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How business intelligence can improve strategic sourcing

How business intelligence can improve strategic sourcing

How business intelligence can improve strategic sourcing
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Applying business intelligence (BI) solutions to procurement resolves traditional customer/supplier conflicts and provides a wealth of benefits to both parties. A longtime supply chain executive explains how it works.

To optimize their purchases of the high-dollar-value items that are essential for their businesses, many large and progressive companies are turning to strategic sourcing, a systematic and fact-based approach to improving an organization’s purchasing activities. These companies look to their purchasing and procurement departments to implement strategic sourcing. Yet many also undermine the ability of their sourcing departments to successfully carry out those responsibilities, by using outdated approaches for evaluating suppliers and overburdening their procurement personnel with repetitive, low-value tasks.

At the same time, many suppliers view the process by which their customers evaluate them as a mystery. They lack a clear understanding of their own performance and where they stand relative to their competitors. Even when their customers do provide hard performance data, suppliers often fear that the data are inaccurate, out-of-date, or biased. This situation makes it harder to engage in strategic sourcing.

What can be done to resolve this dilemma and fully embrace strategic sourcing by more thoroughly evaluating an organization’s supply base? The answer lies in the application of business intelligence (BI) to procurement.

A tool for analysis and decision-making

Business intelligence uses analytics, various technologies, and software to retrieve and extract raw data from enterprise resource planning (ERP) systems, data warehouses, and other data sources and then convert it to usable, applicable facts. BI is able to summarize the data into meaningful, real-time, and fact-based information that facilitates and simplifies decision making. This capability can help companies solve some longstanding information-related problems.

Historically, the relationship between supplier and customer was adversarial because of a lack of trust or transparency. Moreover, the primary thrust of sourcing was reduced price and acquisition cost. Now, however, the relationship between a company and its suppliers is much more symbiotic. The buyer needs quality goods and services by a required delivery date (RDD), and at the best possible price. The strategic suppliers, meanwhile, would like more business, and they want to receive advance notice of purchases and demand patterns. Today’s approach, then, is one of optimizing value (which transcends purely price) in order to determine the total cost of acquisition and operating costs—in other words, the total cost of ownership (TCO).

Still, the strategic sourcing experts in any business have a difficult job. They must determine how well each vendor is meeting their requirements for goods or services, and whether more or less business should be directed its way. The suppliers they work with need information that will allow them to answer four questions:

  1. How am I being evaluated?
  2. How am I performing against the criteria?
  3. How am I performing vis-à-vis my competitors?
  4. Are the data by which I am being measured accurate, unbiased, and up-to-date?

Additionally, when a company’s evaluation criteria change, suppliers want to know what impact those changes will have on the answers to questions 2 and 3.

In the past, however, the information sought by both buyer and supplier was simply unavailable, or woefully out of date. Until recently, providing timely, accurate, and verifiable answers to these questions was impossible.

Fortunately, the needed data are now available, thanks to recent advances in the capabilities of the business intelligence applications included in ERP software. Instead of making decisions based on “gut feeling,” executives can now take advantage of a BI application’s analytics and decision-making tools to provide actionable intelligence. These BI tools can sort through the voluminous available data to quickly perform **italic{ad hoc} queries, optimize reporting of key performance indicators (KPIs), update dashboards and scorecards in real time, and even perform predictive analytics.

As will be discussed later in this article, in order to do that effectively, both the strategic sourcing arm of the company and the information technology (IT) department must work together, with the former determining the critical data required, and the latter using BI tools to obtain or ferret out the needed information.

Identify the most important criteria

So how might a company use the data available through the BI pipeline to evaluate strategic suppliers? The first step is to decide which factors are the most important to assess during the evaluation. Companies traditionally have used criteria such as price, quality, on-time delivery, and service to evaluate suppliers. But there were two difficulties with that approach. First, the data were often out of date or delayed. And second, many of the criteria were based on subjective judgment rather than on facts.

BI overcomes both of these impediments by supplying verifiable, real-time metrics. Moreover, a company can define its own criteria for evaluation as long as the relevant data are available. In addition, BI can vary the relative importance of one or more factors based on the product or service. For example, one might normally assume that price is the key factor for evaluating any supplier. However, in some situations, quality and on-time delivery may be more important, because a critical product or material that fails or does not arrive when required is unacceptable, regardless of how good the price may be. Given the right tools, this is not a problem; the marvelous thing about BI is that the criteria can easily be modified as required.

