Supplier Management–Benefits, Process, & Best Practices
Supplier Management–Benefits, Process, & Best Practices
Globalization has swept today’s businesses off their foundations and has rendered the business processes more dynamic, competitive, and complex. Consequently, all organizations engage with suppliers for the provision of various goods and services to maximize business performance. Suppliers form an indispensable part of any business, and hence, managing suppliers 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 a practical 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 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.
Key Factors Driving Supplier Management
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
- The increasing complexity of supply chains which also result in a rising depth of the organization’s supplier base
- Growing risks in a 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 streamline crucial supplier data to provide meaningful insights for improving supplier management
- Establishing long-term supplier relationships that will enable 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
- An 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 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 the 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 the 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 improve their performance further.
Tracking Compliance to Relevant Parameters
Every supplier has to fulfill specific set parameters to ensure they are fulfilling the requirements of the organization. Using a supplier management system, you can evaluate the suppliers’ compliance with the set parameters and identify the scope of improvement to derive maximum value.
Evaluating Supplier Performance
This is possibly one of the essential benefits of having supplier management. You need to know how your suppliers are performing because your organization’s performance is mostly dependent on them. Not only will supplier performance management allow you to evaluate supplier compliance, but it will also give you in-depth insights on their performance. Supplier management includes the creation of various KPIs to measure supplier performance, and using these; you can assess the value created 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 caters 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, it is necessary to establish a supplier management process. The process will guide an organization about the strategies it has to employ to manage the entire lifecycle of the engaged suppliers.
The 5-step Supplier Management Process
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 depend on the type of the organization and its requirements from suppliers, standard measures 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.
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 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 get them onboard finally. Ensure that you involve all relevant stakeholders in the contracting process to gain 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 groups that will 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 onboarding, you need to periodically evaluate their performance to see how well they are fulfilling the set objectives and requirements. To ensure practical 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 it can optimize it further.
Strategies to Improve Supplier Management
Apart from a well-structured process for managing suppliers, here are the best practices to fortify your supplier management.
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. KPIs enable supplier performance measurement to evaluate the value-creation and identify problem areas. Zycus’ whitepaper on ‘Best Practices for KPI Creation’ for supplier management has identified the 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 strategy will help build collaborative relationships with the suppliers. 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 supplier risks that plague supply chain, dissolve costs savings, and disrupt performance. The risks you need to primarily look out for are financial, operational, 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, 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 throough improved goods and services quality that determine the bottom line. If is time to put your suppliers in the front seat and 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 long, suppliers were in the back seat as mere recipients of the company’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 need to be actively involved in the value-creation of supply chains.
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