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Strategic supplier relationships benefit procure-to-pay and beyond: organizations building stronger relationships with a broader group of suppliers have clear advantages.

When it comes to improving performance, many organizations focus too much on tactical processes for regular activities such as ordering materials. They neglect the front-end steps they can take to benefit these internal processes and help them run as smoothly as possible. This includes improving processes for appraising and developing suppliers. By conducting these processes effectively, an organization can weed out unnecessary, inefficient or ineffective suppliers and foster stronger relationships with suppliers that are beneficial for the organization. The relationships that come out of a strong supplier development program lead to highly efficient procurement efforts both at the tactical and strategic level.

APQC recently looked at its Open Standards Benchmarking data in procurement to determine how practices aimed at evaluating the capabilities of suppliers affected the procure-to-pay process and procurement efforts overall. APQC found that organizations focusing their supplier relationships on more strategic factors and organizations more broadly and more frequently using supplier scorecards have clear advantages in their procurement efforts overall and in their procure-to-pay processes.

Supplier appraisal practices

APQC examined several aspects of how organizations evaluate suppliers. First, it looked at the nature of organizations' relationships with suppliers. As shown in Figure 1, these relationships are focused on a variety of factors. However, the top three factors are quality, total cost and supplier capabilities. Only 14% of responding organizations indicate their supplier relationships are focused primarily on the price of purchased materials. These results indicate that many organizations are looking at the bigger picture when selecting and retaining suppliers.

When it comes to assessing suppliers, APQC's data indicate that the majority of participants in its survey use supplier scorecards with their active suppliers. Specifically, 38.4% use supplier scorecards with some of their active suppliers, and 31.6% use scorecards with all of their active suppliers. In a related practice, many organizations conduct formal reviews of their top-tier suppliers using scorecards as the basis for communication. The largest groups of organizations with this practice conduct these reviews quarterly (38%) or annually, (24.1%), but some even conduct these reviews on a weekly basis (3.9%).

Impact of supplier relationships

APQC has also found that organizations with a more strategic approach to supplier relationships have clear advantages over organizations with a more traditional approach. For example, they have some of the shortest procure-to-pay cycle times. Organizations with supplier relationships focused on capabilities have the shortest, with a cycle time of 16.0 days at the median, followed by organizations with a focus on delivery (17.5 days at the median) and organizations with relationships focused on quality (26.0 days at the median). Although different factors can affect procure-to-pay cycle time and even lead to an organization wanting a longer cycle time, for many organizations a shorter time for the procure-to-pay process is beneficial.

Organizations having more strategic supplier relationships have an advantage with regard to strategic suppliers as a percentage of all active suppliers. Again, organizations with supplier relationships focused on quality perform best, with a median 25% of their active suppliers being strategic ones. This is followed by organizations with supplier relationships focused on delivery (17% at the median) and organizations with supplier relationships focused on capabilities (16.1% at the median). The higher percentage of strategic suppliers may be a result of a broader focus on strategy within procurement that extends to the focus of individual supplier relationships. However, it may also be that developing more strategic relationships leads organizations to do business with fewer non-strategic suppliers.

Impact of scorecard practices

APQC's data also reveal procurement benefits for organizations that broadly use supplier scorecards. As shown in Figure 2, the more widely organizations have implemented formal supplier scorecards, the better supplier lead times they achieve and the smaller percentage of maverick purchases they make.

Organizations that use supplier scorecards with all of their suppliers have a median supplier lead time three days shorter than those of organizations that have not implemented supplier scorecards at all, and two days shorter than those of organizations that have implemented supplier scorecards for only some of their active suppliers. The shorter supplier lead time can have a clear benefit to an organization's procure-to-pay process because the organization spends less time waiting on delivery and is able to complete transactions faster.

Similarly, organizations that use scorecards with all of their suppliers have better results with regard to the percentage of their total purchases made via maverick buying. The difference between the median amount of maverick purchases these organizations make and the amount made by organizations that do not use supplier scorecards is over 2%. When compared with organizations that use supplier scorecards with some of their active suppliers, organizations with the widest use of scorecards still make nearly 1% less of their purchases via maverick buying. By reducing maverick buying, an organization ensures it does business with familiar suppliers with which it has established expectations. This ensures that the organization avoids surprises in delivery, such as delayed or incorrect shipments.

A related practice is the use of formal reviews with top-tier suppliers using scorecards as the basis for communication. This goes beyond simply tracking supplier performance to discussing performance on a regular basis with suppliers of greatest importance to the business. As shown in Figure 3, organizations that conduct formal reviews of top-tier suppliers on a weekly basis have the greatest percentage of supplier on-time delivery, as well as the lowest total cost to appraise and develop suppliers per $1,000 in purchases.

