What Is Supplier Management and Why Is It Important?
Table of Contents
What is Supplier Management?
Supplier management is identifying, qualifying, acquiring, onboarding and managing suppliers who are essential for the operation of a business and its products and services. Its core objective is to ensure that all contracts with suppliers are in place to support each aspect of the organization to put it in the best possible position for growth.
While supply management is related to purchasing physical goods, data and other essential business resources, supplier management is focused on the relationship between the business and its supplier. Therefore, supplier management is moving towards supplier relationship management (SRM) and, more recently, in leading-edge organizations, towards supplier experience management (SXM).
SRM is focused on managing relationships at scale, although the focus here tends to remain on the needs of the enterprise as a customer. On the other hand, supplier experience management is concerned with a deeper collaboration with suppliers and considering how the entire ecosystem can contribute towards common goals, for example, ESG sustainability or diversity. It also ensures that organizations adopt a supplier-centric approach that will be highly beneficial in the long term.
Why is Supplier Management Important?
As customers’ expectations for quality products delivered on time and in their entirety continue to increase, so too does the need for companies to invest in supplier management to acquire, retain and work effectively with suppliers to exceed customers’ expectations. Failure to adhere to these standards can have a considerable detrimental impact on an organization’s reputation and, most importantly, value.
Regardless of the company’s size, supplier management is vital for any business. They all require multiple suppliers to purchase goods, services, or raw materials, especially as the organization begins to scale.
This is especially the case now that supply chains have become global entities with many complex networks, leading to ever-increasing complex, time-consuming supplier management processes.
Across the globe, many businesses are still reliant on paper-based systems that are prone to human error, which further increases the amount of time taken due to completing them both manually and digitally.
This is a cause for concern, especially when considering recent global events. This approach to supplier management is a hindrance to businesses that need to remain agile in the face of adversity.
Now, more than ever, companies need to ensure that their relationships with partners and suppliers are agile and resilient and able to withstand turbulence to continue their high levels of customer service.
How to Approach Supplier Management
The approach to supplier management you decide to take when onboarding, managing and communicating with your suppliers is essential in ensuring the success of your business and, as such, requires meticulous consideration.
Nevertheless, organizations often disregard the discipline of supplier management in its entirety, dismissing it as an unnecessary cost and a time-consuming exercise. However, this can lead to unpredictable supplier behavior and complications within the supply chain, which could, in turn, have numerous negative impacts across an organization.
Ensuring that supplier management is a core consideration and engrained into your organization will stand you in good stead for improving your offerings to your existing customer base, acquiring new customers and maximizing revenue.
Supplier management is, however, complex when you are dealing with multinational supply chains and a base that incorporates thousands of suppliers. Therefore, it can be tempting to focus solely on the suppliers who are perceived to be most strategic and profitable to maximize their ROI.
This approach can expose your organization to more significant risks than anticipated. With that in mind, here is some guidance on the benefits for making a business case, consequences of not implementing it and some recommended next steps.
What Are the Benefits of Effective Supplier Management?
Organizations that dedicate sufficient time to putting supplier management processes and systems in place and implementing supplier management in its entirety for all their suppliers are more likely to reap benefits, including:
Reduced Costs
When setting up and negotiating deals with new suppliers, there can be considerable costs. Effective supplier management helps reduce overall costs by offsetting these increased expenses thanks to its ability to lead to mutually beneficial and valuable relationships with key suppliers.
This results in fewer issues related to quality, availability and supply, resulting in overall longer-term savings, mainly when new relationships are effectively managed over time.
Better Efficiency
Over time the relationship between an organization and its supplier improves, as does the level and quality of communication between the two entities. This allows the supplier to develop a better holistic overview of an organization and empowers them to increase the efficiency of their service. This will help ensure that the strong relationship between the two will lead to any problems being promptly resolved if issues occur.
Better Quality Products
Ensuring that the quality of your products produced by the supply chain meets your customers’ high expectations can be an immense challenge. Supplier management ensures that as the relationship between the organization and the supplier grows, each party’s involvement in the decision-making process will also.
Concise yet extensive communication ensures that issues are dealt with as they arise. Over time, organizations can guide suppliers in implementing quality control techniques and ensure that they are thoroughly implemented.
Supplier management leads to a mutually beneficial and supportive relationship. When consistency and quality are fused through supplier management, this is hugely beneficial for the organization as higher quality products will increase their customer base and revenue generated.
