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Supplier Enterprise Management

Author(s):

Walter E. Buczynski C.P.M., C.P.C.M.
Walter E. Buczynski C.P.M., C.P.C.M., Supplier Management Manager, Southern California Gas Company, Los Angeles, CA. 90013, 213/244-5590.

80th Annual International Conference Proceedings - 1995 - Anaheim, California

INTRODUCTION.
Supplier Enterprise Management (SEM) is not just another academic acronym to sell books or to create another consulting practice. It is a higher level look at a total concept to manage the supplier base for any organization. This strategic approach takes the purchasing practices one step further in the financial management of an organization's funds.

The supplier base is an organizational asset that should be managed from that perspective. One needs to evaluate the investment strategy and associated risks. This includes your organization's market, the supplier's market, the amount invested, and the estimated rate of return. The successful approach to this system involves not only an established supplier management program, but new information systems, non-traditional education for buying personnel, long term goals for the supplier base investment, and persistence.

An asset based approach to the supplier community includes an investigation on what is invested, when, why, and consideration towards the ultimate vision of total organization. Supplier management needs to be defined before the asset-based approach can be discussed and evaluated from the organizational perspective.

SUPPLIER MANAGEMENT - A DEFINITION.
Supplier Management is a recent step that better describes a more comprehensive look a the purchasing function. In general, the following is a possible generic definition:
"It is a team of people managing the supplier base and responding to the internal client base. Supplier management functions are a group of components that fit together into a whole organized method to control total purchasing dollars. As professionals, supplier management people manage many of the organization's assets, namely cash, inventory, and the supplier base. There are a few basics that are needed to begin the process, though they are the same for any good materials management activity. On-time delivery, quality consistency, and competitive pricing are a foundation. It may vary by commodity or service, but those variances should be gradually brought to a high level of acceptance. We should understand the total cost of the products we buy including a long laundry list of areas to consider: shipping cost, maintenance cost, installation cost, training cost, field serviceability, lot size/inventory cost, obsolescence versus technology costs, etc.

The role of the Supplier Management department is to add significant value to the organization. Reducing the supplier base and creating meaningful long term relationships is a first step. Long term contracting establishes the baseline to create partnering. Formal or informal agreements supplement the contract to work towards mutual need and benefit. These agreements can include: keeping updated on directions of technology, cutting handling and transportation costs, value analysis of current products, improving systems quality to eliminate inspections, environmental recycling of products and other issues as needed that relate to the general relationship. Buyers become value consultants to their internal clients where we contribute to their success. Negotiation skills, knowledge of markets and marketing, contracting skills, knowledge of distribution and manufacturing systems, all contribute to making a value input to the client's decision. The right source selected for a need is the ultimate goal."

Certain new skills now are required from the supplier management buyer. Leading a cross-functional team that directs the long term approach to select a needed supply or service is a more recent development. The team determines the supplier base needed that best fits the long term organizational strategy. Supplier base reduction, long term contracts (using price redetermination clauses as required), returning use of FOB destination, and supplier alliances are all current trends. Only the supply market, criticality of the product or service, and inventory strategy significantly effect the overall direction of the contracting method.

The use of teams bring with it a different approach to purchasing. Team consensus, team goals and rewards systems, and as we will see later, advanced skills in team negotiating all appear in the new supplier management systems. Alliance agreements, those that have goals outside though in adjunct to the long term contract are new documents that must be created and coordinated by the new supplier management department. These agreements may include value analysis goals, future technology development, joint marketing strategies, quality assurance certification programs, and innovative inventory stocking methods or service delivery.

A reemphasis on Value Analysis programs with a goal cost sharing to improve supplier involvement can be included in the new supplier management function. Supplier Management Continuous Improvement programs may additionally involve Electronic Data Interchange (EDI), Electronic Funds Transfer (EFT), Evaluated Receipts Settlement (ERS), and the new developing Purchasing Card systems. This credit card purchasing system moves, as we shall see, in the direction of Supplier Enterprise Management. Initially, the card looks to reduce the number of small purchases that cause many transactions in Accounts Payable, but a longer term strategy also arises from a successful program.

Supplier Certification programs, including the ISO 9000 series, are another component of a full supplier management system. This quality assurance solution takes the quality assessment back to the source, to the manufacturing system that produced them. Quality is built into the total supply delivery system as to provide the buyer's internal client and the organization's final customer the best value. It is not always the lowest cost, but the most effective total cost solution to your marketplace. Certification systems graduate to a new level in Supplier Enterprise Management to include all purchases including services and a specific need by type of business. The quality organization also takes on a new look and reporting strategy under SEM.

Supplier Management calls for a stronger statement in professional education. The new systems require increasing knowledge and awareness for the people that will work in this purchasing environment. The certifications provided by the National Purchasing Management Association (NAPM) and the National Contract Management Association (NCMA) give some basic assurances that the person has achieved a specific skill level. An undergraduate degree should show that certain writing and critical reasoning skill have also been developed and exhibited. A concerted effort is needed to provide personnel the opportunity to add to their professional 'toolbox', that can later be used effectively in the Supplier Management department.

SUPPLIER ENTERPRISE MANAGEMENT - A NEW DIRECTION.
A solid growth towards a Supplier Management department is a prerequisite to considering a supplier enterprise management program. A more sophisticated approach to internal relationships begin the process. The internal client is the investor, the supplier is the asset or investment, and supplier management personnel are the investment Managers or advisors. This view takes on a new view as to analysis of the supplier base, its investment potential, volatility, and long term return on investment (ROI). Non-traditional training, matrixed client support, and advanced information systems are a few of the new needs of this strategy.

