E veryone in business has heard of the Pareto principle, otherwise known as the 80/20 rule.
From a procurement perspective, 80% of a company’s business comes from 20% of their suppliers. However, this means the remaining 20% of business comes from 80% of your suppliers. There is a misconception that the result is not worth the effort in properly vetting and managing these smaller, non-sanctioned suppliers that fall into the 80%. After all, their small size and relatively low-budget profile create workload challenges for procurement or supplier management organizations tasked with providing enterprise-wide oversight and controls. However, these smaller suppliers are often strategic and crucial to the success of the business, and improper control and management could be exposing your organization to unexpected consequences.
The benefits of using smaller suppliers are vast and include advantages such as increased diversity of supply base and tapping in to the explosion of the gig economy, potentially creating a larger, qualified supplier pool for your organization. They are often less expensive to use than your 20% suppliers and satisfy tactical initiatives. The risks, however, can be substantial and include maverick and/or fraudulent spending, high process cost, reputational risk, and non-compliance risk to internal policies and external laws. Smaller suppliers might also introduce significant levels of worker misclassification risk into your organization, which carries enormous penalties and fines.
The optimal solution to this dilemma is an end-to-end plan for the engagement and management of smaller suppliers. A properly executed strategy helps you optimize this segment of spend, delivers cost savings, reduces the cost of your procurement process, leverages niche providers, increases purchasing control, increases visibility of expenditures, improves efficiency in billing and invoicing, and establishes compliance to your supplier standards.
Considerations for implementation of a small vendor engagement solution should include vendor setup and validation of all their documentation, such as business licenses, insurance and payroll tax reporting. The resources performing services on your behalf from the supplier should be properly vetted to ensure they are appropriately classified as W2s. All resources should also be pre-screened according to your established requirements. Finally, small vendor engagement should include paying the vendor and year-end reporting requirements.
There are options in the marketplace that help your organization take strategic action to provide small vendor oversight and reap the many benefits of properly managing this critical 80% of your suppliers. For more insights and to hear the perspective of seasoned, industry experts on this important topic, join our webinar, Simplifying the World of Small Vendor Engagement presented by Teresa Creech, TalentWave CEO and Doug Leeby, Beeline CEO. Register for the live event on August 14, 2018 at 2:00 EST or catch the on-demand version after 8/14.