How Do You Execute Effective Supplier Performance Management in Today’s World?

This is an interesting topic. Many books have been written about this; dozens of specialized software vendors and consultancies have cropped up over the past two and half decades to address this; many top tier analyst firms have been putting out frameworks for almost three decades; and every Big X consultancy has their detailed methodology, 200 page strategy and implementation deck, and a dozen or so publications on their website documenting numerous benefits and case studies.

In fact, there’s so much material out there that if you asked your favourite clod or chat, j’ai pété instance to write you a book, put together an implementation plan, prepare an executive presentation, prepare an implementation plan for your team, and prepare a training plan for your supply base, chances are, believe it or not (and the author rarely does) any particular Gen-AI instance is likely to do a decent job of it because there is so much nearly identical material on the subject that the models are likely to be decently weighted to generate a decent facsimile of the material.

But here’s the question — is everything that has been defined, prescribed, optimized, and re-prescribed over the last two and a half decades the right approach? This might appear dumb on first read and sound dumber on first vocalization, but it’s actually pretty poignant. Just because whatever has been prescribed for the past two decades has worked just fine, that doesn’t mean it’s optimal. And just like modern drugs can deal with most symptoms of any ailment you might get, at least at first, that doesn’t mean they address the root cause. And if they don’t address the root cause, you can still get really sick, and even die if the symptoms the drugs are addressing are covering up a long term, slowly progressing, [incurable] cancer or autoimmune disease.

Plus, certain practices are designed to achieve end-states with certain assumptions in mind that are based on expected market conditions and activities that are expected to optimize to those conditions. In other words, its assumptions across the board (on what to do) based on assumptions across the board (on what is success) based on expectation across the board where the assumptions on what to do assumes that what got a result before will again (without any proper definition of the scenario in which it worked or proof that its effective) and the assumptions on what is success is only based on what has achieved the best results (and not the best results that could be obtained) and the expectations are simply hopes that what came before will come again.

Of course, given the reliability of some of the methodologies out there, the consistent results obtained by the best-in-class providers, and the wide-spread adoption of certain methodologies, it’s hard to argue with the assumption, the underlying assumptions, and the expectations because, for most organizations that adopt the methodologies, and stick to them, they get great results!

But what happens when the results flatline?

I’m asking because I expect there’s a chance it will happen, and possibly sooner than I expect, for companies who are already practicing good supplier performance management. There are a number of reasons for this. As per above:

  • effective is not necessarily optimal
  • you can get short-term results treating the symptoms, but you can’t get long term results unless you address the route cause
  • everything is based on assumptions, on assumptions, against expectations

and

  • market conditions are (drastically) changing
  • all good things must come to an end
  • managing after the fact is not the same as laying the groundwork for success

These are the reasons in particular I suspect there is a chance that current SPM frameworks and efforts might crash.

All Good Things Must Come To An End

This universal truth holds true for anything with a limit. Since every action has a limit when it comes to the minimum time required for completion, the maximum number of uses or lifespan of a product, the value that can be delivered against a metric, and so on.

Combine this with the definition of supplier performance management which focusses on measuring, analyzing, and managing vendor performance to cut costs, minimize risks, and drive continuous improvement, this means that SPM has a limit. This, of course, is nothing new — we’ve known this for decades. But, applied properly, SPM has worked spectacularly for decades because:

  • only so many suppliers can be measured, managed, and developed at a time … so there’s an endless supply of projects
  • suppliers constantly change … increasing the endless supply of projects
  • technology in our space has kept improving, allowing for slow, continual, improvement
  • the global trade situation was relatively static for two decades
  • most companies haven’t, and still aren’t, doing SPM in earnest
  • SPM is done by humans, who aren’t perfect and continuously make mistakes

It will continue to work spectacularly for the majority of organizations the majority of the time as a result of all of these reasons. But it may soon start sputtering for some organizations. The reasons being:

  • the suppliers not measured, managed, and developed are the ones that will need it the most and cause you the most problems
  • suppliers will suddenly become (effectively) unavailable unexpectedly — often before the contract expires
  • technology has stalled in SPM
  • the global trade dynamic has drastically shifted and has entered a new age of continual instability
  • those doing SPM are running on outdated assumptions
  • Agentic AI is being injected everywhere, and decreasing the reliability and effectivness

This means that the days might be numbered for SPM-in-a-box, which is pretty much what you get because most vendors / consultancies who do SPM just do SPM.

