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Be nice to your indirect suppliers

Internet Security Threat Report 2014

Workshop When thinking about supply chains, what usually comes to mind is the manufacturing company that sits mid-chain. Raw materials flow in from suppliers and finished goods flow out to customers.

But there is another part of the chain: indirect, or MRO (maintenance, repair and operations), supplies. These are the goods and services that do not go directly into the products the company sells but that it needs for day-to-day operations.

They might be paper cups for the staff canteen, lubricant for the machine-shop, spare parts for the fork-lift in the warehouse, stationery – the list goes on. They don’t seem as important as the components that the firm turns into finished goods but without them it wouldn’t be able to function.

When it comes to supplier management, indirect supplies are often an after-thought. After all, if you’re a company like EADS making A380 Airbus super-jumbos, securing Rolls Royce jet engines is going to take precedence over driving the best deal on bog roll.

Light bulb moment

But there’s money to be saved in these dull but worthy supplies. And if you’re the Ministry of Defence found to be paying £22 for a 65p light bulb, there’s also a lot of face to be saved.

It’s not just in manufacturing operations that this applies. At the University Hospital Birmingham (UHB) NHS Trust, each department has its own budget and the authority to place orders for the resources it uses, from catering provisions and maintenance supplies to drugs and medical equipment.

"While it is, of course, vital to ensure the uninterrupted supply of important medical items, we also need to keep watch of stocks such as detergent for the kitchens,” says Gordon Hancock, financial systems manager at UHB.

“These could easily be overlooked but are essential for smooth running and maintaining a healthy, safe environment."

Armed with a search engine, seeking out the most competitive suppliers for indirect supplies is a lot easier these days than it used to be. Buyers no longer need to trawl through business directories or conduct interviews because most of the info can be gathered in a morning’s browsing.

"Indirect supplies are often an after-thought"

The main question now is about continuity of supply: will the supplier still be around in six months? But of course, credit checks can be run online too.

Doing it online

Pretty much the whole process can be automated, although in reality a mishmash of proprietary and standard protocols bedevils most ecommerce transactions between suppliers and customers.

The ancient but ubiquitous electronic data interchange (EDI) prevails where a large customer such as a grocery supermarket dominates the supply chain.

Despite looking like a standard, EDI often appears in a different implementation at each big customer. This makes life hard for the starry-eyed small supplier that lands a gigantic contract and then realises it needs £20,000-worth of EDI integration work before it starts.

There are also the e-business XML standard, which isn’t widely adopted, and Universal Business Language, which is even rarer in this country.

Most small businesses that don’t have these might employ a developer to write a front-end around the customer’s EDI.

Having found suppliers that can offer the right price and service, it’s tempting to stick to them. So what if you can save a penny on every loo roll if you use up the time of an expensive buyer to do so?

“Business is not just about driving the cheapest price,” says Stuart Lynn, head of research and development at Sage. “It’s also about maintaining good relationships and knowing who will help you when you need to pull out all the stops.”

Hello, stranger

Buyers are advised to build a list of suppliers they can rely on in the enterprise resource planning (ERP) system, especially if their business tends to feast or famine, or suddenly needs to ratchet up capacity for large manufacture-to-order jobs.

“You need a number of known suppliers who can deliver on time so you don’t have to resort to strangers,” says Lynn. “In reality, you often find if your main supplier can’t deliver, it will offer to buy at cost to keep the relationship, so they do the sourcing work for you.”

Of course, the buying team will be bombarded with offers that undercut the preferred suppliers. Although chopping and changing to chase the best price is not a good idea, neither is allowing the relationship to become lazy.

“It’s good policy to stick with preferred suppliers for a certain period, but to review the relationship regularly,” says Lynn.

It’s important to strike the right balance with authorisation set-ups. “You might not want manual intervention on every order, but maybe you want it on all orders above a set value,” he suggests.

An advantage of automated ordering is that, once the authorisation is set up junior employees can order what they regularly need, freeing senior people to get on with what they are good at without having to sign off petty purchases.

“The responsibility for ordering is being devolved to ward clerks, making better use of senior staff's time,” says Hancock. “There’s a movement towards night staff placing the orders too, which makes use of quieter periods and optimises system resources.”

At restaurant and deli chain Carluccio’s, supplies such as stationery and cleaning products are centrally purchased from preferred suppliers, mostly by automated agreements.

“When the system is purchasing on auto, all you’re really doing with the ERP is matching goods ordered with goods received and the invoice,” says Nick Remzi, managing director of Sage partner Five Go Live, which deployed Carluccio’s systems.

The system can also be set to minimum/maximum reorder, so it doesn’t send an automated reorder until a real person has manually checked the amount being reordered.

“That provides for some human intervention to tweak orders according to consumption,” says Remzi. ®

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