Simple tools for Small Business to Manage Supplier Performance like the Largest Companies

Supplier Spending

List annual spend per supplier in descending order, stop listing at a significant drop point in spend. If supplier spending levels change significantly each year, go back 3 or 5 years.

How many total suppliers do you have? Generally, you’ll find that at least 80% of your supplier spend is from only 20% of your suppliers. As an example, if you’ve bought from 100 suppliers over the past 3 years, the top 20 in spend will account for 80% of total supplier spend.

These 20 suppliers will be your main supply chain focus, and therefore your “Key Suppliers”.  As you develop communication and management strategies for and with these key suppliers, it becomes easier to offer them more business based on a more “trusting” relationship.

These key suppliers are an extension of your organization and require different communications and management approaches, just as employees do. Complete the Segmentation survey for each key supplier to proceed.

A hint from organizations that spend $1B annually: Focus your strategic planning and performance management efforts on your Key Suppliers. Measure the right things (see below), Communicate and manage more actively with scheduled reviews and shared improvement efforts, recognize successes. Segment, Collaborate, Measure, and Solve Problems Together.

Supply base Segmentation

Two suppliers, even with the same spend, will have differing impact and complexity with regards to your operations and business outcomes. Similar to Customer Relationship Management (CRM), Supplier Relationship Management (SRM) is based on understanding the significant differences, then interacting, measuring, and managing performance accordingly. Answer each question for each of your top spend suppliers to better manage for supplier impact and complexity.

Supplier Impact

1. How would you characterize this supplier?
   a) Core & Custom – Generally high value to company operations, high risk for supply or service availability.
   b) Core & Standard – Generally high value to company operations, lower risk for supply or service availability.
   c) Non-Core & Customer – Generally lower value to company operations, high risk for supply or service availability.
   d) Non-Core & Standard – Generally lower value to company operations, lower risk for supply or service availability.
2. What potential is there for a breakthrough offering?
   a) Strategic Advantage – Supplier is highly likely to develop an offering that will help my company create sustainable strategic advantage in the next 3-5 years (such as help open new markets, create new segments)
   b) Competitive Advantage – Supplier is likely to suggest improvements and provide products/services to improve company approach and competitive standing in the next 3-5 years (such as provide better service, capture market shares)
   c) Operational Advantage – supplier is likely to suggest performance improvements that will improve company efficiency and productivity (such as cost reduction and process improvements)
   d) Minimal Advantage – Supplier is not likely to provide any breakthrough suggestion or offering
3. What is the impact on external customers (patrons)?
   a) Distinctive – Supplier provides products/services that directly enable company to create distinctive offerings to increase its customer base significantly
   b) Direct – Supplier directly impacts key company customers by providing products/services for customer selection, attraction, and retention
   c) Indirect – Supplier enables quality interaction by providing generic products/services for customer selection, attraction, and retention
   d) Removed – Supplier has limited, if any, impact on company interaction with customers
4. What is the impact on company employees?
   a) Distinctive – Supplier provides an essential and distinctive platform to ensure employee performance and morale across entire company and attract and retaining talent for my company
   b) Direct – Supplier provides products/services to significantly enhance employee and group performance and morale across entire company
   c) Indirect – Supplier provides products/services that enable employees to improve individual performance and morale
   d) Removed – Supplier has limited, if any, impact on employee performance or morale.
5. How do they interact; what is the linkage with key processes?
   a) Unified/Co-defined – company and supplier’s processes are intricately linked so that both parties need to jointly configure & strategically align their processes
   b) Integrated – company & suppliers processes are integrated so that both parties share best practices and are aware of the variances of each others processes
   c) Shared – company and supplier share information about each other’s processes to the extent required for smooth alignment of inputs and outputs
   d) Discrete – company and supplier have independent processes
6. How do they interact on sharing of critical information & knowledge?
   a) Strategic Dialog – company and supplier share critical confidential information, knowledge, and intellectual property through intense two-way dialog
   b) Operational Dialog – company and supplier share tactical information through two-way dialog
   c) One-way Information – company provides tactical information to supplier for performing involved tasks
   d) One-way Instructions – company provides requirements to supplier with little or no information sharing
7. What is the annual expenditure?
   a) Top 5% of all my suppliers ordered by spend (ie: of 100 suppliers, in top 5)
   b) Top 10% of all my suppliers
   c) Top 20% of all my suppliers
   d) Not in the top 20% of all my suppliers
8. What is business/service risk associated with failure?
   a) Severe, Continuous, and Immediate – Supplier failure immediately disables company capability to serve its external customers
   b) Significant and clearly noticeable – Some back-up or reserve capacity to mitigate failure, for a short time. Supplier failure creates some disruption that is significant but not paralyzing for company external customers
   c) Moderate risk – Some back-up and/or redundancy with less direct impact on customers and service. Supplier failure creates disruption that may be felt as annoying or bothersome but has low or minor impact on company capability to serve its external customers
   d) Little or no risk – External customers do not feel any performance changes when the supplier fails

