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Supplier Lifecycle Management Measuring Performance while Mitigating Risk

August 2012

Constantine G. Limberakis

Supplier Lifecycle Management: Measuring Performance while Mitigating Risk Page 2

© 2012 Aberdeen Group. Telephone: 617 854 5200 www.aberdeen.com Fax: 617 723 7897

Executive Summary As global business continues to evolve based on various spheres of political, economic and social influence, advancing the cause of supplier lifecycle management in the supply chain has become more critical than ever before. This research report examines the crucial set of processes that encompass the disciplines within supplier lifecycle management by exploring the key pressures, actions and capabilities of over 130 organizations surveyed globally in June 2012.

Best-in-Class Performance Aberdeen identified the following three key performance criteria to help distinguish Best-in-Class companies:

• 85% of suppliers demonstrate on-time delivery or meet commit / project completion dates compared to 38% for Laggards

• Average cost savings achieved since implementing a supplier management initiative is 12% compared to 6% for Laggards

• Average time to on-board suppliers into the organization is 13 days compared to 27 days for Laggards

Competitive Maturity Assessment Survey results also show that the firms enjoying Best-in-Class performance over all other organizations (i.e. the Industry Average and Laggards combined) shared several common characteristics, including:

• 1.36 times more likely than all other organizations to monitor and manage supplier performance across the entire source-to-pay cycle

• 2.1 times more likely to use predictive supplier risk monitoring via alerts and real-time online dashboards than all other organizations

• 2.93 times more likely to use intelligence based tools for decision criteria for on-boarding / working with suppliers

Required Actions In addition to the specific recommendations in Chapter Three of this report, to achieve Best-in-Class performance, companies must:

• Improve the ability to embed / enhance supplier scorecards from multiple internal and external sources

• Enhance proactive monitoring of suppliers via a supplier network or business social network for activity streams related to risk

• Establish better capabilities to connect to social network company pages for extending supplier profiles with business credentials

Research Benchmark

Aberdeen’s Research Benchmarks provide an in-depth and comprehensive look into process, procedure, methodologies, and technologies with best practice identification and actionable recommendations

This document is the result of primary research performed by Aberdeen Group. Aberdeen Group's methodologies provide for objective fact-based research and represent the best analysis available at the time of publication. Unless otherwise noted, the entire contents of this publication are copyrighted by Aberdeen Group, Inc. and may not be reproduced, distributed, archived, or transmitted in any form or by any means without prior written consent by Aberdeen Group, Inc.

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Table of Contents Executive Summary ....................................................................................................... 2

Best-in-Class Performance ..................................................................................... 2 Competitive Maturity Assessment ....................................................................... 2 Required Actions ...................................................................................................... 2

Chapter One: Benchmarking the Best-in-Class .................................................... 4 Business Context ..................................................................................................... 4 Pressures Driving Supplier Lifecycle Management ........................................... 5 The Maturity Class Framework ............................................................................ 6 The Best-in-Class PACE Model ............................................................................ 7 Best-in-Class Strategic Actions ............................................................................. 8

Chapter Two: Benchmarking Requirements for Success ................................. 11 Competitive Assessment ...................................................................................... 12 Capabilities and Enablers ...................................................................................... 14

Chapter Three: Required Actions ......................................................................... 20 Laggard Steps to Success ...................................................................................... 20 Industry Average Steps to Success .................................................................... 20 Best-in-Class Steps to Success ............................................................................ 21

Appendix A: Research Methodology ..................................................................... 23 Appendix B: Related Aberdeen Research ............................................................ 25

Figures Figure 1: Duration of a Formal Supplier Management Program ........................ 4 Figure 2: Top Pressures related to Supplier Management .................................. 5 Figure 3: Strategic Actions based on Maturity Class ............................................ 9 Figure 4: Sources of 3rd party data on suppliers ................................................... 9 Figure 5: Monitoring Supplier Information through Social Media .................... 10 Figure 6: Cross-functional support in supplier management efforts ............... 14 Figure 7: Technologies used for Supplier Lifecycle Management..................... 16 Figure 8: Exposure to Supplier Risk - 1st, 2nd and 3rd ..................................... 18 Figure 9: Supplier Lifecycle Management Deployment ....................................... 19

Tables Table 1: Top Performers Earn Best-in-Class Status.............................................. 7 Table 2: The Best-in-Class PACE Framework ....................................................... 8 Table 3: The Competitive Framework ................................................................... 12 Table 4: The PACE Framework Key ...................................................................... 24 Table 5: The Competitive Framework Key .......................................................... 24 Table 6: The Relationship Between PACE and the Competitive Framework ......................................................................................................................................... 24



Chapter One: Benchmarking the Best-in-Class

As a result of increased pressure to enhance control of supplier relationships, procurement executives today are beating the drum for their organizations to improve their supplier management efforts. However, the drum beat is not isolated to procurement, but is also coming from several other areas in the organization such as finance, supply chain and the sustainability office. Based on the supplier challenges facing organizations of all industries and of all sizes, organizations that can distinguish themselves as Best-in-Class are able to establish a 360-degree view of the supplier lifecycle through improved process and technology approaches.

Business Context Figure 1 reveals that a formal supplier management program is not new for many organizations. For instance, where maturity is based on the amount of time a formal supplier lifecycle management program has been put in place, 20% show they are advanced and 24% intermediate. However, 37% of survey respondents still lack a formal supplier management initiative or program. Aberdeen research also finds that even among those that have implemented a formal supplier management program, many are still heavily relying on disparate processes and/or multiple systems that prevent the ability to forge a holistic picture of their supplier relationships.

Figure 1: Duration of a Formal Supplier Management Program

Source: Aberdeen Group, June 2012

This report found the average number of systems containing supplier information or attributes is 4.25, but one in ten state having more than 20

Advanced (more than five years in

place), 20%

Intermediate (two to five years),

24%

Beginner (less than two years),

17%

Implementing program in 2012 -

2013, 17%

No initiative in place, 20%

(Percentage of survey respondents, n=132)

Fast Facts

√ Based on this survey, it was found the average number of systems containing supplier information was 4.32, putting pressure on organizations to be synchronized in efforts

What is Supplier Lifecycle Management?