This increased level of demand is also helpful for the supplier and will assist in increasing the revenue generated from its perspective.
Consolidated Supply Chain
As an organization and a supplier understand each other’s businesses and how they operate, opportunities to assist and complement each other will develop. Both sides will likely need to adapt some of their existing processes, but this will increase efficiency and prove valuable for both parties in the medium term.
This could also provide the organization with outsourcing non-essential activities to the supplier to focus attention elsewhere. This could include tasks related to inventory management and responsibilities for some aspects of customer service.
Improved Operations
As a long-term partnership between the supplier and organization develops, so does the feedback exchanged between the two parties. This empowers both entities to identify issues to be remedied to improve operations, streamline the supply chain and reduce costs and provide higher levels of customer service. This generates numerous benefits for the organization, including investing the reduced costs into other underperforming areas of the business and growing the customer base through improved products and levels of service.
What Are the Risks of Poor Supplier Management?
While there are numerous benefits of well-implemented supplier management processes, there are risks for those who do not adequately invest in risk mitigation or allow the necessary time to build meaningful supplier management policies, including the following:
Working with Unreliable Suppliers
Supplier management ensures that organizations can identify inefficient and unreliable suppliers quickly. Failure to do so can be hugely detrimental to the business and leads to a loss of revenue, time, and most importantly, reduced quality of products.
This reduced quality has a knock-on effect on the organization’s reputation amongst its customer base, inevitably leading to customers seeking out competitors who can provide better quality products and services.
Frequent Disruption and Complications
Unreliable suppliers lead to frequent disruptions and complications due to their unpredictability. This results in delays across various points of the supply chain, meaning that it becomes increasingly difficult for businesses to meet deadlines, fulfill orders and ensure that they are meeting the demands of consumers.
This can have a devastating impact on company revenue and lead to more significant amounts of the budget being allocated to repair the decreased reputation and stifling growth.
Poor Communication
Ineffective communication with suppliers can lead to issues at each stage of the supply chain and lead to many problems that cause tension between the organization and supplier. The time taken to deal with aggravation between the two parties can be considerable, which means that focus is taken away from more critical areas of the businesses.
Organizations also must overcome the associated decreases in the quality of products and services that lead to ineffective communication.
How to Set Up Effective Supplier Management Processes
Each organization requires a different approach to set up effective supplier management processes. However, there are common guidelines that can be followed across a range of industries and businesses of all sizes to ensure enhanced levels of supplier management.
Internal Policies For Supplier Governance
Supplier governance needs to be viewed holistically with the following critical areas at the forefront:
- Performance Management
- Contract Management
- Financial Management
- Relationship Management
- Risk Management
Organizations that neglect only one of these are at risk of the supplier experience failing to meet their expectations and the defined targets. Each of these areas needs to be effectively and efficiently managed by the organization to ensure that expectations are met, and the business’ demands are catered for.
Investing in supplier management software empowers both organizations and suppliers to efficiently manage each of these points for mutually beneficial success in the long term.
Setting Clear Terms & Conditions
Before refining your supplier management process, the business’ expectations of suppliers must be clearly defined in advance. This will empower the company to understand what each business area requires from suppliers to utilize finances and resources best.
It is also essential to take the time to define relevant criteria for choosing suppliers. These will be unique to every business, but critical areas to consider are legal reputation, pricing, and the quality of the services provided previously.
Supplier Evaluation & Hiring
When choosing suppliers to work with, most businesses will decide based on financial considerations; this can be counterproductive in the long term. Ensure that the needs of the business are placed at the forefront of concerns to ensure that each area of the company is getting the most out of the relationship with the supplier.
Negotiating Contracts with Suppliers
Once you have chosen the suppliers you wish to work with, the next part is commencing the contracting process to get them onboarded. All stakeholders must know how the contract’s conditions can deliver maximum benefit for the organization. Ensure that those involved with suppliers daily are engaged from the outset for maximum benefit.
Performance Evaluation
Once suppliers have been onboarded, regular supplier evaluation is essential to measure performance and ensure that the defined KPIs are met. These KPIs should be used to understand areas that need to be worked upon to improve performance and provide insights into the supplier management process to understand where refinement may be required.
As the move towards an ever-increasing globalized economy gains traction, well-polished and effective supply chains are essential for businesses to maximize performance and generate revenue.
Ensuring that your business invests in supplier management solutions and putting your suppliers at the forefront of your operations rather than treating them as a commodity will deliver mutually beneficial success.
Article updated June 2022
