A different take on value creation
Most of the procurement organisations I’ve seen since I started working in the field are somewhere between the operational and strategic levels and far from homogeneous, even within the same organization. I can think of production facilities having the cost of raw materials under control and then spending unnecessary millions in indirect goods and services. Every company is different, and the world is not a static one, changes are rather on the overwhelming side. It might sound trivial but there are usually huge gaps in the understanding of company-wide requirements and procurement-compliance requirements. Very often these concepts are unknown and certainly not applied. Everyone is so stuck in their roles that no one really takes a step back to look at the full picture. Eventually every internal organization seeks on its own improvements that will only respond to their needs without considering that there are common goals and expectations.
The programme
For the purpose of this paper I will focus on using your procurement power to ensure that your company-wide quality requirements are met. First step is to align the procurement organisation strategy with the other entities: logistics, production, finance and quality. As trivial as it sounds, the key to achieve the goals is to consider everyone’s needs and requirements. Most likely there will be a quality management system already in place, ISO 9001 or similar, BRC for the food industry, and so on. That should serve as starting point simply because it’s the most comprehensive QA/QC system and it already includes to some extent, procurement-related activities. The goal is to set up a bonus system that will create a financial incentive to integrate the idea of continuous improvement into the procurement organisation. Think about a “lean” approach to procurement.
The tool to evaluate and place suppliers into one of the three groups is the scorecard. Scorecards have been around for years and more and more procurement departments are adopting it, there’s nothing innovating about it, it’s just good practice. The key to take scorecards to the next level is to integrate other departments to actively contribute and improve the use of the system. Many times in my working experience I have seen parallel quality systems working independently within an organisation. Most common cases are the production quality system and the procurement quality system. The lack of strategic alignment makes neither truly effective or capable of deliver extra value to the organisation.
The contents of the scorecards are, therefore, created and agreed based on input from all stakeholders. The evaluation criteria also needs to be aligned with wider company expectations. The exercise requires looking at own weaknesses and most important areas of improvement. The scorecards should encourage suppliers to make the changes you require in your organisation instead of making your teams adapt to variables and different ways of working. The score should be a mix of quantitative (mostly) and qualitative requirements. By adding the requirements of every other organisation, it is possible to create a fr²amework in which suppliers can be placed into contractually-bound “groups”. Ideally the number of groups can be limited to 3 to keep a simple and easy to understand structure.
The first lot is the target group. These suppliers are the best performers and will be placed at the lowest level of contributions, if any. They will also benefit from a preferred treatment when new opportunities arise. Ideally, critical suppliers should fall into this group. The second lot is the challenged group. These suppliers are not yet where they should be in terms of performance and they are actively encouraged to increase their quality level to get to the target group. The level of contribution is intermediate. Finally, the third lot is the exit group. These suppliers will potentially give away their business to suppliers in the first lot. Their level of contribution is high and most likely won’t even agree on the programme unless they’re truly eager to keep the business. If any critical components are supplied by vendors in this group, a sourcing activity is highly recommended. It is also recommended to have a best-in-class status as well, ambitious suppliers will fight for it and is a win-win situation.
Other important aspect is transparency, suppliers must be aware of their score and their improvement points, the information should be available for them upon request and reviewed every time there is a supplier meeting. An “incidents log” and a “corrective actions list” should fit the purpose as tools. Additionally, sharing forecast information is also really appreciated by the suppliers. It also provides a peek to what’s potentially “on the table” for them. When the time comes to kick-off the programme, communication is key. The best way to communicate is to invite every supplier in the scope to a supplier’s conference animated by the program’s sponsors. It is really important that suppliers see that the top management is committed to the success of the programme and that they’re expecting an additional effort from everyone.
The goal of the conference is to transmit a rollercoaster of emotions to the suppliers, I can think of 4 very distinctive ones:
➢ Feel important: the conference is not for everyone but for the chosen ones
➢ Doubt: am I going to lose this client?
➢ Challenged: where am I as a supplier and what can I do to get better?
➢ Empowered: it is in my hands to do something about it
Usually at the end of such event, all kinds of reactions are triggered but there are some patterns: the ones that become curious and actively look for a meeting, the ones that hide, the ones that reluctantly go ahead (arguing that the approach is complicated) and the ones that just say no (that might eventually come back).
The programme should manage to fit every supplier under the same kind of framework agreement. The idea is that one contract standard is used and managed in the same way, creating a way of working that is tailored-made for the teams. It is critical to define clauses that respond to the organisations and systems in place and that highlight the actions that are critical to achieve wider company goals. If a service level agreement is introduced, same rules apply. I have seen many times in my career contracts that are just a “template” coming from the legal department that were not drafted with the goal of creating value.
The penalties and liabilities are a good example, the most important clause should be the liabilities in case a supplier forces the production to stop. This can be due to a non conformity or a late delivery, in any case there should be a clear compensation per hour for any such event. If it’s pre-agreed, there’s no discussion in case it ever happens.
Countless times I have seen useless penalties that are never applied simply because they don’t make sense: penalties for errors in invoices, penalties for errors in product registration and so on. Just to be clear, this is important but it is scorecard material rather than contractual clauses.
To conclude, the contract should be a straight-to-the-point document that aims at creating value rather than a random collection of clauses hacked together by the legal team.
Expectations
As a consequence of implementing the programme, you can expect an immediate result in your EBIT that eventually will give way to a long term improvement that will keep your production running smoothly, will minimize your stoppage times due to late or missing deliveries, will create a transparent framework that both suppliers and your own organisation understand and last but not least, will help you focus on your strategic goals.
