The Intricacies of Supplier Management

Introduction

What’s in a name? Vendors or suppliers? I tend to prefer suppliers as this name gives the idea that your suppliers are links in the chain that delivers your outcome (my background is manufacturing and logistics, after all), whereas vendor to me seems a bit disengaged (thinks vending machine).

What’s in a name? Partnerships – Many of us throw the term partnership around to talk about how we engage with our suppliers. Partnerships, in the legal sense, mean the sharing of profits, debts, and liabilities. Although this is not the case with our suppliers, the idea of sharing risk and reward is integral to the concept of a successful supplier partnership.

The point is that the best results come from your suppliers when you are fully engaged with them. But this can be easier said than done, even with a Vendor Management Function in place.   

This blog aims to give you some key insights on where I would start to move towards this goal based on my many years working in this area:

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My background & working with Suppliers

An IT career that started post-University at Unilever Head Office in London and developed with roles in Europe and across Asia, culminating for the company as CIO for Australia and New Zealand. During that time, I became a founding member of Australia’s CIO Executive Council Board and was on the External Advisory Committee for the Information Faculty at UTS, Sydney.

Moving to Singapore to become the CIO Asia-Pacific for DHL supply chain, a role not only responsible for internal IT, but as IT service provider for DHL’s logistics customers, I became in charge of giving key insights into the other side of the fence, i.e., being a supplier.  

Then a global role with BASF as VP responsible for IT and supply chain vendors, negotiating new multi-million-dollar deals with SAP and Microsoft and massively improving performance with existing vendors such as BT. Along the way implementing a Quality Management System focusing on the “Voice of the Customer” as a driver of quality services. Alongside this role, I was an invited member of the (Gartner) Research Board on Suppliers.

This role saw me successfully complete one of my favorite projects: At its start, two renowned German companies in their fields, BASF and SAP, (only 20 minutes apart from each other) who should have had a close working relationship, particularly with BASF having one of the largest SAP implementations in the world – had one that was almost entirely transactional. The project’s end saw a 5-year deal where BASF became a key customer helping SAP design future releases of the product.

Returning to Australia and the Hunter Valley, I worked at the University of Newcastle designing and implementing its “Strategic Partnership Program”. Now I have moved to the beautiful Macedon Ranges just outside Melbourne.

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So, the challenge for many is, Am I getting the most out of my suppliers?

Vendor Management Function

You may already have a Vendor Management Function, or at least this is a clear part of some people’s roles, but in many cases, the focus may be on contract and/or license management, and it does not have a strategic view of Supplier Relationship Management (SRM).

The first steps I would undertake is to assess the current situation with regards to suppliers and their management, and at the same time identify which services or processes could be improved by implementing SRM and then put in a plan to source an appropriate supplier or begin working with an existing one.

Inventory of Suppliers 

These are some of the questions I would be asking when looking at your existing supplier base:

  • Do you know how many suppliers you have?
  • Do you know which suppliers are important or not?
  • Do you know what “important” is?
  • Do you have a Procurement Strategy?
  • Do you have a Strategic Sourcing Plan?
  • What types of products or services are they delivering?
  • Do you have a contract management system (even if in a spreadsheet)?
  • Do you have contracts in place, and when are they up for renewal?
  • Do you have a formal review process with your (key) suppliers?
  • Do you know how your suppliers are performing?

Who are my important suppliers?

It is neither necessary nor desirable to have a supplier relationship with all your suppliers because it is a time-consuming activity. Therefore, it is essential to work out who is your important suppliers.

The contract value is one dimension, but high value alone does not necessarily mean important as one of your biggest purchases may be hardware but spending time building a strategic relationship is unlikely to make a substantial difference to outcomes. 

Strategic value – is the supply going to advance the company’s strategy in some way? Is there an opportunity to improve the service, product, or engagement by working more closely?

Add these two together, and you may have found your important or strategic suppliers or at least know where you should have your strategic suppliers!

Strategic Sourcing Plan

Alongside looking at your existing supplier base, develop a plan of where you would like to be in terms of supply and suppliers. Once it is decided which functions you want to outsource (near-source, right source, whatever) and which to keep in-house, the next step is to select your suppliers.

At this stage, it is vital to review your Procurement policies. What is needed from this is to ensure that any existing plan does not preclude the selection of an ideal strategic supplier by stipulating elements such as the lowest cost. 

Of course, the cost is an extremely important element, but what should also be considered is the Total Cost of Ownership (TCO) over the course of the contract. An hourly rate may be more attractive initially, but if, as a result of not working well together, there is a high degree of rework required for the final article, then your ultimate price may be much higher.  

When identifying a supplier or groups of suppliers to work with, for it to be a successful relationship, culture needs to be considered. Do you have similar goals and can therefore work well together?

Some elements may be included in your existing procurement policy or guidelines, but others you can choose to review either through a pre-qualification process or by asking specific questions during the RFP process.

