In Every Issue

Evaluating a Supplier's Tech Capabilities

Author(s):

Victoria Damato
Victoria Damato is a procurement specialist — information technology for Sears, Roebuck and Company, Hoffman Estates, Illinois.

November 2003, Inside Supply Management^® Vol. 14, No. 11, page 10

A supplier's technical capability or "non-capability" affects your organization and its ability to do business.

According to Andrew Heller, the renowned IBM leader, "Technology is like fish: the longer it stays on the shelf, the less desirable it becomes." So then, how does one in a strategic sourcing role go about evaluating any supplier's technology (beyond even those that supply technology solutions) so as to reap the benefits and minimize the risks? The complexity of the item or service being considered will likely dictate the time and effort spent on answering this question. Whether you are looking to source raw materials or services to support your business, technology will play a role.

Why Consider a Supplier's Current Tech Capabilities?

In a nutshell, you need to know where your supplier is headed and what is important to it as an organization. If the supplier is a manufacturer, the level of technology will drive processes, customer service support, inventory, supply chain, quality control, logistics, etc. Therefore, the supply manager should ask if all of the internal systems are integrated, and if so, to what level. If the systems are outdated, the supply manager needs to weigh the risks involved in everything from executing day-to-day business transactions to the disaster recovery program. Is the technology that supports the business changing rapidly (like desktop PCs did in the mid- to late '90s), or is it a five- or 10-year strategic investment (such as claim systems)?

What matters these days, according to Michael Dell, CEO of Dell Computer, is not delivering technology per se so much as value and productivity. In today's tight economic climate, priorities have shifted. Supply managers are using their leverage to ask for more than price concessions. They seek purchasing terms in which the initial cost of acquisition is limited or even eliminated, or even sharing risk and reward.

An example can be seen in a recent transaction between Johnson Controls, Inc. and Ikon Office Solutions. Instead of paying a flat fee to buy or lease 750 multifunctional machines scattered throughout 250 offices, Johnson Controls is paying per use — getting charged each time employees copy, print, fax or scan documents. This type of pricing scheme has reduced usage costs by 35 percent. It has also replaced a significant capital investment with an operating expense.

The flexibility of your supplier to offer alternatives and meet the needs of your organization is essential. Why do some suppliers succeed in markets where others struggle? Southwest Airlines, Dell Computer, Fidelity Investments and Wal-Mart have remained viable with increased revenue and/or market share — while facing wide and diverse challenges. Fortune magazine cites that after a two-year assessment, these organizations and others like them place their customers at the center of their business. The pattern was remarkably consistent — these companies provide value propositions that their competitors provide poorly or not at all.

A Supplier's Tech Capability: The Impact on You

Whether you are dealing with an existing supplier or evaluating a potential supplier, its technical capability or "non-capability" affects your organization and its ability to do business. You might discover that a supplier relies heavily upon a labor-intensive process to support your business or operates at a level of automation that does not truly benefit your business. In either case, you may be paying too much — but how do you go about determining whether you are a good technological fit with your supplier?

Before you can effectively evaluate a supplier's technical capabilities, everyone on the team needs to understand the buying organization's objectives and priorities. Define success of the project (whether it be technology or any other project in which the supplier may be involved with your organization) in business terms and not in technical terms. Will the result of this evaluation provide a competitive-advantage cost reduction or advance a business objective?

How to Determine a Supplier's Tech Capabilities

Just the word "technology" invokes something intangible and subjective. Technology is the practical application of knowledge, especially in a particular area. Although technology is an ever-changing phenomenon, the methods used to evaluate a supplier's technical capability have remained relatively unchanged over the years. The key steps involve:

• Conduct supplier visits — Depending on the type of relationship, the supply manager might look for the extent of internal system automation and the age and complexity of supporting hardware and software.
• Review references specific to the technology you are considering; also review both official and unofficial references.
• Assess benchmarks for the supplier's specific industry.
• Issue a request for information (RFI) — Ask clear and specific questions (see "Questions to Ask" below).
• Request an equipment list including hardware and software.
• Review annual reports as well as recent press and media releases to gain further insight into the health of a supplier's business and its focus and areas of growth.
• Organizational chart — Understand the structure of your supplier's management team.
• Financial review — Where is it spending its capital?

Questions to Ask

Ideally, the following types of questions should be asked prior to any formal engagement — when leverage is at its peak and risk is minimal.

• Is the supplier relationship more tactical or strategic?
• How much leverage does your organization have to drive or influence your supplier's business?
• Is the supplier using standard or customized technology?
• Is it supporting its technology systems mainly in-house or through outsourcing agreements?
• What type of information will be shared and with whom?
• How is security of information and data maintained?
• Does the technology improve the quality of the item produced or service delivered?
• Are upgrades planned? If so, when? What is the expected impact or benefit of the upgrade?
• How much money has been invested in technology/capital recently? What is expected in the future? (This information may be readily available in the supplier's annual report or in recent press releases.)
• Is the supplier operating the most recent software?
• What is the age of the hardware?
• What is the technical level of the internal support resources? And what access will you have to internal support?
• What are the compatibility issues? Will you be able to integrate systems, if needed?
• Who owns any data that is generated?

Be sure you are pursuing a technology that is truly needed by your business and not simply succumbing to perceptions that the latest is the greatest. This affliction is sometimes referred to as "technophilia" by authors Brad L. Peterson and Diane M. Carco of the book, The Smart Way to Buy Information Technology. Insightful sourcing managers should be leery of "technophiles" or those whose love of technology can cloud their ability to seriously consider alternative solutions. Just remember: technophiles can exist both within your own organization as well as in your supplier's organization.

Furthermore, you should seek assistance from your information technology resources, particularly if the evaluation involves a highly technical product or service. For larger projects, assembling a cross-functional team may be appropriate. An effective team will have the right skills to identify and resolve issues.

If your project involves an outsource or insource decision, the cyclical trends in business require supply managers to consider what will happen when/if a decision is made to take the opposite action. Supply managers should address these issues with suppliers in contracts to ensure that any transitions with regard to technologies and responsibilities are addressed upfront.

Finally, a common way to identify emerging technology trends is to follow the trails of strategic partnerships between companies. These relationships can often result in the implementation of a new technology and can enhance a technology that, in turn, augments a service to some customer within the supply chain. These partnerships enable organizations to reach new customers and increase efficiency in working with suppliers.

In summary, before you can effectively evaluate a supplier's technology, be prepared to compare the terms of your deal (including total costs and risk level) with the best alternative. Moving forward with a supplier that inhibits your business can cost time and money and cause negative attitudes. The best way for a sourcing manager to proceed with these types of evaluations is to "know what you don't know." You should be prepared, know your supplier, work with your team and your supplier, and fight for what is right within your organization.

"Box page 12"

To contact the author or sources mentioned in this article, please send an e-mail to author@ism.ws.

Back to Top