Deploying Best Practices in Supplier Relationship Touch Briefings by alicejenny


									                                                                           Technology & Services

                  Deploying Best Practices in Supplier Relationship Management

        a report by

With economic conditions continuing to apply                   More Than Technology
downward pressure on corporate profits, world-class
companies are now recognising the value that the               Although exploiting proven, available technologies is
source-to-settle process brings to increased margins           certainly an important part of best practices, they
and competitiveness. At these companies, the                   encompass more than technology, and even more
procurement organisations are committed to                     than revising or automating processes. The most
consistently deploying best practices across the               successful implementations of best practices
organisation to improve efficiencies, reduce costs and         incorporate all of the following:
increase visibility into supplier relationships and
spend. Ultimately, these measures serve to improve             • People – People participate in and drive the
company profitability.                                           source-to-settle activities and must be able to
                                                                 focus their time on value-added strategic work,
Best Practices Defined                                           not just clerical or administrative duties. The
                                                                 strategic focus of team members should include
Talk of ‘best practices’ may ring through many                   empirical data gathering and application of
corporate hallways, but, in the end, best practices are          analytical tools, improving planning and policy-
often just that: talk. However, as proven by leading             making, negotiation and supplier evaluation.
companies that actually employ best practices with
measurable results, it is clear that it is not just a theory   • Processes – Processes must be simplified wherever
or a ‘good idea’.                                                possible, creating efficiencies and eliminating
                                                                 excessive rework and unnecessary detail. A key
In real world implementations, best practices produce            component in process improvement includes
predictable results with lower risk. To do so, they              automation, which shortens processing cycle times
must be proven, put into practice, demonstrating and             and helps eliminate human error. Standardisation is
driving measurable change. They also must be                     also important since consistent treatment of data
documented – not only in writing, but with data that             reduces redundancy and saves time. Standardising
certifies the success or efficacy of the practice.               data management enables a focus on the analysis of
                                                                 results, which increases visibility into information
Perhaps most important, best practices must create               and allows for more strategic decision-making and
sustainable performance and lower costs by applying              buyer–supplier interactions.
to a broad spectrum of organisations, not just isolated
areas. It is only when it is repeatable and widely             • Information – Fundamental to good decision-
applicable that the value of a best practice is evident.         making is getting access to the right information,
It also needs to ensure effective control and risk               regardless of where it is in the company and
management, enabling broad control across the                    whether it is distributed or centralised. To be of
organisation while still empowering individuals                  value, data must be consolidated into a ‘single
throughout. To achieve these measurable results, best            source of truth’ instead of multiple silos and
practices must also leverage proven technologies                 shared as appropriate. For example, all team
without relying just on technology, a point that will            members need access to supplier performance data
be elaborated on later.                                          and spend analytics regardless of where they are in
                                                                 the organisation.
Probably the best definition of a best practice is that it
is a proven methodology, aligned with strategic                • Technology – Overall, technology supports,
business objectives, that results in increased quality and       automates and reinforces the enablement of
productivity, faster cycle times and greater efficiency. It      recognised best practices across people,
allows companies to outperform competitors in specific           processes and information. It also serves to
operational areas and deliver more value at less cost.           consolidate and centralise systems and control         1

                       Technology & Services

Figure 1                                                           leverage technology to increase efficiencies. For
                                                                   example, generation and approvals of purchase orders
                                                                   using paper and e-mail is inherently time-consuming,
                                                                   but cycle times can be reduced from a high of 50.2
                                                                   hours for an average organisation to 1.4 hours for an
                                                                   organisation applying best practices to automate the
                                                                   process through Web-based technology. The
                                                                   automation of procurement activities drives the cost
                                                                   of procurement down as a percentage of spend,
                                                                   meanwhile reducing cycle times.

