Business Process Services. White Paper. Effective Vendor Management: Improving Supply Chain Efficiencies, Reducing Risk

Transcription

1 Business Process Services White Paper Effective Vendor Management: Improving Supply Chain Efficiencies, Reducing Risk

2 About the Author Devaraj Chithur Devaraj Chithur is a subject matter expert on supply chain management and a business process services (BPS) solution architect in presales and solutions at Tata Consultancy Services (TCS). Devaraj held several leadership positions in global multinational companies in their delivery functions across geographies and industries. He was also involved in sourcing, procurement, planning operations, and end-to-end supply chain processes in various capacities for nearly 30 years. He holds an MBA, a Master's degree in Biological Sciences, and a Diploma in Foreign Trade, and is a Certified Professional in Supply Management (CPSM). He has guided several Six Sigma projects, and is a frequently cited author in industry journals.

3 Abstract Enterprises across industries rely on third-party vendors for essential services. These vendors have access to sensitive data, exposing organizations to many risks. The possibilities of vendor non-compliance to regulatory as well as internal senior management requirements are also high. Regulatory acts such as Sarbanes Oxley (SOX), Foreign Corrupt Practices Act (FCPA), and Health Insurance Portability and Accountability Act (HIPAA), and standards set by government and industry bodies such as the Federal Financial Institutions Examination Council (FFIEC), New York Stock Exchange (NYSE), and Payment Card Industry (PCI) further complicate compliance challenges. Organizations need to therefore diligently assess and scrutinize vendors and contractors. Without a robust and comprehensive vendor management program, large manufacturing organizations, banks, and insurance and financial institutions face a high risk of regulatory, legal, operational, financial, and compliance issues. This paper reflects the need for enterprises to invest time and resources to effectively evaluate and manage vendors, as well as the challenges they face in this endeavor. Traditionally, most organizations preferred to retain vendor risk management and performance measurement activities in-house. Given the huge investment this requires, enterprises are now increasingly looking at engaging service providers to manage vendor risks and achieve high quality compliance. The paper also highlights the key features of an effective vendor management solution, including the advantages of using sophisticated e-procurement platforms that automate manual processes and improve compliance.

4 Contents Introduction 5 Critical Success Factors for Effective Vendor Management 5 Selection and Evaluation 5 Quality Management 6 Risk Management 6 Performance Management 7 Overcoming Key Challenges in Vendor Management 7 Partnering with Service Providers for Greater Efficiencies 8 Adopting e-procurement Systems 9 Conclusion 10

5 Introduction Many manufacturing and service organizations, including banking, insurance, and other financial institutions outsource non-core activities to third parties. The objective may be to increase revenues, reduce costs, or gain greater expertise and efficiency for a particular activity. For instance, third-party product providers for banks and financial institutions include mortgage brokers, intermediaries, auto dealers, credit card providers, and loan servicing vendors. Similarly, power plants and oil and gas companies seek the services of third-party suppliers for sourcing oil rig components, spare parts, and services. Although beneficial, outsourcing key functions of an organization to multiple vendors engenders risks to quality, regulatory and legal compliance, as well as financial, operational, strategic, reputational, and credit aspects. Enterprises therefore need to accurately assess and mitigate third-party risks so that they can protect themselves and their customers from potential loss. However, some large organizations have more than 50,000 suppliers, and gaining visibility across these suppliers can be an overwhelming task. The final responsibility for all compliance requirements remains with the client organizations and not their vendors. It is therefore paramount for organizations to leverage comprehensive vendor management solutions to ensure that third parties fully comply with regulatory and legal requirements for the industry. Critical Success Factors for Effective Vendor Management Vendor management enables organizations to realize optimal value from vendors throughout the relationship cycle by ensuring quality and compliance, mitigating risks, controlling costs, and driving excellence. Here is a look at some of the significant aspects of vendor management: Selection and Evaluation A well-defined strategy and process for supplier selection and evaluation goes a long way towards ensuring quality across the entire supply chain. This includes a clear-cut process for evaluating the financial health of vendors before signing the contract. Manufacturing and services organizations typically consider several categories of criteria for vendor selection and evaluation: quality, risk and performance. 5

