It is at times of economic stress that buyers need to be particularly alert to the risk suppliers present. Cuts in corporate budgets erode the resources that are available to supplier companies and in some instances critical risk factors may be exposed. It may be that the supplier itself is unaware of the holes that have appeared in its own compliance concerning, perhaps, important aspects of its Health & Safety processes, insurance cover or its Corporate Social Responsibility (CSR) practices. Staff cuts in the business can easily result in a breakdown in compliance if those within the business with the specialist skills, knowledge or responsibility for important processes are removed.

For supplier organisations, as much as for buyers, it is important to ensure that the auditing of these high risk elements of the business is carried out correctly, thoroughly and on a regular basis. Exposure to risks, such as a Health & Safety processes being neglected, can have very serious consequences in the event of an accident, for both the supplier and the buyer. The supplier faces the possibility of being sued by staff, or in the case of a fatality, even worse, it may lead to litigation or may leave directors exposed to prosecution. And for the buyer, on whose site the accident may have taken place, the damage to reputation may be considerable.

A supplier’s non compliance to CSR policies can also have a hugely damaging effect on a buying organisation’s brand. There are plenty of examples that have hit the media in recent years. In these stringent times, are buyer’s more exposed to supplier digressions to CSR policies and practices?

For buyers, the auditing of high risk suppliers allows the validation of pre-qualification information offered by the supplier. But for the supplier, an audit conducted by a fully trained and experienced auditor with relevant industry experience should offer the supplier a little more than simply a ‘tick in the box’. It should also deliver added value to the supplier in the form of formal feedback based on in-depth analysis of evidence and observations on the integrity of the supplier’s business systems and processes. This may be valuable feedback for companies, particularly if suppliers are concerned about the integrity of their processes following budgetary cut backs.

Auditing of high risk suppliers is an important step to mitigating risk. In tight economic times, perhaps the need for audits is even higher.

Kristofer Whitfield is head of audit for UK and Ireland at Achilles www.achilles.com

About Achilles: Achilles helps companies to improve their supplier information management. Our services onboard suppliers and validate their information throughout the life of the business relationship so that buyers are better informed and can make better procurement decisions. Achilles has offices in 23 locations around the world and actively support over 750 of the world’s largest buying organisations to manage their supplier data. With a global view of the supplier base, buyers have access to accurate and up-to-date information on their suppliers, they can streamline their supplier engagement, standardise their policies and reduce the risk of non-compliance (in areas such as health and safety, quality and environment); and confidently assess the total impact of their procurement decisions.

A tremendous opportunity exists for the Rail sector to realign and enhance the auditing processes for its suppliers – an opportunity that will deliver greater value to suppliers and buyers alike. By Annette Poehl

For many years the Rail industry has audited its suppliers in accordance to a supplier’s potential for risk. And, of course, this is an essential process for every buyer and ensures that the important safety requirements are met. However, the way the industry approaches supplier audits is fragmented and in need of change. Firstly, there is a significant level of confusion in the industry over the boundaries between the three key tiers of auditing that exist.

On one level, there is the qualification of a supplier to certified standards, such as the ISO standards for health & safety, quality and environment. On another tier, there are technical and buyer/contract specific audits, such as RISAS, and on-track plant that relate to specific risks. But in the middle, there is a critical tier which concerns the pre-qualification and auditing of a supplier’s management processes and systems relating to the way a supplier deals with health & safety, quality and other important policies within the organisation. This audit is offered through the Link-up scheme run by Achilles.

Unfortunately, a number of industry members wrongly assume that the Link-up audit is a technical one, evaluating the technical and contract specific capabilities of an organisation. This is just one aspect of the rail industry’s auditing structure that needs to be made clearer. There are further areas that can be improved and upgraded to provide greater value.

Link-up, the industry’s supplier qualification scheme, is a collaborative community of 3500 suppliers of which some 1300 undergo a pre-qualification audit on an annual basis. The assessments are undertaken by a team of highly skilled and fully qualified auditors who are conducting the in-depth analysis of management processes and systems at an organisational level. At present, this is an exercise which determines whether a supplier is compliant to the defined minimum standards or not, hence, if a supplier has passed or failed the audit. There is no grading of a supplier in terms of its maturity and approach to its management processes – offering little visibility to buyers of a supplier’s continuous improvement efforts and long-term performance in this regard.

