There’s No Supplier Relationship Management Without Spend Analytics
Managing relationships between people who share a common goal is hard enough, but procurement professionals have it harder than most. Their success depends on lowering costs while working with vendors who are focused on maximizing them.
This tension can quickly create a difficult dynamic. But as Pierre Laprée, Chief Procurement Officer at SpendHQ said in a recent interview, “When you look at how the world is changing, one of the tricky things that Procurement is facing is managing scarcity and overcoming shortages. For me, the only way to address this is by becoming a customer of choice for your suppliers.”
So how do you conduct supplier relationship management in a way that positions you as a customer of choice and look out for the business’ best interests at the same time? 20+ years of Procurement experience have shown us that the answer lies in understanding organizational spend. Here are three supplier relationship factors spend analytics allows you to see.
As we’ve established, suppliers are in the game of making as much money from their business relationships as possible. That means that if you let them, they’ll maximize how much they make from you.
One of the ways they do this is called supplier gamesmanship. In sports, the term refers to participants toeing the line of the rules to see what they can get away with. In sourcing, it usually involves deviating from contract terms to increase the cost of goods or services. While vendor non-compliance doesn’t make a difference on a handful of transactions, it adds up to significant savings leakages over time.
Without vendor-level spend analytics, procurement teams don’t have a way to catch supplier gamesmanship. You could be paying a vendor more and more every year without ever realizing it. In fact, research by Insight Sourcing Group found that gamesmanship leads to an average savings loss of 15%.
While this certainly won’t hurt how the vendor feels about your company, supplier relationship management goes both ways. Having a preferred or contracted supplier shouldn’t leave you explaining net cost increases to your CFO. Spend analytics let teams avoid this issue altogether by making gamesmanship easy to spot from the moment it happens.
Procurement often seems like the antagonist in supplier relationship management. Your team is always in charge of playing hardball with vendors. But relationship management doesn’t have to devolve into a boxing match. By leveraging spend analytics to find contract opportunities, you can create scenarios that benefit everyone.
From a supplier’s perspective, an ideal world is one where you pay as much money as possible for everything you buy from them. The problem is that they don’t know which order will be your last. Are you going to find a new supplier who charges 12% less? Will you diversify your supplier portfolio and cut your business with them by half?
Contracts benefit suppliers by preventing these situations and they benefit Procurement by giving you a per-unit discount in exchange for your guaranteed business. They also make it easier for Finance on both ends. Your Finance team can better plan budgets and the supplier’s Finance team can more easily ballpark revenue. Contracts make operations easier on all fronts, which creates further qualitative benefits like a preferred customer status. If supply chains ever get tight, this is the kind of relationship you want with your most critical vendors.
So how does spend analytics help you foster these relationships? Procurement teams sign contracts with the companies whom they do the most business with. But without spend analytics, figuring out which companies to contract with can be very difficult.
For example, if a procurement team knows that they do most of their shipping with Fed-Ex Freight, the logical course of action would be to pursue a contract with them. But as the screenshot below shows, the company is actually decreasing its spend with Fed-Ex while rapidly increasing its spend with two other suppliers. Without spend analytics, the procurement team would never know that the most obvious contract opportunity isn’t necessarily the best one.
Rooting out maverick spend
Vendor non-compliance can flip the dynamics of supplier relationship management against you. But non-compliance from your own buyers can dampen your vendor relationships in more qualitative ways.
Non-compliance, also known as maverick spend, is the act of disregarding contracts and buying outside of purchasing protocols. In most cases, companies care about maverick spend because it creates savings leakage.
However, if non-compliance deflects enough revenue from a vendor, it can negatively affect supplier relationship management efforts. After all, suppliers only enter contracts to lock down revenue. If they don’t receive that revenue, then the lowered price per unit they agreed to only hurts their bottom lines.
This is where spend analytics comes in. Savings leakage is a lot like contract opportunities—just looking at how much an organization has spent won’t help you find it. You need a way to slice, dice, and drill down into your data so you can see which vendors you’re spending with, what subcategories are contributing to non-preferred vendor spend, and which purchasers are responsible.
Supplier relationship management is a core piece of the strategic sourcing puzzle. In today’s interconnected business world, organizations need strong supply chains that they can rely on. In order to build them, businesses will need partnerships built on trust and mutual benefit.
However, the modern digital procurement landscape has left businesses with spend data spread out over multiple P2P suites, BI solutions, and ERPs. While each tool is great for its specific purpose, none of them provide the full picture that teams need to spot gamesmanship, contract opportunities, or maverick spend. Not only do teams miss significant savings opportunities as a result, but they also miss the chance to build lasting partnerships with the vendors that hold their supply chains together.
However, you don’t have to operate this way. We’ve leveraged 20+ years of hands-on Procurement experience to build a spend analytics solution that consolidates and categorizes 100% of an organization’s spend, allowing teams to extract and execute on opportunities. If you want to get the most out of your supplier relationship management efforts, you can’t afford to proceed without seeing how it can help. Click the button below now to schedule a demo and see what a strong supply chain can do for your organization.