Business Intelligence and a strong supply base

[Ari Korpinen]

Procurement professionals are expected to select suppliers that provide best value-for-money for the company they work for. Implementing some solid Business Intelligence (BI) methods in the supplier selection process is one way of securing best value-for-money and reducing the risk of supplier failure. The realities of the ongoing financial crisis - with an increasing amount of supplier bankruptcies as one of its effects - drives home the point that Procurement departments should increase their focus on the financial and commercial health of their supplier candidates and suppliers. That is not to say that such focus should be neglected in a growing economy either. Furthermore, BI should be used also after the contract has been awarded to monitor the supplier's performance. BI methods can here provide early warning signals on potential upcoming difficulties with a selected supplier.

The main purpose of applying BI methods in procurement is to avoid the pain of supply disruption caused by financial difficulties of a supplier. Another purpose is to guesstimate the likelihood of a supplier invoking during the contract term a price adjustment clause that is negotiated into the supplier contract. A financially and commercially strong supplier is less likely to invoke such a clause than a weak supplier would. The focus of the analysis should therefore be any financial and/or commercial indicators of falling revenue or increasing cost in the short-term in the supplier company that could potentially lead to supply disruptions or price increases.

BI has a lot to offer for the Procurement professional prior to supplier selection; e.g. in analyzing a supplier candidates's cost structure in order to validate claims made in tenders, or in preparing for negotiations (e.g.developing question-sets for supplier candidates based on signals received during the pre-negotiation due diligence). BI methods can also be used to obtain an understanding of the drivers of the supplier candidate's business. Such analysis can then be used as input in investigating how the external environment affects each of the drivers in a way that affects the supplier's costs and revenue which are channelled to the offered price. In those supply categories that have the highest impact on the corporate bottom line, the supplier analysis should also be future-oriented; e.g. focusing on finding answers to questions such as the following: (i.) Is the supplier candidate engaging today in actions that enables it to manage change that follows from the driving forces that shape the industry?, (ii.) Is the supplier candidate diverting enough resources to capitalize on its critical success factors?, or (iii.) Is the supplier candidate's current / intended business strategy or planned project sustainable given the supplier's financial realities? And, in the most important supply categories the pre-qualification should go beyond the supplier candidate itself, to include also the supplier's main customers and main suppliers. To summarize, the investigation should focus on anything that is relevant to the revenue and cost levels of the supplier.

In terms of integrating the Business Intelligence function into a Procurement organization, I believe that a best-in-class approach is to maintain a roster of commercially and financially viable suppliers (i.e. such that have undergone a recent pre-qualification by the Procurement team) that could potentially be used as replacements for an incumbent supplier if one needs to be replaced quickly.

Does any of you members on this Forum have experience from using BI in Procurement? I'm not sure whether there are full-time Procurement professionals on this forum besides me, but maybe there are some full-time BI consultants who have done consultancy assignments for a Procurement operation client. Or maybe you have some thoughts about this topic nevertheless. If so, I would be interested to share some thoughts on using BI in Procurement. What methods have you used? In what stages of the Procurement process have you used them? Do you have experience of sharing with other functions of the company any information obtained from suppliers during the sourcing process?

It would be interesting to hear your thoughts on this topic.

All the best,
Ari