Supplier management, the 3 essential steps to building a reliable supplier networke-Procurement Insights ● August 12, 2022
The success of a corporate procurement strategy is not only determined by reducing procurement costs but is primarily influenced by the quality of the relationship with the company’s supplier network and by its size. From global corporations with thousands of suppliers to SMEs with a smaller supplier base, every company needs to optimally manage its buyer-supplier partnership to best meet the expectations of its customers.
As early as 1983, Peter Kraljic, a consultant to the multinational McKinsey corporation who is credited with coining the concept of “supplier relationship management” (SRM), stated in a famous article published in the Harvard Business Review that the purchasing department should focus on strategic supply management, rather than repetitive operational tasks. A seemingly simple message that almost four decades later sounds remarkably relevant today.
US research by IDC Custom Solutions in 2020 estimates that up to 50 percent of a company’s value may depend on its supply chain’s strength and relationships with those who populate it. In a historical context characterized by high uncertainty about economic trends, rising inflation, and an increase in unforeseen – and potentially disruptive – external events on the supply chain such as the current one, this percentage may already be estimated downward.
So, let’s take a look at the three basic steps with which to build and manage a supplier network that is reliable, collaborative, and aligned with one’s business goals.
1. Analysis and scouting: building the ideal supplier pool
The first step in efficient supplier management by the procurement department is to analyze the current supplier base and actively scout for new suppliers with the desired profile. Analysis and scouting, in combination with expenditure planning and strategic sourcing, also form an excellent basis for a sound procurement strategy.
Analysis of the current supply chain
A supplier-focused SWOT analysis can help you understand strengths, weaknesses, opportunities, and threats to your business continuity, and most importantly, which and how many new suppliers you need to increase your competitiveness. Information technology applied to procurement in this helps, thanks to the centralization of all information and communications with each supplier, for 360-degree visibility of each node in the network.
Searching for new suppliers
Under ideal conditions, such activity should not be done solely on the push of external “emergency” factors, but carefully planned. Again, source-to-pay software such as Online Procurement supports CPOs and procurement officers with access to a large panel of prequalified suppliers.
2. Qualification and segmentation of the supplier base
Qualification
The supplier qualification process should be tailor-made to the needs of the enterprise through flexible and customized registration procedures. To save time and resources, it is a good idea to offer the opportunity to enroll in a digital supplier portal, where you can enter your data independently.
Segmentation
The types of suppliers a company turns to can be vastly different, but it is important to identify and segment key suppliers for the business. Kraljic’s lessons come in handy once again: buyers need to be aware that in the relationship with strategic partners, the goal is not to reduce costs, as in the case of occasional or noncritical supplies, but to build mutual trust over time and look for opportunities that will create “a bigger pie,” and therefore more marginality, for both.
3. Risk management, performance evaluation, and contract monitoring
In the operational management of procurement, having a large supplier network, where there are strong interdependencies between different companies, and customers with increasingly high expectations of the quality of products and services, requires substantial coordination efforts, the complexity of which makes them more vulnerable to risk. For this reason, constant monitoring of suppliers and evaluation of performance through ratings throughout the supply process is crucial, as is the importance of defining clear evaluation KPIs, such as compliance with contractual requirements and possession of specific certifications.
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