A 5-Step Process to Effective Supplier Management

Success in today’s globally competitive and dynamic marketplace requires new strategies and new capabilities. Companies are under constant pressure to reduce their supplier management costs even as they need to leverage suppliers to drive innovation. Meanwhile, the potential risks to consumer safety, company reputation, and corporate earnings of poorly managed supply chains demand rigorous supplier management.

Volatile commodity pricing, global competitive pressures, disruptive technologies, and continuous changes in supplier leverage relative to customers all create new risks, new challenges, and also new opportunities. Procurement and supply chain organizations need to improve cross-functional collaboration within their own companies, develop and pursue innovative negotiation strategies, and lead efforts to build and sustain collaborative partnerships with key suppliers.

Here is a 5-step process for effective supplier management-

Negotiation

Negotiation is one of the key supplier management objectives. This is a critical part of planning, on which success depends. Research must be as realistic as possible informed by impeccable supply market knowledge and supplier knowledge. An agenda is required, based upon the tactical plan for raising each point and their impact on psychology and business considerations. The other party’s reaction should be considered carefully and possible responses prepared. Each item must be timed, taking due account of the other party’s involvement. Many negotiations fail because people run out of time. Poor time management can lead to misunderstandings and a failure to resolve the detail. Planning requires appropriate time and resource. This planning effort is fine, but please remember that some suppliers are well versed at procrastinating to put the buyer on the back foot.

Selection

The second key supplier management objective is selection. The sourcing team should apply its evaluation criteria to the supplier responses. If extra information beyond the RFP response is required, don’t be afraid to ask for it. If carried out manually, the negotiation process is conducted first with a larger set of suppliers and then narrowed to a few finalists. If the sourcing team uses an electronic negotiation tool, a greater number of suppliers may be kept in the process for longer, giving more diverse suppliers a better chance at winning the business.

Collaboration

Ensuring the best prices through strategic sourcing is no longer perceived as a strategic capability of the procurement function for supplier management. As a result of further outsourcing of non-core competencies, organizations are starting to realize that they have become more reliant on suppliers in terms of innovative power, security of supply, corporate social responsibility, and on-going cost savings. Strategic partnerships are at the top of the corporate agenda of many global organizations and Supplier Relationship Management (SRM) or collaboration with the supplier is seen as one of the few procurement objectives that can still make a significant difference.

Innovation

In supplier management, innovation is an important strand of SRM thinking and practice. For some firms, it is probably the main justifier and reason for their SRM program. While it may be possible to look at a self-standing innovation initiative, the majority of firms appear to build that specific goal onto a wider SRM program simply because the processes have much in common. For instance, it is important to segment your supplier base both to drive SRM and to run a supplier management innovation initiative.

Evaluation

For supplier management to track supplier performance evaluation is at the core wherein the truth is never obscured and data is laid bare regardless if this is a supplier recommended or selected by Procurement. Here, Procurement participates in the evaluation with the organization to learn why the supplier performed as it did or what the organization did well; what the organization could have done better or what the supplier could have done to improve how its supplier management strategy.