The same supply chain tactics that make your company lean and profitable can become your downfall in just the blink of an eye.

That’s because the benefits of the drive to improve efficiency — running lean, just-in-time production, single-source suppliers — can also leave you more vulnerable than ever before.

Fortunately, the best solution is easily summed up in two words: Be prepared.

The fancy term for it is “risk management.” Either way, we’re talking about shooting for the same goal.

1. What could go wrong?

The first step in managing supply chain risk (or being prepared), is to identify and catalog the “what-if” problems that could possibly disrupt your operations.

A few to consider include:

• Shifting customer demand
• Changing financial factors, such as credit availability
• Other market pressures, such as your competitors or your supplier’s competitors, and
• Weather, natural disasters or similar problems (think Hurricane Katrina or the California wildfires, for instance.)

2. Profiling your suppliers

At the same time, you should gather material about your own company (think of it like you’re writing a book) that is critical to supply chain continuity.

This means your company’s operations, including production and fulfillment; and data about your suppliers and your customers.

Try profiling your top suppliers, by identifying:

• Who are your key suppliers
• Where they are located
• Is there another site that could fill in if the primary supplier or supplier site fell short?
• What’s their production capacity, and
• What’s their production flexibility? Can they turn on a dime to help you if you asked?

Today’s emphasis on lean production has left many companies dealing with single-source suppliers, without much of a safety net.

3. What else could go wrong?

There’s the flip side of this coin, too.

Does your company rely heavily on a small but powerful customer base? What would happen if one of those customers closed up shop or took its business elsewhere?

Another contingency to consider: Does your supply chain focus efforts on one primary “ship-from” location? Would you be prepared if a disruption put that area out of commission?

Of course, you’re not going to come up with all of the answers right away.

Risk management is an ongoing process. You can never be prepared enough.

But taking the time now to anticipate problems and plan contingencies could make the difference between success and failure for your company in the future.

But proponents of taking procurement processes on line are quick to point out that in the long run, the savings from this investment can be significant.

As part of building your case to consider e-procurement, start selling its benefits to your suppliers.

There are three big selling points:

• When a supplier receives your purchase order automatically into its order management system, the supplier saves time and trims labor costs. No longer will people be forced to hand-enter information into the supplier’s ordering system, which will greatly reduce the incidence of errors.
• The increased accuracy that comes from no longer hand-keying information into the system will help make sure the suppliers’ customers get their orders more quickly.
• The final benefit is that because there is no longer a delay in getting orders into the supplier’s system, products will be delivered faster and the supplier will develop a reputation as being extremely responsive to customer needs.

Chances are, people at your company will want to know the estimated Return on Investment for automating procurement processes.

The best that experts can speculate is that a good e-procurement system will save 5% to 10% of your annual spend. Your own ROI will depend on your annual budget and the vendor you select for the e-procurement system.

The best way you can stay in the driver’s seat is to make sure you have an organized plan of attack for working with suppliers, one that lays out your expectations and  emphasizes quality.

There are three areas to focus on that’ll help upgrade your relationships with suppliers:

1. Most companies treat poor supplier quality as collateral damage, part of the price of doing business. Here’s a painful stat: The cost of poor supplier quality (COPQ) take take a 10% bite out of an organization’s revenue.

It’s more than just faulty materials or goods. There’s a ripple effect — rework, slowed production, extra freight costs, warranty expenses when customers complain, and recall expenses when you have to ship it back from those customers.

So the first step — which many businesses don’t do now — is to track supplier quality, by logging to the bad (and the good), and what it ends up costing your company.

2. Once you’ve done your homework, you can approach suppliers about recovering the cost of poor quality supplies. In this case, many companies charge back the goods to the supplier. When enough product starts flowing backward, suppliers will take notice.

Experts point out that the bulk of costs stemming from suppliers providing poor goods is NOT the materials. It’s that collateral damage that really rings up the dollars. Finding a way to quantifying these costs will show suppliers just how deep — and costly — the problem is.

3. Finally, the best way to formalize your approach to solving these problems is to design your own supplier scorecard. Not only will you create a running evaluation of each supplier, it’ll also provide a solid framework of your expectations for these suppliers.

