To clarify, in business there are two types of supply chain management; the centralised approach and the decentralised approach.
Let’s first define each so you can understand the risks involved better.
The first is the centralised approach to sourcing and it’s the best way to manage SCM.
A centralised and often strategic approach to sourcing business supplies and services requires your head office to have a procurement team in process. If you don’t have the capital to invest in developing your own in-house team of sourcing experts, outsourcing to specialist providers would be the next best thing and will still help you cut costs.
The second approach that many smaller sized businesses take to SCM is the decentralised approach. With this, when you’re only operating from one location, you may be able to keep on top of things but the risk is still there that certain aspects could be overlooked leading to higher operational costs than you need be paying.
The decentralised approach to sourcing anything transfers power throughout the company, meaning that many staff are able to order whatever supplies they feel they need and worse still is when there is no pre-approval required before ordering. That will lead to increased invoices, leaving upper management with little influence over expenses control.
Beyond that, here are…
The Top 5 Risks of Operating with a Decentralised Sourcing Process
1. The risk of having too many suppliers
Even stationery can become cumbersome if it’s not managed. Can you imagine, or worse if you’re experiencing this already, getting your stationery from one supplier, your secretary ordering print paper and ink cartridges from another, letterheads from another supplier and business cards from somewhere else?
The costs will quickly spiral but the worst risk you’re putting your business through is the one of quality management. Everything you order needs to be consistent with your brand and that includes your printer ink, company letterheads and business cards, and all your stationery.
With too many suppliers in your business, you’ll have increased invoicing to deal with, which can lead to some being missed resulting in late payment fees and you’ll struggle to manage the quality of supplies across your firm.
Stay in control of quality and expenses by minimising your supplier base for each product or service category your business requires.
2. Surplus expenses
The less “expenses” your company has, the better you’ll be able to manage your accounts. This isn’t only about managing your finances, because it’s more about the paperwork that comes along with increased operational expenses. The more invoices you have, the more payments you need to make or cheques need issued. It can become a time intensive process just dealing with the paperwork involved in having too many suppliers, creating far too many invoices for your accounting/finance team or your accountant to deal with in a timely manner.
Even if you’re using cloud accounting to manage your financial records, the input and reconciliation of each invoice will quickly become time intensive.
3. Brand quality sacrificed
Your suppliers are business partners and need to be treated as such. A lack of control over your suppliers and you’ll be doing wrong by your customers.
The best approach to strategic sourcing in supply chain management for any business is to remember these three rules…
The first is to get a process in place for strategic sourcing, letting you manage the process efficiently.
The second rule is to have a representative work closely with partners, which often means personality matches ensuring they can work together professionally for amicable business objectives. The third is repertoire between your sourcing expert and a supplier representative ensuring long-term partnership resulting in best practices for both businesses.
When you have all three, you have a process in place that can stand the test of time and could even give your firm a competitive advantage. That’s the entire reason for taking a strategic approach to sourcing business supplies and services.
4. Too much data
Having too much data from a broad range of suppliers will make it difficult for your team to scour through it to make the best decisions moving forward.
By centralising your supplier base, your team will be better equipped to scrutinise the B2B contracts in place, and then work with suppliers to negotiate better terms, pricing or both; something that’s going to be too difficult when you lack the attention of one supplier.
Today’s supply chain management is not always about buying bulk for discount. It’s more about buying into value. The supplier to provide your business with the most value is the one that should win the contract. Suppliers know this and will work closely with you to ensure you are receiving value. Some will even go as far as investing to ensure their business is in the best position possible to streamline the supplies to your company and pretty much future-proof the contracts against potential competitors.
5. The biggest risk factor is to your optimised spending
For purchasing to be efficient across a business, it requires spending to be optimised. You cannot do that without having a centralised purchasing process in place. There needs to be formal supply chain management policies in place, approval processes that all staff understand so they can divert their needs to the appropriate named contact in your business; even if that’s a named contact acting as a liaison officer between the firm and an outsourcing procurement specialist.
Only when you have standardised approval processes for purchasing in place, and professionals to oversee the procurement process of all supplies across the entire company will you be able to mitigate the risks of operating with a decentralised procurement process.
Image courtesy of coaconsult.com.
It seems in every sector there’s always someone or some company looking to take the shortcut in bidding wars and enter into the tendering process competing on price alone.
You can’t and nor should you.
Legislation’s been in place since ’06 and it’s further reinforced in the updated 2015 Public Contract Regulations.
There’s an issue with it though…
It’s for public contracts.
Don’t you think this should apply equally to the private sector?
In a nutshell, yes it should.
Tell you why…
When you bid on a public sector contract during the tendering stage, every company is considered.
Not just on price, but you’ll certainly make your proposal stand out if it’s considered abnormally low.
What’s abnormally low?
Hard to define but the decision makers can spot it a mile out. If all bids are in the tens of thousands and there’s you with a proposal of a few grand, it’ll stick out like a sore thumb.
When it’s spotted, the bidder is contacted to explain themselves. What the Contracting Authorities are looking for during an explanation stage of a bid that’s lowballed is satisfactory evidence that you’re complying with environmental, social and labour laws.
This brings into question supply chain management.
Will you be able to provide evidence that you’re sourcing products in a sustainable way?
If you’re using overseas suppliers for your materials, do you have audits to prove there’s no slave wages being paid to employees; that the working conditions are in line with health and safety standards, and that there are no children in the workforce?
Supply chain management is a tough battlefield. It’s easy to source cheap materials from around the world, but the bottom line is you just can’t do that.
Your suppliers are your responsibility. Funding unethical businesses overseas won’t get you any public contracts.
This is why the private sector should be adopting the same principles. There’s many a thing the government do that only bring red tape and more administration, but in the case of the updated Public Procurement Policy, they’ve took a step in the right direction.
It makes sense that to eradicate the poverty in third world countries, we source while supporting developing.
The Best Procurement Policy Should Outline Supporting The Supply Chain Long-Term
When you’re sourcing products, think about how long your supplies can realistically last. That’ll give you a good idea if you’re doing it right.
Say for example you’re in the clothing sector, bulk shipping garments from overseas and selling them wholesale or even job lots on eBay.
· The staff need sufficient wages to live on
· The factory requires sufficient profit margins to source materials
· The materials providers need sufficient margins to continue their operations
There’s a further profit margin for the shipping of goods, and you’ve packaging to consider too.
It adds up to a lot of expense, but if you get it wrong, it’ll be even heftier.
Business sales contribute to quite a few businesses. Often worldwide too given the nature of how the digitised businesses operate today.
Do you think your suppliers really value your trade?
Image courtesy of masterstv.com.