Uncommon and breakthrough purchasing savings levers - Series 4 (Lever - SG)
Objective of the series: Hi there. I plan to share some very interesting avenues through an exciting series of at least 5 blogposts (Depending upon the response, I can consider sharing more). In each of the posts, I will share a few highly impactful savings levers that generate very high level of annualized savings across many industry verticals. These levers are still not widely used just because they are hardly covered in the common Sourcing & Procurement literature or practices. Hope you will find them useful, apply them somewhere and come out with flying colors. Wish you good luck and enjoy the read.
SG - What is SG? I am sure this is an obvious first question in every reader's mind. SG's expanded form is Services Guarantee.
SG is a contractual commitment from suppliers to buyers on how would they recover failures in contracted service and compensate buyers. A formal mechanism is specified by suppliers and often validated by buyers during pre-RFI/RFP/award discussions with buyers. But what is the scope of SG? Well, in my 20 years' experience across all the spend categories, I believe that SG is a breakthrough savings lever that is spend category neutral or applicable to all the spend categories (i.e. Direct, Indirect materials and services, MRO, Capital). Firnstahl 1989, Hart 1993 reported that significant cost savings can emerge, even though they were not the initial motivation for the introduction of guarantees. It also reduces supply exposure/risk with TQM equivalent rigor from both suppliers and buyers thereby increasing supply reliability. Having or not having SG defined in RFIs, RFPs and contracts is a sort of barometer test for the purchasing knowledge of buyers and organization capability of suppliers. From the next paragraph onwards, this will become clearer.
Hart (1993) and Wirtz (1998) did some seminal study on SG relevant to hospitality industries (B2C focused study). The difference here is that we are discussing SG in the context of B2B environment. Folks working with Automotive or Tier-1 firms would know JIT/VMI etc. clearly which are replenishment processes. I will stretch their imagination further by adding that these are one of the capabilities of suppliers to fulfill the service guarantee and ensure that service from them (to provide parts on time with self-certified quality) is impeccable. The suppliers need this greatly too while on the face of it, it may feel that why some supplier should commit into things like assured service guarantee. Simple. All suppliers want that their customers (buyers in case of B2B) are satisfied, retained for year on year business, be able to find and drive process improvement opportunities and therefore improve their financial/stakeholder performance. The other reality is that suppliers often perform their best only when buyers demand/drive more and more (all the purchasers know this well). So I would say it is more contingent on buyer to demand and include SG in all the spend category contracts and Purchase Orders (irrespective of large or tail spend items/services). Hart (1993) found that many companies actually re-engineer their processes from top to bottom in order to bring quality up to the requirements of their guarantees.
So here is how buyers should sell/convince suppliers on agreeing to include this clause in the contracts/POs: SG programs provide buyers and suppliers with proactively defined processes and mechanisms to monitor data on poor performance, track errors and thereby help both organizations to identify and remove fail-points. The customer/buyer firms, in the long run, might be willing to pay a premium for suppliers' service as the perceived/expected value of service will increase for them. Improved performance will also help suppliers reduce the process cost and cost of losing customers or rework. The employees of suppliers' firms also benefit by having the satisfaction of providing error-free service and possess high morale.
As an example, refer UPS service guarantee and extent of compensation at http://www.ups.com/media/en/terms_service_amr.pdf. Similar clauses/sections can be considered by buyers to introduce in RFIs/RFPs/Contracts/POs etc.
However, services guarantees have the downsides of misuse too (e.g. putting barricades to apartment gate so that pizza delivery fails for 30 minutes delivery guarantee and a free pizza is obtained). The adequate and just drafting of these is much beyond having SLAs, KPIs, supplier performance scorecards. Consider taking help of procurement outsourcing service providers to design commodity and supply market specific RGs as well as get them accepted from suppliers.
Found this post useful and refreshing? Want me to write the 5th and the last in the series? Want to extend the series? Send me your views. Thank you all.