How to avoid supplier defaults?

When COVID ravaged businesses last year, many suppliers decided to take on jobs at marginal cost, just to keep the ‘fires burning’.?With demand rising back robustly this year, this strategy seems to be backfiring, as suppliers are stretched to deliver, and hence are prioritizing the new profitable contracts over the older marginal-cost contracts.?This has led to many supplier defaults, and worse still – low quality delivery, especially in construction and related service sectors.

The current situation raises an age-old question: How far do you push suppliers on price, without risking their ability to deliver? And how do procurement KPIs support the right actions?

Here are 4 pointers on pre-empting and managing for supplier defaults, in times of massive disruption:

1. Hone your should-costing expertise:

Every buyer needs to be aware of the true cost of the solution provided by the bidder. This helps buyers assess if a certain supplier is merely bidding aggressively – but within limits, or bidding out of desperation and getting into negative margin territory. ?Simple and easy-to-update ‘should-cost models’ are a great investment for this purpose.

2. Invest in deep supplier relationships:

Good quality supplier relationships are increasingly becoming indispensable.?Buyers need to have a robust understanding of the industry, and a good relationship with the leadership and sales organizations of supplier entities. ?Top quartile buyers, also know the operations leadership of long-term suppliers. ?Such relationships help to better gauge the true situation at a supplier, and can help inform the choice of supplier and sourcing strategy.

3. Deploy category-appropriate supplier evaluation frameworks:

For critical projects, with a high bar on technical competence, it is best practice to stick to a 70:30 or an 80:20 split on technical vs commercial evaluation, so as to ensure that a high quality vendor is chosen.?Going with a 2-step approach of technical qualification followed by ‘L1’ is fraught with risk as no two technically qualified vendors are really the same.

4. Invest in deep(er) relationships with internal customers:

Very often, negative margin contracts are awarded because procurement teams have operated in a savings-oriented mindset, while the internal customers may have a nuanced perspective on supplier capabilities and motivations.?In such cases, more than ever, it is critical to keep communication channels open, discuss more than required so as to arrive at the right sourcing outcome.

In times of disruption, ensuring supplier viability could be a huge driver in protecting and increasing the resilience of your supply chains – and therefore requires immediate action.