Your supply base AVL (Approved Vendors List) is one of the most important assets in your supply chain and should be reviewed frequently, if not daily, especially before you add new suppliers.
Be sure you have an ongoing, good understanding of your current supply chain base while keeping in mind its also necessary to remove unnecessary suppliers from your AVL every once in a while.
From your AVL, you can retrieve the following information, including, but not limited to:
- Companies you cooperate with as suppliers
- Identify products / services your company needs from these vendors and determine weightings for each item. This may also surface variations in what your internal client (purchase request initiator) requested at the beginning of the year v. what they actually needed. Leverage this information for better forecasting and also to improve communications with your internal clients to help improvement alignment of their ‘actual’ needs.
- Determining your spending allocation among suppliers, and commodities
- Reveal opportunities to consolidate and improve negotiation leverage with your suppliers
- Identify active players in industry and theirs vicissitudes.
Regarding vicissitudes, you may see that some currently listed suppliers in your AVL actually disappeared years ago or, their ranking in your AVL needs to be revised lower.
If you talk to these suppliers, you may come to understand the supplier(s) actually was beaten by their competitor(s) and has either withdrawn from the market altogether, or this supplier has stopped distribution services and has turned, to researching and developing their own (branded) products for another market.
Understanding these vicissitudes enables you to see how some suppliers have developed along their own company path-of-evolution along with their strategy, which may deviate from, or come closer to, your needs.
At first glance, your AVL is a list of suppliers with company names or abbreviations. Work to pull out more information from each supplier to facilitate adequate vendor review and analysis. Critical features of a supplier you should pay close attention includes, but is not limited to:
- Segmentation: Global / Regional / Local, Core / Emerging / Niche
- Industry, and commodity / brand specialty
- Your degree of spending / saving with this supplier
- Important general contractual terms (e.g., payment terms)
- Agreements, projects and other features related to your organization’s key operations and materials performance indicators
Step 1: Sort your suppliers by segmentation
How many global suppliers do you have? How about local suppliers? Do you have emerging suppliers? If you fail to look at your AVL from a supplier segmentation perspective you may never be able to determine potential bottlenecks in your supply chain that could restrict, even prevent, your company’s geo expansion goals.
If you have no global suppliers, or only a few (perhaps knowing your local suppliers in different countries or regions may sell the same product to your branches in these different locations), you may consider locating a global supplier with the bandwidth to provide you the same products in all countries where you have need requirements to fulfill.
In the case of the latter above, you can save effort managing your supplier and find yourself in a better position to negotiate better pricing and terms.
Step 2: Sort your suppliers by industry, commodity / brand specialty
Once your AVL is sorted, you can see which end-market / industry, commodities or brands where you have the most requirements and suppliers. In doing so, think about how you can consolidate to leverage your purchasing power and your purchase order management, as well as create some competition among suppliers.
You might invite all suppliers in the RFQ at the beginning of the year for considerations but following evaluations you award one year’s of business to only one of them. You then review these results with this supplier at the year’s end to see whether you need to introduce competition again for the subsequent year’s supplier program. (See also: Why your manufacturing proposal for military / defense electronics got rejected)
Step 3: Determine annual spend per supplier as percent contribution to that supplier’s total revenues
What is the percentage of your spending divided by this supplier’s main business revenue? Your supplier knows this for sure and you should as well.
A supplier with a large portion of its revenue from your company will be more willing to cooperate with you and offer the best terms and price. Meanwhile, a supplier deriving only a small portion of its revenues from your company should also not be considered un-important. (See also: 7 China purchasing, supplier mistakes to avoid)
You can proceed to investigate more on the latter supplier’s capabilities and its major customers to see how you can cooperate more closely with this type of supplier in the future.
Step 4: Rank suppliers by percent savings
What is the percentage of your savings divided by your spend with a supplier? Evaluate the reasons why a supplier has a higher savings percentage while others have smaller spend percentages Then, transfer some of your best practices with some suppliers to other suppliers.
Step 5: Review supplier agreements, projects, terms
Are suppliers in the same commodity / brand offering different terms to you? If yes, determine why and address improvement opportunities with suppliers offering worse or, less-than-desired, terms.
Or, perhaps you should not see discrepancies in supplier terms whatsoever, since your strategy is to use one supplier for all purchases of a particular brand.
You can identify and isolate issues with your procurement strategy and execution by reviewing your AVL. Numbers and facts will talk to you. (See also: OEM Supply chain and contractual strategies to reduce EMS provider pricing and sourcing costs)
By following these five steps, and with some persistence, you can find out what you are not doing well and then implement measures to improve your supply chain. Often times, with immediate results.