Supply Chain
Poor supplier management has operational, financial and strategic implications and remains a major source of value leakage in organisations. Failures in supplier selection, performance monitoring and relationship management lead to increased waste, disruption and reputational damage. Investing in structured supplier management can generate savings across total procurement spend.
Supply Chain
Michael Nzule
The Cost Of Poor Supplier Management
Before exploring the cost of poor supplier management, it is useful to reflect on the main frameworks adopted in procurement management. Procurement can be viewed from two major perspectives: the Sourcing Wheel and the Supplier Performance Management( SPM) Wheel. Procurement generally covers end-to-end processes, ranging from identifying a sourcing need to managing the supplier and reviewing the results. The Sourcing Wheel and the Supplier Performance Management Wheel are useful frameworks for understanding procurement as a continuous cycle rather than a one-time purchasing activity.
The Sourcing Wheel addresses the question of how to select the right supplier. It covers the process from identifying a business requirement to selecting and contracting a supplier. Typical stages include identifying the sourcing need, designing the sourcing strategy, analysing the market, identifying suppliers, issuing requests for quotations, proposals or tenders, evaluating submissions, negotiating terms, awarding the contract and completing the contracting process. The key objectives are to secure the right supplier, achieve the best total cost and value, maintain competitiveness and fairness, manage sourcing risks, and establish appropriate commercial and contractual terms.
For example, when a company needs security services, the sourcing team researches the market, identifies suppliers, issues a request for proposal, evaluates submissions, negotiates rates and awards the contract. This completes the sourcing loop.
The SPM Wheel assesses whether the contracted supplier is delivering what was agreed. It begins once the supplier has been selected and focuses on ongoing supplier performance. Typical stages include setting expectations, defining KPIs, measuring
performance against those KPIs, reviewing the operating environment, establishing corrective actions, pursuing continuous improvement and reassessing performance. This process also operates as a continuous loop and may lead back to the sourcing cycle when necessary. SPM evaluates supplier quality, on-time delivery, cost and pricing, service levels, responsiveness, contract compliance, innovation, risk and continuous improvement.
In the example of the company sourcing for security services, after awarding the security contract, the company measures whether guards are deployed as agreed, incidents are handled properly, reports are submitted on time, and service-level targets are achieved.
Having outlined the critical components of procurement management, it is important to consider what happens when poor supplier-management decisions are made and, specifically, what those decisions cost. Poor supplier management has operational, financial and strategic implications and remains a major source of value leakage in organisations. Failures in supplier selection, performance monitoring and relationship management lead to increased waste, disruption and reputational damage. Investing in structured supplier management can generate savings across total procurement spend.
Industry research indicates that additional cost-reduction opportunities of 5-12 % may exist within contracted supplier relationships, highlighting the potential value of systematic post-contract supplier performance and relationship management. These findings are relevant to procurement managers and supply chain leaders seeking to justify investment in supplier-management programmes.
In today’ s global supply chains, organisations spend 50-70 % of their revenue on external suppliers( Chartered Institute of Procurement & Supply-CIPS, 2022). Yet many firms still manage suppliers in an ad hoc, transactional manner. Poor supplier management occurs when organisations fail to select, evaluate, develop and collaborate with suppliers properly. Its consequences extend far beyond late delivery.
The cost of poor supplier management can be defined as the total financial and non-financial losses arising from suboptimal
Poor supplier management has operational, financial and strategic implications and remains a major source of value leakage in organisations. Failures in supplier selection, performance monitoring and relationship management lead to increased waste, disruption and reputational damage. Investing in structured supplier management can generate savings across total procurement spend.
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