Why managing your most critical suppliers requires a strategic approach
13 December 2013
You’ve just finished a gruelling competitive proposal process that took months to negotiate. Your business case to executive leadership, business units and functional stakeholders required significant selling. There were times where you didn’t even know which negotiation was more challenging — the one with the supplier or the one with key internal stakeholders; the contract was sent back and forth between legal departments so many times that you feel you could actually pass the bar exam tomorrow.
Congratulations, you finally have a signed contract. That was the easy part.
For most companies, the next step — managing your supplier relationships — can be a lot cloudier. And, as I’ll explain in this post, the murkiness of that process is a major gap that needs to be closed.
Supplier relationship management is the discipline of planning for, and managing, your interactions with third-party suppliers. Although it’s long been part of your procurement department’s “perceived” mission, in fact the stakes are much higher than just one department’s responsibility.
The truth is, the tactical — or, worse, the ad-hoc — approach can put your company at risk.
Here’s why. Many companies, when assessing the potential value of a supplier, choose to focus only on expense. But spend alone cannot provide an accurate, 360-degree picture of supplier impact. Focusing solely on cost can make you overlook some more strategic suppliers — and even potentially expose you to supply interruptions, negative media coverage about supplier actions, and increased costs of goods sold, as this graph illustrates.
So what’s the most strategic way to determine the real value of potential suppliers to your business?
First of all, I recommend zooming out — beyond the simple cost metric — to consider a wide variety of other factors, such as innovation, risk (financial, supply chain and regulatory), criticality to your product(s) and the availability of viable substitutions.
A recent client example underscores this point:
A global industrial products company with US$3+ billion in external spend purchases chemical elements with a total spend of approximately US$3 million. Only two suppliers worldwide can provide these elements. Both are government entities — one in the United States, the other in Russia. Assessed on percentage of external spend alone, these suppliers would not be considered “strategic.” But, when the client expands the determination measurements for “strategic” to include criticality to products and risks (regulatory and import), the suppliers are suddenly among the top 5 most strategic vendors to the entire company — even though they represent only 0.1% of the total spend.
The fact is, identifying your most strategic suppliers, and then managing and building relationships with them, requires establishing far more sophisticated metrics, both internal and external, that are closely aligned with your business goals and needs — be they driving innovation, lowering costs, reducing your carbon footprint or just assuring continuity of supply.
The process doesn’t end there, of course. Once you’ve selected your strategic suppliers, you have to shift your focus to sustainable process execution. And for that, it’s useful to think about supplier scorecards.
A scorecard can reduce problems in a supplier-client relationship by proactively establishing goals, requirements and deadlines. It’s also a very useful mechanism for receiving, and incorporating, valuable feedback from your suppliers — which can help you deal with both looming challenges and promising opportunities, while offering valuable customer insight. And all while building sustainable, mutually beneficial relationships with your suppliers.
Finally, because nothing in business is static — your suppliers’ strategic value can change if you, or they, experience a shift in direction or goals — it’s also a good idea to set up a refresh frequency.
True resilience means adopting a strategic, proactive approach to your business processes. Your supplier relationships and your management of the entire process — both today and tomorrow — have a critical part to play in that resilience.
So how does your company handle its supplier management process? Is it a work in progress… a finely tuned engine… or somewhere in between? I welcome your comments and feedback.