Elements that define supplier lifecycle management include the automation of key processes that include:

√ Vendor management / data cleansing

√ Supplier on-boarding and enablement

√ Supplier risk analysis and mitigation

√ Supplier audit and compliance management (regulatory)

√ Supplier benchmarking and performance monitoring

√ Supplier sustainability and corporate responsibility

√ Supplier information dashboard

√ Supplier business network/portal



that includes multiple instances of enterprise systems like ERP or homegrown systems. The use of multiple supplier systems requires an enhanced ability to integrate or synthesize supplier information for getting the big supplier picture, but the processes for managing them are often discrete and isolated. For instance last year's report, The Year of the Supplier: Perspectives on Supplier Management (May 2011) demonstrated that organizations are using a number of different types of solutions for storing transactional supplier data such as strategic sourcing (used by 21% of respondents), contract management (40%), procurement solutions (39%), plus other solutions not directly related to spend management like ERP (69%), internal data warehouse (49%) and of course the ubiquitous spreadsheet (77%). Meanwhile organizations have also looked to embed financial and operational controls into business processes by leveraging enterprise Governance, Risk and Compliance (GRC), where according to Aberdeen research from Effective GRC Management: Strategies for Mitigating Risk and Sustaining Growth in the Tough Economy (May 2012), GRC solutions are used by 29% of organizations to manage enterprise risk, profitability, quality and compliance, but also may be tacking supplier related information critical for understanding supplier performance and behaviors.

Pressures Driving Supplier Lifecycle Management Looking at the key pressures related to managing suppliers provides a clearer picture of where supplier processes are misaligned and adopting dedicated tools for automating supplier lifecycle management needs to be addressed for procurement, finance and supply chain professionals.

Figure 2: Top Pressures related to Supplier Management


In this regard, Figure 2 reveals that the top pressure for a majority of organizations today is related to a lack of insight into supplier performance across the enterprise (54%). Not having proper insight into supplier

(Percentage of survey respondents, n=132)

27%

32%

41%

43%

54%

0% 10% 20% 30% 40% 50% 60%

Inconsistent means of communicating withsuppliers

Lack of multi-level (e.g. - n-tier) visibility intosuppliers

Product and/or service issues due to supply chainor inventory failures

Incomplete information on corporatevendors/supplier relationships

Lack of insight into supplier performance acrossthe enterprise

"A major challenge for supplier management is that many if not most suppliers have not experienced any prior involvement in formal programs - and thus need to be educated on the process, expectations, and mutual benefits it can provide."

~ Senior Category Manager

Non-For Profit Environmental Organization

http://www.aberdeen.com/aberdeen-library/7103/RA-supplier-performance-management.aspx


http://www.aberdeen.com/Aberdeen-Library/7946/RA-governance-risk-compliance.aspx

http://www.aberdeen.com/Aberdeen-Library/7946/RA-governance-risk-compliance.aspx



performance prevents organizations from obtaining a truer understanding of the corrective actions necessary for improving their performance and better understanding the impact on the bottom line. Not having proper insight into supplier performance prevents organizations from obtaining a truer understanding of the corrective actions necessary for improving their performance and better understanding the impact on the bottom line.

While performance is at the top of the list, another driver for supplier lifecycle management is lack of visibility into supplier relationships. For instance, incomplete information on corporate vendors/supplier relationships is noted as a top pressure by 43%, demonstrating the concern over data collection on their suppliers and the ability to prevent product and/or service issues due to supply chain or inventory failures, a pressure noted by 41% of respondents.

But what is also noticeable is a concern on extended relationships into the supplier's supply chain. As global commerce activity increases for organizations of all sizes, understanding the root of the supply chain from one supplier to the next is critical to preventing risk while staying compliant with international, federal or local regulation. For instance due to existing and even pending regulatory requirements (e.g. pending Section 1502 Dodd Frank legislation on conflict minerals legislation) 32% of respondents note pressures related to a clear lack of insight into understanding secondary and tertiary suppliers.

Finally, a lack of formal supplier management processes also provides no consistent means for communicating with those suppliers that may be most vital or pose the most risk to the organization, a pressure stated by 27% of respondents.

The Maturity Class Framework To better understand how organizations can manage their supplier lifecycle efforts, Aberdeen used three key performance criteria to distinguish the Best-in-Class from Industry Average and Laggard organizations. Table 1 shows the metrics that were chosen to determine the Best-in-Class. Observations made from the leading pressures in Figure 2 indicated a majority of respondents leaning towards pressures attributed to supplier performance in contrast to the previous benchmark which focused on supplier disruption. As a result, this year Aberdeen focused on metrics that could improve these capabilities. Key performance metrics were defined as the following -

• Percent of suppliers demonstrating on-time delivery or meet commit / project completion dates - represents an organization's ability to influence and incentivize suppliers for performing according to SLAs and other contractual requirements/obligations, while helping an organizations realize identified savings from sourcing and achieve operational efficiency.

Impact of legislation on Supplier Lifecycle Management

Within the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law by President Obama on July 21, 2010, new requirements for manufacturers of products containing tin, tantalum, gold, tungsten or any other “conflict metals.”

Section 1502 of the new law imposes direct U.S. Securities and Exchange Commission (SEC) reporting requirements on any publicly traded companies whose products contain metals derived from conflict minerals. Companies will be required to submit a due diligence plan with their annual SEC report.

In the month this paper publishes the SEC will meet on August 22 to finally vote on the adoption of conflict minerals regulations required by Section 1502 of the Dodd-Frank Financial Reform Act.



• Average percent of cost savings achieved since implementing a supplier management initiative - a metric that asked survey respondents to consider cost savings as related to the savings achieved through better pricing, less expensive mark-ups or the introduction of efficiencies due to improved processes or technology initiatives.

