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SUPPLIER INCENTIVISATION

Definition

Incentivisation is the term used to align the motivations of the client with the supplier and vice-versa by and stimulating supplier's performance improvement in return for enhanced reward. Incentivisation can lead to a purchasing partnering relationship (CIPS: Purchasing and Supply Management: Incentivisation).

Steps to Successful Application

1] Set clear objectives and deliverables when incentivising a contract

2] Baseline setting: get the buyer to establish the total cost of the existing service

3] Identify whether the improvement in quality and/or cost reduction can be achieved with-out incentivising the contract

4] Establish expected benefits

5] Decide whether incentives will be financial (e.g. those which have a monetary value) or related to some contractual benefit (e.g. a longer contract with larger scope)

6] Post award monitoring: manage contract and conduct post implementation reviews.

 Benefits Of Incentivisation

Improved performance for both supplier and buyer. This can lead to benefits such as:-

- reduced costs

- early delivery

- inventory reduction

- increased sales

- improved labor utilization

- better technical solutions

- safer products

- higher quality products and services

- reduced risk exposure

Adapted from, Supplier Incentivisation , [2019] , CIPS Knowledge, Copyright © CIPS 2019.

One of the key findings from a research carried out by Gartner was that “organizations leading in sustainable procurement are more likely to incentivise suppliers to support sustainable procurement goals, outpacing followers in usage of structural, financial, partnership and recognition incentives.”

“A supply chain works well if its companies’ incentives are aligned—that is, if the risks, costs, and rewards of doing business are distributed fairly across the network. For reasons that we shall later discuss, if incentives aren’t in line, the companies’ actions won’t optimize the chain’s performance.”

Source: Harvard Business Review


Suppliers benefit from incentivisation programs through:

-Improvement in their cash flows

-Reduced time and resources spent following up on payments

-Heightened visibility from the client

Some drawbacks of supplier incentivisation may include:

- buyers changing the baseline target after supplier meets target

- difficulties reconciling buyer goals with supplier goals

- lack of continuity for the incentive program from buyers

Data Source: World Economic Forum [https://initiatives.weforum.org/net-zero-supply-chain-support-hub/3-4]

Source: BCG analysis

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Supplier Incentivisation