How to incentivise suppliers

How to incentivise suppliers

Milan Panchmatia Blog, Procurement, Supply Chain

In an economic climate where many businesses need to do more with less, procurement functions are increasingly looking to uncover new ways to incentivise their suppliers.

Incentivising suppliers to deliver improved performances is not a new concept in the world of procurement. However, with an increasing number of businesses facing tighter margins, it is an area which certainly merits investigating. The potential benefits of a well-managed incentives programme can be massive and can include lower overall costs, a reduction in inventory, access to better technology, increased supply chain visibility and a multitude of other benefits.

The traditional techniques employed by strategic procurement departments to incentivise their suppliers are also wide ranging. The most common include introducing rewards for hitting targets and mutually beneficial initiatives. However, companies have begun to explore more innovative avenues for getting the most out of their partners.

In this piece I will examine a number of tactics used to incentivise suppliers as well as some of the key principles for procurement to keep in mind.

Some examples of incentivising suppliers

In 2012, Marks and Spencer introduced its own awards called the ‘Supplier Sustainability Awards’. This initiative encouraged its suppliers to ‘green’ their supply chains and in return can use any awards for marketing purposes. Additional benefits include supply chain savings, a better relationship with suppliers and a potential for increased sales due to improved customer perception.

Vodafone has previously had success using a similar system, albeit with slightly different rewards. The company’s best performing suppliers were rewarded not just with recognition, but also the chance to spend time with senior stakeholders. This approach led to stronger relationships with the company’s top providers, but also served to drive more spend towards those performing best and raised procurement’s profile within the business. A win-win.

In a recent 4C engagement we faced a difficult key supplier negotiation where a particular supplier was pressuring the client for higher rates and longer commitment based on the fact that there was constrained supply capacity within the market.

Using our negotiation planning methodology we were able to identify the core cost levers available to use and asses what was important to the client and supplier. These levers clearly showed what was important to the supplier but not the client and consequently we were able to offer a higher level of annual commitment (well within the range of what the client was going to spend anyway) to the supplier. The use of this level provided the required incentive to the supplier in order to free up capacity whilst not really giving anything away by the client. An incentivisation programme doesn’t have to be in the form of a bonus it should be more structured towards the actual business drivers the supplier values.

Not a one-size fits all approach

Of course, supplier incentivisation is not always appropriate. It is important that the culture on both sides is compatible if such a scheme is to prove fruitful. Another potential issue is the need for buy-in, on both sides, from senior stakeholders. This type of programme needs to be supported throughout both organisations if it is to succeed.

In addition, procurement must ensure that it has the budget to run such a programme. This requires in-depth analysis of all potential outcomes and costs. The latter point is generally dealt with by inserting a cap on rewards, which is in-line with any budget constraint.

The implementation of any successful incentivisation project is dependent on maintaining an on-going dialogue with the supplier in question. This type of contract can deliver wide reaching benefits, but needs procurement functions to spend more time monitoring and analysing supplier performance metrics than would be the case on a more traditional contract. It is easy to get caught up in an incentivisation project and lose sight of the benefits vs costs of running the initiative.

Concluding thoughts

Incentivising suppliers can be a great way to deliver extra value, but needs to be managed effectively if it is to be successful. One of the key points to emerge from my experience of developing these initiatives is that there must be a two way discussion between buyers and suppliers.

Getting incentives right means procurement needs to understand suppliers as well as taking a holistic view of the business. A combination of the latter will enable the function to spot mutually beneficial opportunities. If carried out correctly supplier incentivisation schemes can prove yet another valuable element in procurement’s toolset.