Which is concern #1.

More importantly, SPM is pointless if the supplier is going to suddenly become unavailable or unable to produce the products that you need.

A sanction, border closing (due to conflict or epidemic with pandemic potential), seaway closing, economic collapse, etc. can all take a supplier out of the picture overnight. Chances are you’re monitoring for this for your (most) strategic suppliers, can usually see it coming with enough warning to at least take some emergency measures.

However, chances are that this sub-tier supplier, or it’s sub-tier supplier, aren’t monitoring for potential disruptions like you are. What happens when those suppliers suddenly shut down or become unavailable. Then your supplier is unable to produce the products you depend on, and it’s essentially the same as that supplier suddenly becoming unavailable.

Which means you need Supply Chain Visibility in order to not only select appropriate suppliers, but ensure your suppliers are selecting appropriate sub-tier suppliers and, if not, help them to do so. However, not only are most companies still not adopting SCV solutions, but they aren’t part of standard SPM.

In addition, it’s not just availability, it’s supply line, and dependency. Rare earths are becoming more rare, oil keeps going up, and many renewable commodities in the food stuff categories are in relatively short supply due to population increase, droughts, and wildfires. Sufficient supply demands that dependency on any one raw material be minimized to the extent possible. This means that PLM, and especially design, alternate designs, and substitution capability is becoming more and more critical. But this is completely ignored by today’s SPM that just focusses on making the production process more efficient, not the product.

In other words, while the classic SPM theory is fine, and the implementation close to flawless in a handful of suppliers, the impact will soon be minimal to non-existent if they continue to address the wrong problem or try to address the right problem in a vacuum.

Now that process performance is often not the critical problem, the effectiveness of traditional SPM may begin to wane — fast.

Which brings us back to the starting question:

How Do You Execute Effective Supplier Performance Management in Today’s World?

I don’t have a good answer yet, but I believe you need to find one before the question becomes relevant.

Modern Strategies for Supply Chain Finance

The strategies for success haven’t changed much in the past few decades, but for some reason still aren’t in widespread practice. So we’re going to review the best practices from two decades ago and then indicate what else you should be doing.

1. Open Account and Letter of Credit Balancing

It’s critically important to understand your organization’s cost of capital versus your supplier’s cost of capital. Open account terms, for example, may bear lower fees than a letter-of-credit based transaction, but they can also restrict a seller’s access to working capital financing and increase its costs of working capital. The additional cost borne by the supplier for accepting extended payment terms, for example, could be finding their way back into your cost of goods sold.

2. Better Forecast Accuracy

One of the best ways to take cost out of the supply chain is to take unnecessary inventory out of the chain, as this just leads to additional storage, overhead, and financing costs and losses when it has to be cleared at considerable markdowns.

3. Supplier Cost Reduction

Depending on where your primary supply base is located, (up to) half of your suppliers might be struggling to access financing at acceptable terms. It might be their top issue, even above reliability of component and raw material supply! Their cost reduction is your cost reduction and your best chance at good supply chain finance strategies!

Building on these foundations, today you need to be considering:

4. Deep Tier Financing

Making sure your suppliers’ critical suppliers have access to fair and affordable financing so they can manufacture and sell their products affordably to your suppliers’ and not inflate your supplier’s cost which would inflate your cost.

5. Sub-Tier GPO

If you are relying extensively on a few key raw materials or components across your product lines, and if those are in short supply, costly, or volatile, buy the raw materials on behalf of your sub-tier supply base and sell it back at cost.

6. 0 Days DPO

Pay cash-strapped suppliers who would have to borrow at loan shark rates of interest immediately. It’s that simple. You’re paying for their overhead, so if your cost of finance is 1/5 or 1/10 of their’s, then, even if you risk borrowing occasionally, it just makes good financial sense.

7. Inventory Financing

Either enable your supplier to get financing based on their inventory materials and components and the goods they are going to produce, or create your own inventory financing solution for them.

The reality is that the standard techniques of JIT (and forcing suppliers to sit on inventory), increasing DPOs to the maximum legally allowed, and pretending EPD is a substitute for financing is NOT financing, only hurst the supplier, and only hurts you.