6 Quality Management Third-party service providers can significantly impact the business performance of an organization. For a manufacturing organization, the final product quality is heavily influenced by the materials and components supplied by vendors. Biopharmaceutical companies demand stringent quality standards from their suppliers to eliminate the risk of poor drug quality and consistency that can lead to public health issues. These companies require prequalified vendors, proper confirmations of product provenance, certificates of analysis, and other documentation. Most countries have laws governing product or service liability, which apply to a product or any of its components or any service rendered. Manufacturers are liable for damage under the Consumer Protection Act or the common law of negligence for providing poor quality products and services. According to quality experts, vendors are responsible for about 50 percent of a firm's product quality related problems. However, business pressure to reduce costs often compel manufacturers to source raw materials at the lowest cost. This practice creates an opportunity for less scrupulous suppliers to enter the supply chain and introduce substandard materials. Hence, vendor quality management becomes an important ingredient for market success. Risk Management Vendor risk management assumes great importance for service organizations, including banks and financial institutions. These organizations could be held accountable for a third-party's breach of consumer protection laws and regulations, as well as wrongful, deceptive, and abusive acts and practices. These risks can lead to huge issues that attract large fines and even prison terms for contravention of the Foreign Corrupt Practices Act (FCPA) or the UK Anti-Bribery Act. The Office of the Comptroller of the Currency (OCC) in the US Department of Treasury expects banks to practice effective risk management. The Federal Deposit Insurance Corporation (FDIC) reviews a financial institution's risk management program and the overall effect of its third-party relationships as a component of its normal examination process. Regulators, including the Office of Inspector General (OIG), the FFIEC, and others are increasing their focus on potential third-party risks. Organizations in all industries are prone to third-party risks. It is therefore essential to set up appropriate policies and procedures to manage vendor relationships, and also maintain documentation of all ongoing due diligence and monitoring. Most organizations conduct risk assessment as part of the initial due diligence conducted before entering into a new third-party relationship, and also periodically monitor them. 6

7 Performance Management To ensure that vendors deliver optimal value, it is imperative to monitor and review their performance regularly. A robust performance management policy and strategy will help realize this goal. Organizations need to define clear key performance indicators (KPIs), and lay down well thought-out evaluation criteria based on service level agreements (SLAs). It is also essential to set standards at the initial contract stage, and clearly communicate the organization's expectations and policies with the vendors. Key activities in vendor performance management: Better results can be achieved through periodic meetings with vendors to review and reset collective goals. By implementing sound performance management practices, organizations can achieve vendor optimization by disengaging with low performance vendors and strengthening ties with high performers. Overcoming Key Challenges in Vendor Management As organizations scale and extend their lines of business and operations, they find themselves availing the services of many vendors across geographies. Vendor management can therefore become complex, time-consuming, and expensive. One of the biggest challenges in managing vendors is the need for manual activities such as supplier selection and evaluation. This could be eliminated by automating processes, thereby reducing efforts and costs. The latest vendor management systems as well as web-based RFP systems help organizations streamline and expedite processes, and drive efficiency. Another effective way to overcome these challenges is to partner with a trusted service provider with in-depth expertise and extensive experience in vendor management. Implement effective processes to capture, measure, analyze, and report various aspects of vendor performance Use scorecards and surveys to collect vital vendor performance data, and analytical tools to assess and measure the data Leverage dashboards and predefined reports to report and share the information and insights with key stakeholders Utilize the reports and findings to identify gaps and drive continuous improvement initiatives to enhance vendor performance 7

8 Partnering with Service Providers for Greater Efficiencies Organizations can realize greater value and better efficiencies by leveraging end-to-end vendor management services and solutions. Service providers offer comprehensive vendor management solutions to facilitate the following key activities: Streamline sourcing through customized e-procurement tools Enable online vendor registrations, create vendor profiles, and facilitate updates Support exhaustive due diligence both before and after the deal is signed, and enable continuous monitoring of vendors Aid vendor segmentation for risk assessment and ratings, and provide scorecards Facilitate competitor, financial, and market analysis Some service providers have a comprehensive analytical approach to comparing third-party vendors. They develop an exhaustive financial model by factoring in strategic, business, and operational metrics. Based on this model, they use a framework to outline the effect of industry trends on the products and services organizations, and then identify business opportunities for them. Vendor management service providers research and monitor a firm's competitors, and use that information to project growth in key markets and industries. These service providers also enable banks, insurance and financial institutions, and manufacturing organizations to meet their risk management guidelines. Financial regulators emphasize the need to identify 'significant' vendors based on the spend value for vendors, the vendor's access to confidential information, and the type of products they support. Another key factor is whether the vendor is performing a 'critical' function for the institution, or supporting highrevenue, high-profit, or high-risk products or services. However, many firms do not have this information readily available. Vendor management service providers can offer this information in the form of comprehensive vendor score cards. They analyze the firm's complete inventory of third-party suppliers and the risks they pose to customers, and then segment suppliers by risk level. The score cards indicate the weighted average ratings of vendors based on their financial health, market position, competition ranking, and credit quality. Figure 1 offers an illustrative representation of a customized workflow tool's content and reports. 8