There are many ways to measure the commonly used criteria of price, quality, delivery, and service. For example, price or value can be determined by comparing one supplier’s charges against those of another supplier of a similar good or service. Another, related criterion is the bid-success ratio; namely, how successful was a supplier in obtaining business when bidding through requests for quotes (RFQs). Product and service quality can be determined based on over, short, and damaged cargo (OS&D) data from receipts at distribution centers or warehouses, as well as on feedback from quality assurance/quality control (QA/QC) personnel in the field who inspect, install, and use the product. (If nonconformance data are to be used in BI analyses, it must be accessible to the BI application, rather than simply residing in a written report.) On-time delivery measures the actual delivery date versus the promised or required delivery date. (It should be mentioned that a “promise” date in a purchase order is a contractual commitment; a required delivery date is the customer’s desired date.) Service levels can also be measured by bid responsiveness (the percentage of RFQs for which the supplier submitted a bid), and the percentage of purchase order acknowledgements.

A caveat: The accuracy level will not be the same for all data, especially when some data require manual input. Decision makers must always have a realistic view of data quality.

Using key metrics for mutual benefit

Once the critical criteria have been established, it is easy to develop the metrics that will be used in the strategic-supplier evaluation process. Most BI programs come preprogrammed with reporting tools for such items as spend, demand, and performance. However, software that allows tailored metrics, reports, and analyses is available. Depending on which factors are the most important for a given product, a weight can be assigned to each, so that an overall score can be calculated.

The primary method of displaying the data in BI solutions is through a dashboard. Using software such as Tableau, the various criteria can be graphically depicted. “Speedometer,” pie, or red/yellow/green charts clearly demonstrate at a glance how well a supplier is performing.

Using BI solutions to provide performance metrics to strategic suppliers helps them answer the four critical questions mentioned earlier. It also creates a win-win situation for both buyer and supplier because it incents suppliers to improve their performance.

For example, if the supplier sees that its prices and quality are good, but its on-time delivery is substandard, it will know exactly where to focus its efforts in order to be more competitive. Or if its performance deteriorates, the instantaneous feedback provided by the BI solution alerts the supplier that something is amiss, so it can quickly take action to return to its previous performance levels. When the relevant information is not available, or it takes much longer to obtain, the supplier may suffer a loss of business without knowing why. With a BI application, that is not the case.

Here is another example. The BI solution informs the buyer how well each supplier stacks up against its competitors. It also tells suppliers the criteria by which they and their competitors will be evaluated, thus setting up a healthy competition among them. If a strategic supplier sees that it has high scores for quality and on-time delivery but has a low overall score, it may be incented to reduce its prices in order to be more competitive.

When sharing performance data with suppliers, however, it’s important that they know the overall criteria used to evaluate their products and performance but are not privy to the exact formula used in the matrix. That way they cannot manipulate the data to “game” the system.

Yet another advantage of BI solutions is that all the data used to evaluate suppliers are real-time and verifiable. This completely removes subjectivity from the evaluation process and “tells it like it is.” If, say, a supplier promises to deliver by a certain date, but the actual delivery date was later, the system will calculate the difference and the supplier’s score will immediately reflect that failure. Moreover, the supplier will know exactly why its score suffered and can take action to remedy the problem.

Still, data must be used judiciously, as a tool and not as a weapon. The customer may uncover poor business practices that are manifesting themselves as performance issues on the scorecard. The supplier needs to understand that this may be the case, and that the ultimate objective is to reduce both hidden costs of business and friction in the relationship. Indeed, in my experience, suppliers that have been rated using BI data greatly appreciate the feedback they receive, thus enhancing their relationship and desire to do business with the purchasing company.

BI enables automated purchasing

Business intelligence applications can help to alleviate procurement professionals’ workload burden. These professionals have a most difficult job. They must be subject-matter experts and fully versed in the procurement rules of both their own company and the marketplace. They must also be skilled negotiators. Unfortunately, they often get bogged down in handling routine yet time-consuming transactions, which distracts them from the more complex responsibilities of strategic sourcing. What if there was a system that would reduce the buyers’ workload and allow them to focus their efforts on larger or more difficult buys? It turns out that there is: The BI solution’s dashboard and the associated data, which are collected and reported through the BI solution, make automated purchasing possible.

