1. How much do my suppliers really cost me?
2. Who are my key suppliers.....and what happens if I lose them ?
3. Am I getting value for money - and how do I know?
4. Do I know what great supplier performance looks like...... and what it doesn’t?
5. Are my suppliers getting better at what they do?
6. What’s my exit strategy?
7. What do I do now?

How much do my suppliers really cost me?

Analysing your supplier spend can help you really understand the relationships you have with your suppliers and to use this information to procure in a more structured, efficient and effective way;

In particular it will:

• identify suppliers with whom your organisation spends significant amounts.
• indicate opportunities to reduce the overall number of suppliers you deal with - in particular suppliers of low value goods and services.
• Differentiate between expenditure that is critical to the delivery of your company’s objectives, and expenditure that supports its smooth running (such as IT systems, and other ‘back office’ functions).
• help you map out a route to a more efficient, cost effective purchasing process.

Who are my key suppliers...... and what happens if I lose them to a competitor?

Analysing supplier spend is useful, but you also need to gain an understanding of value and risks associated with suppliers.

For example, your spend analysis may have revealed a high spend with a supplier and recognise the potential for negotiating a price reduction – but what happens if this is the only provider in the marketplace of a particular piece of equipment vital to your company’s success?

The two key factors to take into account are supply risk and impact on your organisational objectives (not just profit).

Supply risk is high when the market lacks maturity or if the item is a scarce raw material.

Organisational impact is high when the item contributes significantly to profit, quality or service delivery.

Where both risk and impact are high, this would indicate the existence of strategic suppliers. Typical examples may include some raw materials used in manufacturing, or tailored IT systems. 

The key behaviour here is to build and maintain a partnership relationship with your supplier. The mutual trust and commitment that is associated with such a relationship is likely to reduce the supply risk to a minimum.

Close cooperation with key suppliers may lead to improvements in product / service quality, reliability, lead times, and may even result in cost reduction. 

Am I getting value for money - and how do I know?

When considering VFM it is vital to recognise the distinction between price and cost.

On the surface, a product or service may have been cheaper to acquire from a new market entrant as opposed to a long-standing supplier, but it may require the investment of more contract management time, or there may be a steeper learning curve before quality reaches optimum levels.

So it is important to consider the ‘Whole Life Cost’ when purchasing.

Quality measures and metrics provide information about how well a supplier is performing. But of course it is no good providing a perfect service if the costs are prohibitive. Ensuring value for money is about the trade-off between quality and cost.

Increasingly, the issue of Sustainability  is seen as a VFM criteria.  This could include environmental factors, but also sustainability in terms of the legacy of the contract e.g. employing local labour or community benefits.

Do I know what great supplier performance looks like...... and what it doesn’t?

Some performance aspects are reasonably easy to measure/ They can be counted and measured in a simple, mathematical way. Examples would be capacity, throughput, transaction volumes and accuracy.

Other aspects of supplier performance may be harder to measure because they involve subjectivity: usability and flexibility.

Subjective aspects should not be neglected simply because mathematical techniques cannot be applied to them; it is a question of gathering information and analysing it with as much objectivity as possible.

It may be that something that is quantifiable can provide a ‘handle’ on a much less tangible aspect. Such a measure is known as a proxy measure. For example, an indication of ‘staff morale’ may be provided by a measure of staff turnover rate.

KPIs and SLAs should not be seen as immoveable objects. Over time there  will be a need to modify, add or remove KPIs and SLAs, possibly due to the introduction of new technologies or economies of scale..

Do not include too many KPIs / SLAs or those which are disproportionate and do not add value to the process. They will  take up valuable time to monitor and report upon.

Are my suppliers getting better at what they do?

It is one thing to hope our suppliers become more efficient over time, and another to create the conditions and culture where this can happen.

"It is worth remembering that KPIs and SLAs should not be seen as immoveable objectives. Over time there will be a need to modify, add, remove and replace those that are redundant, ineffectual, or do not add value."

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In our work we often hear clients bemoaning the supplier’s lack of innovation or continuous improvement. However, more detailed questioning often reveals that the contract focusses on KPI compliance – with no scope for the supplier to suggest improvements, or to provide feedback to the client.

Moreover, at the contract award stage there can be an over emphasis on an input specification which stipulates not only ‘what’ needs to be done, but ‘how’ it should be achieved. Such an approach is unlikely to create the desired improvement or innovation culture.

Payment mechanisms are usually compliance based. If a supplier knows that their income depends on compliance with a predetermined set of KPIs (and behaviours) then that is what they will deliver.

So why not.....?

• Have an agenda item at your supplier meetings where you explicitly discuss innovations and improvements.
• Encourage your suppliers to challenge you. Encourage them to ask “Why....?” and “Why not...?”
• Incentivise improvements through gainshare or similar mechanisms.

What’s my exit strategy?

There are several reasons why you may want to exit a contract such as termination for convenience; termination for cause (breach); or the contract could have come to a natural conclusion at the end of its term.

Terminating a contract can be costly, lead to litigation and disrupt your business. Therefore, it should be a matter of last resort.

It is vital that there is an orderly transition of the relevant services to either the customer or a replacement supplier without any undue disruption to such services. Robust and comprehensive exit plans must be put in place.

Generally speaking, the outgoing supplier should be required to provide details of the capabilities, processes, resources, assets, documentation and other key items used in the provision of the services which will have to be sourced or provided by the customer or the replacement supplier .

Key areas for consideration regarding contract exit which are usually included in the contract documentation are:

• Transfer of assets e.g. I.T.equipment, 
• People –  TUPE Regulations may apply
• IP (Intellectual Property) / Patents. These should have been agreed at a much earlier stage
• Payment procedures on termination.
• In the case of professional services contracts, ensure knowledge transfer from the supplier back into your organisation. 

What do I do now?