How do you measure your vendors' contribution to your company? In this episode, Chris Pieper, CEO of Alliance Enterprises, gives us a new and unique approach to identifying winners and losers in our vendor portfolios. Using principles and methods from Activity-Based Cost, Vendor Contribution Assessment gives a quantified measurement of vendor contribution to the organization's mission. From this assessment information, managers can now focus on replicating best practices and eliminating bad practices. This approach works well for both nonprofit and commercial enterprises.
== Transcript ==
Alan: So, Chris, we have taken something from what was in the commercial and non-profit arena. We went to profit contribution, which almost seems to be a commercial concept, now you seem to have taken it to a stage of a value but could somebody, well we are in the North West, so could somebody like Boeing apply this or another large company of that sort?
Chris: A commercial entity?
Alan: A commercial enterprise.
Chris: You bet. And I believe that the vendor contribution, the value contribution analysis has been something that’s missing from the manager’s tool box. The Boeing’s ability to produce their outcomes, i.e. their planes and the products that they deliver to their customers, is a function of the quality of their staff and their processes. It’s a function of the quality of their relationships with their customers, but because they have a high degree of vendors and contractors, external that are integral part of their processes, those vendors and contractors can affect the organization’s ability to produce the highest value outcome.
And in the end, I believe that the customers will pay the most for the highest value outcomes because if Boeing has to find…
Alan: So in creating their feedback loop, if you will.
Chris: A feedback loop. I mean an organization is what it wants to be and so really, they want to produce outcomes that need a certain standard, a certain set of values, if you will. And so when you have vendors that are a part of that mix, then your ability to produce the highest quality of product and fetch the best revenue is going to be inevitably affected by the quality of your vendors.
Go back to the value that our public sector folks found when we did vendor contribution analysis for them, is they were able to explain. First of all, they were able to separate layers of their vendors and to be able to show which one is…
Alan: Distinguish one from another?
Chris: One from another. Those that contributed high value, those contributed neutral value, those that destroyed or produced negative value…
Alan: It seems like we should be able to port this into a commercial enterprise also.
Chris: Yes, this…unless you believe that all vendors produce equally regardless of the complexity or the goals…
Alan: I can’t believe that.
Chris: It doesn’t happen because like with customers, vendors are diverse. They are different sizes, they have different desires, they are driven by different things, and the importance of vendor contribution is if you can’t explain to the vendor what’s important, in terms of value, and to bring it down to dollars and to show them how much value they are contributing through their activities, then if you can’t explain that to them, you don’t have a benchmark to give them a means to improve.
As in to move out of the bottom, or to be rewarded because they’re out here producing far in excess of value of what others, and remember, again, it’s a routed contribution so all vendors were compared equally. So what we just know is that right or wrong, the ones in the middle were not doing as well as the ones on the end; the ones on the far left had large, gaping holes that needed to be addressed.
And a company like Boeing - any commercial entity, what we have seen is when you can sit down, when you’re equipped with knowledge, one, you can decide where to put your valuable smart resources to improve, and two, you can work with your customers to get them, or your vendors, in this case, to get them to help.
So really we end up with our three legs - one, a chance with performance management to work with our staff to be a more efficient in their process. Two, a chance to work with our customers to make sure that we are getting the maximum profit. And three, then the third leg of the missing stool, a chance to work with our vendors to make sure that they are contributing value to those outcomes so that our customers will pay us the most for those outcomes because they are in fact providing the kind of value that we want.
Alan: So years ago we bought all to a customer, to focus on customers. Now you have taken it and we can bring it back the other way to the vendors, to focus on the vendors. So maybe we now do have a complete picture of what we can do for performance management.
Chris: Like I think as a CEO and as I have gone out and talked with many organizations over the years, what you are looking for is what are the variables that affect your ability to be successful. And in the end, if you don’t have a lot of vendors then it’s your staff and your customers.
But in organizations, public sector or commercial, if you have thousands of vendors that are integral to your delivery vehicle, then they’re going to have an impact, and what our pilot studies and our work is showing is that we can assess their contribution in the same way as we were able to assess customer profitability’s contribution back in the 2000’s.
Alan: Sound’s exciting.
Chris: It’s exciting, yes, and just again, watching managers light up when they see something that matches their gut feel and that they can take action on. It’s transparent; it’s actionable, and in the end, that’s what performance management is all about.
Alan: Can we take this to Congress?
Chris: Hopefully in time.
Alan: Thank you, Chris. I really appreciate speaking with you today. It’s been great catching up and actually seeing and getting a view into the next frontier.