9 Manage Process Requisition Create RFI / RFP / RFQ Supplier ABC Process Name Count Bid # Process Name A Process Name B Process Name C Bid Amount $123 Live Reverse Auctions Process A Dashboards & Reports Spend Analysis A Supplier A Supplier B Supplier C Spend Top Suppliers Figure 1: Content of a customized workflow tool of a service provider Adopting e-procurement Systems Many organizations use e-sourcing tools. Such tools entail recurring costs every year, since license fees are based on the number of users. This can prove too expensive for large organizations with many locations and business units. Many service providers, on the other hand, offer e-procurement systems to facilitate review of existing vendors, create sourcing events for selecting new vendors, and support the final vendor selection process. They provide customized workflow tools with useful functionalities at much lower costs. Key features of these customized e-procurement workflow tools include: They enable evaluation and selection of both existing and new vendors. These are bolt-on software, providing very specific functionality to complement ERP systems, instead of replacing them. They also employ customized business rules to meet the organization's specific needs. The typical means of connection between these applications and the ERP systems of suppliers and organizations is through software components. These workflow applications are easier to manage, upgrade, and connect to host systems. They are cost-effective and cloud-based, and provide easy access even in remote onsite locations, enabling employees to create purchase requisition and prepare goods receipt notes. These notes can also be posted seamlessly in the firm's ERP systems. 9

10 A typical e-procurement suite of applications with customized workflow capability should include the modules shown in Figure 2. ADMINISTRATOR SUPPLIER erfx PURCHASE & REQUISITION GRN WORK FLOW INVOICE PROCESSING CONTRACT MANAGEMENT REVERSE AUCTION DASHBOARD & REPORTS MATERIAL REQUISITION CATALOG MANAGEMENT MANAGEMENT Features such as contract authoring, clause library and contract repository, when used in conjunction with other modules of e-procurement, contribute to an effective e-procurement solution. Such a tool should be fully integrated with the ERP system to avoid duplicate entries. Conclusion Figure 2: Features of an e-procurement suite of applications In an increasingly complex marketplace, third-party vendors play a crucial role in an organization's success. In order to enhance the value of vendor relationships, and tackle their sourcing challenges effectively, organizations need to leverage third-party expertise that is unavailable in-house. This will enable them to conduct objective risk assessment and streamline all aspects of vendor management. Service providers act as impartial third parties to ensure a fair procurement process for both the supplier and the buyer. By partnering with service providers, organizations can put in place an effective vendor management system, and respond effectively to inquiries from senior management, auditors, and regulators. Best-in-class service providers also help businesses automate, manage, and monitor vendors with ease and efficiency. Their offerings can help streamline the end-to-end vendor management process from vendor identification, request for quotations, and vendor response management, to selection, registration, evaluation, analytics, risk assessment, and relationship management. Organizations also need to adopt a relevant technology solution to evaluate and monitor vendor compliance, and ensure effective management reporting. By drawing upon service providers' evaluation techniques and wide range of vendor management services, organizations can lower supply chain costs and substantially improve the quality of products and services. 10

11 About TCS Business Process Services Unit Enterprises seek to drive business growth and agility through innovation in an increasingly regulated, competitive, and global market. TCS helps clients achieve these goals by managing and executing their business operations effectively and efficiently. TCS Business Process Services (BPS) include core industry-specific processes, analytics and insights, and enterprise services such as finance and accounting, HR, and supply chain management. TCS TM creates value through its FORE simplification and transformation methodology, backed by its deep TM domain expertise, extensive technology experience, and TRAPEZE governance enablers and solutions. TCS complements its experience and expertise with innovative delivery models such as using robotic automation and providing Business Processes as a Service (BPaaS). TCS' BPS unit has been positioned in the leaders' quadrant for various service lines by many leading analyst firms. With over four decades of global experience and a delivery footprint spanning six continents, TCS is one of the largest BPS providers today. Contact For more information about TCS' Business Process Services Unit, visit: bps.connect@tcs.com Subscribe to TCS White Papers TCS.com RSS: Feedburner: About Tata Consultancy Services (TCS) Tata Consultancy Services is an IT services, consulting and business solutions organization that delivers real results to global business, ensuring a level of certainty no other firm can match. TCS offers a consulting-led, integrated portfolio of IT and IT-enabled infrastructure, engineering and TM assurance services. This is delivered through its unique Global Network Delivery Model, recognized as the benchmark of excellence in software development. A part of the Tata Group, India s largest industrial conglomerate, TCS has a global footprint and is listed on the National Stock Exchange and Bombay Stock Exchange in India. For more information, visit us at IT Services Business Solutions Consulting All content / information present here is the exclusive property of Tata Consultancy Services Limited (TCS). The content / information contained here is correct at the time of publishing. No material from here may be copied, modified, reproduced, republished, uploaded, transmitted, posted or distributed in any form without prior written permission from TCS. Unauthorized use of the content / information appearing here may violate copyright, trademark and other applicable laws, and could result in criminal or civil penalties. Copyright 2015 Tata Consultancy Services Limited TCS BPS Design Services I 01 I 15