This is the fourth in a series of posts by Matt Holzapfel on salient topics in procurement analytics; click to read Post 1, Post 2 and Post 3.
Sourcing managers often pride themselves on their deep understanding of their suppliers, but as supplier count grows, it becomes almost impossible for managers to stay up-to-date on the health and activities of all their suppliers. Compounding the problem is the constantly growing amount of information being pushed to managers. A new approach is needed that allows managers to focus their energy on their top suppliers, but alerts them when major developments occur within smaller suppliers that demand action.
A key enabler of this new approach is detailed company data provided by companies such as Thomson Reuters that tracks financial health and corporate activities. Connecting these data sources to an automated spend analysis tool allows companies to quickly create detailed supplier risk dashboards. The insights generated by these dashboards reduce the risk of being blindsided by supplier disruptions and increase savings opportunities.
Improving supplier risk management
Procurement and finance perform significant due diligence on a supplier to complete initial qualification, but are limited in how often they can refresh this analysis. Thus, buyers carry the risk of experiencing supply chain disruptions from being late to hear about a supplier’s financial difficulties or compliance issues.
An external data-driven approach to supplier monitoring means that significant supplier events — such as a compliance issue or liquidity crisis — are automatically surfaced to the appropriate business owner for rapid response. Further, by enriching supplier information, executives can see a complete picture of their company’s exposure to geopolitical risks and create fact-based continuity plans.
Companies should demand that their spend analytics solution easily integrates with this external data so they can understand their supply chain risks as they simultaneously investigate savings opportunities from changing their spend mix.
Identifying hidden savings opportunities
The most well-informed sourcing managers are able to effectively design their sourcing strategies and time their RFQs to take advantage of corporate-level activity within their supply base. Two specific activities these managers monitor are mergers & acquisitions and earnings announcements.
A merger or acquisition by a major supplier will certainly be noticed. However, it can be challenging to keep track of M&A activity with smaller suppliers where interactions are sparse. Since a significant amount of M&A is motivated by cost savings opportunities, managers should periodically examine the ownership structure of their suppliers to identify areas of their supply base where they might be unnecessarily purchasing from multiple entities owned by the same parent, or find suppliers who have grown through acquisition and may be able to offer price reductions as a result.
Earnings announcements can shed light on supplier pricing practices, and help sourcing managers better time their RFQs. For example, if a supplier announces that revenue growth, instead of margin, is their priority, sourcing managers can expect these suppliers to be aggressive to win new business in RFQs. Conversely, a supplier looking to improve margins may be a tough negotiator or raise prices. Managers equipped with this knowledge can modify their sourcing strategy to stay on track with their goals.
Today’s seemingly infinite sources of information have created a blend of challenges and opportunities for sourcing managers. Fortunately, managers are not alone in capturing these opportunities. The quality and availability of external data about suppliers has grown considerably. The organizations that take advantage of it will have an edge in being prepared when an unexpected event occurs.