Supplier Enterprise Management calls for a change in the organizational strategy leading towards a process based system. This places Supplier Quality Assurance in the Supplier Management department. The total responsibility for the quality of the investment(supplier product or service quality and associated certification system) should be squarely placed in one area. Separation leads to a bifurcation of the effort to achieve the best value buy for the client. Services should be considered in this effort where Supplier Enterprise Management coordinates the investment in all suppliers. For services, quality assurance involves the quality of the personnel, repair parts if required, the supplier's system that coordinates the service delivery. Supplier Quality Assurance personnel may recommend new ideas for maintenance or warranty repair service on new equipment, for example the use of 'triggers' where a specific amount of failures or service calls automatically result in a faster turn around at no premium to the client. Supplier certification programs can be divided by manufacturer, distributor, service provider with a 'best in class' award program.

Client based cross functional teams can be used to select the service investment using the same objective decision making methods available to commodity selections. The team creates the request for proposal (RFP) and the associated weighted rating system that best objectifies the resulting decision. The buyer as investment manager coordinates these measures to provide the best advice to the organization. The team must look at the investment focus for the particular purchase, or as a standing team to develop an overall investment strategy for a commodity or service. Certain investments may have more risk, but if managed correctly, have a greater payback. In some instances the ROI may be less tangible, as the purchases from minority, women-owned, or disabled veteran businesses. This community investment may be important to the overall organizational strategy.

New information technology is required to provide the buyer investment manager tools to accomplish the tasks. The recently released Center for Advanced Purchasing Studies (CAPS) program on Total Cost of Ownership (TCO) is an example of new analytical tool. It is a formal designed approach to determine the total cost of purchase and use of a given product or service. Expert systems are being developed to assist in writing a statement of work for service needs or research and development requirement. This provides the client with a better tool that provides the Investment Manager (buyer) a clear definition of the requirement. The Investment Manager then helps select (possibly with the use of an investment team) the investment portfolio, meaning the supplier(s) that provide the best value to the client.

Supplier Enterprise Management is a client focused process and the resulting department needs to have both a commodity and a client matrix orientation. Each Investment Manager is a professional in a certain investment area (commodity) and is also a client contact for customer service purposes. This customer service arrangement includes regular meetings with client departments that describe SEM processes and to discuss client issues. There should also be a periodic client evaluation that provides feedback to the SEM organization on the investment management personnel and the management of the portfolio (supplier base).

The supplier base or portfolio of investments needs to be constantly maintained. Quality Assurance certifications rate portions of the portfolio including all investments(services in particular). The portfolio includes the small investments using the purchasing card system. These seemingly small acquisitions may show themselves to be more substantial over time. Specific investments may concentrate with certain suppliers because they offer the credit card service. This credit card system allows the investment manager a cumulative view of these investments with any new resulting investment strategy (blanket orders, discounts, after the fact rebates triggered by certain purchase levels).

New information services are available that assist the Investment Manager in evaluating the investment portfolio. Changes in the market place, a CEO leaving, a merger, new product announcement, new major sales announcements, profit figures for a given quarter are a possible reasons to revisit the investment in a particular supplier. Information services agencies like Dunn & Bradstreet offer supplier tracking programs for key supplier investments. This is another method for the Investment Manager to watch over the organization's portfolio assets.

New investment strategies also are available under the SEM program. The consistent worsening of our environment and the growth of recycling bring new ideas to the table. Quality Assurance certification efforts may include the suppliers efforts at recycling scrap or the use of environmental friendly products both in product and corporate consumption. Investment purchases can contractually include recycling of old products and the requirement to recycle to the supplier's subcontractor. This could happen if the organization has scrap, residue, or nonrepairable products that can be recycled by a subcontractor with the ultimate destination as the purchased product. This may reduce the material cost in the product, or at least use material that might find its way to the land fill. A substantial investment recovery program can be a strategic portion of the Supplier Enterprise Management program.

Education and training is a key to Supplier Enterprise Management. Non-traditional seminars on sales techniques for each Investment Manager (buyer) would explain the tactics and strategies of sales people. Concentrated workshops on team negotiating techniques in relation to cross functional teams would build necessary skills to make the best value investment. Cross functional team management training benefits the Investment Manager and allows for a more open effective team environment. Courses on MRP and DRP systems would better clarify good manufacturing and distribution operations, providing the Investment Manager with a new tool for investment evaluation. Policies need to be established with empowerment rather than detailed procedures than limit the thought and creative process. The technology has arrived allowing for Alvin Toffler's electronic cottage. Investment Managers can work from their home some days during the week cutting down traffic and allowing for more efficient use of less floor space. Laptops with docking stations, client-server software, optical recognition equipment, and the ever present fax machine all provide baseline equipment for Supplier Enterprise management systems.

SUMMARY

Supplier Enterprise Management is the continuing improvement of the Supplier Management Department. It considers the supplier base as a portfolio of investments made my the buyer (Investment Manager) for the internal client (investor). It assumes control of supplier quality assurance, hones the use of cross functional teams, and participates in the overall strategy of the organization. It requires a better set of tools provided by technology, information systems, and new areas of education. It is a total cost oriented system that additionally includes recycling as a investment recovery and environmental issue. It investment for the internal client is the overall focus as that focus is part of the vision of the organization. It's professional orientation shows the contribution that the buyer makes to real value added control of the supplier base asset.


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