It’s understandable that managing suppliers can be difficult. In fact, a recent survey by DeltaBid found that 18% of procurement professionals considered managing supplier relationships to be one of their biggest challenges.
Building strong relationships with your suppliers is pivotal for any business and can ensure that the services you receive are of the quality expected and to meet your budget. Research by the Chartered Institute of Purchasing and Supply notes that 60% of corporate spending is uncontrolled, and, since a Deloitte survey cites 74% of CPOs want to reduce costs, having a strong SRM (Supplier Relationship Management) strategy in place can ultimately be beneficial to your business’s overall expenditure.
Good SRM involves negotiating competitive contracts, purchasing materials wisely, managing logistics, and collaborating on product design, in order to develop a mutually beneficial relationship.
The pressing issue isn’t why companies and suppliers shouldcreate close partnerships, but how to create and manage those relationships. Let’s explore how to manage existing supplier relationships, in order to improve supply chain efficiency and your overall procurement strategy.
How to Create a Lasting Supplier Relationship
Many companies choose to find suppliers that provide more of the services they need; that way, companies can create fewer relationships of a higher-quality with those suppliers.
But, over one third of businesses find discovering the right supplier problematic. Even with a reduced supply chain, 31% of Chief Procurement Officers told Deloitte that they wanted to restructure existing relationships. So, sourcing suppliers and understanding how to manage these relationships are amongst the biggest struggles for businesses.
In order to create a quality relationship with your supplier, you need to understand each other, trust each other, and create mutually beneficial purchasing process. Ultimately, you need to establish a solid foundation in order to work together and create satisfactory solutions.
One way to understand your suppliers – and for them to understand you – is to visit the manufacturing location. Learn about bottom line costs and the pricing structure, so that you can better evaluate where you can cut costs and where you can’t.
Treat suppliers as part of your team – they should act as an extension of your business, not an external third-party. Deal with them professionally and considerately, and exchange information with transparency on both ends, so that you can ensure business practices are mutually beneficial.
How to Maintain Your Supplier Relationship
In 2015, only 34% of Global Chief Procurement Officers specifically planned to increase their level of supplier collaboration. Collaborating constructively with suppliers is a way to be more efficient, nurture relationships, and create a greater understanding of your suppliers.
When you build a supplier relationship, you do so with the expectation that that supplier can grow with your business, that they can accommodate an increase in demand or a slump (whichever the case may be), and that, in the future, they can keep their costs competitive.
To maintain a good relationship with a supplier, make sure that you both have a clear understanding of expectations. You can help your suppliers by:
- Coordinating your production schedules
- Discussing ways to reduce overall costs through order size
- Providing early updates if any requirements change, to help suppliers adapt and meet those changes
- Using their purchase order system to control and monitor your orders
- Paying invoices promptly
- Analysing your sales forecast so suppliers can meet your supply needs
Every relationship needs good communication. Your project manager should keep in regular contact with your suppliers at every step of the way, checking to see that both businesses are fulfilling their end of the bargain.
Maintaining supplier relationships is all about discovering the benefits of your supplier and figuring out if those benefits are in balance. If you find out that your supplier is suddenly overcharging you for a certain product, then you may decide to look elsewhere for the same service. It’s a tough decision, but it’s important to discover if it’s worth renewing your contract just to keep that relationship in place.
If you’ve maintained a close relationship, you may find that your supplier will lower costs for you, increase efficiency on your account, mitigate pricing volatility, look for ways to consolidate your supply chain to reduce bottom line, and continually find ways to improve for mutual benefit.
But that’s not always the case. Many procurement officers are fixated with maintaining their established supplier relationships, but may not realise when they aren’t getting their money’s worth or, worse, when they aren’t getting the best quality possible.
Many businesses are reluctant to switch suppliers, but could negotiate better deals when moving companies. Nearly 25% of CPOs prioritise cost instead of value when considering suppliers, and nearly 10% of relationships go sour because of conflict instead of collaboration. This is why it’s important to know how to navigate relationships if they deteriorate...
What To Do If Your Relationship Begins to Falter
New studies reveal that bad supplier relationships are costly. In the car industry alone, studies revealed that companies would have gained millions more in profits if relationships were effectively managed. What do you do when things have gone wrong? How do you respond to declining quality? How do you respond to increased costs?
If you’re faced with a bad supplier relationship, it can be hard to know what your options are. You could end your contract, look elsewhere for other suppliers, or communicate what’s wrong in the hopes of working out the problem.
The first step – as with any relationship that’s deteriorating – is to talk to your supplier. If costs have gone up, ask why. If deadlines are missed, ask why. Ask why these circumstances weren’t brought up before the end product was delivered. A good relationship always maintains solid communication from start to finish. If that level of communication is no longer happening, now’s the time to implement the following.
The second step, if the bottom line price is an issue, is to research actual costs. How much does it cost your supplier to make the product? You’ll have a better idea of how much wiggle room there is in the budget by knowing.
A third way to recover a relationship is to establish where you can find mutual gain. What are the supplier's business goals? If they don’t want to budge on price, then focus on other areas of negotiation, such as the amount of down payment, the length and scope of a warranty, or a discount for purchasing in bulk, for example.
Depending on what has gone wrong with your supplier, you need to find a solution. If quality has gone downhill, this needs to be discussed. Let the supplier know that you expect a certain level of quality at the price point you’ve agreed upon. If they cannot supply a satisfactory reason as to why production quality has decreased – and why communication has failed – then that’s the time to rethink your contract.
It’s good to keep in mind that with increased competition, you might find cheaper prices amongst other suppliers, but, how much are those ‘savings’ worth to your business? Jumping ship and changing supplier in favour of a lower cost supplier may not provide the answers.
If you can rebuild a struggling supplier relationship and retain the quality you expect with a marginal increase in costs, this may prove more profitable in the long run. But, if you really are on the fence, then it might be worth looking for a new supplier who you can establish a better relationship and contract with.
Building, maintaining, and managing supplier relationships can be tricky – especially when you are working with multiple suppliers. But, the benefits of doing so will most certainly pay off.
A simple solution to help you manage supplier relationships is to outsource an area of your procurement. By outsourcing, you get an all-in-one service, whilst only having to build one single supplier relationship.
Want to find out other ways to make your procurement strategy more streamlined and efficient? Download your copy of our latest eBook, The Four Stages of Procurement Savings.