 Market Complexity

1.  What type of product or service does the supplier provide?
   a) Unique – Supplier has created a specific product/ service to match the needs of my company which has a significant impact on company core processes
   b) Customized – Supplier has customized an off-the-shelf product/service to match the needs of a company, making that product/service unique requiring customized support (not off-the-shelf anymore)
   c) Co-developed – company and Supplier have collaborated in the development of the product/service which has a major impact on company customer attraction and retention capabilities
   d) Commodity – Supplier provides an off-the-shelf product/service to the company with negligible if any, modification
2. What is the ease to change or replace this supplier?
   a) Dependent – Supplier is very difficult to replace. Optimal replacement is likely to take more than 12 months with company strategies, systems, and processes impacted significantly
   b) Reliant – Supplier is difficult to replace. Optimal replacement is likely to take 6-12 months with company systems and processes will be impacted
   c) Connected – Supplier is easily swapped with other current or identified suppliers. An optimal replacement will take 3-6 months with company systems and processes impacted marginally. a company can handle some functions internally until a replacement is found
   d) Independent – Supplier can be replaced without any impact on systems, processes, or output. My company can handle functions internally until a replacement is found
3. Are there proprietary aspects to this product or service?
   a) Yes in design, delivery and service/maintenance – Proprietary aspects relate to both material and service. My company is dependent on the supplier for service and maintenance due to proprietary aspects
   b) Patented or exclusive materials
   c) Proprietary or unique services
   d) No proprietary aspects
4. How high are the barriers for entry for new suppliers? This is relative to the market for commodity sought. The question is not dependent on whether the new suppliers entering the field could support company business.
   a) Virtually absolute – No new entrants in the field in the last 10 years, irrelevant whether they would qualify to supply company needs
   b) High – Few new options in the last 10 years
   c) Moderate – New players every few years
   d) Very Low – New suppliers every year
5. What is the size of the supply base? This is relative to the actual company supply base size. Suppliers who can support company business.
   a) Less than 5 qualified, reliable options
   b) Less than 11 suppliers
   c) Less than 25 suppliers
   d) 25 or more suppliers
6. What are the results of the SWOT analysis?
   a) Significant weaknesses and threats
   b) Slight edge to the weaknesses and threats
   c) Slight edge to the strengths and opportunities
   d) Significant strengths and opportunities
7. What portion of the total cost can be influenced by SCM activity?
   a) Less than 10 percent – The contracting officer’s sourcing and negotiation strategies and tactics have less than 10 percent impact on the total cost of the contract
   b) Approximately 10 to 24 percent
   c) Approximately 25 to 40 percent
   d) Greater than 40 percent
8. What is % dependency of supplier on company business? This evaluates how much a supplier relies on company business, and is dependent on that business
   a) Less than 2 percent – company business represents less than 2 percent of the supplier’s revenues
   b) 2 to 10 percent
   c) 11 to 25 percent
   d) Greater than 25 percent

This simple spend analysis and segmentation survey will provide insights by giving you a different perspective.

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