Supplier Due Diligence - Some thoughts....

One of the most important steps of Strategic Procurement to be understood by practitioners is to have a basic knowledge of assessing prospective vendor’s credentials. Over the years, I have experienced that while purchasing/procurement folks are good at & find it comfortable to negotiate on pricing part (more on that in another post later on), they avoid wading the other waters (partly because there’s no number gratification here and partly because the bandwidth of top management is on revenues granularity). Ideally this step should be after RFI (later on that) and techno commercial shortlisting process. Some functional tips on DD which can enhance sharpness of understanding a prospect supplier’s future can be:

A.     Observe Operations – Do make it a point to visit a facility (plant, packaging unit, delivery centre etc.) alongwith a Procurement Governance/vendor management and/or business user with a guiding template on what all to ask/observe. Exchange notes later on and have a rating number recorded by applying suitable weightage.

B.     Connect Customers – Request a couple of supplier’s customers (preferably in your line of business and actual users ) to give you an opportunity to meet them at the place where service gets delivered . Follow the process as at A. and do note what else the customer would have liked more/better to be delivered. Also get a check on customer’s vs yours KPIs for the underlying purpose of service being rendered.

C.     Familiarize Finance – Make your team aware of importance of being financially literate. Unless one understands how to read & analyse ratios related to Efficiency (inventory turnover, AR turnover), Financial strength ( current, quick, debt-equity), Profitability (ROE,ROCE,ROA) etc., one can’t take a judicious call on short to long term risk assessment of prospect. Putting a number on an agreed rating scale is as important as understanding that cold ratios have to be seen in light of real business strategies e.g. company A having growth orientation vs company B’s value & profitability play. This moderation to normalise ratios for arriving at final ‘Financial strength’ can be done by a senior resource within Procurement or take help of an internal management accountant.

D.      Compatibility calibration – An often ignored aspect is to understand that for a long term relationship the vendor has be in sync with your org’s people, process, systems etc. A culturally mis-aligned vendor is like a wrong recruitment – technically qualified & experienced but pulling you down all the time. DD process can act as both awareness of same & knowing the willingness As an example- it is mandatory in my company for each vendor to get delivery of goods/services certified from user and it has to be a part of invoice submission to AP. This is all on a world class P2P system but for one vendors this became too big an ask to comply to. Procurement folk, being aware of their internal environment are best placed to take a call on this critical aspect.

One has to be aware that a category specific approach in a DD process makes the outcome more relevant. A one size fit all approach is detrimental in an indirect procurement scenario because of wide variance between the size of vendors, type of services being availed , your internal business user vendor management maturity etc. If one is dealing with both tactical & strategic spends, this is the reality of most procurement orgs.

At some point of time , the destination should be to arrive at a Balanced scorecard laying out organization spend SWOT landscape. Will keep on sharing my thoughts and looking forward to feedback!!