Supply Base Management. Have you got the right Segmentation, Enablers and Drivers?

Supply Base Management is one of the key Enablers of Procurement Excellence but our experience is that organisations rarely take a strategic view and structure the procurement function to effectively manage risk, drive performance or create value from their supply base.

There are a number of core processes that it is essential that organisations put in place, get right and operate effectively. These Enablers and Drivers are fundamental to any Procurement Strategy and they dictate the optimum Target Operating Model for the procurement function. We visualise these through the Procura SBM Process House:

Getting the basics right – Supply Base Segmentation

One of the first considerations is Segmentation. Not all suppliers are equal and applying a clear and structured segmentation to your supply base enables the right effort, attention, tools and approaches to be focused in exactly the right place.

Segmentation should not be overly complex. A simple 4-layer model as shown below can help to define different approaches to different suppliers.

 

Which suppliers sit in which segment should be established by working collaboratively with stakeholders from all parts of the organisation. A common misconception is that segmentation should be based on Spend, but there are a range of equally important factors to consider:

  • Time – the anticipated length of the future relationship
  • Type of Contract – the type of contractual agreement in place
  • Relationship – how the organisation views the supplier relationship
  • Outside-In view – how the supplier views the relationship
  • Criticality of Supply – the risk to supply in the supply market, including transportation constraints
  • Market Competition – the nature and size of the market and potential alternative options for supply
  • Dependency – the level of dependency on the supplier

A key output of segmentation is assessing the Supplier Relationship, both from an internal and from the supplier’s perspective. This often proves to be the most though-provoking criteria when conducting segmentation, especially when the relationships are unbalanced – indicating that the organisation’s view does not match the supplier’s view of the relationship, which requires corrective mitigation strategies to be applied.

Core SBM Enablers – Risk, Performance and Management

The four enablers of SBM are essential for the management of risk and to drive supplier performance;

  1. Supply Chain Risk Management

The aftermath of Covid-19 lockdowns and the subsequent disruption to suppliers and global supply chains has clearly demonstrated how essential Supply Chain Risk Management is. In a recent survey conducted by Procura, 75% of procurement leaders are working with their suppliers either through active risk management or closer strategic collaboration to secure business continuity in response to the pandemic. Deeper supplier risk management provides assurance for onboarding new suppliers but also offers an early warning of vulnerabilities throughout the incumbent supply chain.

Benefits of good Supply Chain Risk Management:

  • Ensures Supplier Financial assurance
  • Provides a structured approach for identifying, monitoring and mitigating risks
  • Safeguards ethical and anti-corrupt supply chains
  • Allows for assessing and implementing ESG and CSR risk factors
  • Ensures that geographical, reputational, and operational risks can be anticipated and quickly addressed
  1. Supplier Performance Measurement

The adage “What gets measured, gets managed” has bever been more important and Supplier Performance Measurement is an essential Enabler in driving the theoretical benefits identified by sourcing into reality on the P&L. A structured approach to measuring KPIs via Supplier Scorecards provides the basis for informed supply chain decision-making and the leverage that is often required for negotiating with poor performing suppliers.

Benefits of good Supplier Performance Measurement:

  • Allows for informed decision making based on objective and logical quantifiable data
  • Creates the basis for targeted Supplier Management
  • Supports a strategic category sourcing approach
  • Provides a strong foundation for continuous supplier improvement initiatives
  • Creates a joint approach to collaborative supplier development
  1. Supplier Relationship Management

The benefits of Supplier Relationship Management (SRM) are rarely realised by organisations, often because it is seen as too onerous and time consuming. However effectively managing supplier relationships is fundamental to creating value for the entire organisation, and it can be so easy to implement.

The basics of good Supplier Relationship Management:

  • Preparation – understand what you want to review with your suppliers (KPIs, performance data, contractual SLAs, risks etc), ideally as part of a Supplier Scorecard
  • Supplier Review – conduct regular Supplier Scorecard reviews based on the segmentation (Critical suppliers more frequently), agree corrective actions and identify improvement opportunities
  • Reporting – communicate the output of the review with your wider stakeholder group and escalate any issues if required
  • Corrective Action – implement any corrective actions and review these during the next supplier review

Structured and targeted SRM ensures that high-performing suppliers stay that way, and that poor-performing suppliers can be effectively developed in order to add value to the organisation. Where this isn’t possible, effective SRM ensures the early identification of supply chain vulnerabilities and allows for suitable mitigation solutions, such as alternative sourcing, to be quickly implemented.

  1. Tail Spend Management

Finally, tail spend management is equally important. Low value and often one-off or infrequent orders can make up 80-90% of an organisation’s total purchased items and a failure to address this can result in procurement resources being redirected away from strategic SRM and Risk Management to focus on operational issues.

Benefits of good Tail Spend Management:

  • Improves supplier consolidation initiatives – managing less suppliers and targeting SRM at critical suppliers
  • Enhances supplier risk management – allowing for early warning risk signs, even from low spend suppliers
  • Allows for greater spend consolidation – less invoices, less processing, less queries
  • Can equate to savings of between 10% and 15% – simply by addressing the spend via strategic category sourcing

Getting the fundamentals of SBM right can be easy, quick and doesn’t always require additional resources. However the benefits will almost certainly be big, far-reaching and will create added value for the entire organisation.

In summary:

  • Effective Supply Base Management requires the right Enablers and Drivers in place.
  • Segmenting your supply base will ensure you apply the right approach, with the right effort, in the right place.
  • The SBM enablers focused on supply chain risk, contract management and supplier performance ensure you realise the benefits of procurement
  • Supplier Relationship Management will enable you to create value from your strategic suppliers

If you want to know where to start, our Procurement Function Diagnostic provides a clear mechanism to benchmark your function in relation to the 8 Key Enablers of Procurement Excellence.

For further information or to discuss how Procura could help your organisation – please get in touch:

Email us: info@procuraconsulting.com

Call us: +44 (0)203 693 7275

Or subscribe for regular updates:

Subscribe below for regular Insights

* indicates required

Please select all the ways you would like to hear from Procura Consulting:

You can unsubscribe at any time by clicking the link in the footer of our emails. For information about our privacy practices, please visit our website.

We use Mailchimp as our marketing platform. By clicking below to subscribe, you acknowledge that your information will be transferred to Mailchimp for processing. Learn more about Mailchimp's privacy practices here.