Addressing the Costs of crappy Supplier Relationships.
Supplier relationships — and the management of those relationships — can become a deciding factor in the top-line quality, performance and profitability of an organization.
Selecting the right suppliers is no easy task. Adding on to the complexity, once an organization selects the ‘right supplier’ there is no guarantee that the buyer-supplier collaboration will be a relationship of trust, transparency and/or longevity.
In this scenario the purchasing entity has to play a forced hand: drop the supplier and pay the costs of changing or spend resources to develop the supplier relationship.
“To their detriment some companies never look for new suppliers. Other organizations change suppliers far too often” (Hough 2003).
Does anyone else smell a bit of a Catch 22?
There are numerous factors that go into the decision to select a supplier, as well as the choice to change suppliers. Supplier selection is relative to the purchasing body and organization’s situational wants and needs; whether it is a new collaboration, the choice to extend a supplier relationship or the choice to change suppliers.
Whichever way we slice it, defective supplier relationships can be the leaky hole in the bottom of your business’ vessel.
I’ve found in both my personal and professional life, the best way to avoid my pain points from becoming my pitfalls is to confront them before they materialize. So, I’m going to lower the life rafts and help you reach shore.
Let’s start addressing the costs of crappy supplier relationships.
Wasting Time and Money on uncommunicative suppliers.
Your company is most likely already wasting time and money on the management of existing supplier relationships
It’s ok. Don’t be alarmed. You’re running right in the middle of the pack.
“Businesses estimate they spend on average per week around 55 hours doing manual, paper-based processes and checks; 39 hours chasing invoice exceptions, discrepancies and errors and 23 hours responding to supplier inquiries” (mhlnews.com 2017).
This loss- over time has been equated to around 6500 hours, during the work year, that businesses are throwing away by processing papers, fixing purchase orders and replying to suppliers.
These numbers pertain to the average business. Can you imagine the money and time lost when adding a bad supplier relationship into the fold?
These statistics were originally published by Tungsten Network to illustrate the ineffective actions in traditional supplier relationship management. Displaying that the adoption and integration of digital solutions could create more effective supplier relationship management.
However, no digital solution in the world can help enhance the value of buyer-supplier collaboration if the supplier party isn’t upholding their end of the relationship.
Infrequent or ineffective levels of communication can become detrimental for a supplier relationship. There is a volatility imbedded in uncommunicative relationships that breeds uncertainty.
Don’t waste your time, money and energy on uncommunicative supplier relationships.
“The best competitive advantage a company can create is the relationship it forms with its suppliers, because in the end products can be duplicated, relationships can’t” (gcpindustrial.com 2017).
When you find yourself stuck in a bad supplier relationship as a procurement , category or sourcing manager you may have the instantaneous want to drop them like a hot potato.
Evaluate the logistics involved with the existing supplier relationship, and evaluate the costs of switching suppliers. Above all, assess the requirements and limitation of your buyer-supplier contract.
“If you’ve been with your current supplier for some time, odds are they are very familiar with your needs and the type of business you’re running. If you have experienced minimal issues during the course of your partnership, you may want to reconsider making a change, especially if the financial savings will be minimal. In cases like these, trying to renegotiate your current contract may be a way to both save money as well as maintain the status quo” (digitalpurchaseorder.com 2016).
Renegotiation can be a painstaking activity. However, there’s always opportunity that you could continue collaboration in a sub-par supplier relationship, and renegotiate a larger cost savings opportunity for your organization instead of changing suppliers.
Then again, if you’ve made up your mind, don’t let this information deter you. Some pain points in buyer-supplier relationships escalate beyond a renegotiation of a contract, and are better handled with a clean break.
Devaluation of Brand Image
Supplier relationship management can prove crucial to the top-line success of a brand’s image and profitability.
One defective tier 2 supplier, allowing child labor in it’s Bangladeshi factory won’t read in the newspapers as: “Company X stops working with Supplier Y due to their lack of compliance”.
It’ll be a bit more like this:
“Company X lacks transparency in Supply Chain, allowing child labor in their factories”.
The actions of defective suppliers will almost certainly fall on the shoulders of your brand. Brand association is one of the most volatile elements of selecting and collaborating with new or existing suppliers.
In our media heavy world, news spreads fast and the visibility of brands is at an all time high. Averting risks requires initiative to get in front of the possibility for risk. In the case of supplier relationship management, this requires hands-on governance and compliance parameters to be placed upon suppliers, both during prospecting and on going during collaboration. This is the most common method for managing supplier-related risks from materializing.
When choosing a supplier, you must take into account their ‘non-price benefits’. Elements of a supplier’s organization and activities that can’t be equated to initial monetary gain or profitability, but rather elements such as quality, sustainability, competitiveness and overall stability.
These are the same supplier attributes that will eventually save, or make your company millions.
In 2015 “The North American Automotive Tier 1 Supplier Working Relations Index (WRI) found Ford, General Motors (GM), Nissan and Fiat Chrysler Automobiles (FCA) would have earned between $144 (£93) and $285 (£184) more profit per vehicle if they matched the supplier relations of leaders Toyota and Honda” (Green 2015).
“Honda and Toyota are going back to the ‘Honda way’, the respect for the individual. The extra training those companies are putting in with their buyers is kicking in and that is reflected in their behaviours, remarked John Henke, president and CEO of Planning Perspectives” (cips.org 2015).
Stop letting the pain points of bad supplier relationships get you down. Address your pain points head on, and they’ll never become your pitfalls.
Until next week.
This publication is brought to you by author Sam Jenks, but also on part by Kodiak Rating — A Supplier Relationship Management SaaS functioning out of Stockholm, Sweden. Kodiak Community intends to challenge traditional business practices with innovative thinking and creation.