At the median, organizations performing weekly reviews of top-tier suppliers have 95% of their supplier deliveries made on time. APQC recognizes that some organizations may not be able to achieve weekly reviews of suppliers, no matter how strategic they are to the business. Organizations in APQC's data conducting monthly reviews also perform well, with 93% of their supplier deliveries made on time at the median. This interval may be more achievable for organizations wanting to keep resource levels down. Less frequent reviews (quarterly, annually, sporadically and never) have the same percentage of supplier on-time delivery, although their performance level may be acceptable for organizations wanting to limit the amount of resources needed for reviews.

Perhaps counterintuitively, organizations conducting weekly reviews of their top-tier suppliers spend less to appraise and develop suppliers per $1,000 in purchases than organizations with reviews at any other frequency. At the median, they spend one dollar less on this activity than the group conducting monthly reviews, and over two dollars less than organizations conducting reviews sporadically. These results indicate that organizations conducting such frequent reviews have streamlined their supplier appraisal and development processes to minimize cost while increasing frequency. It may also be that these organizations focus most of their appraisal and development efforts on their top-tier suppliers, which can offset the cost associated with frequent reviews.

Re-evaluate supplier relationships

Data collected by APQC reveals that organizations considering strategy when appraising suppliers and building supplier relationships see benefits to their overall procurement efforts, as well as to the procure-to-pay process. These benefits range from shorter procure-to-pay cycle times, to more supplier on-time deliveries, to a smaller percentage of purchases attributable to maverick buying.

APQC's data also indicate that growing strategic relationships to include a broader group of suppliers can lead to even greater advantages for organizations. However, how an organization implements these types of relationships can vary. To keep costs down and to minimize the amount of resources needed to manage these closer relationships, organizations can take a tiered approach, as done by pharmaceutical organization Merck. Merck identifies the suppliers critical to the business, and then gives them the greatest amount of oversight and proactive management. With this arrangement, an organization can then allocate an appropriate amount of oversight to the suppliers that are not as critical. The organization can still focus its supplier relationships on more strategically important factors, such as quality or total cost, and it can still use supplier scorecards with all of its suppliers, but perhaps with less frequent or detailed oversight.

Clearly the degree to which an organization can create and manage strategic relationships with its suppliers will vary depending on its resources and capabilities. However, with the potential for benefits within the procure-to-pay process and to procurement efforts overall, organizations would do well to consider whether they can re-evaluate the focus of their supplier relationships to determine what would best serve the business.

About APQC

APQC helps organizations work smarter, faster, and with greater confidence. It is the world's foremost authority in benchmarking, best practices, process and performance improvement, and knowledge management. APQC's unique structure as a member-based nonprofit makes it a differentiator in the marketplace. APQC partners with more than 500 member organizations worldwide in all industries. With more than 40 years of experience, APQC remains the world's leader in transforming organizations. Visit us at apqc. org and learn how you can make best practices your practices.

Becky Partida is senior research specialist, supply chain management, APQC
FIGURE 1

An organization's relationships with suppliers

Focused on quality        27.6%
Focused on total cost     21.1%
Focused on capabilities   19.2%
Focused on price          14.0%
Focused on delivery       13.3%
Other                      4.8%

Note: Table made from bar graph.

Source: APQC

FIGURE 2

Implementation of formal supplier
scorecards and procurement performance

                   Average supplier lead    Percentage of total
                     time on purchased     purchases procured via
                        materials             maverick buying

Not implemented          10 days                    3.0%

Implemented for some
active suppliers          9 days                    1.2%

Implemented only for
all active suppliers      8 days                    0.6%

Implemented for
all suppliers             7 days                    0.5%

Note: Table made from bar graph.

Source: APQC

FIGURE 3

Frequency of formal reviews with top-tier
suppliers and procurement performance

                                Percentage of        Total cost to
                               supplier on-time       appraise and
                                   delivery        develop suppliers
                                                       per $1,000
                                                       purchases

Never                               $1.71                90.0%
Sporadically/Issue-based            $2.65                90.0%
Weekly                              $0.25                95.0%
Monthly                             $1.25                93.0%
Quarterly                           $1.33                90.0%
Annually                            $2.00                90.0%

Note: Table made from bar graph.

Source: APQC
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Title Annotation:BENChMARKS
Author:Partida, Becky
Publication:Supply Chain Management Review
Date:Jul 1, 2017
Words:1668
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