• Average time to on-board suppliers - a metric that asked survey respondents to consider the time required to collect all necessary data for doing business with the suppliers - (i.e. supplier attributes, financial, risk profiles, Non-Disclosure Agreements (NDAs), contracts, compliance, diversity, etc.)

Table 1: Top Performers Earn Best-in-Class Status

Definition of Maturity Class Mean Class Performance

Best-in-Class: Top 20%

of aggregate performance scorers

85% - Percent of suppliers demonstrating on-time delivery or meet commit / project completion dates 12% - Average percent of cost savings achieved

since implementing a supplier management initiative 13 days - Average time to on-board suppliers in the

enterprise

Industry Average: Middle 50% of aggregate

performance scorers

67% - Percent of your suppliers demonstrating on-time delivery or meet commit / project completion dates 8% - Average percent of cost savings achieved since

implementing a supplier management initiative 23 days - Average time to on-board suppliers in the

enterprise

Laggard: Bottom 30% of aggregate

performance scorers

38% - Percent of your suppliers demonstrating on-time delivery or meet commit / project completion dates 6% - Average percent of cost savings achieved since

implementing a supplier management initiative 27 days - Average time to on-board suppliers in the

enterprise


The Best-in-Class PACE Model Using supplier lifecycle management solutions to achieve corporate goals requires a combination of strategic actions, organizational capabilities, and enabling technologies that can be summarized as follows:



Table 2: The Best-in-Class PACE Framework

Pressures Actions Capabilities Enablers Lack of insight into

supplier performance across the enterprise

Improve supplier communications through standardized process and workflow Develop and enhance

strategic, savings and operational metrics with supplier lifecycle management tools

On-boarding properly authenticated suppliers to reduce the possibility of payment fraud Usage of notifications and

expirations based emails on compliance areas Active measurement of

supplier performance against Contracts and Service-Level Agreements (SLAs) Ability to understand

supplier risk by supplier relationship

Supplier on-boarding and enablement (70% BIC Adoption) Supplier benchmarking and

performance monitoring (70% BIC Adoption) Vendor management / data

cleansing (68% BIC Adoption) Supplier risk analysis and

mitigation (55% BIC Adoption) Business network /

supplier portal (53% BIC Adoption) Supplier audit and

compliance management (50% BIC Adoption) Supplier sustainability and

corporate responsibility (45% BIC Adoption)


Best-in-Class Strategic Actions Based on the respondents from this survey in Figure 3, Best-in-Class organizations show a clear distinction from all other organizations (combined Industry Average and Laggards) in focusing on two areas that can help or parallel supplier performance efforts, those being - predictive supplier risk tracking and the other being corporate social responsibility.

The most noticeable is the use of predictive risk monitoring via alerts and real-time online dashboards, where Best-in-Class are 2.1 times more likely to focus on this action. This is a clear indicator that Best-in-Class may be more established in their abilities for monitoring existing or known risk factors that can prevent a supplier's performance, but are looking to be better prepared to pre-empt potential disruptions that can impact performance.

Another area that shows a discrepancy between Best-in-Class and their peers is related to improving Corporate Social Responsibility (CSR) programs for their suppliers. With a rapidly changing landscape, organizations are becoming much more aware of their "public performance" in the eyes of the public as relates to their impact on social, labor, economic, and environmental activities. Best-in-Class companies are 42% more likely to focus on establishing CSR programs through formal supplier relationships teams or supplier boards than all other organizations.



Figure 3: Strategic Actions based on Maturity Class


Aberdeen Insights — The trend in 3rd Party Information

As a basis to assessing a supplier profile, there are two key elements that can make this happen - one is internal data generated from enterprise tools and systems and the other is external data. Given the deluge of information being generated today, organizations are increasingly relying on third party data to better understand the world around them.

Figure 4: Sources of 3rd party data on suppliers


21%

36%

53%

46%

16%

30%

35%

45%

45%

50%

0% 10% 20% 30% 40% 50% 60%

Establish corporate social responsibility programsthrough formal supplier relationship teams /

supplier boards

Consolidate the process of housing supplier datathrough master vendor/supplier management

Improve supplier communications throughstandardized process and workflow

Develop and enhance strategic, savings andoperational metrics with supplier management

tools

Use predictive supplier risk monitoring via alertsand real-time online dashboards

Best-in-Class

All Others

68%

58%

47% 47%

37%32%

46%49%

54%

33%

23%

48%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Premiummarketing

intelligenceservice

Corporate /personal email

Search engine(e.g., Bing,

Google, Yahoo)

Businessdirectories

Business socialnetwork /suppliernetwork

Trade journals

Best-in-Class All Others

"Simply put we only use approved suppliers who have been appropriately vetted. We invest in our key suppliers' development and hold annual Supplier Conferences. All this has led to reduced costs, improved productivity and optimize efficiencies. These efforts are measured and shared with key suppliers in order to continually improve their performance."

~ Executive Manager MENA Division of Leading of a

Global Management Consultancy



Aberdeen Insights — The trend in 3rd Party Information

Figure 4 (opposite) makes it is clear that Best-in-Class organizations today are relying on Premium marketing intelligence as a source of third party intelligence. This is data coming from third-party providers (e.g. D&B, LexisNexis) that enhances the view of a supplier profile beyond what can be generated internally. Other areas where organizations are relying on third party data include email, search engine, business directories, business social networks and trade journals.

However when you consider the Arab Spring in 2011 to the global Occupy movement in 2012, organizations and individual nations are more empowered than ever before to generate information on social networks (i.e. LinkedIn, Facebook and Google+), blogs and Twitter feeds. Activity streams generated from these social media outlets produce up to the minute content based on current events that can give organizations more insight into supplier related risk. Based on Aberdeen discussions with technology providers and other pundits of "Big Data", social media is increasingly being integrated into enterprises as a source for supplier intelligence due to its immediate impact and the ubiquitous nature of mobile devices.

Figure 5: Monitoring Supplier Information through Social Media


Best-in-Class are 60% more likely to use social networks as a source of third-party supplier data. But Figure 5 also shows that while 21% of Best-in-Class connect with social network company pages and 35% are leveraging social efforts internally. This represents a clear opportunity for organizations across the board to improve their visibility by leveraging the integration of social media into their supplier management efforts.

