Reducing supply costs remains the top challenge and focus for supply management executives, according to a survey of 300 supply management and business executives. Cost-cutting angst has been fueled by the long-held run up in energy costs and the inflationary issues it sparked. Economists expect that the recent downturn in fuel prices will take months to show up in lower supply costs. And news that OPEC could curtail production could cause another run up in oil prices right before the holiday shipping season and the home-heating crunch.

Confusion over the future of supply markets was evident when the Institute for Supply Management (ISM) released its latest Manufacturing Business Survey earlier this month. The survey of supply managers provides an aggregate index of orders, inventories, supply prices and availability. The index was down to 52.9, indicating that the economy was expanding, but at a slower rate. Supply managers continued to report price increases and supply constraints for key commodities, including copper, plastics, electronic components, and chemicals

I sat down with Norbert Ore, Chair of ISM’s Manufacturing Business Survey Committee, last week, in part to better understand future predictions for supply prices and markets. Norbert said, “It’s just too early to tell. Changes in fuel prices take months to impact [commodity] prices and manufacturers are unsure whether fuel prices will stabilize. Most inventories have been worked off and [suppliers] have been more cautious about building up inventories.” Upshot: Commodity prices will remain inflated until the energy supply stabilizes.
 
However, driving compliance and managing supply risk as challenges were the fastest-growing challenges reported by supply management executives. Compliance pressures have increased in recent years due to heightened financial and environmental regulatory scrutiny (e.g., SOX, RoHS, WEEE, etc.) and CFO’s tougher stance on measuring cost savings reported from strategic sourcing and supply management initiatives.

Supply risks have grown in tandem with the increase in globalization and outsourcing, both of which have expanded supply chains and introduced new challenges in the form of governance, visibility, and compliance. Mark Hillman, AMR Research’s supply risk czar, reports that supply chain risk management is emerging as a dedicated focus at many enterprises. In his recent research, nearly one-third of supply managers said their companies have dedicated budget line-items for supply chain risk management, and 54% expect spending on resources and technology to monitor and manage risks will increase this calendar year. (Hear Mark's predicitions and advice on supply risk management in an exclusive podcast by clicking here)

In the survey, sponsored by Procuri, Inc., respondents also rated securing executive support for supply and contract management initiatives among the top challenges they face today. Luckily, Dave Anderson, partner at Supply Chain Venture and former head of Accenture’s Supply Chain Management consulting practice, has shared tips for developing the perfect business case for any supply management initiative – whether it’s securing new category experts or deploying sourcing automation.

ELP readers can access a complimentary copy of Dave’s white paper on How to Make the Perfect Pitch by clicking here.

Check back here soon when we identify Top 5 Supply Strategies supply management execs have prioritized for the next two years.

Unfortunately I was unable to attend this week's BME Symposium in Berlin, however we can report that REHAU has been awarded with the BME Innovation Award for its “Innovation management within the REHAU purchasing network”.

REHAU has been recognised for its approach to identify and encourage innovation of products, markets and technologies from its suppliers and thereby bringing innovation into its own company according to Dr. Juergen Marquard, president of the BME. A family-owned business, REHAU is positioned as a world leader in premium brand for polymer-based solutions, employing more than 14,000 individuals in more than 170 locations around the world.

REHAU systematically analysed the potential of innovation of its suppliers, allowing the purchasing department to get early involvement into the product development process. A number of initiatives helped REHAU to identify innovations and transfer them into the company including:

• Development of a new “Innovation Scout” function 
  
• Innovation mentors from the management
• “Innovation days” with selected suppliers
• Launch of "new ideas" portal allowing suppliers to submit new products ideas
  

The award shortlist included the likes Océ Printing Systems, RWE Systems and Wacker Chemie. Since 1986 the BME has recognised companies from the manufacturing industry, retail and service sector with the BME Innovation Award and for their successful concepts. 

One of the most well received presentations at the October European Leaders In Procurement Forum was given by Haidé Villuendas of Royal Numico. In her inspirational presentation, Haidé explained the advantages of innovation as a source of growth and how Royal Numico has tapped into its suppliers' R & D budget to benefit.

Numico had benchmarked its Supplier Relationship Management programme - through the Supplier Working Relationship Index - to understand how their business was perceived and where they needed to focus to drive relations and innovation.

The case study is a great example of how a strong Supplier Relationship Management programme can enable procurement to drive value into the business.

If you were unable to join us at the this conference, you can now listen to Haidé's presention online by clicking here (ELP Network members only). Going forward, other selected presentations from the our conferences and events will be made available in the 'Community' section of the site. We hope you enjoy this new service!

High performance purchasing with long-term strategic orientation is a key factor for successful international competition. Therefore, purchasing is one of the most important issues in a company – material costs are the largest cost block in an industrial company. Due to this situation, efficient cooperation with suppliers is becoming increasingly important.

An important success factor for professional purchasing is achieving transparency, especially regarding company-wide purchasing activities, purchasing volumes, frame contracts as well as detailed information about current and potential suppliers. A company can attain this comprehensive view through integrated supplier qualification, contract management and spend analysis.

