Sourcing, Logistics and Supplier Relationships

Sourcing is paramount in business and no matter what business you are looking to run, you will typically need to procure and manage a certain number of supplier contracts and relationships. e.g. software contracts, premises contracts etc. When it comes to these contracts, businesses in their infancy typically make the mistake of simply going with the first supplier they find or using a supplier they are familiar with. However for large contracts or key suppliers especially, it is worth assessing the marketplace in an attempt to receive the greatest Value for Money (VFM).

Getting Value for Money (VFM)

The first step you want to take in when sourcing is to map out your purchasing needs. For certain service related organizations e.g. consultancies you will only need a small number of suppliers, typically software contracts, telephony contracts and premises contracts, however if your company is going to be product-based your purchasing will be more volumetric and often integrated with a wider supply chain and logistics process. In any case, once you have established what you will need to purchase, it is important to source the market and find reliable suppliers that can provide to your requirement at the right price.

In terms of finding the right supplier in the desired market with the desired characteristics to suit your business requirements you will need to invest some time in market research such as:

1. Internet research – The internet is always a powerful tool when initiating research and is definitely a useful means of identifying the key market players and potential suppliers that could be approached
2. Referrals – If you have contacts in the market or are networked with suppliers that have experience in that market then you can often get referrals to suppliers which you would otherwise not hear about
3. Industry publications – Pretty much every industry has in depth articles published by organisations specialising in market research and these are an extremely useful and reliable tool in determining who the key and emerging suppliers are in a particular market
4. Trade shows – If you have time to invest in attending trade shows you can often chat face-to-face with some of the key suppliers in a certain market and thus build an initial relationship which can help in future negotiations.

Once you have a reasonable understanding of the potential suppliers in the market you should start exploring which one is going to offer you the greatest VFM. There are a number of ways a business can go about doing this:

1. Shortlisting – Following your market research shortlist 3 or 4 suppliers and retrieve quotes along with their standard terms of business. Using this approach puts you in more of a driving seat when conducting negotiation as you will have an idea of what suppliers are offering and can thus negotiate your position based on a foundation of offers from the market
2. Running a full tender exercise – This is generally for the more established organisation and for contracts of significant value. The exercise is designed to deliver the greatest value for money with vendors submitting in depth tender documentation designed to illustrate themselves as your best option. Tender exercises are often lengthy and require an extensive workload to complete with various stages and evaluations, however they are an excellent tool in realising the greatest value for money in the market and will ensure you have been through a thorough process before reaching a conclusion. It is however best practice to save such tenders for the larger value and more important contracts to your business (not many vendors will be interested in applying the resource to something that isn’t particularly large or worthwhile). For some tips and tricks on how to put a tender exercise together see our tips and tricks section
3. Network – if you visit trade shows, business events etc you can often network with some key suppliers and key individuals to develop a rapport. In many markets relationships are paramount and you can often retrieve better value, more favors and/or better terms should you have developed close relationships.

Selected a Supplier…What now?

When you have selected the supplier offering the greatest VFM, you now need to be actively managing the supplier to ensure they are delivering on what they promised.

In many cases in order to track and monitor supplier performance an organisation looks to employ a “scorecard” which highlights the key aspects to be monitored regarding a specific supplier. Such metrics could include financial health, pricing, lead time, quality/defects and responsiveness and would, depending on the value and importance of the supplier to the organisation be updated on a regular basis.

A scorecard for a particular supplier could look something like the below:

As you can see this scorecard provides a visual representation of the supplier performance and uses a Red, Amber Green method of identifying strengths and weaknesses. The template also includes a comments section which can document actions that need to be taken in order to solve any problem areas. Such a scorecard can be taken to and discussed with the supplier at the next scheduled supplier meeting and can act as an excellent talking point to structure conversation around performance and improvement areas.

Which Suppliers require the most attention?

As mentioned above, there are certain suppliers that will be core to your business that will require significant attention and the derivation of a scorecard similar to the above along with regularly scheduled supplier management meetings. However there are also other suppliers that I like to call the “tail spend” that still need to be monitored, but not with the same level of diligence as a high value, high importance supplier. For instance you will need to monitor your business insurance provider and your utilities provider, but it is very unlikely that you will need to be meeting with them on any sort of regular basis, however a core provider of a raw material used in the manufacturing of one of your products needs to be managed very closely and frequent (at the very least monthly) meetings need to occur in order to discuss performance, market conditions and challenges.

Understanding which suppliers need to enter an active supplier management program and suppliers that could be dealt with in a more passive fashion is an exercise that is very specific to each business, as one thing considered vital for one organisation could be seen as passive for another. However there are a number of rules of thumb that you could use to derive which suppliers require the most attention:

1. Value of the contract – It goes without saying that you will have some contracts with suppliers for spend that is very small (e.g. a website hosting provider) and others that could run up to relatively significant values (enterprise management software). As a business it is always worth understanding the contracts you have and the level of spend you are putting though these suppliers. From here you could use Pareto’s 80/20 to surmise which suppliers based on value need to be managed actively which essentially means analyse where 80% of your spend goes and manage all of those suppliers that fall within the 80% category.
2. Importance of the product/service – When it comes to your business, assess how important the supplier contract is when it comes to your day-to-day operations. For instance if there was a material change or problem with the supplier how significant would the impact be to your operation? If supplier issues are going to have significant impact on your ability to perform as a business, then it is certainly a supplier worth managing closely.
3. Past performance – In any business supply landscape, there is typically always a bit of a problem child. If you find a supplier is consistently underperforming then it pays to invest some time into understanding why and work with them in order to put together an action plan with some measurable targets and milestones that need to be hit. If the supplier continues to underperform against the action plan, then you begin re-procurement and will know exactly what any future supplier will need to deliver in order to be a successful partner.

Business Logistics

Business logistics is all about getting the right product to the right place at the right time and therefore it ties in nicely with both sourcing and supplier relationships.

So what exactly is Logistics management?

The primary element of logistics management is to ensure that product is delivered to its intended location within a timeframe that works for all of the parties involved.

That being said there are a number of functions under the logistics umbrella that come together to make this possible:

1. Warehousing – Optimising your warehouse space and ensuring it is suitably organised to receive and distribute inventory as it arrives is a vital ingredient in a healthy logistics recipe. The design of your warehouse needs to focus on efficient flow of resources to maximise the efficiency of staff receiving, finding and sending orders
2. Inventory management – Bin locations and clear labelling needs to be enforced to ensure each item of inventory has its specific space in warehouses and/or showrooms. A policy for a full inventory count twice a year with regular cycle counting is also a necessity to ensure you are aware of any system deviations well in advance of it becoming a potential problem
3. Order fulfilment – Fulfilment of an order should be efficient, thus appropriate organization and labelling of inventory items is required. In addition to this, the transportation policy should be clearly defined e.g. Will you be using a third party provider? Your own transportation network (trucking etc) or a combination of the two?
4. Scheduling – Scheduling encompasses both receiving and fulfilment. A logistics schedule should define the planned weekly incomings and outgoings enabling the parties involved to trace and track their delivery through to the end point.
5. Coordinating with other organisations – Naturally other organisations are typically involved in the logistics process, from the manufacturer to the customer and any third party logistics organisations in between. Communication has to be tight ensuring all parties are on the same page and aware of prospective lead times so that planning for any shortages can occur quickly to minimise any operational impact.

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