10%

6%

13%

13%

35%

21%

0% 5% 10% 15% 20% 25% 30% 35% 40%

Leverage supplier B2B social efforts toimprove intelligence and supply chain

operations

Connect with supplier social networkcompany pages and extend profiles with

business credentials

Best-in-Class

Industry Average

Laggards



Chapter Two: Benchmarking Requirements for Success

The automation of supplier lifecycle management plays a crucial role in the ability to better manage supplier performance while mitigating supplier risk. Selling supplier lifecycle management as a concept becomes a differentiator for organizations that accept its value and can implement technology that has a direct impact on the efficacy of suppliers for the organization.

Case Study — The Downside of Growth

A leader in virtualization and cloud infrastructure, this organization has experienced tremendous revenue growth over the past several years. Based on this fast paced growth there are clear areas in the supply chain where they needed to play catch-up was in supplier management.

As an organization focused on technology, most of its spend is in indirect categories which translates into $1B in spend annually and roughly 12,000 suppliers in the ERP system. One area that has needed vast improvement is supplier on-boarding. For instance, today if the line of business wants to create a supplier it is simply entered into the ERP supplier database. The problems this creates are many but boil down to the inconsistencies in supplier vetting and insight since proper workflows during the on-boarding process do not exist.

Another area of concern is the ability to do a better job in tracking government diversity requirements. The organization today is increasingly working directly with government and federal agency where requirements are strict on clearly providing data on supplier diversity (woman-owned, minority-owned, disabled-owned, service-disabled, small-business, etc.). Without a supplier manager platform, supplier management in strategic sourcing is left do this process manually rather than rely on the data enrichment from third party data that can all be housed in a supplier management platform.

In using the ERP system today as the main source for supplier information, the organization is looking to outside supplier relationship management tools that include eSourcing, Contract Management and Supplier Lifecycle Management. Moreover, in trying to stay true to their business, they are currently reviewing a number of vendors that are Cloud / SaaS based solutions. Strategic sourcing also sees many advantages to selecting a SaaS model based on the time to implement being generally quicker than in-house on premise models and the ability to leverage supplier focused services such as onboarding and business process outsourcing. Finally a key requirement to any new solution being vetted will be the need to support and help strategize on supplier rationalization and the ability to provide a supplier portal for supplier self-service in order to reduce much of the manual processing being done today.

Fast Facts

√ 67% of Best-in-Class' suppliers measure their performance compared to 20% of Laggards.

√ 50% of Best-in-Class use predictive supplier risk monitoring via alerts and real-time online dashboards compared to 22% of Laggards.



Competitive Assessment Aberdeen Group analyzed the aggregated metrics of surveyed organizations to determine whether their performance ranked as Best-in-Class, Industry Average, or Laggard. In addition to having common performance levels, each class also shared characteristics in five key categories: (1) process (the approaches they take to execute daily operations); (2) organization (corporate focus and collaboration among stakeholders); (3) knowledge management (contextualizing data and exposing it to key stakeholders); (4) technology (the selection of the appropriate tools and the effective deployment of those tools); and (5) performance management (the ability of the organization to measure its results to improve its business).

Best-in-Class characteristics identified in Table 3 serve as a guideline for best practices, and correlate directly with Best-in-Class performance across the key metrics. Moreover the framework that distinguished process, organization and knowledge management looked at those areas where leading organizations were most capable in comparison to their peers across all areas related to supplier lifecycle management such as supplier information management, compliance, performance, and risk.

Table 3: The Competitive Framework

Best-in-Class Average Laggards

Process

On-boarding properly authenticated suppliers to reduce the possibility of payment fraud

65% 52% 25%

Third party auditing of supplier premises and process capabilities

50% 35% 21%

Organization Cross-functional support and participation in managing supplier risk

53% 40% 8%

Knowledge

Customizable supplier surveys for collecting data on suppliers

60% 42% 13%

Intelligence based tools for decision criteria for on-boarding / working with suppliers

55% 15% 13%

Technology Supplier Lifecycle Management Technology that is implemented



Best-in-Class Average Laggards 68% - Vendor

management / data cleansing 70% - Supplier

on-boarding and enablement 55% - Supplier

risk analysis and mitigation 50% - Supplier

audit and compliance management (regulatory) 70% - Supplier

benchmarking and performance monitoring 45% - Supplier

sustainability and corporate responsibility 60% - Supplier

information dashboard 53% - Supplier

business network/portal

41% - Vendor management / data cleansing 33% - Supplier








50% - Vendor management / data cleansing 14% - Supplier








Performance

Supplier Lifecycle Management performance capabilities:

90% - Active measurement of supplier performance against Contracts and Service-Level Agreements (SLAs) 70% - Track the

progress of corrective actions and improvement plans for suppliers








Capabilities and Enablers Based on the findings of the Competitive Framework and interviews with end users and vendors alike, Aberdeen’s analysis of the maturity classes reveals that Best-in-Class are advanced in almost all areas of supplier lifecycle management. The following is an analysis of where Best-in-Class organizations are exceptional in comparison to their peers within the context of process, knowledge management, organization, technology and performance management.

Process: Leveraging Third Parties for Validation Increased pressure for being able to understand the inner-workings of the supplier's supply chain is forcing organizations today to verify what is not obtainable through internal on-boarding processes and data alone. In this regard, Best-in-Class are showing clear advantages in their ability to establish processes for authenticating and monitoring supplier information and compliance through third parties. 45% of the Best-in-Class stated the use of supplier authentication by third parties (i.e. non-governmental organizations or regulatory bodies) compared to 36% for all other organizations. Third parties also provide an additional validation of company identity, compliance criteria (i.e. quality, social, environmental, security) and certifications. Part of this validation is through third party on-site visits where Best-in-Class are 1.4 times more likely than Laggards to be using third party auditing of supplier premises and process capabilities.

