Suppliers Managing Suppliers

Over the past two years I have had the opportunity to spend time within several Fortune 500 procurement departments undergoing large-scale organizational transformations. While the goals and approach varied by firm and industry, there was one definitive similarity…each company sought to realign the focus of their full time employees on the most strategic activities. This shared objective manifested itself in various ways, including:

  • The engagement of a BPO provider for transactional procurement activities. In some instances the entire sourcing and category management function was outsourced for a subset of total spend defined as “mature” and/or “less sensitive to the end users.”
  • The increased integration of technology systems that automate large portions of the sourcing and category management process that were once conducted manually.
  • A preference for managed or integrated services providers as opposed to working directly with the supply base for any given product or service.

The transition to managed or integrated service providers is nothing new, but its widespread adoption raises interesting questions with regards to risks, benefits, and the future role of the internal procurement function. For most indirect procurement categories, there is a third party service option available: 4PL for logistics, MSPs for Temporary Labor, Integrators for MRO, PMCs for Fulfillment/Print, and IFMs for Facilities to name a few. An internal procurement department can now almost entirely remove itself from direct interaction with the end-supplier network. In transitioning supplier management responsibilities over to an integrated provider, a firm also transitions responsibilities related to risk management, savings, quality, and innovation. For example, Print Management Companies (PMCs) are known to manage the end-to-end procurement process, incorporating hard savings and process improvement into their SLAs. They are also willing to become “owners” of a company’s brand guidelines. Under this arrangement it becomes the PMC’s responsibility to ensure that the printers in their network operate within a brand’s predefined design and quality parameters. PMCs can even help drive ongoing innovation by identifying and supporting internal demand oriented initiatives. Such extensive service offerings have left some internal procurement employees questioning their role, while others have embraced the opportunity to take on more strategic and less tactical responsibilities. The underlying value proposition across all such managed or integrated service arrangements is that the focused expertise of the service provider results in benefits that outweigh the premium being charged. This is often a very challenging assumption to validate. Firms that do choose to pursue this less hands-on approach to procurement may see their internal RFP volumes decrease substantially, but they also must focus significant time and resources to ensure that contracts with their select integrated service providers are extremely thorough. The engagement of integrated or managed service providers (MSPs) is ultimately a means to achieve a more agile and strategically oriented internal procurement department. However, as with any outsourcing arrangement, the lack of internal expertise can quickly backfire if the relationship goes south. Such dynamics make the selection and management of these integrated service providers particularly critical to a department’s ongoing success.