Supplier Management – its Benefits, Process and Best Practices
Supplier Management – its Benefits, Process and Best Practices
Globalization has swept today’s businesses off their foundations and has rendered the business processes more dynamic, competitive and complex. Consequently, almost all organizations engage with third parties, more commonly known as suppliers, for provision of various goods and services to maximize their own business performance. Suppliers form an indispensable part of any business, and hence, managing suppliers throughout their lifecycle and engaging in effective supplier relationship management is crucial.
What is Supplier Management?
Supplier Management refers to all the business processes and activities that deal with the entire lifecycle of a supplier for an organization.
This includes, but is not limited to, identification, selection and management of relevant suppliers coupled with effective evaluation of their performance to ensure they are providing maximum value for the organization’s third-party requirements.
Given the complexity of business relationships, the variety of suppliers engaged with organizations and their sheer importance, a definition can only cover so much. Hence, this blog will cover the need for supplier management, its benefits, process and best practices.
Why do we need Supplier Management?
When it comes to comes to establishing why businesses necessitate supplier management, there are two main pillars we need to recognize:
- To evaluate if the suppliers are performing as per the organizational requirements
- To identify areas of improvement while engaging with suppliers throughout their lifecycle
These two factors primarily highlight why we need supplier management – to ensure we are deriving the maximum value from the suppliers for the relevant requirement(s), given the resources invested in the suppliers. To get the most out of a supplier’s service, it is important to track and measure their performance. With regular communication and feedback, an organization develops a transparent relationship with the supplier which helps in finding areas of improvements with quick solutions.
A whitepaper by Zycus on ‘Building Blocks for Improved Supplier Management’ has identified other key factors that are currently driving the need for supplier management:
- Increasing operational scale that results in increasing need for local as well as global suppliers
- Increasing complexity of supply chains which also result in increasing depth of the organization’s supplier base
- Increasing risks in supply chain which can make the organizations more vulnerable to performance failure if their involved suppliers are not managed and evaluated effectively
- Managing supplier data that allows organizations to identify streamline crucial supplier data to provide meaningful insights for improving supplier management
- Establishing long-term supplier relationships that allows suppliers and organizations to meaningfully collaborate and create synergies for maximized performance for the long-run
- Leveraging supplier relationships in times of organizations or external distress to ensure business performance doesn’t fluctuate
- Increasing competition which implies organizations have to identify and improve aspects of their business processes that can provide them a competitive advantage
- Matching industrial standards of supplier performance so that an organizations can achieve best-in-class performance
Benefits of Supplier Management
Now that we understand why need supplier management, let’s look at how it can benefit organizations:
- Managing a Growing Supplier Base Effectively
The supplier base of organizations is increasing – this is a consequence of a myriad of factors like increasingly globalized business processes that provide access to global suppliers, increasing complexity of supply chains, increase in the scale of operations of organizations, etc. Due to the increase in the number of suppliers engaged with the organizations, managing the entire lifecycle of suppliers becomes difficult. Having a well-structured supplier management process in place will allow organizations to manage their multitude of suppliers with ease.
- Achieving Cost Savings and Quality Control
Having strong supplier management practices will enable organizations to identify cost savings opportunities in the supply chain and scrutinize the quality of supplier output. This directly impacts and contributes to the company’s bottom-line.
- Improving Organization’s Supply Transparency
When you have a supplier management system in place, it will allow you to streamline valuable information and data regarding the lifecycle of the suppliers. It enables the organizations to have increased transparency into the number and type of engaged suppliers and how they are performing and helps in identifying areas of improvement and design strategies to further improve their performance.
- Tracking Compliance to Relevant Parameters
Every supplier has to fulfill certain set parameters to ensure they are fulfilling the requirements of the organization. Using supplier management techniques, you can evaluate the suppliers’ compliance to the set parameters and identify scope of improvement to derive maximum value.
- Evaluating Supplier Performance
This is possibly one of the most important benefits of having supplier management. At the end of the day, you need to know how your suppliers are performing because your organization’s performance is largely dependent on them. Not only will supplier performance management allow you to evaluate supplier compliance, it will also give you in-depth insights on their performance. Supplier management includes creation of various KPIs to measure supplier performance and using these, you can assess the value creation by the suppliers.
- Building Development Programs to Support Suppliers
Once you have evaluated suppliers and identified areas for improvement, supplier management can help you design development programs to support suppliers, especially the one that cater to long-term/crucial requirements, and help improve their performance.
- Leveraging Supplier Relationship Management
It might not seem so but the relationships you build with your suppliers can be very beneficial for your organization. When you collaborate with your suppliers and involve them in the process of deciding how to achieve the relevant requirements, you build long-lasting, trust-based relations that can be leveraged in the future. Collaborating with suppliers makes them more willing to understand your business needs and consider strategies on the organization’s terms.
- Assessing and Mitigating Supplier Risk
Identifying and mitigating supplier risk is another unequivocally critical benefit of having efficient supplier management for your organization. As supply chains and the resultant supplier relations becomes complex, the probability of detrimental supplier risks also increase. Supplier management helps in identifying and assessing the impact of the supplier risks and devising appropriate risk mitigation measures.