There’s No Cost Savings If It Doesn’t Hit the P&L

Anytime costs go up — due to oil spikes, tariffs, raw material shortages, generic inflation, etc. — which is, sadly, the majority of the time — the first word out of every solution and software provider’s mouth is how their solution will generate savings … which, sadly, almost never materialize.

Yes, they show up on the sourcing award, on the new spot-buy Procurement, in the (temporary) workforce reduction from automation, etc. — but that’s not what hits the balance sheet, and definitely not what hits the profit & loss statement. What hits the balance sheet is how much actually gets paid out to obtain the products or services (not just the unit costs, but the delivery costs, including expediting when forecasts or planning is off), what gets paid for all spot-buys (including those that don’t go through RFQ but instead the first punch out with product the user wanted), and how much loss occurs when the automation doesn’t catch errors and when exceptions require hiring a FT resource at an outsourced Procurement operation to deal with them (at 3X the cost of the internal resource you let go).

The reality is that all of the “savings” the majority of software and solution providers deliver results in cost transfers to other line items in the organization, the totals on the balance sheet don’t change, and nothing hits the P&L.

Even worse, when the “savings” strategy is too aggressive, it usually results in the introduction of additional risk into the supply chain and, eventually, something breaks where the required mitigation ends up costing way more than the “savings” that was identified, which not only results in no savings hitting the balance sheet, but a significant additional expense which results in a loss on the P&L, resulting in the CFO correctly claiming that Procurement didn’t save a dime (and, in fact, somehow drove up costs), which results in the CEO claiming it’s time to bring in a new Gen-AI-based solution to cut costs and a useless Big X consulting firm to tell you how. (And we all know how that’s going to turn out!)

So if you want to ensure you stay in control of all relevant organizational spend, you need to produce results that hit the P&L. That means you need to reduce overall outlays on the balance sheet, which means you need to stop looking at short-term savings that cost more than they deliver and start looking at long-term expense reduction efforts.

The best way to do that is to prevent unnecessary expenses, not to try and shave additional margin off of categories that you have strategically sourced multiple times and are already below market and within 1% or 2% of optimal. Look for allocations that mitigate risk and the associated disruption costs. Find ways to improve forecast accuracy and balance stock to prevent stock-outs, minimize the need for expediting, and prevent overstock that will have to be liquidated later. Ignore the new hype experimental tech and instead focus on tried-and-true last generation tech that will be low cost, highly accurate, and capable of addressing the majority of your needs when you adequately define your process workflows, break them up into tasks, and identify appropriate automation tech for each task. (And if you do need AI, classic AI works best, especially when you pick classic AI designed for a specific task.)

Instead of trying to replace people with overpriced tech, focus on trying to find augmented intelligence solutions that will make your employees up to ten times as productive while allowing them to appropriately source and procure every single category. Instead of outsourcing critical or difficult categories to third parties, get your people training and, if necessary, work-along-side category experts to help them improve. Instead of using outdated methodologies to classify your categories and strategies, like the Kraljic Matrix, step up to something modern like the Busch-Lamoureux Exact Purchasing methodology which will help you understand what you truly need to be effective in each category.

In other words, don’t focus on the savings — focus on getting the spend right and overall spend will decrease, generating more savings than any single effort ever would.

Creating a Source-Ready Supply Chain …

It’s never been easy, as there have been challenges since the dawn of time with maintaining trade routes, but we’re at a point where it’s now getting harder by the day.

Disruptions are regular.
Risk is high.
Logistics costs are high and spike regularly.
Suppliers are in constant peril.
Markets are unpredictable.
And the list goes on.

How do you create a source-ready supply chain? We know that, especially in manufacturing, you have to direct source with supply chain awareness. (As per our joint series with Bob Ferrari on how direct sourcing solutions don’t work for direct.) We also know that you have to more finely classify your categories in order to come up with appropriate sourcing strategies and day-to-day Procurement Management. That’s why we created Busch-Lamoureux Exact Purchasing which, based on the pocket cube, is the first framework with a real shot at succeeding because it’s the first to admit that risk, complexity, and impact are all fully independent dimensions and that’s why the Kraljic Matrix, and every 2*2 methodology that evolved from it, doesn’t work. And we know that centralization doesn’t work, center-led is decades behind (it’s a center of excellence that shares knowledge and best practices and orchestrates Sourcing and Procurement, with Logistics and Supply Chain, but doesn’t actually execute), and Procurement as a whole has, more-or-less, learned nothing in the past two decades (see our previous posts).

