Optimising diversity of supply base in our new normal

In my article “How to create social value in communities living with Covid-19” I proposed that companies and organisations should be optimising diversity of supply chains.

This is not a new concept - there’s now a CIPS Excellence in Procurement award for ‘best initiative to build a diverse supply base’ – but it’s one whose time appears, finally, to have come. 

That’s because, from the earliest days of the current pandemic, business has recognised that our reliance on global, just in time and lowest cost supply chains has been associated with a loss of resilience. Smart professionals are readjusting. They are strengthening their supply chains by diversifying the location, type and size of vendors and ceasing to rely on single sources of supply.

Diversification of supply base typically requires both the re-engineering of process and procedures and culture change. How can this be achieved?

“If you always do what you’ve always done, you’ll always get what you’ve always got.” Henry Ford

1.      Engage outside current networks

We won’t achieve supply chain diversity of we continue to send RFQs (requests for quotations) and ITTs (invitations to tender) to the same communities of companies, and in the same format, time after time.

Allow potential vendors to identify themselves to you, by providing an email address for the procurement team, or the type of free registration process typically used by companies with well embedded supplier diversity programmes e.g. RBC , Costain , Pfizer

Undertake pre-market engagement. This means researching and reaching out to a wide pool of potential vendors - those you already know and some you don’t – and seeking their views (e.g. via a questionnaire or consultation event) on how best a service, or similar, might be delivered, then applying learning to generate a competitive tendering process. Don’t rely just on peer recommendations for vendors because those peers are likely to be fishing from the same limited pool of supply as you.

This represents a step-change on from the common approach of asking current vendors to validate an approach that the procurer has already defined. It has four key benefits. First, a fuller risk profile can be achieved; second, the likely number of bidders can be assessed and adjustments made (e.g. via lots) to optimise competition; third, involving vendors meaningfully in pre-market encourages them to take part in the subsequent competition. These three benefits combine to create the fourth; risk of low appetite for high value contracts (particularly public sector ones) can be mitigated.

Publicly advertise contract opportunities. UK government requires procurers to use Contract Finder to help achieve free and fair competition. The experience of large infrastructure projects is that using CompeteFor or similar enables identification of great new vendors, particularly at tiers 2 and 3 of supply chains. Yes, this adds time and workload to a procurement process but that can be recouped in keener pricing, innovation and higher performance. Littlewood Fencing, for example, has benefited from this approach.

Develop potential suppliers. Collaborative supplier development initiatives such as Supply Chain Sustainability School, the Scottish Supplier Development Programme and East London Business Place evidence how a relatively small amount of practical support can help multiple small and medium enterprises (SMEs) become ‘fit to compete’, thus creating a wider pool of potential supply for buyers and contributing to market making, as advocated in UK government market management guidance.

Working with supplier development initiatives is particularly helpful where the target market is inexperienced in bidding for specific types of contract. For benefits to be fully realised, joint activity (e.g. workshops, webinars) should be underway well ahead of formal competition opening. For that to happen, functional teams need to involve procurement and commercial professionals in their projects from project initiation. Sadly, this early joint working often does not happen, and opportunities missed at pre-market and market development stage result in sub-optimal tender outcomes.

Regardless of what supplier development work does or does not occur before the competition, at the end of processes procurement professionals should provide feedback to unsuccessful bidders. This is vital to potential vendors being able to present themselves more effectively, next time.

2.      Lean processes

Save potential vendors time and make them more likely to respond to RFQs and ITTs by keeping the procurement process lean. This principal is becoming ever more important as open procedures become commonplace and potential vendors question their chance of success versus the effort they must put in.

Use an accessible common supplier questionnaire (SQ). Documents such as Crown Commercial Service’s Standard Selection Questionnaire and PAS 91 enable potential vendors to compete for contracts more easily and encourage them to do so. 

But when potential vendors are charged to use an SQ, many simply won’t.

