Supply Excellence — Top Supply Tips: Don’t Put Yourself in the Penalty Box

Top Supply Tips: Don’t Put Yourself in the Penalty Box

August 28th, 2007 · by Tim Minahan · No Comments · best practices, supplier management, supply management

The final days of the The 100 Greatest Supply Management Tips of All Time! contest turns us to a tip that reaffirms the dangers of myopically focusing on reducing spend (i.e., what some call “spend management). The head of global sourcing at one of the world’s largest software companies offers up this lesson learned:

Don’t Penalize Yourself: Performance credits and charges (thinly veiled penalties) can be misleading. I inadvertently learned that whenever a performance charge was owed due to a missed service level, the tier-one supplier was profiting from the sub-tier suppliers. They charged the tier-two 150% of what was owed to my company. So in fact, we had built an incentive to fail into our risk/reward factors with the tier one mitigating the full risk. This, of course, isn’t a sustainable strategy in the long term. It also misaligns actions with intended performance.

The tip should stand as a warning that a narrow focus on reducing spend can have dangerous side effects. (Sort of like cutting inventories seems like a great idea until you stock out.) Every supply strategy must balance supply cost, performance, and risk. As evidenced in the above tip, focusing too much on any one of these areas often yields unintended (and negative) impacts on your supply and business performance.

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