Organization: Establishing Cross-Functional Support Cross-functional support is critical in establishing consistent policies and procedures within the organization, but the ability to get support seems to vary based on the type of supplier activity. For instance, 60% of Best-in-Class stated the capability of cross-functional support and participation for managing supplier performance as compared to 54% for all other organizations.

Figure 6: Cross-functional support in supplier management efforts


34%

54%

53%

60%

0% 10% 20% 30% 40% 50% 60% 70%

Cross-functional support andparticipation in managing supplier risk

Cross-functional support andparticipation in managing supplier

performance

Best-in-Class

All Others

"We are discussing an enterprise supplier relationship / risk management program, though this will likely not gain significant traction until 2013. Today suppliers are managed and monitored in a decentralized fashion by the business owners with high variability in approach, standards, results, etc. With that said, we have a fairly evolved disaster recovery and business continuity program under which key suppliers are monitored."

~ CPO US-Based Asset Management

Services Organization

Preventing Fraud

Changes that often occur due to regulation or internal supplier changes (i.e. contact, bank accounts) makes onboarding and enablement a frequent, but supplier profiles must provide automatic notifications that trigger proper review due to potential issues related to fraud or corruption.

Best-in-Class are 1.6 times more likely than Laggards to on-board properly authenticated suppliers to reduce the possibility of payment fraud



However, as demonstrated in Figure 6, the differential is larger between Best-in-Class and all others, when it comes to managing supplier risk. Why is this? This difference may be due to the very nature of metrics for managing supplier risk. For instance, quantifying performance metrics (i.e. total cost of ownership, percentage of late deliveries, percentage of stock-outs, purchase price variance) can translate directly into costs mitigation.

In comparison, metrics for risk (i.e. risk probability, risk ratings, risk scores, risk index, etc.) tend to focus more on qualitative scores or indices, and may be less actionable if executive involvement is not on top it. Familiarity with supplier risk metrics may also provide a basis for executives to directly communicate the metrics on supplier risk and garner cross-functional support in mitigating it. Based on the research, 85% of Best-in-Class executives from procurement, sourcing or supply chain are actively managing and reviewing supplier risk metrics compared to 52% for all other organizations.

Knowledge Management: Data Consistency and Visibility When it comes to supplier lifecycle management, the crux of the issue is and has always been the ability to obtain a common view of suppliers based on supplier data that is generated both internally and external to the organization. As shared earlier, the backend challenge for many organizations is the number of systems that contain supplier related data. In this regard, 40% of Best-in-Class state the ability to access a "single source of truth" for all supplier information from point of supplier on-boarding through supplier auditing. Best-in-Class are also 88% more likely than Laggards to have implemented master data management programs for establishing a consistent view of suppliers across all systems.

But while systems exist with these capabilities that can manage all supplier lifecycle components such as supplier-based transactions, information management, compliance, performance and risk, it is unlikely that most organizations are using a common platform for these functions. Therefore, the ability to establish clarity on discrete supplier metrics through reporting and visibility tools is essential for the different stakeholders managing suppliers (i.e. compliance, procurement, finance). Based on the results of the survey Best-in-Class are more adept at reporting and intelligence gathering capabilities. For instance, 47% have established reportable transparency of supplier compliance, performance, and risk within the procurement and / or SCM (Supply Chain Management) organization compared to 28% for Laggards.

Technology Establishing better knowledge and processes through supplier lifecycle technology is becoming ever more critical in improving most if not all of the processes where Best-in-Class are seeing an advantage. Figure 7 reveals that across the board, Best-in-Class have deployed supplier lifecycle management technology more frequently than their peers.

Fast Facts

√ Best-in-Class are 2.3 times more likely than all other organizations to use of mobile applications (e.g., iPad, smartphones, tablets) for monitoring / reporting on supplier information

√ 63% of Best-in-Class can evaluate the experience and background of owners and key executives compared to 23% of Laggards.



Figure 7: Technologies used for Supplier Lifecycle Management


The top three areas with the widest gap between the maturity classes include: on-boarding and enablement, benchmarking and performance monitoring, supplier information dashboards -

• Supplier Information Dashboards - Supplier dashboards are the nerve center for any supplier lifecycle tool. Given a world where most individuals are inundated with data, dashboards become critical link to the larger enterprise by providing the big picture element that includes benchmarking information, the ability to drill-down, rank exception alerts, and access to business user comments and thoughts related to suppliers. Dashboards also provide insights with intuitive visuals. This is particularly critical for the ability of executive management to get a quick view of performance and risk drivers relative to supplier management. Best-in-Class are 2.5 times more likely to be using supplier benchmarking and performance monitoring than all other organizations.

• Onboarding and Enablement - One the largest challenges organizations often face is an inability to effectively on-board suppliers that are properly authenticated. Described as a Best-in-Class metric earlier in this report, improving supplier on-boarding is foundational and a critical first step for building intelligence around suppliers. On-boarding must also be purpose driven and clearly defined for obtaining all necessary data such as supplier attributes, contracts, certificates or financials. Based on this capability, 65% of Best-in-Class state on-boarding properly authenticated suppliers to reduce the possibility of payment fraud as compared to 25% of Laggards. Moreover onboarding and enablement are the critical first

21%

41%

21%

33%

17%

44%

29%

35%

45%

50%

53%

55%

60%

68%

70%

70%

0% 10% 20% 30% 40% 50% 60% 70% 80%

Supplier sustainability and corporateresponsibility

Supplier audit and compliance management(regulatory)

Supplier business network / supplier portal

Supplier risk analysis and mitigation

Supplier information dashboard

Vendor management / data cleansing

Supplier on-boarding and enablement

Supplier benchmarking and performancemonitoring

Best-in-Class

All Others



steps in the supplier lifecycle process. If not properly performed, areas such as performance and risk management are disjointed or misaligned with the needs of the business, while also not providing the true picture of a supplier's potential risks where information may be missing or out of date. Best-in-Class are 1.4 times more likely to have deployed technologies related to supplier onboarding and enablement than Laggards.

