Three Tips: How to Optimize Cooperation with Your Class C Suppliers

10.09.2020

Topic: Procurement | Digitalization | Supplier Portal

Many purchasing departments already categorize their suppliers according to their strategic relevance, to make sure they are supported appropriately. Suppliers are divided into categories and prioritized according to criteria such as purchasing volume, number of orders, strategic importance, etc. — the commonly used ABC supplier analysis.

This type of classification entails standard values. The Pareto principle is most likely the best-known rule when it comes to spend analysis. When applied to purchasing, the ratio 20% of suppliers would account for 80% of total company spend. This is just a rule of thumb, however — exact distribution will naturally differ from company to company, as it depends on numerous factors such as industry, market environment, business model, etc. Purchasing volume may be more evenly distributed, and the differentiation may be even more pronounced.

Whichever way it works out, in every company there is a small group of top suppliers (Class A), a certain midfield (Class B) — and a large group of Class C suppliers. The Class C suppliers are defined as those with whom you place an order only irregularly or possibly only once.

Efficient management of Class C suppliers holds high potential

Not surprisingly, the list of "long-tail suppliers" for any given company is generally of some length numerically speaking. In addition, transacting with these seldom-used suppliers likewise tends to generate a disproportionate amount of effort per order. It starts with the need to set up supplier master data to be stored in the ERP system, an action which must occur simply as a prerequisite for any payment to the supplier, regardless of how many business transactions are to follow. It's a simple calculation: The lower the number of invoices per supplier, the higher the transactional cost per invoice in terms of effort spent. Therefore, the cost per invoice for a Class C supplier will obviously be significant compared to one from a supplier who sends invoices on a regular basis. Another source of extra effort, also related to the onboarding of suppliers, is the queries that are concentrated around the beginning of a business relationship. Once a few orders and invoices have been exchanged and the supplier relationship has been established, the need for clarification usually goes down to zero.

As described above, Class C suppliers are large in number, and effort per order transaction is disproportionately high. This makes them ideal candidates for standardization and automatization when looking to bring ease and cost-efficiency into supplier relationships. In other words, the key to more efficiency in supplier relations is digitalization. We have identified three important approaches for optimizing supplier relationship management. Here they are:

1. Standardize onboarding

The creation of a new supplier in your ERP system always involves a certain amount of effort. If you want to keep it to a minimum, the necessary information must be available: complete, if possible in a uniform format, and preferably directly in digital form. A web platform where suppliers can make their data available digitally on their own is ideal for assuring proper data availability: With forms standardizing information, mandatory fields ensuring completeness, your master data is created with minimal effort. Ideally, only one click on your part will be required for approval, with the rest running automatically.

2. Centralize communication

Interactions with one-time and occasional suppliers tend to be accompanied by a relatively large number of queries, both from the supplier and from yourself — queries which may, in numerous cases, demand more effort and time than any other single factor in the purchasing process. And the process can be further complicated if the information you have exchanged with the supplier while engaging in this communication is not centrally available or accessible to all parties involved.

A simple solution to such inefficiencies in communication can be a digital purchase file, which summarizes and displays all procurement-relevant information for purchasing, accounting and the requesting departments at your company. Another, possibly supplemental approach might be a portal solution, which bundles all communication with the suppliers and already runs 100% digitally.

3. Digitalize document exchange

In recent years, several studies have looked at the potential savings to be made by using electronic invoices rather than paper ones. Results vary according to whether the invoice is being received or sent, whether it is merely in a digital format or machine-readable on top, and whether accompanying processes are optimized as well. However, in all studies, significant potential for savings — between 30% and 80% — has been established as realistic.

Nor does this come as a surprise: If documents have already been received digitally, no further digitization step is necessary; and if the data is already available in a machine-readable format, you can also skip the step of entering or extracting data.

So, if you're seeking optimization in your operations, it makes lots of sense to give your suppliers the opportunity to hand over documents to you digitally in the P2P process. The simplest implementation is a dedicated e-mail box for incoming invoices. You may also want to standardize the upstream steps of purchase order, order confirmation, and shipping notification on the digital level, in which case it would be advisable to offer a web portal for your suppliers.

These three steps — standardization of onboarding, centralization of communication, and digitization of document exchange — are important building blocks to making cooperation with suppliers more efficient. They benefit both you and your suppliers. With faster processing, suppliers can be paid faster. At the same time, standardizing how you handle your Class C suppliers will relieve you in your everyday work so you can focus more on your strategically important Class A suppliers.