10 supplier management best practices and strategies
Supplier management is the term used to describe the processes of selecting and managing suppliers or vendors. It’s a hugely important element of operations for most companies, having a significant impact on costs, manufacturing, and cash flow.
Getting the best performance from your suppliers, while also ensuring you’re contributing towards a stable long-term relationship, can pay off in meaningful ways. Knowing how to manage suppliers effectively is therefore of great importance.
Supplier management is a multi-step process. Each stage can be optimized to unlock efficiencies that not only improve supply chain performance, but also strengthen overall operational health. These steps can generally be defined as:
- Selection: Sourcing suitable suppliers using specific criteria
- Negotiation: Drawing up contracts beneficial to both parties
- Onboarding: Approving suppliers quickly and efficiently
- Evaluation: Measuring performance using key performance indicators (KPIs)
- Monitoring: Continually assessing supplier risk
- Payment: Ensuring agreed terms are adhered to
With poor supplier management processes, your business can face disruption due to late delivery, poor quality goods, inaccurate billing, data breaches, regulatory issues, and commercial and reputational risks. By adopting effective supplier management best practices, you can avoid these pitfalls and enjoy more robust relationships with suppliers. This can lead to greater supplier loyalty, better product quality, and lower costs.
The following supplier management best practices and strategies can help you optimize your supplier management processes and get closer to achieving your business goals:
1. Set strategic objectives and establish KPIs
Your supplier management objectives should be informed by business needs, with key considerations likely to include cost, supply chain efficiency and resilience. By using supplier key performance indicators (KPIs), you can gain valuable insights into how well your suppliers perform.
Common KPIs include:
- Defect rate: Degree to which products or services meet agreed quality guidelines
- Lead time: The time taken for orders to be fulfilled
- Order accuracy: Accuracy of orders in terms of items and amounts
- Competitiveness: Cost of goods provided by one supplier compared to its competitors
- Customer service:
2. Adopt a centralized supplier management database
A centralized and digitized supplier management tool is essential for businesses with complex and extensive supply chains. This can be facilitated by supplier information management (SIM) or supplier relationship management (SRM) solutions.
SIM is a system or a set of processes that companies can use to capture, store, and analyze supplier data, thereby reducing the administrative burden and increasing the accuracy of data capture. SRM encompasses the processes a business can use to manage its suppliers and develop more productive relationships.
3. Improve your supplier risk assessment process
Your supplier base can pose a range of significant risks to your business, such as the following:
- Financial risks include the possibility that suppliers will go bankrupt or be unable to handle increased volumes or sudden increases in costs.
- Legal risks include contractual non-compliance, misuse of intellectual property and civil lawsuits.
- Operational risks include quality control issues, as well as the risk of disruptions and delays to manufacturing.
- Reputational risks include safety issues relating to products, or the failure of suppliers to abide by agreed ESG principles.
As such, it’s vital to assess supplier risk carefully during the supplier selection process and on an ongoing basis. By employing a suitable risk assessment process – and carrying out risk assessments regularly – you can guard against the possibility of future harm.
4. Strengthen your supplier onboarding process
During supplier onboarding, it’s important that you obtain various information and documentation to complete all necessary compliance and risk assessments and register the supplier on internal systems.
The supplier onboarding process should be as seamless and efficient as possible, as a positive experience can lay the foundations for a strong future relationship. In practice, however, onboarding is often labor-intensive and time-consuming. Onboarding best practices include automating wherever possible, maintaining a consistent approach and ensuring that supplier data is secure against breaches.
5. Segment your suppliers
Placing suppliers into different segments or categories according to their importance to the business is one way you can improve your supplier management strategy. By identifying and prioritizing the most important suppliers, you’re able to focus on and strengthen those relationships that are most critical to the resilience of your supply chain. This has significant potential benefits for the overall success of your business in the long run.
6. Integrate automation and self-service
By using SIM and SRM software to drive automation, you can achieve a range of efficiencies and cost savings, such as managing contracts in a single location, automating the onboarding process, and monitoring supplier performance in an automated way.
Additionally, by offering suppliers self-service options, you may be able to delegate the task of inputting data – thereby reducing overheads and ensuring that supplier records are accurate, complete and up to date.
7. Streamline communication channels
Clear and open communication channels are vital to building strong and lasting relationships with suppliers and ensuring supply chain resilience.
You can take advantage of various tools to improve your communication with suppliers, including direct messaging and document-sharing tools. Taulia Collaborate, for example, allows suppliers to check on the status of invoices, with queries automatically associated with the relevant purchase order, invoice, or payment document. With conversations tracked in a systematic and centralized way, you can resolve issues with suppliers quickly and easily.
8. Assess supplier performance regularly
Your business is directly linked to the performance of its suppliers. As noted above, you can use KPIs to monitor supplier performance against specific criteria and identify any cases where suppliers may be failing to meet agreed standards.
If suppliers fall short of their performance targets, an assessment will need to be carried out. If the relationship is strong, it is more likely that poor performance can be tackled successfully. However, if suppliers continue to fall short of their performance targets, you may wish to renegotiate the contract or escalate the issue.
9. Prioritize strong supplier relationships
Poor supplier relationship management can lead to poor communication, the breakdown of mutual trust and a mismatch of priorities, which can lead to difficult negotiations, the risk of a communication breakdown, and possible supply issues.
Conversely, by prioritizing long-term supplier relationships – for example, by taking advantage of a sophisticated SRM system – you can improve operational efficiency and your supply chain resilience.
10. Formulate supplier management contingency plans
Even the best-laid supplier management strategies can fail – so it’s important to anticipate potential disruption by having effective contingency plans. This may include detailing contingency suppliers that could be called upon to protect your business from supplier failure, together with key contacts and possible lead times. With proactive planning, you’ll be better able to protect your business from the consequences of supplier failure.