It strengthens your hand considerably when you sit down at the table with a supplier if you have a written list of problems and the costs incurred, along with a clear explanation of your expectations.

One of the biggest costs in transactions with suppliers and customers is the physical act of getting paid.

Most businesses still rely on the tried-and-true method of paper checks (and taking advantage of features like mail float time — or being frustrated by the same).

But there’s hard proof that moving away from paper and handling more transactions electronically is more efficient, easier to do, and even safer than using checks.

First, there’s the inherent complexity of the payment process itself. In a 2008 Aberdeen Group study, 76% of businesses described A/P operations as either complex or somewhat complex.

(A complex transaction, in this case, involves two or more banks and more than three payment types.)

Across the board — including Best in Class operations down to industry laggards, electronic payment processing costs were noticeably lower than handling paper-based checks.

• Best in Class companies spent an average of $10.84 on each paper-based check transaction, compared with an average electronic payment processing cost of $6.71 — a savings of 38%.
• Below average operations spent an average of $11.33 on each paper-based check transaction, compared with an average electronic payment processing cost of $8.42 — a savings of 26%.

OK, many of the Purchasing & Procurement folks already know there’s money to be saved by pitching paper. These are some stats to back it up.

But the biggest fear — one that hampers efforts to turn transactions into electronic time-savers — is that security can be compromised, creating chaos for all parties involved.

Here’s some ammo to help shoot down that argument.

When businesses experiencing payment fraud were polled as to the source of that fraud, here’s what they said:

• paper-based checks — 42%
• commercial cards — 33%
• ACH — 6%
• wire transfers — 4%

(Admittedly, there are more paper-based frauds reported because there are more paper-based transactions. But you get the idea.)

For some Purchasing & Procurement pros, it’s actually a bit gratifying, as they get the opportunity to land a few body blows on suppliers that’ve been pounding them for the past few years.

Why is there this sense of satisfaction?

For the 2-3 years, suppliers have been jacking up prices to take advantage of the growing economy, which they didn’t hesitate to pass along to Procurement & Purchasing pros.

Now, for some, it’s payback time.

One factor that’s working in your favor: Many suppliers implemented “escalator clauses” in contracts, so they could jack prices based on economic influences.

Now, those same economic influences are driving contract prices down.

If you’re feeling the heat, you’re not alone.

Among the findings in a recent survey by CPO Agenda magazine, procurement managers have:

• felt increased pressure to decrease supply costs — 76%
• more closely scrutinized the financial stability of suppliers — 76%
• asked for price cuts — 73%
• more closely monitored a supplier’s performance — 72%
• switched to cheaper supplies/services/products — 30%
• volunteered to pay earlier in return for a discount — 27%
• directly supported a supplier’s finances — 19%

Sure, you already work together in many ways. You’re certainly not working against each other.

But there are three ways you can reinforce the bonds that keep this team performing at a high level.

The final result is a win-win-win: Procurement, A/P and your entire company all benefit.

• Get on the same page. One of the biggest problems in getting payments in or out of your business can be invoice keying errors. Even the best number-punchers and crunchers will occasionally tap the wrong key — sometimes that’s all you need to create a large headache. Try this: Ask suppliers to repeat purchase order numbers back to buyers when placing phone orders. At the same time, include a clause in your contract that requires suppliers to match up invoice line numbers to line item numbers.
• Finding the best terms. Given today’s business conditions, you might want to re-open the door on negotiating standard payment terms with suppliers. Team up with your A/P folks to identify optimal payment terms. Are there early payment discounts you should be taking advantage of? Are there ones you might want to stop?
• Notify the proper authorities. It seems every business has its share of renegade (non PO) transactions, which inevitably fall to A/P for resolution. Catalog these strays and make sure each group is getting the proper review necessary before approval. This increased visibility has been proven to reduce renegade buying and save businesses money.

In fact, most suppliers will tell you the hits are more like body blows than toe-tapping tunes.

Chances are, you’ve already formulated back-up plans for key suppliers, by scoping out and maybe even contacting alternate sources.

But the suppliers you rely upon for more specialized goods or products aren’t so easily replaced.

