This is the story of an order for 500 Altesia-branded cups that never arrived. Instead, we received 500 cups, personalised for Pierrette and Claude’s 50th wedding anniversary... not very appropriate for the job fair we were preparing! This story gave us a few gray hairs, but also a lot of laughter. But the story can quickly turn from comic to tragic when applied to some business-critical orders. It underscores the crucial importance of risk management in the strategic procurement process. So, how can you avoid ending up with Pierrette and Claude's order? Or worse, with the wrong part for a machine essential to your production? Or with sensitive information sent to your competitor?
The saga of Pierrette & Claude's cups
The 500 Altesia-logo cups were expected for a Job Fair. When we received Pierrette and Claude's order, we reported the error and returned the shipment. After all, such things can happen...
A new delivery arrives, and oh surprise! 500 cups… still personalized with the name of Pierrette and Claude, their 4 sons, 6 grandchildren, and lots of love. In total, we received the wrong order 3 times in a row! We never received our own in time for the job fair and got a refund.
As you've understood, this wrong order didn't prevent us from attracting talents at the job fair, nor from providing our services to our clients. But it would be a different story if such problems occurred with more strategic suppliers.
So, what lessons can be drawn to manage key suppliers in your purchasing process?
Lesson 1: Segment your suppliers with ABC analysis
The A/B/C categorization establishes the strategic importance of your suppliers to your company. Category C suppliers probably represent the vast majority of your suppliers but only a small portion of your expenses. The procurement process for Category C suppliers should be automated as much as possible, with, for example, the establishment of a catalog of pre-selected products by the Procurement department. On the other hand, your critical suppliers - Category A - should be monitored more closely with, as a bare minimum, the establishment of KPIs up to the establishment of a Supplier Relationship Management framework.
Catégorie | Proportion of suppliers | Volume of expenses |
A | 20% | 80% |
B | 30% | 15% |
C | 50% | 5% |
The suppliers generating the largest part of the expenses are the most strategic.
Lesson 2: Measure supplier performance (eg. OTIF)
Category A and B suppliers, who have a strategic impact on your company, will require closer attention. The establishment of KPIs is key to track performance & guide suppliers to meet your requirements. The well-known "OTIF" KPI - On Time / In Full - is a good example of how framing the performance of a supplier can help you with a critical aspect: delivery accuracy.
When placing an order, elements such as the punctuality of the delivery and its compliance are often as essential as the product itself. Tracking them is crucial to avoid costly delivery errors and delays that can disrupt your operations.
The OTIF measurement consists of two criteria:
On Time: measures whether the order has arrived within the set deadlines and at the delivery point. Penalties can be associated with late deliveries or even deliveries that arrive too early. Being delivered early might seem interesting, but it can have negative impacts such as the need to find extra warehouse space which means extra costs.
In Full: measures the completeness of the delivery: is the quantity in line with the order, or are there too many or too few products?
These KPIs will be linked to payment milestones, or even penalties.
In the case of our cups, since the order was wrong, we can estimate that it was never delivered. If it was delivered to Pierrette & Claude, it’s the delivery location that is problematic. And even if the company would like to send it to us eventually, it would arrive too late for our needs - namely, the Job Fair.
Lesson 3: Plan for auditing rights for your strategic suppliers
After numerous exchanges with the merchandising company, they confessed the reason for the disaster: our purchase order was associated with the wrong order. Thus, even if the order was relaunched, it was always the wrong product that came out. This system bug reveals essential flaws in the production process and in quality control.
To avoid this scenario with your strategic suppliers, consider including audit rights to ensure that their production, quality control, and delivery processes are robust enough. This audit can be performed at various times:
Either during a tendering process before formalizing the contract, as a preliminary check before validating the collaboration
Or as a routine check during the execution of services, or after observing problems or errors
Lesson 4: Involve the Procurement department from the start
The role of the Procurement department is not always well understood. Often, the internal client involves their colleagues from Procurement at the end of the process, when it comes to negotiating prices. But very often, it is too late to negotiate anything: neither the prices nor other essential conditions like OTIF KPIs or audit rights.
On the contrary, if the procurement department is involved from the start of the process, its managers can help you identify not only the needs but also potential risks and strategies to mitigate them.
In conclusion, supplier risk management should not be an afterthought, and your Procurement department has a key role to manage them. If you want to understand how to better integrate these considerations into your company, do not hesitate to contact us.
In the meantime, let's raise our glasses to the 50th wedding anniversary of Pierrette and Claude. And let's hope their celebration was just as nice with Altesia cups!