For example, a large contractor I worked with on a major central London development was surprised at the relatively low percentage of suppliers and contractors who were SMEs. A summer work placement student researched the local SME market, identified those who appeared potential vendors and surveyed them. Almost none were part of the commercial assessment standard that was (at that time) a requirement to be part of the development. SMEs were resistant to joining it because of the cost and lack of confidence in being fairly considered for contracts, even if they were to pay and join. The contractor found alternative ways to manage vendor risk and, with the agreement of their client, dropped the requirement for vendors to be part of the standard. The percentage of SME suppliers and contractors to the development increased significantly.

To encourage diversity of supply, buying organisations should shoulder the cost of pre-qualification rather than pass it on to potential vendors. 

State requirements clearly (after considering market implications). List required deliverables and outcomes. Stipulate ‘inputs’ or how deliverables are to be created only when necessary (e.g. to comply with regulation or a named company policy). Write succinctly and in plain English. Avoid jargon, explain abbreviations and provide all the information needed to price. Get a third party who is new to the process to review documents for clarity before issuing them.

Too many RFQs and ITTs issued are currently incomprehensible to anyone other than the current vendor. They sometimes demand experience that is specific, and therefore biased towards, the incumbent provider.

Ask questions that manage risk and optimise opportunity. Our risk matrices should reflect material issues. We can then ask one question about how each inherent key risk and opportunity will be managed, mitigated or optimised during contract delivery. This helps potential suppliers (and us) focus effort on what matters most.

Covid-19 is catalysing the updating of risk matrices. Who included ‘infectious disease’ in one twelve months ago? It featured fleetingly in January in the World Economic Forum’s top 10 risks facing the world in 2020. It’s time to take all other risks highlighted by WEF seriously.

Forward thinking buyers (e.g. at Skanska ) recognise that addressing issues such as diversity, ethics, responsibility and sustainable procurement in their procurement and supply management helps manage risk at strategic, category and contract levels. This approach has been accompanied by a diversification of supply base - 63% of total spend is with SMEs.

Beware system biases in digitalisation. Algorithms cannot duplicate the nuances of a human mind (Robert Elliott Smith writes eloquently about why). Certain automation may result in human biases being removed from processes, but algorithms have biases baked-in based on the data and minds that were used to create them. A Digitalisation World article and OECD blog flag-up concerns. As we digitalise, we must be alert for evidence of biases against particular vendor groups and be ready to address them. We can’t rely on the people or companies who created the systems to do so.

3.      Use an appropriate balanced scorecard

Almost all procurers use some variation on a balanced scorecard, but some don’t use it appropriately or fairly.

Be honest about value versus price. A major gripe of many fantastic SMEs is that buyers claim to use a balanced scorecard when they are really seeking lowest price. If that is the case – and for some public authorities with very tight budgets it might be – let’s be explicit about it, for example by weighting price highly and using ‘pass’ or ‘fail’ thresholds for certain non-financial criteria.

Be aware how using a 50% price : 50% quality ratio almost certainly results in a skew towards lowest price, because bidders are rarely given full marks across the board for quality. 

Beware manipulation after scoring. A procurer might apply conscious or unconscious biases to a completed scorecard and be tempted to manipulate weightings or process so that the supplier they expected or wanted to come out on top is awarded the contract. This is counter to good practice and to achieving diversity of supply, but it does happen …

4.      Manage supply performance

Move towards collaboration. A common attitude among the thousands of SMEs I’ve worked with over the last decade or so is how they prefer to work with clients with whom they have a professional, open and trusting relationship, because it enables them to do a better job. They typically perceive that supply chain managers are more comfortable talking with large companies than them. Public sector clients might not be comfortable engaging at all, assuming the private sector will try to take advantage of them. These are poor foundations for doing business.

Consider what happens when one of those vendors has a good idea for value engineering. Which client will they discuss it with first? The client with who manages their contract on a relatively transactional basis, the one who operates supplier relationship management or the one with whom they have a collaborative partnership? Almost certainly the latter because it’s a client they trust. The relationship will already involve sharing objectives, data and information. And it’s that client who stands to gain competitive advantage from the vendor’s idea.