                                                                   Best Practice 1 – Strategic Sourcing

                                                                   Bidding and negotiation are time-consuming, often
                                                                   paper-based processes that significantly hinder an
                                                                   organisation’s ability to source strategically.
                                                                   Dispersed information and latency of data on
                                                                   supplier performance only add to the challenges.
                                                                   What is more, once better practices are identified, it
                                                                   remains difficult to make them pervasive
                                                                   throughout the organisation. In fact, it is not
                                                                   unusual to only have 5% of all commodities sourced
                                                                   strategically in a given organisation (Center for
                                                                   Advanced Purchasing Studies).

                                                                   With Web-enabled sourcing, organisations can
                                                                   automate the entire cycle to speed the transfer of
             and provide the necessary visibility into data and    information and to share knowledge. Organisations
             performance analysis.                                 also need to adopt a common commodity
                                                                   management strategy based on standardised coding
           Together, these components of best practices allow      for consistent, streamlined processes, whether the
           companies to simplify, automate, consolidate and        purchase is direct or indirect goods or services.
           standardise processes, enabling them to work smarter
           and be more productive.                                 Once an organisation has automated and
                                                                   consolidated information, leveraging spend
           Importance of Best Practices in                         performance analytics to examine the historical
           Supplier Relationship Management                        performance of suppliers provides a valuable basis for
                                                                   strategic sourcing. With these sorts of best practices
           The Hackett Group, a US-based business processes        in place, organisations are in a much better position
           consultancy, has conducted exhaustive research in the   to negotiate long-term agreements to reduce costs
           area of best practices for supplier relationship        and improve profitability.
           management. This research was recently published in
           a white paper entitled “Achieving World Class Source    Best Practice 2 –
           to Settle Through Best Practices”, which provides the   Strategic Procurement
           basis for some of the data presented in this article.
           When The Hackett Group compared companies that          One of the biggest challenges faced by organisations
           have an average performance in key practice areas       is unauthorised, ‘maverick’ spending, which is
           with companies that have embraced and adopted best      especially hard to track and control when suppliers,
           practices, they made some interesting discoveries.      buyers and systems are dispersed. Time-intensive
                                                                   manual processes only add extra steps and introduce
           While the average company counts 37% of its             greater chances of human error in the process. In
           contracts as ‘long term’, 75% of contracts from         most organisations, materials and services are
           companies adopting best practices are long term. The    procured through separate systems and departments,
           benefits these long-term contracts bring to an          further fragmenting the process.
           organisation include lower administrative costs and
           the ability to negotiate better prices.                 By shifting the procurement focus from tactical to
                                                                   strategic with an eye to automating and centralising all
           Another key finding from The Hackett Group’s            procurement, organisations are able to recognise
2          research underscored how world-class organisations      tremendous gains in time and cost savings. World-class

                                       BUSINESS BRIEFING: GLOBAL PURCHASING & SUPPLY CHAIN STRATEGIES 2004
                                     Deploying Best Practices in Supplier Relationship Management

organisations process 80% of their purchase order in       Figure 2
electronic form, while an average would cover only
17% and the rest is paper-based. Just automating the
request-to-cheque processes accelerates procurement
cycles, saving time. Walking purchase orders around
for signatures is expensive and is an obvious area to
target cost savings. The Center for Advanced
Purchasing Studies (CAPS) estimates that best practices
enable companies to decrease the cost per purchase
order from US$121 to US$33, adding up to substantial
savings when applied across the organisation.

Managing all spend – for direct materials, indirect
materials and services – enables organisations to gain
visibility and control into total spend, in turn
minimising maverick spend. As mentioned
previously, consolidating the number of suppliers
directly results in lower costs of goods and services,
as does an increase in the number of long-term
contracts. Another direct benefit of gaining visibility
and control into the procurement of services is the
reduced lead time to fill positions.

An important hallmark of organisations applying best
practices is the strides they have made to consolidate     Figure 3
and standardise the source to settlement, not only of
goods, but also of services. In addition to the cost and
time savings mentioned already, strategic
procurement of services results in decreased legal risk
with enforced compliance, which is especially
important in litigious environments.