In some cases, it’s in your best interest to lend a helping hand, to keep your own lifeline open.

There are five strategies you could consider, and determine what might work best for you:

• Offer a troubled supplier a bridge loan, which must be secured by a tangible asset like real estate or equipment. If this is the path you choose, tread carefully — you don’t want to obligate your company to end up with a supplier’s white elephant.
• Become a supplier for your supplier. See if you can purchase the raw goods or materials your supplier relies upon, and feed them to the supplier. In return, you get credit or discounts on your own transactions with the supplier.
• Speed up your payments to a supplier. Instead of taking the full net 30, mail the payment sooner, so the supplier can pay its own bills more quickly.
• Offer your company’s expertise, to help advise the supplier in ways to improve business practices. Your people might be able to quickly spy weak spots the supplier might have historically overlooked.
• If nothing else seems  to be working, it’s likely the supplier will consider a price increase. Spend time weighing this against the cost of finding a new, specialty supplier. Many companies opt to pay the new price and stick with a reliable business partner.

In this case, it’s the possibility that your suppliers could suddenly go belly up.

One worst-case scenario (and it has happened): The supplier who provides nuts-and-bolts goods, like packing materials, leaves you in a lurch. Result? Some companies have been unable to ship product.

Of course, you want to make contingency plans for where you could turn if one of the suppliers fails.

You might be able to detect which suppliers are feeling the squeeze the most. Some have fallen behind in paying their own suppliers, which has slowed the flow of materials they need.

Before you pull the trigger and switch suppliers, consider taking a supportive stance. After all, you probably have a long track record with these guys, and it’s tough to break in a new supplier. Add that to the fact that a new supplier is more likely to make mistakes, and it’s worth your time to take a second look.

One strategy: Your company can offer to buy the materials the supplier needs, and then receive a discount on the finished product.

If your buying power is strong enough, you might even be able to earn a bulk discount and lower your own costs further.

But beware: Shooting for goals at face value can sometimes blow up in your face, especially if the goal is trimming money from the purchasing and procurement budget.

Case in point: You’re charged with reducing the purchasing budget by a specific amount, $XXX — without any loss in quality when it comes to suppliers and your purchasing performance.

Managers higher on the food chain often believe this is easily accomplished: Replace those expensive, old suppliers with cheaper, newer ones.

Uh, not this time.

Sure, you’re looking hard for suppliers that will out-perform your current suppliers — but they could very well end up being your current suppliers.

Your criteria remain consistent:

• on-time deliveries
• low rates of material defects
• high supplier service performance
• internal customer satisfaction, and
• lower prices.

Good news: You may not need to search far and wide.

Given the current economic climate, it could be an ideal time for you to negotiate with existing suppliers.

They might be more willing to make certain concessions, rather than lose all of your business.

One note of caution: Be sure you’re keeping track — metrics — against benchmarked performance, to prove in dollars and cents that you’ve saved money and improved purchasing and procurement performance.

Most times, your toughest sneaky challenges come from beneath your own roof.

The biggest problem? When people in other departments — like, oh, let’s say Sales — take it upon themselves to cut their own deals with suppliers.

Fortunately, there are ways to battle back (without injuring any co-workers).

Here’s  a three-part strategy that’s proven to be successful:

• Explain what’s wrong, and why it hurts. Believe it or not, there are cases where these folks might have thought they were saving a little time or even doing you a favor.  In a calm, non-confrontational fashion, meet with the offending party and explain why their actions can (and often do) lead to trouble. These situations can even cause frustrated suppliers to leave you, if they can’t duplicate the “great deal” they got last time around. Once your colleague understands the problems, enlist that person to work with you on further negotiations with the supplier.
• Line up your ducks. Catalog the price(s) your company typically pays for these goods or services. Track the history. Document the prices other companies pay suppliers, or compare your price with industry benchmarks. At the very least, suppliers will realize they shouldn’t expect ongoing price breaks of the nature.
• Get something in return. It’s unlikely suppliers will budge on the price, at least this time around. Instead, look for areas that can be negotiated: longer warranty, better service contract, extended payment terms, or even future breaks in price or service that work to your advantage.