• Benchmarking and Performance Monitoring - These solutions offer the ability to measure, analyze and manage an organization's performance as a part of the effort for improving supplier relationships, while looking to remove unnecessary cost related to the sourcing and procurement of goods and services. Best-in-Class are 1.0 times for likely to be using supplier benchmarking and performance monitoring than all other organizations. A critical aspect to these solutions relates to the usage of supplier scorecards for measuring supplier performance, benchmarking. For instance Best-in-class are 1.4 times more likely than Laggards to focus on continual process improvements related to the creation of a perfect supplier scorecard. Moreover, through higher use of benchmarking technologies three-quarters of Best-in-Class are able to systematically collect performance assessment and evaluation results compared to 47% of Laggards.

Performance Management As discussed in last year's report, The Year of the Supplier: Perspectives on Supplier Management, perhaps more than any other area, how organizations are managing supplier performance is determined by the use of supplier management processes and tools. Performance management demonstrates a ROSR factor - or "Return on Supplier Relationship" if you will, that can point to the ability of an organization to reduce issues or errors and maximize the utility of its relationship through compliance and corrective actions. In this year's report, there are two areas that appeared to most demonstrate this concept:

• Active measure of supplier performance against contracts is an indicator of how connected supplier management is with contract management systems. In this regard, 90% of Best-in-Class noted an active measurement of supplier performance against Contracts and Service-Level Agreements (SLAs) compared to 29% of Laggards. What this suggests is a more acute ability to use notifications an expirations based emails in contract compliance areas, something Best-in-Class are 1.6 times more likely to be doing than Laggards. Best-in-Class also show the ability to customize compliance ratings based on configurable weighted criteria. Through these actions, leading organizations can better assess supplier performance based on unique supplier criteria where 65% of Best-in-Class are able to customize compliance ratings compared to 29% of Laggards.

Fast Facts

√ 70% of Best-in-Class state a higher sharing of supplier scorecard results with suppliers compared to 27% for Laggards.

√ Of the organizations using supplier benchmarking and performance monitoring , 74% percent of suppliers demonstrate on-time delivery or meet commit / project completion date compared to 60% of organizations not using one.





• Another factor that is differentiating organizations is based on the ability to track the progress of corrective actions and improvement plans with suppliers, something Best-in-Class are 1.1 times more likely to do than Laggards. How organizations monitor their progress with suppliers is clear to understanding how well organizations are managing their supplier relationships. For instance, through the implementation of best practice compliance templates and regulatory monitoring, Best-in-Class are more aware of the requirements and the ability to understand if improvements are being made, a capability Best-in-Class are 85% more likely to have than Laggards.

Aberdeen Insights — Better Understanding Supplier Risk Understanding the link to a supplier and contingency planning is critical not only for compliance to regulatory requirements but planning in the event of a natural disaster or social-political unrest that prevents the flow of goods or services. Based on Figure 8, it is clear that Best-in-Class organizations are much more prepared to understand their primary suppliers, being more than 1.7 times more likely to have established a linkage to list products / services provided by a supplier and the contingency replacements for them.

Figure 8: Exposure to Supplier Risk - 1st, 2nd and 3rd


Figure 8 shows Best-in-Class are also 2.75 times more likely to map secondary and tertiary suppliers. However, despite this advantage less than a third of Best-in-Class currently have this capability, showing the potential for improving this area for better managing supplier risk across all maturity classes.

continued

8%

28%

30%

75%

0% 20% 40% 60% 80%

Mapping of 2nd and 3rd tiersupplier risk

Linkage to list products / servicesprovided by supplier and

contingency replacements

Best-in-Class

All Others



Aberdeen Insights — Supplier Lifecycle Management Approaches

Organizations today have a number of options for deploying supplier management solutions. With organizations using an average of four systems for managing suppliers, there is no clear and straight forward solution for deploying a supplier lifecycle management solution. Due to merger or acquisitions organizations often inherit systems that require organizations to use systems as part of a wider solution set. For instance, based on the survey, 45% of respondents noted the use of supplier lifecycle management solutions as a stand-alone solution and 35% noted that it is the same vendor platform as Enterprise Resource Planning (ERP). Therefore due to existing infrastructures, it may be difficult for organizations to easily switch entire platforms from on-premise to Software-as-a-Service. However, this may not deter organizations from using multiple systems that combine deployment approaches.

Figure 9: Supplier Lifecycle Management Deployment


For instance, Figure 9 shows that there are a handful of options in how to deploy supplier lifecycle management. Areas of deployment where organizations are focused on behind-the-firewall may be those where data security is of higher concern such as vendor or supplier data. Based on the graph, it also appears that majority of solutions currently implemented by both the Best-in-Class and all others are behind-the-firewall/on-premise. However, nearly one-in-five implementations for Best-in-Class are SaaS. Best-in-Class also demonstrate a slightly higher deployment of applications hosted by a third party. What is insightful, however, is that Best-in-Class are 81% more likely to implement using a SaaS platform for a supplier lifecycle management. Furthermore, it is clear that all others are 8-times more likely to be using homegrown systems than Best-in-Class.

70%

20%15%

5%

52%

11% 12%

45%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Implemented on-premise / behind

the firewall

SaaS / on-demand(multi-tenant)

Application hostedby a third party

Homegrown

Best-in-Class All Others



Chapter Three: Required Actions

Whether a company is trying to move its performance in supplier lifecycle management from Laggard to Industry Average, or Industry Average to Best-in-Class, the following key actions will help spur the necessary improvements related to supplier lifecycle performance.

Laggard Steps to Success • Create customizable supplier surveys for collecting data on

suppliers - To get the most out of supplier benchmarking and performance management, Laggards need to improve in their ability to accommodate the gathering of custom information on their suppliers. As part of the wider supplier lifecycle process, creating customizable surveys assists in the process of being able to collect unique or customizable supplier attributes based on project requirements during strategic sourcing or contract management efforts. In this regard, Industry Average are 2.23 times more likely to have this capability than Laggards.