For many suppliers this is doing them a disservice, as top performing companies are seen in a similar light to those merely attaining a pass. What is more, the auditing process, at present, offers little advice, guidance or feedback to suppliers on how that organisation might improve its processes.

Clearly, there is a great opportunity to change for the better and this is exactly what Link-up is in the process of doing. Under the new Steering Group for Link-up, a Working Group on auditing has been established to find a more ‘value adding’ means of conducting supplier audits. Discussions are underway to put in place a ‘star’ system that will rate suppliers on the maturity of their management systems in regard to supplier risk. In addition, suppliers will receive valuable feedback on ways of improving their systems. This will promote ‘best practice’ and raise standards across the industry. After all, if you only ask for minimum requirements, what is the incentive to go the extra mile?

These proposals are similar in many respects to auditing schemes run by Achilles in the Utilities and Construction industries, where they have been successfully proven to deliver significant benefits for both suppliers and buyers. If the proposals are accepted Link-up will follow suit, delivering a more graded approach to auditing and, in the process, will offer more value added advice in return.

It is also proposed that Link-up will offer a central repository for information relating to the various audit schemes. Users of Link-up will be able to access the results of supplier audits undertaken by other schemes making compliance far more visible to buyers.

Ultimately, the aim is to further align the pre-qualification audit programmes across the industry and to closer integrate the requirements of London Underground/TfL. This would bring huge advantages for many suppliers, reducing the burden of duplicate audits, taking out complexity and reducing costs for the industry.

Link-up has embarked on a process of change that will deliver far greater levels of efficiency to the rail industry, making procurement and its vital auditing methods easier to engage with, more responsive and, above all else, more integrated, visible and intelligible.

Annette Poehl is Director Rail and Transport at Achilles. www.achilles.com

About Achilles: Achilles helps companies to improve their supplier information management. Our services collect and validate supplier information throughout the life of the business relationship so that buyers are better informed and can make better procurement decisions. Achilles has offices in 23 locations around the world and actively support over 750 of the world’s largest buying organisations to manage their supplier data. With a global view of the supplier base, buyers have access to accurate and up-to-date information on their suppliers, they can streamline their supplier engagement, standardise their policies and reduce the risk of non-compliance in areas such as health and safety, quality and environment; and confidently assess the total impact of their procurement decisions.

Traditionally, companies have been loath to collaborate with competitors, apart from against common ‘enemies’, like government where they have been prepared to form trade associations to lobby for their interests. Also, they have been prepared to work together in areas like science or on standards to make sure their industries are looked after. But they haven’t been prepared to look at collaboration much beyond that. Companies are now starting to have to look at collaboration with competitors as a way of reducing costs and this is opening up the next stage of the business development model.

We have already seen companies outsource their activities to others in an effort to reduce costs, we have seen them move down the road of greater and greater efficiency methods – lean supply chains etc – but the next stage – where it’s economically sensible and non competitive – is to collaborate with competitors for mutual advantage.

Companies have to be innovative about defining the areas where they truly compete and the areas where collaboration is sensible and possible. The first thing is to undertake a value chain analysis and ask, ‘where do we add value as a company, and where is it absolutely against our interests, long term or short term, to work with others?’ But as a point of caution, it is important to understand these boundaries, as potentially, a company could undermine its own competitive advantage.

In areas where there is no competitive advantage it may be absolutely right to collaborate. By way of example, if you have two car companies both using different factories, producing broadly the same part, if they could agree the specification for that part then they could collectively still continue to use those two factories, but if one of their factories became disrupted by an event like an earthquake, both could draw on the other plant. And of course, if they were able to collaborate on specification the price of those components would drop.

People in the supply chain need to have a different way of thinking when it comes to collaborative opportunities. We have got to start rethinking fundamentals. Most companies, especially large companies, tend to think they are an island at sea – it’s them, their suppliers and their customers.

