Despite fluctuations in the global economy, companies have continued investing in globalization and outsourcing programs. With this increased and complex reliance on suppliers, managing suppliers has taken on a new sense of urgency, particularly in the executive suite.
Typically, at least half of every revenue dollar is spent on goods and services purchased from external suppliers. As companies focus on their core competencies and outsource their non-core operations, this percentage has steadily increased. In certain industries, such as technology and automotive, purchases from external suppliers can add up to 80 percent of the total cost of new products.
While there are clear cost and efficiency benefits to utilizing suppliers for certain aspects of the business, the reliance on third parties significantly raises an organization’s supply and pricing risk and increases its exposure to adverse scenarios such as safety issues and lack of regulatory compliance. To continually improve operational performance, manage costs and reduce regulatory risks, a company must be able to select appropriate suppliers and monitor and manage their performance over time.
Companies that implement successful supplier lifecycle management programs are able to identify problems earlier and implement corrective actions more quickly—before the problem snowballs and affects both their reputation and earnings.
Supplier lifecycle management is the process of qualifying, evaluating, classifying, developing and analyzing and managing supplier performance to reduce costs, mitigate risk and drive continuous improvements in value and operations.
Companies that have implemented supplier lifecycle management programs have been able to significantly improve the efficiency and effectiveness of their supply chains. Key benefits that these companies have realized include:
- Identify and address weak links, as well as reward strong performers within the supply chain, by using Key Performance Indicators (KPIs) to ensure a well-functioning and competitive supply chain.
- Reduce supply risk by gaining visibility into metrics that serve as an early warning system for potential supply interruption, quality issues or price fluctuations.
- Develop a scorecard on how well a supplier is performing against its contract terms and, as a result, employ a mechanism to implement contract compliance.
- Increase organization-wide alignment on key operational objectives. When setting KPIs for measuring a supplier, gain the ability to identify the primary business objective from this list: a) reducing component costs b) improving component quality c) increasing component delivery flexibility d) accelerating volume ramp-ups, etc.
- Build a strong foundation for implementing continuous improvement programs to identify future cost savings, improve quality, increase flexibility, improve delivery metrics, etc. For example, our customers use it to benchmark a supplier against its peers to compare their cost, on-time delivery, quality, support and responsiveness to issues, and then use the information to set future process improvement goals for the supplier.
- Establish a way to evaluate a supplier’s capabilities, which serves as input into future sourcing decisions. For example, if a company is looking to expand their supply base in anticipation of higher demand, it can use this data to select a supplier with the best record for both delivery flexibility and the ability to rapidly scale.