Best Practice 3 – Effective Settlement

Settlement and dispute resolution processes are
complex, tending to be very paper-intensive and
error-prone. The area of settlement is one that is very
frustrating for most organisations, causing a large
administrative burden that is often underestimated.
The reality is that most accounts payable organisations    capture as much as a 1% to 2% discount off invoices
are mired in paperwork and the communication lines         for paying suppliers within 10 days – savings that
between requestors, buyers and suppliers are               rapidly add up to an increase on the bottom line.
completely broken. This is one area that benefits
especially well from the application of best practices.    Best Practice 4 – Meaningful
                                                           Performance Management
In highly effective, efficient organisations, best
practices provide a framework for preventing               Applying best practices across sourcing, procurement
disputes, minimising errors and settling accounts          and settlement has clear benefits. What are
more rapidly. Technology plays an important role           sometimes not as obvious are the benefits derived
here, since Web-enabled invoice transmission and           from strategic, proactive supplier performance
dispute resolution streamline processes and quickly        management. Without this, organisations will lack
resolve issues, while automating the request-to-           visibility into total spend and into actual
cheque process helps to improve cash flow.                 performance. If there isn’t a single source of truth for
                                                           supplier performance – and especially if the
There are myriad time and cost benefits to effective       performance is self-reported by suppliers – the
settlement, but the greatest value to organisations can    information will not be consolidated or consistent
come in the form of lucrative cash discounts.              and ultimately cannot be strategic to the business. As
According to US-based consulting and research firm         a result, organisations are unable to identify the best
Celent Communications, companies can often                 suppliers or issues easily or in realtime.                 3

                Technology & Services

    By leveraging best practices into the area of            • reducing manual processes, iterations and
    performance management, organisations can make a           duplicative work; and
    significant, lasting impact on supplier relationships.
    When suppliers are able to review their own              • simplifying supplier interactions.
    performance metrics and to respond in realtime,
    research has proven that they do respond. Simply         When reviewing current processes and exploring
    measuring supplier performance can result in a 26%       opportunities for best practice enhancements, it is
    improvement, according to The Hackett Group.             necessary to ask:

    The use of Web-based tools for realtime access to        • Is the transfer of information timely, or are there
    performance ratings and to decrease data latency           disruptions and stops in the process?
    gives the visibility that decision-makers need to best
    leverage supplier relationships. Analysing supplier      • Is the information accurate and reliable?
    performance and purchase history to target suppliers
    with high volumes and high performance enables the       • Are stakeholders more informed by greater access
    negotiation of better contracts. Meaningful                to information, leading to a more nimble
    measurement based on actual commodity types,               procurement process?
    whether they are goods or services, is far more
    indicative of performance, again supporting better       • Are actions traceable and can they be tracked?
    decision-making. Metrics should be aligned with the
    commodity being procured.                                • Are they consistently repeatable?

    First Steps Towards Best Practices                       • Are they measurable with accuracy?

    By enabling best practices through an efficient          A well-considered best practices strategy will not
    source-to-settle process, organisations make smart       only improve the effectiveness and efficiency of the
    buying decisions. By relying on best practices, these    procurement function, but will benefit the larger
    decisions become part of an overall strategy for         goals of the organisation. By moving source-to-settle
    achieving business goals, meanwhile facilitating the     processes online and focusing on supplier
    building of long-term relationships with the highest     relationships rather than processes, procurement
    performing suppliers. This happens by:                   professionals have the opportunity to manage
                                                             strategically to help deliver bottom-line benefits to
    • linking and automating critical spend management       the enterprise. s
      processes – including analytics, sourcing and
      procurement – to organisational objectives;               Contact Information

    • proactively managing all categories of spend –            For more information on PeopleSoft Supplier
      direct, indirect, assets and services – everything        Relationship Management and a copy of The
      the enterprise is buying;                                 Hackett Group executive white paper entitled
                                                                “Achieving World Class Source to Settlement
    • providing for an automated linkage of steps in the        Through Best Practices”, please visit
      process and viewing the entire process beyond a 
      purchase order to payment of an invoice;



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