The Monthly Metric: Percentage of Sourceable Spend With Top 10/50 Suppliers

One of this space’s favorite and most valuable resources is the annual The Metrics of Supply Management report by CAPS Research, the Tempe, Arizona-based program in strategic partnership with Institute for Supply Management^® (ISM^®) and Arizona State University.

Which makes this the most wonderful time of the year: The 2023 edition of the report is out, providing the most up-to-date benchmarking on many of the analytics that have been discussed at The Monthly Metric. CAPS Research’s yearly surveys of supply management organizations yield valuable data and KPIs, measuring such areas as spend, cost savings, personnel and organizational structure.

The report’s benchmarks (1) enable supply management organizations to compare their performance against peers and (2) display the value of the function to internal stakeholders. “Companies continue to come to CAPS Research for metrics that measure the effectiveness and efficiency of their supply management functions,” says Geoff Zwemke, Director of Benchmarking at CAPS Research. “The data helps companies drill down and find skill gaps as well as compare against others in their industry or sector.”

This year, CAPS Research introduced The Metrics of Inventory Management, which highlights KPIs for the inventory and warehouse management functions. Meanwhile, Zwemke says that CAPS Research will continue to evaluate supply chain performance metrics in a post-coronavirus pandemic environment, a process that could include streamlining the KPIs in the main report. This year, there are 94.

“Given all of the changes in the business world and the increasing pressure on the supply management function, it’s always good to take a fresh look at all the metrics and provide those that are most relevant to companies and practitioners,” Zwemke says.

Among the most relevant KPIs in The Metrics of Supply Management report are two that Zwemke says are “metrics of opportunity” — percentage of sourceable spend with the top 10 and top 50 suppliers.

Meaning of the Metrics

Some of the most important objectives for supply management organizations are shortening tail spend (because it can also become rogue or “maverick” spend), collaborating with suppliers for product and/or process innovation, and mitigating risk. The amount of spend with a company’s top 10 and/or top 50 suppliers can help measure how well those goals are being met.

They are opportunity metrics, Zwemke says, because more investment with its best vendors not only can limit a company’s tail spend, but also enable more strategic supplier partnerships. “The more spend you have with your top suppliers, the more you should be able to concentrate your effort on a smaller group of suppliers that are important to and bring more value to the organization,” he says.

A high percentage of spend among top suppliers can be a double-edged sword. While it indicates more reliance on trusted suppliers, it could mean that the procurement organization is failing to generate enough competition — and it’s concentrating risk among the vendors it relies on most.

But such a scenario seems to be becoming more prevalent, Zwemke says. “It concentrates risk, but what we hear from (member companies) is it’s best practice to have higher spend in fewer suppliers to shorten the tail,” he says. “In terms of trade-offs, the opportunities to develop strategic partnerships outweigh the increased exposure to risk.”

The COVID-19 era has featured much discussion on finding alternate sources of supply. But in the three years that CAPS Research has tracked these metrics, there has been little movement: In the 2023 report, all companies devoted 31 percent of sourceable spend with top 10 suppliers, 54.3 percent with the top 50. The figures are consistent when broken down between the discrete manufacturing, process manufacturing and services sectors.

“If a company has a more decentralized procurement and more regionalized purchasing autonomy, that can lead to a smaller percentage among top suppliers,” Zwemke says. “And the nature of the business can determine how much spend is spread out. But it’s only our third year of data collection, so there is still more to learn.”

’It’s All About Opportunity’

In terms of supplier spend concentration, this space covered suppliers accounting for 80 percent of spend in 2018 and revisited that KPI in 2021. While this month’s metrics suggest similarities with the 80/20 rule, Zwemke believes the top-10 and top-50 measurements offer better visibility and enable easier benchmarking.

The short history of data collection on these metrics does not inhibit a company’s ability to compare itself to peers, Zwemke says. CAPS Research, for example, provides a value analysis that benchmarks a company’s performance against others in its industry and sector, as well as businesses overall.

“A company should know where it compares in terms of its concentration of spend against others,” he says. “If you have less spend among the top 10 or the top 50 suppliers than your peers and competitors, you’re probably missing opportunities to collaborate and innovate — to zero in on the strategic view.”

In a business world still grappling with the pandemic’s transformational impacts, alternate supply sources to mitigate disruption risk are critical. But in the day to day, when procurement practitioners and suppliers communicate and have shared objectives on improving product design and streamlining processes, that synergy can transform operations and bolster bottom lines. (And yes, there’s a metric to help measure that.)

“It’s all about opportunity,” Zwemke says. “If you have a lot of suppliers versus a few, it’s more difficult to have close collaboration or partnership with a supplier on development of a new product or service, or on improving processes. There are so many examples of innovation that has comes from a supplier to a buying company.

Percentage of sourceable spend with top-10 and top-50 suppliers can, he adds, “reflect those opportunities — especially those that are lost.”

To suggest a metric to be covered, email me at dzeiger@ismworld.org.

(Image credit: Getty Images/Cokada)