Personal supplies often have different needs and expectations than larger sized organizations, for example:

In the drive for increased efficiency and flexibility, the use of contract labour has increased dramatically. Some organizations have based their manpower planning policy on this and predominately hired contractors, even switching their full-time staff to contract basis. The lack of security and employee-benefits is compensated with an hourly/day-rate that results in a net rise in the individual's income. The employer benefits further with reduced tax and no national insurance payments, as the person is no longer an employee.

On the contractor-side, the individual would set up a private limited company and pay themselves a proportion of their income in dividends, which also has no national insurance element and a reduced taxable amount. This mutually-beneficial arrangement spawned the rise in umbrella service companies which specialised in brokering such services.

Such an obvious tax loophole has not gone unnoticed by the government and intermediaries legislation was introduced in 2000, commonly referred to as IR35 after its budget press release number. The existence of a contract alone between the client and the contractor is insufficient to satisfy HM Revenues & Customs (HMRC). If a person works for someone else, they need to know whether it is in an employed or self-employed capacity. Equally, an employer has a responsibility to correctly define the employment status of its workers. There are guidelines and rules available to help interested partied determine employment status of an individual with considerations such as:

• does someone tell them what to do and when?
• do they work a fixed number of hours?
• do they have a defined place of work such as a desk?
• do they enjoy facilities and benefits alongside full-time workers such as a subsidised canteen?
• is more than a certain percentage of their income from the same client?

The HMRC (http://www.hmrc.gov.uk/ir35/leg-applies.htm) website provides useful guidance on this matter, and if in doubt the reader is encouraged to seek professional advice on this matter.

Ethical procurement

Alongside the increase in global trade is a heightened and growing consumer awareness of the possibilities of unethical practices such as use of child and forced labour, unsafe working practices, inhumane conditions and unsustainable production. Several initiatives addressing these issues have already evolved, including:

SA8000

This is a voluntary standard for organizations and demonstrates conformance based on the principles of international human rights standards contained in International Labour Organization Conventions, the United Nations Convention on the Rights of the Child, and the Universal Declaration of Human Rights. It can by used by organizations as part of a corporate social responsibility initiative and is achieved via independent third party certification that the labour practices in both their own premises and that of their suppliers meet acceptable standards in the areas of:

• child labour
• forced labour
• health and safety
• free association and collective bargaining
• discrimination
• disciplinary practices
• working hours
• compensation

Eco-labelling

Products awarded an eco-label indicate achievement of high environmental standards - often not just for the product itself, but in the processes that were used in making it. So for example, eco-labelled electrical appliances have been tested to ensure they achieve very high energy efficiency levels; eco-labelled textiles comply with tight controls chemicals used in production; and eco-labelled print media is sourced from sustainable forestry.

Fairtrade

The Fairtrade Mark is an independent consumer label awarded to products to assure consumers that disadvantaged producers in the developing world are getting a fair deal. Fairtrade product suppliers are audited and certified by FLO (Fairtrade Labelling Organizations International) and they then receive a minimum price that covers the cost of sustainable production as well as an extra premium designated for social/ economic development projects. The UK member of Fairtrade International is the Fairtrade Foundation which was established in 1992 by bodies including Cafod, Christian Aid, and Oxfam.

For non-members who want to learn more about the mechanics of effective supplier management, the Chartered Institute of Purchasing and Supply is a good starting point (www.cips.org). They have four main objectives:

• developing the 'art and science' of purchasing and supply
• continuously improving the professional standards of practitioners
• promoting excellence in organizations
• representing the interests and views of individuals within the profession

The CQI members only section looks at more detailed methods for assessing supplier performance