One of the primary components of any procurement function’s strategy is, or should be, to ensure that the company has an optimised vendor base. This is aimed at achieving a more cost effective and high-quality supply chain.
Most companies therefore go through a vendor rationalisation process at some stage and continuously review vendor categories to ensure that the selected set of vendors still fit the business best for the respective services or products they deliver.
But are they missing something…?
Optimising the vendor base is normally done by assessing various elements such as pricing, service delivery, contractual terms, internal stakeholder sentiment etc., which are, of course, all very important elements to consider. In our experience however, we find that the important elements most often overlooked are the non-contextual ones. In other words, what does a vendor’s business look like outside of how they are meeting Service Level Agreements (SLAs) and engaging with your business?
Most risks to SLA compliance are often driven by other company related factors such as the vendor’s business strategy, reputation, operational structure, cashflow management etc. It is therefore critical to understand these vendor companies in isolation from your business. Even though this might seem obvious, most companies rationalise their vendor base without considering much of the aforementioned factors - especially for non-strategic vendors.
So, what is it that we need to consider on this front and is it possible to do so across the entire vendor base?
In our opinion it starts with finding a methodology that allows for applying vendor-company risk factors across the entire vendor base in a cost-effective manner. Ultimately, organisations cannot justify spending thousands of Rands understanding vendor company risks with vendors that they don’t spend tens of thousands of Rands with.
Since not all vendors are of equal importance to the business, basic segmentation or categorisation principles such as vendor spend and vendor importance, in terms of the organisation’s supply chain, can be used. Based on the outcome of the categorisation process, the extent of the risk information required for rationalisation purposes can be determined. For example, a full vendor assessment including an analysis of the following risk areas can be conducted on the organisation’s highest spend and most important vendors:
· Governance and Leadership
· Company Strategy and Structure
· Financial Performance
· Compliance, Sustainability and Reputation
· Demand Market
· Supplier Market and
· Competitive Landscape
Such a risk analysis will be costlier and more time consuming but, compared to the large amount that the business spends (or intends to spend) with these vendors as well as their importance to the organisation’s supply chain, it is well justified.
For the organisation’s less important and/or smaller vendors, lower costing rudimentary risk assessments can be conducted by looking at, for example, basic compliance, integrity and sustainability related factors. This is probably most effectively done using a specialised service provider who has the ability to overlay the relevant risk data or risk scores with more traditional rationalisation criteria. This not only improves the outcome of the rationalisation process but also ensures that the vendor companies selected are the best, based on how they provide a service to your business as well as the potential sustainability and reputational risks they bring into the organisation’s supply chain.
In the end it comes down to ensuring the procurement function adds value to the organisation by maintaining a cost-effective vendor base of high integrity. This cannot be done without considering non-contextual risk factors which ultimately impact the quality of service delivery and the integrity of your organisation’s supply chain.