How does it work? First the company must code the products and services whose purchases will be automated. The United Nations Standard Products and Service Code (UNSPSC) or other established taxonomy can be used, or the company can simply assign its own differentiating codes for the primary types of products and services it purchases. Within these assigned categories, the suppliers are automatically evaluated through the BI metrics and scorecards. Based on these continuous evaluations, the strategic sourcing department could decide that, say, the top three suppliers in that specific category would be eligible to participate in automatic purchases. An e-mail or automated RFQ would go to the top three suppliers, requesting a product with a certain price range or perhaps by a specified required delivery date. The business could be split among all three, or it could be awarded to the supplier that can best meet the price, RDD, and other requirements. As long as the top-rated supplier or suppliers could meet the mandated price, delivery, or other qualifying criteria in the RFQ, they would be electronically awarded the purchase order.

With the auto-purchase feature of the BI solution, the buyer does not need to become involved because the RFQ is automatically sent electronically to strategic suppliers. The company receives the best value for the items it needs within the established time frame. The strategic suppliers that consistently meet the requirements and have the best overall scores—although this can rapidly change, depending on their performance—garner more business, with little human intervention required. In short, it is another win-win for everyone involved.

Automated purchasing is a boon for sourcing professionals. For one thing, it can handle up to 80 percent of buys in some companies. For another, it allows buyers to provide concrete, contemporary feedback to their suppliers. The successful strategic suppliers receive the same or increased business. More importantly, it frees the buyer to concentrate on critical suppliers or buys, such as large-dollar or time-sensitive purchases, where negotiating is paramount and sufficient time is needed to complete the buy. In addition, it helps the buyers to move from simply managing transactions to learning more about the market and spending additional time on research and value-added activities for longer-term horizons.

Help for expeditors

A pivotal position in every company’s supply chain is the “expeditor,” whose job is to follow up on the status of outstanding orders. This role may be full-time or part-time, depending on the size of the company. Regardless of order volume, the expeditor’s follow-up is vital, because he or she obtains updates and also puts in motion the actions required when ordered parts or items will be delayed.

In the past, the expeditor spent hours on the phone, following up with suppliers on the status of pending or overdue orders. In many cases, suppliers did not appreciate the expeditors’ efforts; rather, they were seen as a constant impediment. But once again, here is an area where BI solutions can help both buyer and supplier.

Business intelligence applications offer a faster, easier, and more precise way to expedite orders. For example, an automated inquiry can be sent via the electronic portal to vendors, asking them to update the RDD, especially when that date is fast approaching. Vendors also can electronically inform the buyers and expeditors of potential delays. This eliminates needless telephone calls and other forms of verbal communication, while nevertheless providing rapid updates on order status. This approach can transition the expediting function to provide higher-level, exception-based review of dates that are extended beyond acceptable limits. Thus, if the supplier anticipates a late delivery, the purchasing company has more time to turn to other vendors or take steps to ameliorate the impact of a late delivery. It is also worth noting that in the case of automated purchases, the company is dealing with its top-performing suppliers, so late deliveries should occur less frequently.

A perfect marriage

In my opinion, a business intelligence solution represents the perfect marriage of strategic sourcing and information technology. BI provides the required data to the right decision maker at the correct time. It enables strategic sourcing to identify the critical data elements needed to evaluate strategic suppliers, obtain constantly updated order statuses, and use automated purchases for the majority of its buys. Through the business intelligence module of the ERP, a company’s IT organization provides the data stream that is necessary to fulfill each of those requirements. In addition, IT configures and calculates the criteria used in the vendor analyses, validates the veracity of that data, and devises the dashboards used to array and display the performance data.

Neither sourcing nor IT can perform these roles in a vacuum. As a result, BI solutions work most effectively in companies in which the overall supply chain organization appreciates the value that IT provides in evaluating strategic suppliers. At the same time, in order to provide optimal support for strategic supplier evaluation, IT personnel must understand how the company’s supply chain operates as well as best procurement practices. The key is mutual understanding, support, and teamwork! Even when IT resources are limited, information technology’s value in support of the supply chain, sourcing and procurement, and strategic suppliers is incalculable.

Today, most companies, large and small, use an enterprise resource planning system to run their businesses. For those that engage in strategic sourcing, the advent of a business intelligence capability in almost every ERP is an enhancement that, when properly used, provides significant advantages to both the strategic sourcing directorate of a company and its strategic suppliers.

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