When we were putting together our schemes, many of the procurement people from the various companies in a sector had never spoken to each other. You would have thought this would have been quite a common occurrence between companies in the same area of activity, in the same geographic region – but not at all. The fact that we provided a forum where they could meet and discuss common problems without entering into anti-competitive behaviour has proved to be a very valuable element of our operation.

There is a natural level of suspicion that needs to be overcome in competitive collaboration. If a competitor phones up and asks you ‘would you like to work together?’ your immediate reaction may well be, what are they up to? To get past that barrier is an important first step.

Challenges take months to resolve and in many cases cost hundreds of thousands of pounds in compensation or settlement out of court.

The Achilles/Nottingham University report highlights the fact that, historically, the challenge rate in the UK has been very low, averaging approximately two challenges per year in the period between 1993 and 2006. However, following 2006 the number of challenges has increased steadily. Findings from the study also indicate that the reforms to the remedies system introduced in December 2009 have had a dramatic effect, with a significant jump in the number of challenges in 2010 when 18 challenges were reported. This increase appears to be continuing in 2011, with 10 challenges occurring in the first six months of the year – up to the end of the period covered by the study.

It can be no coincidence that the number of challenges has risen dramatically since changes to the remedies directive were introduced in December 2009. The new rules have made it easier for suppliers to challenge as more information must be provided to suppliers losing a procurement competition and they can now halt the award of a contract through an ‘automatic suspension’ mechanism where court action has been commenced. In addition, the current tightening of public purse strings is making a challenge more likely as suppliers compete for a dwindling number of contracts. If procuring entities are to find themselves in an increasingly challenging environment, where suppliers are more likely to take their chances with the courts, then buyers are going to have to ensure that their procedures and contracts are ‘water tight’ and in line with current legislative requirements. Any shortfalls or oversights could prove expensive in time, resources and money. Gail Wilson is EU Service Manager at Achilles.

When the study began in 1992, procurement was primarily a back-office function and steadily over the years, there has been a shift towards procurement performing activities that add value with nearly three quarters of staff devoted to strategic activities.

The study found 13 companies, amongst the respondents, that consistently demonstrate high levels of procurement performance – from their findings they identified seven characteristics.

Leading businesses understand that procurement strategy must be aligned with business goals; the report found that leading procurement functions are 85 per cent aligned with the wider business in which they operate, while the rest are only 37 per cent aligned.

Those top companies outperform other study participants in their contributions to top and bottom-line strategies.

In terms of managing risk systematically, the report suggests that 80 per cent of companies are a natural disaster away from a major disruption. The top performers excel at managing risk.

Supplier relationship management is used more consistently and in a structured way to improve innovation, growth, better manage risk and improve supply chains. Leaders are 45 per cent more likely to develop their suppliers’ capabilities.

Leading procurement organizations tailor category strategies and are more likely to adopt technology. Most leaders are fully automated, with real-time access to data with technology in place to support contract management and compliance.

All thirteen firms take more aggressive steps to ‘win the war’ for talent building relationships with universities, recruiting and attracting experienced skilled individuals.

According to the report, the years ahead with be challenging with a continuance of economic uncertainty and ‘wild card’ disruptive event, but it recommends greater collaboration – to bring suppliers closer to company processes; getting creative – to attract, retain and engage the workforce; and getting connected – calling for a focus on technology for process improvements.

Aberdeen Group surveyed 151 enterprises using supplier management in a diverse set of industries. The report goes on to warn that the adoption of tools and strategies to increase on-time delivery and project completion are necessary to reduce the risk of ‘catastrophic’ project failure. Effective supplier management must include a more strategic focus that also considers the impact suppliers make on an organisation through the adoption of tools that can measure areas such as supplier risk, compliance and performance. “Business demands today are requiring organisations to place more emphasis on improving supplier relationships, sparking increased interest for promoting areas such a supplier information management, compliance, risk and performance,” says Constantine Limberakis, senior research analyst. Aberdeen Group.

Limberakis further suggests that ‘The fact that the use of suppliers in an organisation typically follows the Pareto principle emphasises the need to have additional supplier insights, answers to supplier based challenges, the ability to seek alternative sources of supply, and the capability to predict failures.’

