The Decentralised Nature of Supplier Relationships, and Why it Matters

When procurement departments make strategic decisions related to tactical spend, there is often still lots of room for modernisation and improvement. There is no doubt that the talent in charge of procurement is skilled and proficient. However, in many cases, the way in which supplier networks are built leads to unoptimised processes.

Maverick Spend

About 80% of suppliers interact with the tactical spend, which are expenditures not directly tied to the goods/services sold by the company. Consequently, strategic spend expenditures directly related to the goods services sold, account for only 20% of overall supplier transactions. Nevertheless, only a limited set of resources are devoted to optimising tactical expenditure. Following are the two main reasons.

Firstly, suppliers are loosely scattered across the market. In the Business Continuity Institute’s 2017 report on global supply chain resilience, 69% of respondents said they do not have full visibility of their supply chains. Secondly, a vast majority of pricing offers are not even included in supplier choice. Also, maverick spend (a form of spending that doesn’t follow the pre-established company buying strategy) is regularly unavoidable. The unfocused, murky image of supply, inevitably leads to market inefficiencies that drive up the price of company purchases.

The status quo

In firms today, maverick spending is widely known to be an expensive lack of oversight, that leaves management with a losing lottery ticket. Why? Because employees invest too much time and effort into building preferential agreements as well as long-standing relationships with suppliers to drive down the price. Creating long-lasting connections built on trust and loyalty is one of the cornerstones of good business practice. However, it is crucial to precisely evaluate the cost and return on time invested.

On one hand, the FTE (full-time equivalent) of procurement employees to tactical spend projects is either immensely high (as a result of the time invested into building long-standing and labour intensive supplier relationships), or FTE is negligibly low, owing to the fact that indirect spend is handled in the business units of the business without even ever reaching procurement. On the other hand, suppliers effectively utilise their customers' goodwill to build oligopolies in a market that is actually capable of providing many more options. Preferential pricing agreements are great, but they are often not diversified or mobile. “World-class procurement organisations now operate at 21 percent lower labour costs than peers, and have 29 percent less staff, according to new world-class performance advantage research from The Hackett Group, Inc.”. But “procurement is now at an inflection point [...] both world-class and typical procurement organisations will need to turn to digital transformation to ensure that they can continue to reduce costs and add value.”

Ideal world

In the hypothetical ideal, every firm's catalogue of suppliers is equally rich in quantity as in quality. Supplier choice would be plentiful and the selection of offers easily digestible, there would be transparent data on pricing and logistics. Relationships would be personal, completely reliable and trustworthy with frictionless integration of the entire requisition communication process.

But of course, this is not the reality. In practice, major innovations are yet to be implemented. This leads to various forms of information asymmetry that keep prices high. According to research done by Anvyl, small and medium businesses could reduce their shipping costs by almost 30% if they were not forced to make costly last-minute shipments due to foreseeable and preventable delays.

Dynamic solutions for a dynamic market

A vast majority of companies today are investing in more interactive supplier relationships to “improve resilience and agility”, according to Gartner's "Future of Supply Chain: Crisis Shapes the Profession''. Furthermore, companies view diversifying their supply base as a critical strategy necessary in order to ” establish more business resilience”. 63% and 23% of companies, respectively, plan on investing into these areas within the next two years.

With the current digitisation wave, it is crucial for companies to be quick on their feet, shareholders and managers expect this. They should be able to make short-term decisions tied to a few suppliers, while at the same time being able to choose between hundreds in no time

What if, instead of investing time and money into building just a few, labour intensive supplier relationships, a centralised platform was the answer? Instead of scouting the whole market for friendly prices, it is now possible to enter a plaza full of vendors with whom Lhotse is establishing relationships.

We invest the time and energy into procurement software that most small and medium-sized enterprises just don’t have. We have developed data-fuelled algorithms, catering to the D-A-CHian supplier market. We have established an excellently engineered bridge between requisition and offer inputs, with all transactions and communication being facilitated on the platform. Diversification, nimbleness and lower prices are assured. Currently, we are developing a smart supplier scoring system, it is one of our most anticipated features and will bring transparency and reliability. We are reshaping the procurement landscape of SMEs.

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