In a recent blog, we discussed the benefits of implementing supplier management within your organization. However, in order to truly experience such benefits, there are a number of supplier management best practices that must be established first.
Organizations rely heavily on third-party suppliers to provide goods and services that they subsequently provide to their customers. However, the practice of supplier management has not always been given the attention it deserves.
Things are now changing though, with many businesses, particularly those with complex supply chains, having sought to establish and maintain strong working relations with suppliers, in order to optimize production levels and profits.
In spite of the efforts being made to establish supplier management best practices within the supply chain, organizations are often faced with a number of challenges when attempting to do so.
Supplier Management Challenges
A recent report by PWC named the biggest challenges that organizations encounter when trying to implement supplier management, with too much focus on costs instead of value coming proving the biggest.
Just because suppliers offer the lowest prices does not necessarily mean that they offer the best value. You may get the cheapest product or service in the short-term but this may be to the detriment of longer-term strong working relations. Procurement teams need to move on from thinking reduced costs are the be-all and end-all in order to establish supplier management best practices.
The report also refers to a lack of understanding/required skills, resistance to change and a lack of alignment between departments, amongst other things, as the biggest challenges associated with implementing supplier management.
However, through the adoption of the following 7 supplier management best practices, organizations are able to overcome such challenges and experience the many benefits of supplier management.
Supplier Management Best Practices
1. Embrace Technology
Technology has changed the way businesses operate. Procurement’s adoption of supplier management technology is now seen as one of the most important supplier management best practices.
Supplier management technology opens up a wealth of opportunities for organizations. With its ability to track inventory, and automate orders to the required levels, employees save time and unnecessary costs and waste are also significantly reduced.
Aside from its automation capabilities, many supplier management solutions also enable organizations to onboard suppliers, manage their data, track POs and communicate with suppliers.
All told, supplier management solutions provide organizations with the information needed to make the best decisions.
According to Levvel Research, 81% of organizations reported improvements in supplier relations following the implementation of supporting technology.
The key to achieving the true benefits of supplier management technology is to choose a solution that incorporates as many supplier management features as possible, that will benefit as many departments as possible within your organization.
2. Select the Right Partners
The suppliers that you choose to work with and the relationships that you share with them can have a major impact on the success of your organization.
As supplier management best practices go, selecting the right partners is vitally important and includes a number of different stages.
Firstly, it is vitally important to assess any potential suppliers’ capabilities. Look at things such as any previous interactions with them and also the capacity of their workforce. This will give an indication as to what they are like to work with and how capable they are of meeting your organization’s requirements.
Secondly, once capabilities have been assured, the details of any working relationship need to be put into a contract, stating explicitly what the supplier will provide. Details included should cover the likes of delivery times, order specifications and costs, ensuring that there is clarity on both sides.
Even after contracts have been established, it should not be taken for granted that suppliers will always deliver to the expected standards. Regular monitoring should take place in the form of spot checks.
These steps will ensure that, over time, your organization will be able to select the most suitable suppliers and maintain strong working relations and standards with them.
3. Use of Data and Analytics
Data and analytics is empowering organizations more than ever before to make informed, strategic decisions. This is also true to the area of supplier management, with the use of data and analytics now recognized as one of the supplier management best practices that organizations should be focusing one.
As reported by Deloitte, there are several technologies expected to impact procurement over the next few years, however, the biggest of those could well be spend analysis.
With spend analysis, organizations can look at where their money is being spent in order to assess opportunities for savings.
When it comes to selecting supplier management technology that automates inventory management and manages supplier data, as we have mentioned already, look for a solution that provides all of your spend data in one place, as consolidated and standardized results.
A solution of this nature will allow you to group and sort your expenditures in order to look at overall areas of spending within your organization.
The results will be noticed immediately, with the data allowing you to assess methods of saving, your overall dependency on certain suppliers, and the risks that your suppliers pose to your organization’s operations.
4. Alignment of Stakeholders
We have already spoken of how one of the most important supplier management best practices involves selecting the right partners. Alignment with them, following the partnership, is also key to getting the most out of the working relationship.
In order to ensure that your supplier management initiatives are truly a success, you need to promote collaboration and transparency as key elements of your working relationships. You should be transparent about your organization’s goals and what you expect from your suppliers. This is of particular importance when managing multiple suppliers. Once the relationship with a supplier is open and mutually beneficial, you will find all parties invested in producing the best possible outcome.
This requires ongoing communication and constant analysis. You will want to make sure that this oversight is given to the most relevant groups within your company. For example, your Planning department may oversee certain elements of procurement. However, input from Quality Control should also be consistent. It is best to be explicit about these levels of input in order to make sure that alignment is achieved.
5. Supplier Segmentation
If your organization is the subject of a large supply chain, supplier segmentation can be one of the most effective supplier management best practices. Grouping suppliers, based on what they provide and how their services fit your business model facilitates procurement activities and serves to improve communication between your organization and your suppliers.
Some suppliers may be considered strategic, while others may be essential and both segments will be handled very differently. By segmenting suppliers, you provide yourself with an accurate framework in which can truly assess their value and dedicate your efforts towards them.
One of the most accurate frameworks for segmenting and assessing suppliers is the Kraljic Matrix, devised by Peter Kraljic in 1983. In this, he argues that supply items should be segmented by risk and profitability.
Risk refers to the likelihood of an unexpected event occurring within the supply chain that will lead to disrupted operations. Profitability describes the impact of a supply item on the bottom line.
6. Education and Training
Quality supplier management is about more than just theory. There must be application within the daily operations of your organization. Unfortunately, by most estimates, the workforce is woefully unprepared for this task. According to Deloitte’s Global Chief Procurement Survey 2018, up to 51 percent of procurement leaders lack faith in their teams to implement their goals.
This may seem discouraging, however, it highlights the opportunity to implement one of the most valuable supplier management best practices in the form of education and training. Supplier management can be taught, and employees can be trained with the right skills for the job. To do this, first identify the competencies you value most. Teach your employees to think about strategic relationships, and provide the necessary training on the technologies used to monitor those relationships. All employees should understand the expectations in supplier management in order to make it a part of your overall organizational culture.
7. Risk Management
The last of the supplier management best practices we will discuss is all about risk. There is risk inherent in every decision you make, but you need to be aware of the risk in order to manage it properly. In supplier management, you want to mitigate the risk of supply failure. In supply failure, the supplier is unable to provide for your needs. This may be due to a lack of resources. It may also be an error on your part in terms of placing improper orders.
To keep these risks in check, consider the other best practices that have been discussed. Proper data analysis can make sure that your procurement requests are accurate, and maintaining a good relationship with your supplier can ensure that your needs are never left unfulfilled. However, you should make sure that risk is a part of your mindset. Always be aware of potential weaknesses within the supply chain in order to prepare the necessary countermeasures.
There are many benefits to be experienced from having strong supplier management within your organization. However, there will be many challenges for your organization to overcome when attempting to implement it. By adhering to the most important supplier management best practices, your organization will be best placed to reap the rewards.