Supply management, also known as procurement, strategic procurement, purchasing or material management, is gaining attention as companies discover the potential cost savings that can be accrued from effective management of their supply activities. Supply management dollar flow-through accounts for more than half of a typical manufacturing company’s revenue (Severson and Nazaret, 2005). With the globalisation of production, supply management has become even more important.

Supply management comprises five core processes:
1. Source identification
2. Bidding
3. Negotiation
4. Contracting
5. Supplier management

The traditional focus of supply management has been on the last process, namely, supplier management. Companies have long emphasised on the importance of collaboration and relationship building with existing suppliers. Companies facing cost pressures often look at their existing business partners and suppliers for leads and direction. The belief is that cultivating long-term relationships with suppliers will provide greater value, and enhance a company’s future ability to reduce supply cost. Thus, the old paradigm for the supply function is to invest resources and energy to foster long-lasting relationships with existing suppliers for mutual benefits.

A new paradigm shift

As companies pursue new geographic supply markets, the old supply management paradigm is challenged. Market demand for shorter lead times and lower costs has driven companies to review their supply management practices and policies. Smart companies are now shifting their attention to the front-end of the supply management process where critical decisions affecting the long-term supply chain performance are made at the beginning stages of the supply management process. Greater planning, analysis and strategising are carried out at the front-end to ensure more sustainable levels of supply chain performance while minimising total system costs. A new supply management paradigm has evolved, represented by a shift in focus from the traditional back-end orientation on supplier management to a heightened front-end emphasis on source identification and planning (Figure 1).

In the Source Identification stage, the company focuses on source development, preferred and secondary dual sourcing, market intelligence, engineering collaboration with sources and internal stakeholder business units, and establishing confidence in the source’s TQRDCEB (technology, quality, responsiveness, delivery, cost, environmental compliance, and business soundness). Smart companies are realising that this stage proves to be the greatest value contributor in supply management, typically providing over a third or more of the total cost savings. Market intelligence to source materials, products, and services from the right suppliers, coupled with dual sourcing for cost competitiveness, provide significant value at this stage of supply management.

The Bidding stage solicits and utilises market forces and technology tools, such as online reverse auction, to drive cost savings. The bidding process of qualified sources is also significant to sustain continued cost reduction reflective of market pricing. Smart companies are equipped with on-demand online bidding platforms to provide their supply function with competitive pricing information quickly and accurately. It is not uncommon to expect the technology-enabled global bidding process to reduce RFQ lead-times and yield about 10% contribution to the company’s targeted cost savings.

The Negotiations and Contracting stages translate cost bidding as well as other critical parameters, such as TQRDCEB, into explicit terms and contractual requirements with enforceable measures. Effective negotiation and contracting can achieve low total cost while maintaining or exceeding materials specifications and service requirements. The terms and conditions of a supply contract can probably be best summarised in the infamous saying, “The devil is in the details.” Modern supply management has refined contracting into a sophisticated tool to enhance revenue generation and capital flow. As an example, a company’s cash flow can gain more liquidity and generate revenue by intelligent contractual terms between its supplier’s accounts payable terms and its client’s accounts receivable terms – both easily tracked and monitored by an ERP system. Smart companies are investing to equip their supply function professionals with tools and techniques to produce contracts that not only protect the companies but also enhance revenue generation.

In conclusion

Supplier management, contradictory to conventional belief, is not the highest value contributor. More and more companies are realising that resource investments (e.g., man-hours invested in supplier performance evaluations, alert management, supplier relationship building) could be more wisely invested upfront at the earlier stages of the supply management process to yield greater returns on investment. While supplier management remains an integral component of supply management, smart companies are constantly looking beyond existing suppliers to bring greater value to their supply function.

At the pivotal time when the focus of the supply management paradigm shifts from supplier management to source identification, success is imperative on a teamed effort with solid support from internal stakeholders. Working together in collaboration and full confidence, the supply function and internal stakeholders can jointly bring about the best competitive edge to their company.