Supplier Onboarding Process - Part 1
Supplier onboarding is the process of initiating a new business relationship with an external supplier and integrating that supplier into the company's systems and business processes. This is often a challenging, time consuming, and often misunderstood process for many organizations. Supplier onboarding involves more than merely "signing up a supplier." Supplier onboarding does include signing up or registering a supplier, but also encompasses everything required to get that supplier ready to do business with the organization. This can mean interaction with multiple parts of an organization ranging from purchasing, supply chain, finance, accounting, IT, and legal. These interactions often involve many different people performing within these different functions. Without a streamlined, well-managed (and we would argue automated) process, an organization will waste a lot of money and likely will have more trouble with the supplier relationship down the road.
This article outlines and describes elements in the supplier onboarding process, provides details on time and effort involved for many organizations to bring a supplier onboard, and explains the key drivers of cost for this process. It describes how the use of software can help to streamline this process and give personnel the tools that they need to better manage these activities. The article demonstrates why the use of software is integral to this process and will outline some important benefits beyond process cost savings that can result from the effective use of supplier onboarding software. It provides details on why effective onboarding software can lay the groundwork for other best practice buying initiatives. Finally, it lays out some of the key things that an organization should consider when evaluating supplier onboarding solutions.
Supplier Onboarding Process
The elements of supplier onboarding process may vary somewhat depending on the organization, the type of goods or services provided by the supplier, and the strategic importance of the supplier. For strategic suppliers, the onboarding process may involve a level of review that is as quite lengthy and rigorous. However, for non-strategic suppliers, the onboarding process may involve only collecting some basic data and conducting a Dunn and Bradstreet check. However, there is more to getting a new supplier set up and ready to do business with a large organization. A good onboarding process will include other establishing procedures for other common activities that take place in the relationship like purchase orders, invoicing, shipping notices, and receipts. The sections below contain a breakdown of some common parts of the supplier onboarding process and a brief explanation about each part.
Capturing Supplier Data
This involves obtaining profile information like company name, address, primary point of contact, and other information that will be needed to perform supplier verification checks. This is sometimes called supplier registration.
Providing Policies to Suppliers
Important policies, procedures, and other documents must be provided to suppliers and suppliers should acknowledges that they have read and received them.
Obtaining diversity information from suppliers and categorizing suppliers appropriately can be crucial. Suppliers should also provide relevant and up to date certifications where appropriate.
Supplier Verification Checks
Common checks that companies use will include checks to assess financial health, the quality of products, capacity, or the effectiveness of the supplier's manufacturing process. Some companies will also conduct site visits in order to get first hand view of a supplier and its facilities.
Setting up Payment Information
This involves obtaining the appropriate payment address, payment point of contact, banking information, or other financial information required to make a payment to the supplier once the company receives and invoice.
This involves negotiating the contract with the supplier, agreeing to terms, and obtaining a signed agreement.
Acquiring Product Information
Product information needs to be obtained from suppliers. This can be done by obtaining product data, a supplier catalog, or by obtaining information from "punch out" to another source of data.
All purchase orders need to be delivered and received by the supplier. This means that a process needs to be in place for the buyer(s) to enter purchase orders and to send them to the supplier.
Suppliers need to deliver their invoices to the organization's accounts payable department so that they can be processed and the payment can be sent out. The invoices should be paid according to contract terms. There should also be a process for resolving invoice disputes or payment problems.
For some companies, it can be important to receive advanced notice of shipments prior to the delivery of goods. This helps companies plan and prepare and also adds additional value from the supply process. These shipping notices will be sent to the buyers and sometimes to the receiver.
For some companies, it is important to track the receipt of products from the supplier to be able to check the accuracy of the order and verify that the quantity, type, and quality of the items complies with what was ordered.
Costs of Supplier Onboarding
There are real and measurable costs associated with onboarding each supplier. These costs include the costs involved in establishing the relationship, reviewing the supplier, putting processes in place to interact with the supplier, and making the most of the supplier's goods or services. To quantify these costs, it can be helpful to think about what takes place in getting a supplier set up and to consider the costs involved in each part of this process. The process is outlined in the sections above. The total costs involved in these processes is often a function of how well a company can automate many of the parts of this process. Organizations that are automated and well managed will use onboarding software to handle many of these activities. Other companies may employ a more labor intensive strategy. For example, if we take the first step of capturing supplier data, an organization with software will ask the supplier to submit this information using a web based form that sends the data directly into a centralized database. However, a company that doesn't have this software will use a combination of phone, fax, paper documents, and email to obtain this information and enter it into an Excel spreadsheet. These two approaches are completely different. One is scalable and one is not. One is prone to errors and the other less so.
To present a picture of these costs, in the table below, we have taken each part of the onboarding process and tried to develop some back of the envelop calculations to determine the actual time and cost required to onboard a supplier. The information in the table below is not scientific data, but is an estimate based on the time it may take organizations to complete these tasks. We realize that not all organizations engage in all parts of the process listed below for every supplier and that the level of attention to each part of the process may vary as well. For example, one company may conduct site visits and perform detailed quality audits for strategic suppliers. This would raise the time estimates require beyond the amounts listed in the table below. In reality, there are likely few organizations that are completely manual and most organizations fall somewhere in the middle of the manual/automated spectrum. The table below summarizes the time required for each task under both scenarios.
|Task||More Manual||More Automated|
|Capturing supplier data||4 hours||1 hour|
|Providing policies to supplies||30 minutes||0 minutes|
|Obtaining diversity information||2 hours||30 minutes|
|Supplier verification checks||40 hours (or more)||1 hour|
|Setting up payment information||2 hours||30 minutes|
|Contract negotiation||100 hours (or more)||8 hours|
|Acquiring product information||80 hours (or more)||8 hours|
|Purchase order set up||40 hours (or more)||2 hours|
|Invoicing set up||40 hours (or more)||2 hours|
|Shipping notices set up||40 hours (or more)||2 hours|
|Receipts set up||40 hours (or more)||2 hours|
|Total||388 hours||27 hours|
Cost Savings Potential
If you use a rate of $90 per hour as an average hourly cost to perform these activities, then the total costs of supplier onboarding can range from $2,400.00 per supplier for an organization with a more efficient supplier onboarding process to over $35,000.00 supplier for organizations that do many things more manually. There are probably many organizations in between. For an organization that onboards 500 suppliers annually, this means total supplier onboarding costs can range from $1.2 million to over $17.5 million annually. For a company that does many of these processes manually, there is significant opportunity for both cost and efficiency savings. In fact, the process cost savings alone that an organization can realize by implementing the right software and processes can total millions each year.