Buying: Supplier selection (part 1)-Dont go choosing the wrong supplier

Many people are actively working on bringing Artificial Intelligence (AI) to Contract management, and even the World Commerce and Contracting organization states that ”Automation offers defined workflows and the possibility of a disciplined approval process. However, artificial intelligence can lift this process to new levels by providing ready availability of knowledge and past experience.”..in other words… If someone has done it before, it’s OK. Phew!,  you have not committed the carnal sin of ..setting a precedent!

The problem with Artificial Intelligence is simply that it is …artificial; based upon precedence and logic. Whilst this clearly has its place, it cannot be expected to provide all of the answers at least, not immediately. So why am I committing such a modern-day heresy?

Here I will present an alternative argument to the AI solutions that are increasingly purported to be the “answer” to our challenges.

In my experience from the other side of the desk, the biggest reason for poor contract performance is due to three factors:

·         A focus on failure

·         Misplaced assumptions

·         Misaligned supplier selection criteria

Brutal words, and you can’t even blame the suppliers. Its time to look in the mirror if you want to find the culprit. Let’s look at the accusations.

As we all know, there is an elastic relationship of any commercial model between the upside and downside. Focus too much on protecting yourself in the event of failure and you will by design constrain your ability to meet stretch targets. Sixty percent of polled companies confirmed that supplier collaboration is critical to bring innovation, but only a third of the same companies actively seek to leverage this knowledge.*1

A company that recognizes that its suppliers can play a major part in its growth and success, and therefore embraces the positive contribution they can bring will be more successful, and will build more mature working relationships with them. On the other hand, a company that wants to avoid failure at all cost will unintentionally finish with a commercial model supported by a contract that demotivates suppliers and blocks any upside contribution.

So why does this happen?

Several recent articles highlight the fact that buyer’s organizations rarely have all the answers especially when we talk about ESG or sustainability, both relatively new considerations in the supplier selection mix. However, these simply emphasize the fact that today there remains the arrogant assumption that a supplier cannot contribute more than the buyer has identified. However, the reality in most industries is that a buying organization is made up of generalists, not specialists, so it makes little sense to believe a generalist can really think of all possible innovations and efficiencies in isolation? Ignore this reality and you already limit your chances of success.

This discussion raises several assumptions in the way models such as Ray Carter’s 10C model are applied.

1.       That all contract workscopes should ideally be defined in sufficient detail to mitigate poor supplier risks

2.       A contract workscope is implemented in isolation

3.       That there are no benefits in delivering more than the contracted workscope

4.       There are no buyer drivers beyond the contract workscope.

Naturally there are workscopes that respect these assumptions, however there are many that don’t.

Imagine you are organizing a major sporting event, and you have 100 contractors and potentially as many subcontractors. Your task is to build a stadium in time for the event. You select the technically best contractors to perform their individual workscopes. Job done!..or is it?

You may well have project-level constraints such as the weather, or avoiding traffic congestion to take into account. The interfaces between workscopes will be complex and cooperation essential, so how do you include this factor in your choice of supplier? You may need to make design changes to the stadium to account for unexpected situations. How well will your selected suppliers manage this?...collaboratively, or hit you with a massive Change Order?

There are many situations therefore in which the selection of suppliers is less about their ability to deliver their own well-defined workscopes as described by Ray Carter, but more about how they work together in order to deliver the project as a whole. This reflects the commercial relationship that you have sought, as well as their motivation to deliver the “bigger picture”.

As the number of uncertainties increase, along with the number of implementation interfaces, the ability to collaborate and align with the higher-level goals becomes more important than the supplier’s ability to deliver their own workscope in isolation.

In this instance, flexibility, innovation and cooperation should therefore be foremost in your supplier selection criteria.

There are many situations therefore that you do not want to be overly descriptive of the technical workscope, but instead encourage innovation and the ability to adjust to changing conditions. This all starts with you, not your suppliers, and raises its own questions, not least to know when you need to seek a different commercial relationship with your suppliers, and Im afraid AI isn’t going to help you. As outcome uncertainty and the number of critical interfaces increase, the less you can rely on historical precedent to generate probable outcomes. We need a different approach.

We at Comskicom have been looking at this very question, and indeed it all comes down to asking the right questions in the right way; something many procurement teams are ill-prepared to do. Our approach looks at 4 key aspects of supplier selection

·         The direct technical workscope

·         The indirect constraints and drivers

·         The impact of each workscope on the project success.

·         The level of uncertainty inherent in the project

The graphic outputs from our Mbrace Supplier Alignment tool focus on answering three questions:

·         What level of commercial collaboration do I need for this workscope?

·         What specific aspects must I address?

·         How do I chose the ideal supplier?

These outputs will directly contribute to your procurement strategy and give you invaluable insight into the optimal way to structure your commercial relationship.

In Part 2 we will look at linking this to the actual supplier evaluation process.