Best Practices for Supplier Management
Managing suppliers is an essential component of a business’ procurement process. Done well, it can turn you into a company superstar. Poor management, however, can add more stress to the situation. A poor supplier management can result in several issues, including:
- A missed opportunity to save
- Supplier performance problems due to unclear requirements and inadequate oversight
- Unable to adapt or scale quickly enough to changes within the organization
- Inability to anticipate and react to changes in prices and market volatility
- The workload is heavier when processes are complex and ineffective
When a company builds a strong supplier management process, it mitigates risks and ensures its supply chain meets KPIs while operating smoothly. Consider these best practices as you build the right supplier management system for your business.
Table of Contents
Identify Business Requirements
There is more to procurement than cutting costs and finding the cheapest deal. Ideally, procurement would work alongside your overall company strategy and be driven by business needs. In order for your company to grow, smart asset utilisation, risk mitigation, and uninterrupted supply are imperative.
Communication across teams is key to executing this well. You can only achieve your business goals by aligning your procurement strategy with the rest of your organisation. The procurement team will be able to avoid mistakes when choosing new suppliers and negotiating deals when they understand what the business needs. Aligning your business goals with supplier performance and prioritising them will also help you measure supplier performance.
Create a Supplier Management Policy
The supplier management policy describes all of your supplier management activities to senior management and the board. The more comprehensive your policy, the better as it serves as a foundation for strategic and robust management.
To ensure you have a solid supplier management policy, form a purchasing committee. A committee with key stakeholders such as suppliers’ managers and executives, unit managers, and unit heads should be formed. It is important that the committee regularly assesses policy, performance, and refocuses as conditions change.
The policy should outline who is responsible along with how the department works and how oversight is conducted. You should write down your supplier management policy as a document. The management needs to approve the policy that outlines how you will keep stakeholders informed.
In order to remain competitive, your company’s purchasing strategy must align with your overall strategy.
As part of the supplier management policy document, you should outline the ideal number of suppliers according to the categories you have defined. Consider risk factors, diverse requirements, and the dynamic nature of your market. By taking this step, you will be able to gain a competitive advantage.
There should also be a description of the supplier review and selection process included in the document. You should include the parameters that apply to your company so you can move forward when planning site visits and audits.
In addition to your supplier policy, you should also establish your risk assessment principles, including financial, legal, and information security risks. In addition to bank statements and tax records, look for independent documentation from suppliers. Your company may need a risk assessment professional or a risk assessment committee, depending on its size.
You will also be able to include the metrics you wish to monitor in your policy. In addition to data you capture and measure objectively, these KPIs should also take into account contextual factors and qualitative observations.
Contracts Are The Foundation of Successful Business Relationships
Ensure that supplier contracts clearly define responsibilities when creating them. Be sure to follow your vendor management policy guidelines when drafting these contracts. You should define your scope of work (SOW) or service-level agreement (SLA) outside your boilerplate policy document. It is important to include supplier specific agreements that outline the details to avoid future issues. SLAs and SOWs specify the thresholds your suppliers must meet. Besides performance expectations, they also detail data breach management, compliance requirements and penalties if compliance is not met.
Ensure that your contract includes information-sharing expectations so that you and your suppliers can work collaboratively. As part of the agreement, you must share information and priorities. Include supplier strategies, objectives, plans, organizational details and information about your tech stack. Additionally, you may want to include your organisational structure, your commitment to your customers and your challenges. A supplier’s capabilities and areas of investment may also be included.
As vendors may subcontract products and services to others, your contract should contain information about fourth-party stipulations. Ensure that your third party identifies any fourth-party subcontractors they may work with and monitors their compliance with your contractual obligations.
Maintain a Supplier Database
Having an accurate and up-to-date supplier database is crucial to reducing costs, selecting new vendors, and promoting strong supplier relationships. Your company should maintain a database that contains the following information about each supplier:
- Contact details
- A description of the capabilities of the supplier
- Proposals and contracts
- Supplier locations and shipping coverage
- Information about invoices and transactions
- Supplier performance and feedback
Other business-critical information specific to your businsess
Prioritize your suppliers based on a set of criteria you develop. In this way, you can identify which suppliers are most crucial to your business’ success. You can segment your suppliers in a number of ways, including:
Without raw material suppliers, you cannot move forward with production.
In order to achieve the greatest level of success, you must identify potential areas of improvement and growth within your procurement team. A plan for improving individual competencies can then be devised. Creating an environment that encourages people to share what they know and help each other can be done by setting up a training program in-house or paying for courses.
Define the Responsibilities of Each Team Member Clearly
As supplier management involves multiple decision-makers and requires cross-team cooperation, it is easy for roles and responsibilities to get muddled and blurred. Without a clear reporting sequence, decision-making becomes difficult or impossible. It’s therefore important to set up a concise, clear reporting chain as well as a transparent workflow. By doing this, each team member becomes aware of their responsibilities and the extent to which they need to participate. To avoid internal conflicts and keep things running smoothly, having a document on hand can clear up any confusion. Map out your team’s responsibilities and workflows so that you can determine if you need to hire any additional staff.
Establish a Supplier Management System
Assess And Monitor Supplier Performance
It is imperative to manage your supplier performance in order to build successful and long-term supplier relationships. Therefore, you need a transparent and structured evaluation system. By doing so, you can maintain objective supplier relationships while also minimizing risks. You can easily provide feedback to your suppliers and encourage them to improve their services.
- Metrics that can be used to measure performance
- Supplier requirements
- Compliance with your policies and procedures
- Alignment to your business goals
- Perform regular risk assessments
There is always a risk of supply chain disruptions. Throughout history, there has been uncertainty and volatility, as demonstrated by a lockdown and a covid-19 pandemic. You can develop a strategy to work around potential disrupting factors by identifying them early and listing them according to their severity.
Identify your strategic suppliers, goods, and services. Make sure you have a set of contingencies in place in case of supply chain disruptions. You should instruct your team on how to act in those situations so they can make quick and informed decisions.
Develop a supplier risk assessment programme and evaluate the suppliers accordingly.
When developing your supplier risk assessment programme, you should:
- Suppliers should be evaluated based on their risk, spending, and location. Having a global supplier base can be beneficial, but it can also introduce more risk.
- Verify all supplier documents
- Maintain measurable compliance standards and report on them regularly
- Monitor the performance of your suppliers by conducting ongoing third-party verifications
The importance of supplier performance management cannot be overstated, regardless of the size of your business. When your business grows, you may need to add more options, even if you currently deal with a handful of suppliers. It is important to identify cost savings and streamline your business processes early on to increase profitability.
When you take the time to evaluate your supply chain management practices even if you have a lot of supplier data on hand, you can find ways to improve efficiency that will pay off in the long run.