We know a lot on what not to do, and we know a lot on what to do, but what’s the cohesive strategy for a source-ready supply chain? That’s the 40 Trillion dollar question.

And there is no good, or at least no simple, answer.

But there is one common thread.

Human Centric Supply Chains

There’s been one constant in trade since it began. Two, human, parties working out an agreement to exchange goods, where the goods might be currency that represents the ability to buy goods from a third party.

Supply Chains are not managed by technology, not enabled by motorized transportation, and not designed by agentic systems. This is all done by way of human intelligence who deploy the technology to help them be efficient, use modern transportation to speed it up, and agentic systems to help them execute repetitive processes. But the common thread is human intelligence — intelligent humans applying their problem solving, risk management, and wisdom to solve problems, design processes, and apply the right technology to the task. And, most importantly, ignoring (hallucinatory) Gen-AI and hands-off agentic systems. Intelligent humans use the best augmented intelligence technology to maximize their efficiency and effectiveness, 10X-ing their capabilities compared to peers, but they ignore technology that makes decisions — they keep the decisions and strategic analysis to themselves (and their mental acuity in tip-top condition) and use tech for what it is best at, data crunching and tactical processing.

This means that a source-ready supply chain is one that is staffed by intelligent, educated humans across all key functions and locations who can bring wisdom and problem solving to any issue that might arrive and conquer it. Intelligent, educated humans that never cease their quest to learn, improve, and evolve … intelligently … while applying, when it’s appropriate, all the best practice advice that SI has given you over the past two decades.

Seven Sourcing Strategies for Today’s Turbulent Times Part 2

4. Coopetition Collectives and Frenemy Facilitation

If your volumes are low or if the supplier needs more business to ensure long-term stability, then you might need to work with your competitors to form specialized captive GPOs for key common materials and components where you all need to ensure that the supply continues to flow.

But you might need to go one step further — if your peers are smaller and less financially stable then you, you may need to invest in some of your (potential) indirect competitors who require the same materials and components from the same suppliers you need your materials and components from. You may need to identify organizational needs you can buy from them to ensure their stability. For example, as an automotive company, if you only made sedans, you could invest in competitors that only made trucks and vans by buying their products for your local delivery fleets. It’s all about strengthening your strategic supply base.

5. Real-Time Product Design Substitution

It’s no longer enough to just identify substitute products when your primary source goes offline, but to have alternate product designs that can be made with different components and materials to satisfy a significant portion of your client’s needs if one of your critical suppliers becomes unavailable. In electronics, the ability to substitute different off-the-shelf chips and boards is key, especially if they are of different form factors. In control systems, different power systems, converters, and control software. Etc. If your clients just have a need to fulfill, multiple options should be available.

6. Supply Chain Enabled Sourcing

Building on supply chain aware supplier splits, carriageway carrier consolidation, and real-time product design substitution. it becomes clear that the next generation sourcing needed for today’s turbulent times is supply-chain enabled sourcing. There’s a reason that Bob Ferrari and I claimed that standard sourcing solutions don’t work for direct, and that’s because they don’t. In direct supply chains, sourcing needs to be integrated, or at least tightly orchestrated, with supply chain and logistics solutions to be successful. Otherwise, you’re not optimizing to reality, and your best laid plans will be a total work of fiction.

7. Busch-Lamoureux Exact Purchasing

We all know the Kraljic Matrix, along with every other quadrant-based sourcing methodology is broken, but no one tells you the reason why — which is risk, complexity, and impact are all fully independent dimensions that need to be measured on completely different axes and no matter how hard you try to compress them into 2-dimensions, it will never be accurate.

But in Busch-Lamoureux Exact Purchasing, we treat them as three separate dimensions and break your sourcing categories down into a pocket cube (with 8 octants). This allows us to define appropriate methodologies and technologies to accurately address each category with confidence. Something no other methodology gives you!