Nobody will disagree that we all want ethical sourcing, and many, if not all, companies will have statements about compliance with the Modern Slavery Act 2018. However, beyond this, you may wish to review criteria such as a supplier’s green credentials, their sustainability stance, or their diversity and inclusion may be an important aspect for you. Even if a company seems to tick all your boxes, you may wish to consider their supply chains or, if they subcontract work, to understand if they have mechanisms for ensuring the same standards down the line.

Going-to-Market for your strategic suppliers

The above decided, now to develop and release a Request for Proposal (RFP) to market.

In developing the RFP, it is important not only to clearly define your requirements for the service or product but in addition, to outline for potential suppliers what are the mechanisms for ongoing relationship management and the fact that you are looking for a relationship in the first place!

The RPF should include a proposed Balanced Scorecard (BSC). To be clear, this is not the service-level agreements (SLAs) defined as part of the contract, although they may form a part of the BSC. The BSC will assess performance overall and be an agenda for the regular reviews (also laid out in the RFP).

Ideally, the format of a joint steering committee should be detailed in the RFP and must include an escalation process.

The negotiation & the contract

It’s crucial at this stage to avoid falling into a traditional mentality of it being a zero-sum game. Too many times in the past, I’ve noticed that when people get into a room to negotiate, for some reason, they become adversarial and start banging their fists on the table – I’m not just talking metaphorically – I’ve literally seen people do this! There seems to be a mentality that the supplier is “out to trick me” or “If the supplier gets a benefit, I’ve left money on the table”.

Sometimes, however, KPIs drive the wrong behavior. Where savings on the contract may form part of a person’s performance incentive plan or in assessment criteria where the price is too heavily weighted versus quality. These aspects should be reviewed in advance to ensure the proper outcomes.

The supplier relationship aspects may not end up being contractual and may just form an addendum outlining the details and be best efforts, but they should form part of the discussions.

Even as I advocate being willing to negotiate a deal that is good for the supplier, this does not mean being a pushover. The job is still to get value-for-money for your company.

Can I have a relationship with a mega-company when I’m a minnow?

A quick note here, it may seem unrealistic for a small company to have a relationship with one of the leading organizations who have “take it or leave it” standard contracts, but often there are ways to achieve some level of engagement. Agreeing to do media and PR can give you an edge; bundling your anticipated requirements over an extended period or being an early adopter in your industry or geography may give you an advantage in getting you more attention than otherwise.

Ongoing Management

Steering Committee Meeting

As with a Steering Committee in any other context or situation, there must be people who can take decisions, but, in this case, that must include decision-makers from both companies.

There should be a regular schedule for the Steering Committee meetings according to the volume and criticality of the work being carried out. Operations meetings will continue as in any other engagement, but the information will be fed into these Steering Committee meetings. The agenda should include a review of performance using the BSC, but plenty of time should be allocated for sharing information about future activities and opportunities.

Balanced Scorecard (BSC)

Differing from SLAs, which may have penalties associated with not meeting them, the BSC is there to support continuous improvement and build a better, stronger relationship.

What it is not is a hammer to beat your supplier over the head with. It is an opportunity to discuss what things are working or, if not why, and how we can fix them. It’s also a two-way street. Of fundamental importance is the ability for the supplier to point out if or where you are falling short or, more tactfully, “Could do better”.

If issues arise with a particular process, it’s often a case of blaming the supplier, particularly if they are new. However, rather than resorting to blame, I will typically use a process borrowed from Lean Six Sigma to work through, identify inefficiencies, and remove obstacles to successfully focus on the interplay between the two companies, just as I would with individual functions, departments, or teams within an organization.

A full BSC for a strategic supplier will include not only quantitative measures but also qualitative ones such as customer satisfaction. Where this is the case, an agreement needs to be reached on how these can be measured objectively. Quality is an element that can be difficult to measure but getting agreement to use measures such as the amount of rework can reduce its subjective nature.

Concluding Remarks

Fundamental to making a success of Supplier Relationship Management is support for the process at all levels along with commitment and desire on both sides to make it work; it takes two to tango here. The bywords are openness and transparency.

As with everything, saying you have a relationship doesn’t mean that’s what it is. Work will be needed throughout the life of the engagement. Don’t expect it all to go smoothly all the time, but I suggest that if there are bumps, they will be resolved much more quickly.

It should mean that when unexpected issues arise (such as a global pandemic), having open dialogue already well-rehearsed will enable a faster and efficient response.

I suggest starting with one or two suppliers, then build up your competency in this area and communicate the successes. There will undoubtedly be some of those skeptics who believe in the zero-sum game approach to suppliers. But I passionately believe that if both organizations win, the wins themselves will be much greater!

Future Talent. Now.

Sue Bartlett

Sue Bartlett

Author Since: May 4, 2021

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