• Establish links to list products / services provided by supplier and contingency replacements - As supply chains become more global, understanding linkages to a supplier's supply chain is also becoming a more critical aspect to managing against current identified risks such as regulatory requirements, but also those that are unforeseen due to natural disasters or political/social upheaval. Laggards must improve their ability to understand contingency plans based on the intelligence being stored in their supplier lifecycle systems. Only 8% of Laggards have this capability compared to 30% of Industry Average.

• Get linked results and action items from third-party evaluations and assessments - As part of the findings in this report, it was clear that third-parties organizations and agencies are playing a much more important role in helping organizations manage their suppliers. Linking results and action items from third party evaluations and assessments helps establish an independent view supplier capabilities and risks based on recognized international standards (e.g. ISO 9000, ISO 26000, ISO 31000) that link directly to action items for supplier and/or sourcing managers for managing against regulatory pressures. Laggards need to improve their ability in this area, where the Industry average is 3.14 times more likely to have this capability.

Industry Average Steps to Success • Use real-time, role-based dashboards for tracking and

managing suppliers - As a critical part of the selection for a supplier lifecycle solution, use of analytical dashboards are becoming

Fast Facts

√ 69% of respondents stated increased supplier visibility and supplier collaboration the top benefit to implementing a dedicated supplier management platform / solution.

√ Only 16% of respondents stated that their suppliers are provided a published set of risk mitigation standards by supplier managers



the norm for any enterprise user. Given the amount of information that must be processes the ability to make it easy to identify potential issues and across time, geography and categories is essential based on the designated roles (i.e. executive dashboards, supply chain dashboards, procurement dashboard, etc.). Moreover, access to this information improves the ability to respond to or create alerts within the organizations of potential issue areas. Best-in-Class are 1.1 times more likely to be using dashboards than Industry Average.

• Identify and monitor risk related to corporate social responsibility / sustainability - Aberdeen has identified that corporate social responsibility has become an increasingly important area for many organizations due to the exposure of risk to company reputation. Again here within CSR initiatives there is an aspect where internal auditing firms or third party organizations can provide insights based on their expertise in managing against global laws and regulations that can pose additional risks when not managed properly. These risks include reputation, compliance, operational, financial markets, and labor. Best-in-Class are 1.1 times more likely to identify and monitor risk related to corporate social responsibility / sustainability than Industry Average.

• Map suppliers by geopolitical risk (e.g., country risk, location, etc.) - Similar to the aforementioned steps on dashboards, understanding geopolitical risk has become an niche unto itself that goes one step beyond just supplier management. Through the integration of data coming from third party sources (e.g. D&B), developing capability in this area helps organizations better define the regional risk of where suppliers are doing business and the potential impact of economic downturns, political events and geophysical events have on the ability to conduct commerce in certain regions. Integrated into dashboards functionality such as heat maps also provide the quick view of measuring the situation of region. Best-in-Class are 1.2 times more likely to identify and monitor risk related to corporate social responsibility / sustainability than Industry Average.

Best-in-Class Steps to Success • Connect with supplier social network company pages and

extend profiles with business credentials - As an evolving area, many are still uncertain of the impact of social networks on both public and private organizations. However, social media is becoming a form of information that provides additional insights beyond information that can be stored within the four wall of the organization or even collected by third party organizations. Due to its organic nature, technology providers are increasingly incorporating the use of social media and/or social networking as a part of their platforms. In this regard, to stay on top of the game



Best-in-Class organizations should look to embrace the use of social media based information by connecting to social network company pages (i.e. Linkedin, Facebook, Google Plus, Twitter) to extend supplier profiles and add another means to understanding a supplier. Today less than a quarter of Best-in-Class organizations state having this capability.

• Increase the use mobile applications (e.g., iPad, smartphones, tablets) for monitoring / reporting on supplier information Based on global consumer access to recognized consumer storefronts (i.e. Amazon) and search engines (i.e. Google) combined with the dissemination of smart phones and tablets, end-users of enterprise technology are increasingly expecting these same elements at the workplace. Moreover as means of mitigating risk and improving performance, easy access to supplier dashboards through mobile applications provides supplier managers and executives the ability to quickly react to or be instantly informed of events related to wider supplier lifecycle management efforts. Today only 20% of Best-in-Class organizations state having implemented mobile application capabilities.

Aberdeen Insights — Summary

Due to heightened business challenges from globalization and the ongoing economic instability in places like the Eurozone, a unique opportunity exists for organizations of all sizes to adopt and implement new processes that can transform supplier management efforts. Where traditionally supplier management approaches may have been based on disparate processes, establishing a deeper understanding into the dynamics of the entire "supplier lifecycle" requires a multi-tiered approach that includes the collection supplier information, on-boarding of suppliers, benchmarking of performance, and risk mitigation - all foundational elements to implementing a successful supplier program.

Based on Aberdeen research it is clear that lack of consistent supplier lifecycle management strategy for collectively storing and organizing supplier data is preventing organizations from obtaining that holistic view of their suppliers and driving the key pressures such as lack of insight into supplier performance and an incomplete understanding of suppliers.

To improve on the overall process of supplier lifecycle management, organizations must look at the supplier lifecycle frameworks and assess how current system are being integrated which includes the phase out of older home-grown systems and integration of new ones should consider newer frameworks like SaaS. Moreover, the adoption of newer platform technologies through increased use of social media and use of data from third party organizations is helping organizations establish the 360 degree view that is essential during turbulent and unpredictable times.



Appendix A: Research Methodology

In June 2012, Aberdeen examined the use, the experiences, and the intentions of more than 130 using supplier lifecycle management solutions. Aberdeen supplemented this online survey effort with telephone interviews with select survey respondents, gathering additional information on supplier management strategies, experiences, and results.

Responding enterprises included the following:

• Job title: The research sample included respondents with the following job titles: CEO / President (3%); CIO (1%); EVP / SVP / VP (6%); General Manager/Managing Director (2%); Vice President (7%); Director (28%); Manager (39%); Staff (3%); Consultant (8%); Student (1%); and Other (2%).

• Department / function: The research sample included respondents from the following departments or functions: procurement/purchasing (50%), logistics/supply chain (14%); operations (6%); information technology (6%); corporate management (5%); finance (4%); quality management (3%); %) other (5%).

