Are You Accounting for Supplier Performance During the Budgeting Process?
by Victor Engesser, RVCF
The annual budgeting process for retailers, or any organization for that matter, is stressful. Every business need can’t always be met with dollars and labor resources, and not everything will get the green light. Some things just have to wait. However, one area that’s absolutely critical to achieving major budgeting objectives such as revenue, margin and inventory turns is supplier performance.
If you know where you stand with regards to supplier performance, you’re probably already tracking it at the category or merchandise level, or by merchandise group. Hopefully, you’re working on ways to better manage and improve supplier performance as well. But is supplier performance incorporated into the budgeting process so that it is "owned" in the same way that sales and margin targets are "owned"?
Suppose at some point during the year, it becomes obvious that supplier performance is holding you back from delivering the results you budgeted in certain merchandise categories. Can you really say you were caught by surprise?
After all, you know supplier performance is critical. Otherwise, you won’t maintain desired inventory in-stock, which means you won’t always make the sale, which means you won’t meet your revenue and margin goals.
Instead of waiting for something bad to happen, you need to make sure you get a voice at the table during the budget process when everyone is very much aware of what they’re signing up for. In addition to making sure you have the staff and the support you need, you need to plan for supplier performance. This will help you get the commitment and resources you need now, and the attention and follow through during the year to keep your suppliers’ on track so they uphold their end of the bargain, which is to meet your performance expectations.
The objective should be to have a well-defined, documented target for supplier performance within each merchandise category in order to support the high-level budgeted goals of your company. Merchandise category metrics with budgeted objectives that are affected by supplier performance include but are not limited to inventory dollar levels, inventory turns, order frequency, safety stock levels, and in-stock levels.
To support these category objectives, you need speed to shelf. To have speed to shelf, you need on-time, in-full performance. You need an accurate, timely ASN. And you don’t need delays caused by errors with labels, packaging or cartons. In a nutshell, you need the supplier to adhere to your compliance requirements to achieve your objectives within each category and deliver on your budget goals. When these supplier performance goals are identified and aligned with the merchant, the supply chain compliance team and the merchant can then collaborate and work with suppliers when and where necessary to drive these results.
Internally, you need to identify the necessary resources and required supplier performance levels to achieve your budgeted objectives. Externally, you need to make sure your suppliers know how important their performance is to achieving your goals. You need to make it clear that you’ve established performance goals for the supplier that, if met, will make it possible to hit your numbers.
Here is a simple, five-step approach to incorporating supplier performance management into the budgeting process.
- Campaign. Campaign to get others within your organization to understand the importance of incorporating supplier performance management in the annual budgeting process.
- Partner. Partner with key stakeholders to identify what your expectations should be by major category and by major supplier.
- Collaborate. Collaborate with major suppliers. Seek alignment and commitment from them to achieve these goals.
- Commit. Commit resources and identify specific responsibilities to collaboratively accomplish these goals.
- Follow Through. Follow through by measuring, reporting and managing these goals.
The ultimate goal is to use the annual corporate budgeting process to revisit the supplier’s supply chain performance and recommit, both internally and externally with trading partners, to improve performance and the resulting financial benefits it provides to both companies.
You might say to yourself, “Well, we’re already doing this.” But are you truly seizing this moment in time during the budget process to communicate to merchants the importance of having a clear goal for individual supplier performance? If suppliers meet those expectations, you’ll have much more confidence, and much higher probability, that you’ll produce the results needed to meet your budgets in terms of sales, margins, and inventory turns.
The more you directly integrate supplier performance with your budgets, the more it remains top-of-mind throughout the year. Then you can constantly revisit performance goals, determine to what degree supplier performance is keeping you from meeting objectives, and address specific issues as quickly as possible to get back on track.