Facilitate hard and soft reporting. It’s great that supply chain managers and vendors are increasingly driving continuous improvement by sharing data and evidence-based performance scoring frameworks, of which Network Rail’s PRISM tool is an example. Diverse vendors might, though, need time and support to understand reporting requirements and to put new processes in place to address them in a way that large companies might not. 

5.      Develop a culture of inclusion and diversity in our teams

It’s notable that, for the CIPS Excellence in Procurement awards 2020, no nominees have been announced in advance for the category ‘outstanding diversity and inclusion practices in procurement teams’. These are issues that procurement and supply have yet to fully embrace.

Recognise the value offered by a diverse supply base. CIPS recognises that diversity of supply base unlocks innovation, drives competitiveness and enhances reputation. In the UK, the activity of ‘supplier diversity’ or ‘inclusive procurement’ typically means levelling the procurement playing field for SMEs (as promoted by UK government and organisations such as FSB, social enterprises, (as advocated by Social Enterprise UK , women-owned business (advocated by WEConnect, ethnic minority businesses (as advocated by MSDUK and/or ‘local’ supply, where the geographical region is defined according to the contract or project.

Reliance on a supply base of large companies means reliance on just 0.3% of UK VAT or PAYE registered companies. What fantastic vendors and collaborators might we be missing out on?

Our potential UK supply base

In 2019 2.6 million private sector businesses were registered for VAT or PAYE. 98.3% were small sized (less than 50 employees), 1.4% (35,600) were medium sized (with 50 to 249 employees) and just 0.3% (7,700) were large (with 250 or more employees). SMEs accounted for three fifths of the employment and around half of turnover in the UK private sector.

Of all the above, around 99,000 were social enterprises

17% of SME employers were led by women

In 2018, 5.4% of UK small and medium enterprise (SME) employers were led by a majority of people from an ethnic minority (excluding white minorities).

Optimise diversity and inclusion in our own teams. People prefer others who are similar to themselves. These instinctive preferences can play out as biases (conscious or unconscious) in decision-making and lack of trust in relationships, both of which are obstacles to diversifying a supply chain.

The solution is two-fold; to develop both inclusive attitudes and diversity of background and experience within teams.

Diversity, in itself, brings business benefit. McKinsey identify how, in 2017, companies in the top quartile for gender diversity on their executive teams were 21 percent more likely to experience above-average profitability than companies in the fourth quartile. For ethnic and cultural diversity, there was a 33 percent likelihood of outperformance on earnings before interest and tax (EBIT) margin. McKinsey hypothesise that what drives this correlation is that more diverse companies are better able to attract top talent; to improve their customer orientation, employee satisfaction, and decision making; and to secure their license to operate. It’s not beyond the realms of possibility that these organisation-wide principles are applicable to teams.

At present, the supply chain profession is largely white male and lacking in ethnic and gender diversity. Only 28% of professionals are female and purchasing is among the ten least ethnically diverse occupations in the UK.

I am not suggesting that white blokes should be kicked out of jobs - and I write that explicitly because some readers will assume that I am. Rather, diversity statistics indicate barriers to people from diverse backgrounds entering and staying in our teams. We can all take action to become more inclusive in out approaches to attracting and recruiting talent, and how people are managed and promoted. This will, ultimately, make workplaces happier and more productive for everyone.  

In conclusion, much of what needs to be done to rebuild our supply chains in the ‘new normal’ is very different to our old business as usual. It’s therefore challenging. But our profession is a canny one. We can do it. And in so doing, we will prove both our strategic importance to our leaders and our worth to the communities among which we operate.

 Finally, a question - how are you diversifying your supply base?

Share if you like. Message me if you need help. And remember, the UK needs us to diversity our supply base now, more than ever.