Business & Technology Nexus

Dave Stephens on technology and business trends

Supplier Onboarding Costs

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One of the “tricks” I’ve picked up while blogging is to look at click-thru’s from Google searches to get an idea of what questions people are grappling with. One that piqued my curiosity today was “per supplier procurement costs to serve”. In other words, how much money do I spend "servicing" each supplier relationship?

That question is too broad for a single post, so I thought I could narrow it down to the onboarding costs – you know, how much money should I be spending to add a new supplier to my systems and processes?

To my knowledge, there's no ready-made formula on how to compute the cost of adding a new supplier. But all the same, let’s explore the topic some. If you’ll remember I wrote previously about the strategic advantage a company could gain by increasing its supply base in key areas. Perhaps now I can touch on what tools are required to maximize supplier interaction efficiency to make that vision practical.

The supplier onboarding elements that stand out the most typically involve communication and data transfer with your new supplier. Here is a representative list:

  • Acquiring the supplier’s profile
  • Acquiring and sharing relationship contact information
  • Running financial viability checks
  • Setting up banking information
  • Acquiring product content –or-
  • Validating punch-out data sources –or-
  • Negotiating contract
  • Purchase Order delivery integration
  • Invoice receipt integration
  • (optionally) Ship Notice integration
  • (optionally) Payment on Receipt project completion

This list is by no means exhaustive. And yet it shows there’s a ton of steps & work involved to add a new supplier to your systems. And depending on the state of your systems, the costs may vary quite a lot.

Just for the sake of argument, let me assume a “traditional” approach and a "new way" (i.e. more efficient) to each onboarding step and estimate time. And for simplicity I’ll leave out the optional steps. (btw, Time Spent is a guess on my part & should not be confused with elapsed time – elapsed time will naturally be longer)

If you assume burdened cost for your resources is $80/hour, the total cost per supplier for the “traditional way” is roughly 7-26k (the low end assumes ongoing manual entry costs for invoices), whereas the “new way” is roughly 2-10k.

Although the data here is fictional, it’s easy to see there are a number of real and fairly substantial costs associated with bringing on new sources of supply. Further, it’s a reasonable viewpoint that new approaches to supplier acquisition can bring down per-supplier costs dramatically.

 

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Written by Dave Stephens

05/2/06 9:26 PM at 9:26 pm

Posted in Opinion

One Response

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  1. Dave, nice analysis. I’ve consistenly enjoyed your posts, so keep up the great work.

    As far as supplier onboarding costs go, I think this is one of those areas where you’re faced on one hand with a “boiling the ocean” problem — how to realistically onboard tens of thousands of suppliers, particularly if you don’t have a reliable supplier data across your enterprise — and on the other with picking the most important supplier relationships to enable first.

    A network would seem like a convenient solution, but it is sort of a least common denominator approach when applied across ALL suppliers a la EDI/VAN. The surviving marketplaces take a different approach, but siloed by industry. And with all the hullabaloo about outsourcing, what do you do about outsourced relationships? How far down the multi-tier food chain do you go?

    I agree that most organizations don’t give enough attention to supplier onboarding costs — or any kind of supplier operational investment — until they’re already locked in with an approach/vendor and alternatives are impractical. It will be interesting to see how this problem gets solved as procurement evolves.

    K

    Kevin Brooks

    05/4/06 7:20 PM at 7:20 pm


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