Interestingly, the research highlights one of the ongoing challenges still facing organisations today is the use of disparate systems for tracking supplier information and that supplier information is often prevented from providing a holistic picture of suppliers due to a lack of a unified supplier management process.

Aberdeen Group noted that ‘The essential process element advantages for the best in class appear to be the ability to monitor, track and collaborate with suppliers for the purposes of understanding suppliers outside of the typical buyer-supplier relationship. Making decisions on suppliers is based on the intrinsic ability to analyse historical supplier data, yet also have the ability to continue to leverage supplier information as the suppliers evolve.’

Here are Aberdeen Group’s required actions to achieve best-in-class performance

• Enhance the process of acquiring and leveraging supplier information
• Diminish and deter supply/value chain disruption through supplier visibility tools
• Improve supplier benchmarking and/or performance through monitoring tools
• Improve supplier onboarding and enablement
• Improve the process of acquiring and leveraging supplier information
• Improve the ability to analyse the supplier base
• Improve collaboration with suppliers
• Improve supplier risk capabilities
• Implement supplier benchmarking and performance monitoring tools

Every Responsible organisation working in increasingly Regulated environments (and everything seems to be getting more regulated these days) is justly concerned with its Reputation in competitive markets (because reputation is an important differentiator when specifications can otherwise appear so similar).

To secure ongoing competitive advantage, they are dependent on Reliable suppliers with whom they can establish, grow and maintain strong Relationships whilst reducing their cost base.

The traditional approach to understanding and managing supplier Risk is to establish a procurement team whose job is to assess and re-assess suppliers.

The Repetition involved for every Buyer and every Supplier is hugely costly and time-consuming; and for smaller suppliers, especially so, which threatens the breadth of the supplier base and stifles innovation.

Communities of buyers and suppliers sharing information can combine and leverage the experience of multiple Buyers from multiple market sectors into a single environment where all suppliers are assessed equally, thoroughly and appropriately. Such a community provides a benchmark for suppliers against which they can assess their own competitiveness and plan improvements.

However, in a recent speech at a recent event hosted by the Aldersgate Group, Mike Anderson emphasised that the decision on whether to implement mandatory carbon reporting would come down to an assessment of the benefits versus burdens for businesses. It is not enough for business to state that they support mandatory carbon reporting.  In order to introduce the regulation, data is needed to support the case. The necessity of businesses providing data was underscored by questions raised about the assumptions made by DEFRA in its Impact Assessment.  At present the upper end cost estimation of £6 billion for mandatory carbon reporting for all large companies, the preferred option by business in DEFRA’s consultation, far outweighs the benefits proposed.

In the process of consultation, business and industry bodies must not only provide input on the structure of the regulation (eg. size of company to be included, scope to be reported on, importance of independent assurance), but must also provide quantitative detail on the benefits their businesses have gained from reporting.

It is critical DEFRA makes this message loud and clear over the coming weeks ahead of the consultation deadline of 5^th July 2011, as this is likely to be one of the last opportunities for businesses to be heard. Even though over 90%* of FTSE 100 companies measure their carbon footprint, fewer than 10 per cent report their carbon emissions to DEFRA UK standards according to a 2010 Deloitte survey⁺.

Achilles will be responding to the consultation and providing detail on its own benefits and costs from carbon reporting as well as its customers. For example, CEMARS certified Scottish Parliament is committed to becoming a low carbon organisation and reducing its carbon emissions by 42% by 2020 compared to the 2005/06 figures. If the medium term target of reducing emissions by 20% by 2015 is met, the estimated cost savings will be in the region of £245,000 for Scottish Parliament.

This is an opportunity that the UK cannot afford to miss. It should not be seen as reducing the UK’s competitiveness but improving it as businesses become more efficient and adopt a more sustainable model.

*Referenced in the meeting by Colin Baines (Campaigns Advisor at The Co-operative Group)

⁺Deloitte (2010) Carbon reporting to date: Seeing the wood for the trees. London.

Lucy d’Arville is the director of the carbonReduction programme at Achilles Information Ltd.