• Industry: The research sample included respondents from a variety of industries with no industry that was dominant. Some of those represented with at least 5% response included Aerospace, Automotive, Chemicals, Consumer Packaged Goods, Financial Services, IT Consulting, Oil & Gas, Pharmaceutical, and Retail.

• Geography: The majority of respondents (52%) were from North America. Majority of remaining respondents were from the Asia-Pacific region (12%) and Europe (27%).

• Company size: Twenty-three percent (15%) of respondents were very large enterprises (annual revenues above US $10 billion); 26% were from large enterprises ($1 billion - $10 billion); (34%) midsize enterprises (annual revenues between $50 million and $1 billion); and 25% of respondents were from small businesses (annual revenues of $50 million or less).

• Headcount: Twenty-three percent (59%) of respondents were from large enterprises (headcount greater than 1,000 employees); 24% were from midsize enterprises (headcount between 101 and 999 employees); and 17% of respondents were from small businesses (headcount between 1 and 100 employees).

Lack of measurement and low buy-in from senior management makes it difficult to operate SPM systems and seek out the potential major benefits and cost savings. There is a reluctance to budget for "proper" systems, even when RoI is demonstrably significant.

~ Managing Consultant/ Director

UK-Based Consultancy

Study Focus

Responding executives completed an online survey that included questions designed to determine the following:

√ The evolution of supplier lifecycle management and increasing importance within the context of emerging areas

√ The structure and effectiveness of supplier management deployments

√ Current and planned use of supplier management functions and technology

The study aimed to identify current state of supplier lifecycle management as well as discuss emerging best practices for readers to understand and apply within their supplier management initiatives.



Table 4: The PACE Framework Key

Overview Aberdeen applies a methodology to benchmark research that evaluates the business pressures, actions, capabilities, and enablers (PACE) that indicate corporate behavior in specific business processes. These terms are defined as follows: Pressures — external forces that impact an organization’s market position, competitiveness, or business operations (e.g., economic, political and regulatory, technology, changing customer preferences, competitive) Actions — the strategic approaches that an organization takes in response to industry pressures (e.g., align the corporate business model to leverage industry opportunities, such as product / service strategy, target markets, financial strategy, go-to-market, and sales strategy) Capabilities — the business process competencies required to execute corporate strategy (e.g., skilled people, brand, market positioning, viable products / services, ecosystem partners, financing) Enablers — the key functionality of technology solutions required to support the organization’s enabling business practices (e.g., development platform, applications, network connectivity, user interface, training and support, partner interfaces, data cleansing, and management)


Table 5: The Competitive Framework Key

Overview

The Aberdeen Competitive Framework defines enterprises as falling into one of the following three levels of practices and performance: Best-in-Class (20%) — Practices that are the best currently being employed and are significantly superior to the Industry Average, and result in the top industry performance. Industry Average (50%) — Practices that represent the average or norm, and result in average industry performance. Laggards (30%) — Practices that are significantly behind the average of the industry, and result in below average performance.

In the following categories: Process — What is the scope of process standardization? What is the efficiency and effectiveness of this process? Organization — How is your company currently organized to manage and optimize this particular process? Knowledge — What visibility do you have into key data and intelligence required to manage this process? Technology — What level of automation have you used to support this process? How is this automation integrated and aligned? Performance — What do you measure? How frequently? What’s your actual performance?


Table 6: The Relationship Between PACE and the Competitive Framework

PACE and the Competitive Framework – How They Interact Aberdeen research indicates that companies that identify the most influential pressures and take the most transformational and effective actions are most likely to achieve superior performance. The level of competitive performance that a company achieves is strongly determined by the PACE choices that they make and how well they execute those decisions.




Appendix B: Related Aberdeen Research

Related Aberdeen research that forms a companion or reference to this report includes:

• Advanced Sourcing: Maximizing Savings Identification; June 2012

• Supplier Networks v2.0 - A Look at Commerce in the Cloud; April 2012

• Dynamic Procurement: The CPO as Collaborator, Innovator and Strategist; August 2011

• Supplier Networks: Moving Beyond the Traditions of E-procurement.; June 2011

• B2B Integration and Collaboration: Strategies for Building a ROI Business Case; June 2011

• The Year of the Supplier: Perspectives on Supplier Management in 2011; May 2011

• The State of Strategic Sourcing; April 2011

• Effective eProcurement: Assessing Options for the New "Economic Normal"; November 2010

• Strategic Sourcing: The 2010 Guide to Driving Savings and Procurement Performance; March 2010

• Global Payments: Maximizing Cashflow with Electronic Payments and Process Automation; May 2010

Information on these and any other Aberdeen publications can be found at www.aberdeen.com.

Author: Constantine G. Limberakis, Senior Research Analyst, Global Supply Management, ([email protected])

For more than two decades, Aberdeen's research has been helping corporations worldwide become Best-in-Class. Having benchmarked the performance of more than 644,000 companies, Aberdeen is uniquely positioned to provide organizations with the facts that matter — the facts that enable companies to get ahead and drive results. That's why our research is relied on by more than 2.5 million readers in over 40 countries, 90% of the Fortune 1,000, and 93% of the Technology 500.

As a Harte-Hanks Company, Aberdeen’s research provides insight and analysis to the Harte-Hanks community of local, regional, national and international marketing executives. Combined, we help our customers leverage the power of insight to deliver innovative multichannel marketing programs that drive business-changing results. For additional information, visit Aberdeen http://www.aberdeen.com or call (617) 854-5200, or to learn more about Harte-Hanks, call (800) 456-9748 or go to http://www.harte-hanks.com.

This document is the result of primary research performed by Aberdeen Group. Aberdeen Group's methodologies provide for objective fact-based research and represent the best analysis available at the time of publication. Unless otherwise noted, the entire contents of this publication are copyrighted by Aberdeen Group, Inc. and may not be reproduced, distributed, archived, or transmitted in any form or by any means without prior written consent by Aberdeen Group, Inc. (2012a)

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