An active and targeted supplier management is the prerequisite for strategic purchasing. Cross-functional supplier rating identifies supplier strengths and weaknesses. Suppliers are categorized according to their performance and strategic significance based on a substantiated and objective supplier classification. This is the basis for targeted and structured supplier development including measures controlling. During this process, supplier goals are set, deadlines and responsibilities defined, sustainable optimization measures implemented and development progress monitored.

Experience indicates that the individual components must interact with each other in order to provide consistent process support and that maximum benefit can only be achieved through the consolidation of the corresponding information obtained.

Whilst researching for a piece of work earlier in the month, I was amazed to discover some 3 million sites referencing procurement benchmarking. Undertaking even a cursory examination of the content of some of the more prominent sites and you conclude that the procurement function has got plenty to chose from, some of the approaches having more merit than others.

The original term ‘benchmark’ is derived from the chiselled horizontal marks that surveyors used for holding a piece of angle-iron which acted as a bracket, referred as ‘the bench’, for a levelling rod. This ensured that the levelling rod could be repositioned in exactly the same place in the future. Only one benchmark was typically required as a reference point. Unlike surveying, the application of benchmarking to commercial activities usually requires multiple reference points, which then need to be compared to a defined group of indicators. The danger with benchmarking in the commercial domain is to focus on too narrow a group of reference points. This can and does inevitably lead to a misleading view of the world around you.

With so much to chose from, and a striking lack of consistency across the numerous approaches that are on offer, it is probably worthwhile presenting some points to bear in mind if you are considering benchmarking your procurement function.

Firstly, when selecting your benchmarking protocol, it is important to choose an approach that covers a broad range of different indicators to include at a bare minimum metrics from the three following groups:

1. Organisational Metrics

Organisational metrics are the data that describe how the procurement activities within the organisation are performed e.g.

• The number of full time employees per €1bn spend
• The purchased spend as a percentage of operating costs
• The fully loaded cost per procurement employee
• The purchased spend per purchasing employee
• The total number of suppliers, by category and legal entity
• The number of suppliers per €1bn spend
• The number of training hours per FTE, by discipline and level
• The headcount supporting Sourcing, SRM, and Order Processing
• The number of non-procurement staff involved in Procurement
• The ratio of managers to staff

2. Purchasing Process Metrics

Process metrics are the data that relate to the process of purchase order capture through to payment e.g.

• Average cost to process purchase order through to delivery and payment
• 3^rd party spend per order
• Average cost to process invoices
• Volume of ‘straight through orders’ (i.e. no human intervention required)
• Level of compliant spend by Category, Supplier and Order Channel
• Average time to process an order
• Average time to pay a supplier

On this, there are only a few examples of surveys that provide any kind of serious insight around the processing of purchase orders. Purchase order processing and trade settlement in securities processing involve exactly the same activities; investment banks drove out significant levels of efficiency and improved levels of control by developing a set of simple and well understood metrics that helped them manage the process. There is no reason why the purchasing function cannot do the same.

3. Category Specific Metrics

Category specific metrics are the data that relate to the specifics of the contracts that have been established with suppliers e.g.

• Price per hour/unit/licence etc. for goods or services delivered by the supplier as compared to sector average, competitor price point etc.
• Payment terms
• Order query response times
• Service levels
• Penalty charges for late delivery
• Guarantee periods
• Late payment charges

It is important that the three areas outlined above are covered in depth because when combined they will give you the most balanced view of overall procurement effectiveness. Knowing that your procurement function is world class in terms of functional capability is of little value unless you know that the contracts that you have in place with your suppliers are actually saving your organisation money. Knowing that you have superior price points within your contracts is valueless, unless you know that people are using them. Effective benchmarking is about bringing together multiple sets of data, taken over different points in time, using different methodologies from a mixture of providers and interpreting this data in a balanced way and presenting a clear set of next steps. There is no ‘silver-bullet’ solution and it is the ‘next steps’ that are important.

All of the three areas outlined above can be rolled up into a ‘practises’ benchmarking study which looks at the way the various activities within the procurement function operate, such as Strategic Sourcing or Supplier Relationship Management. These studies capture selected metrics from the different areas and reference them back to world class standards. They also assess subjectively via interviews the activities within the procurement function to validate findings, and develop next steps. These studies are an excellent way to understand ‘what should be done’ as opposed to ‘what we are currently doing’.

Other valuable guidelines to bear in mind when considering benchmarking also include:

• understanding the definitions and constraints used for the applicable benchmarks
• ensuring that the population of reference data is relevant to your sector, large enough to be of value and covers a time period that is germane to the operational period in question
• deploying a study protocol that combines both objective and subjective data, ideally in such a way that they reinforce each other
• being clear about caveats that need to be attached to the metrics; price paid only tells one part of the story – is it the average price paid over time, or does it include the impact of supplier rebates?
• the inclusion of a broad range of reference points - internal, competitor, non-competitor, regional, best in class and world class
• make sure that you are comparing apples to apples - it is highly unlikely that your own data will match that of your study; understand the limitations, and the resulting implications.

Remember that benchmarking is not an exact science; in capturing data, approximations need to be made which may not necessarily work for your organisation. Engaging multiple providers and who employ different methodologies will allow a more balanced picture to emerge.

With at least 3 million possible perspectives on the topic, it is undoubtedly going to be difficult, (and fun) to know where to start; one thing is sure, there is plenty to choose from.