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A report published by TiVA, a specialist in getting the best out of supplier and buyer relationships, makes it clear that most corporate buyers, by their own admission, don’t have the resource to sufficiently manage their suppliers.
The research shows that the average procurement department comprises only eight staff managing up to 37 suppliers each. However, the average company’s supplier base was found to contain over 2,700 providers, leaving thousands with no management at all.
The research therefore confirms that buyers are overcome by a massive ‘tail’ of suppliers with no hope of controlling all but a small fraction of the total list. Despite this, 92 percent of companies had no plans to recruit more procurement personnel.
Interviews with buyers also uncovered a casual attitude to their company’s corporate image. 35 percent said there were no financial risks in dealing with suppliers, 40 percent also thought there were no risks to their reputation and 44 percent believed there were no health and safety risks in dealing with suppliers they knew little about.
Andy Brown, CEO of TiVA and a former senior procurement executive at BSkyB and Asda, says:
“It is very difficult to know everything you need to about each supplier due to sheer volume and lack of internal resource available. It is however easy to understand how this lack of knowledge can leave organisations at risk from poor suppliers – financial risk, risk to reputation or otherwise. This is particularly evident in today’s environment, where such risks have huge consequences.
“Corporate governance laws are tightening up all the time and the risks of being found out are more pronounced. In the States, for example, this level of ignorance about suppliers is already a serious concern, especially since the Enron and WorldCom scandals, which brought about the draconian Sarbanes Oxley legislation in 2002 that can land senior management in jail or with a multi-million dollar fine.
“It’s an embarrassing situation when some of our biggest companies are finding thousands of ‘missing’ suppliers they’re buyers know nothing about and have no hope of managing or controlling. How long can these firms allow this to go on?
“Boardrooms need to act quickly if their buyers are openly admitting they can’t deal with all their existing suppliers, let alone the ones that have fallen off the radar. I’m sure many shareholders would be shocked to hear that big chunks of their investments are being spent blindly on suppliers their company knows little about.”
TiVA’s research reveals the primary reason for the non-management of suppliers in the UK is a lack of resource. An estimated 83% shortfall was identified between the number of suppliers actively managed by purchasing staff and the total number of providers on their list.
Brown continues: “The problem appears to be endemic in mid to large organisations with naturally large supply bases. To put it into context, you wouldn’t expect a middle manager to cope with several hundred ‘direct reports’ and there not be a hiccup or two along the way.”
In a further blow to UK PLC, finance and purchasing departments were also found to be in stark disagreement about how many suppliers they actually have. Whilst buyers thought they had 700 suppliers, finance departments in the same firms found a further 2,000 that their colleagues had not accounted for.
One finance manager adds: “We are understaffed with lots of suppliers and are under a lot of pressure as a result.”
Brown adds: “It’s scary. UK PLC is heading for a ‘bear trap’ and doesn’t see it. Unless they start to recognise the problems of failing to manage their supplier ‘tails’, there will inevitably be thousands of mini Gate Gourmets.”
To counter the problem, TiVA says companies also need to put some focus onto the smaller suppliers rather than solely on the top tier. “Today it isn’t enough to control the top 20 percent of the supply base, which accounts for around 80 percent of the total spend. Executives need a broader view.”
However, there were some positive signs resulting from the survey, which showed that 61 percent of organisations, in both the procurement and finance departments, felt they did not know enough about their suppliers and wanted to manage them better, particularly by communicating and sharing information more effectively.
Brown concludes: “Major buyers need to engage better with their suppliers to remain informed and in control of the whole of their supply bases. British Airways recently was caught out by a catering supplier they didn’t know enough about or chose to ignore. They lost £40m and did untold harm to their reputation, but other blue chip organisations like Bradford & Bingley and Capita Group are already redressing the imbalance. These companies and others are working with profiling specialists such as TiVA to develop value added relationships with all existing and new suppliers.”
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