Building a Supplier Management Process
Now that we have identified the need and benefits of supplier management for an organization, it is necessary to establish a supplier management process that will guide the organization about the strategies it needs to employ to manage the entire lifecycle of the engaged suppliers. Here is a 5-step supplier management process you can follow:
- Identifying the set of business goals and objectives
Before you get on-board with your supplier management process, it is important to identify the set of business goals and objectives for which suppliers are required. It will highlight what every department requires from third-parties so that you can map the relevant suppliers to every need without duplicating efforts and resources. These objectives will also help evaluate supplier performance vis-à-vis the objectives that were communicated to them.
- Identifying relevant selection criteria for choosing suppliers
Once you know the objectives and requirements that necessitate supplier engagement, you need to define the selection criteria for choosing suppliers that will provide maximum value for the requirement.
While the selection criteria depends on the type of the organization and its requirements from suppliers, common criteria include pricing, quality of past work, industrial recognitions, legal reputation, etc. Organizations also engage in RFQs, RFPs and RFIs for selecting relevant suppliers, especially when the requirements are significant in nature.
- Evaluating and selecting suppliers
The next step is to evaluate all relevant suppliers based on the selection criteria you have identified. Majority of the organizations simply evaluate the suppliers based on the pricing they have quoted. However, it is equally important to factor in the other criteria that you have identified.
Assess the quotations and proposals given by the potential suppliers and ensure you are deriving maximum cost savings opportunities. Analyze the terms and conditions to see how well the suppliers are planning to meet the organizational requirements. At the same time, make sure you have done a thorough, holistic analysis of the suppliers’ strengths and weakness and study how the external environment’s threats and opportunities can impact your engagement with the suppliers.
- Negotiating and Contracting with the selected supplier(s)
Now that you have chosen the relevant suppliers, you need to execute the contracting process to finally get them onboard. Ensure that you are involving all relevant stakeholders in the contracting process to get valuable insights on how the contract can ensure maximum delivery of value. In a lot of business cases, the contracting process is executed by the finance/procurement team with the senior executives of business units whereas the teams that will actually work with the suppliers on a day-to-day basis are not consulted.
Collaborate with the suppliers to ensure that the negotiation process runs smoothly with minimal roadblocks. We have already established the benefits of meaningful relationship-building with suppliers.
- Evaluating supplier performance
The supplier management process doesn’t just end once you choose the suppliers. After their selection and on-boarding, you need to periodically evaluate their performance to see how well they are fulfilling the set objectives and requirements. In order to ensure effective evaluation, make sure you have established KPIs to measure performance. This will also provide insights into areas for improvement to maximize supplier performance. It also tells us how effective our supplier management process is and how can optimize it further.
Strategies to Improve Supplier Management
Apart from having a well-structured process for managing suppliers, you can also adopt best practices to make your supplier management process even more effective:
- Implement Supplier Information Management (SIM)
Zycus’ eBook on Supplier Management defines SIM a supplier-facing business process that ‘aggregates, collects and maintains the information from all distributed systems, thus providing a consolidated view of supplier data, process status and relationships’.
Having a supplier information system will enable you to:
- Streamline supplier data from disparate sources to gain meaningful insights
- Collaborate with suppliers to improve supplier relationship management
- Monitor the suppliers’ capabilities to feet current and future demands
- Evaluate supplier risks and identify mitigating measures
- Create KPIs to Measure Supplier Performance
While managing supplier lifecycles, it is important to have KPIs that will enable you to measure supplier performance which can help evaluate the value-creation by chosen suppliers and identify problem areas. Zycus’ whitepaper on ‘Best Practices for KPI Creation’ for supplier management has identified objective and subjective KPIs and scorecards that can help you measure you help you in managing suppliers.
- Collaborate with your Suppliers for effective Supplier Relationship Management
Ensure that you have accurately communicated your business objectives and goals to your suppliers. When the purpose is understood, suppliers can offer propositions that provide maximum value for your business needs. Involve them in the decision-making process to take advantage of synergies – this will help you build collaborative relationships with your suppliers for the long-run (we already know how valuable this can be). Supplier relationship management can be your key to derive maximum value from your suppliers and make your supply chain efficient.
- Evaluate Supplier Risks and Identify Mitigation Measures
This is one of the most crucial strategies you need to employ for a well-run supplier management process. It is important to identify the supplier risks that can plague your supply chain, dissolve costs savings and disrupt your performance. The risks you need to primarily look out for are financial risks, operational risks, data security risks and regulatory risks. Analyze the impact of these risks for your supplier management and devise measures that can help mitigate these risks.
In a Nutshell
In this blog, we have taken a look at one of the crucial aspects of business functioning – supplier management. The way economies are becoming more global in nature, involving suppliers in your business processes has become inevitable. An effective supplier management process not only allows you to derive maximum value for your business requirements, it also gives you a competitive edge. It enables you to achieve cost savings and also improve the quality of your goods or services – two crucial factors that determine a company’s bottom-line. If you aren’t already, it is some time to put your suppliers in the front seat and leverage that positioning to drive your organizational performance.
Food for Thought
There has been burgeoning of ‘Supplier Lifecycle Management’ – What is it and how does it differ from supplier management? For quite some time, suppliers were kept in the back seat and they were a mere recipient of the organization’s objectives and strategies for supplier management. Supplier Lifecycle Management brings the suppliers to a more dynamic and central role in the entire process. Being at the heart of procurement, suppliers, at all parts of their lifecycle, need to be actively involved when it comes to value-creation from supply chains.
Do you agree? Leave your thoughts below in our comments section.