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The supply chain management landscape has changed significantly over the past two years. As noted by Supply Chain 24/7, 84% of enterprise CFOs now see supply chain disruptions as moderate or severe risks. And even if suppliers don’t experience shortages or work stoppages, getting goods where they’re going is more expensive.
Transportation costs may increase by 600% compared to pre-pandemic levels. This increase is dependent on the origin and destination of goods, as well as the mode of transportation used.
The result? Supplier diversification. Companies, large and small, now understand the danger of relying on one supplier and have started using multiple suppliers. With more suppliers, however, comes more complexity, in turn creating a need for more robust supplier management.
What is Supplier Management?
Supplier management is the process involving monitoring, evaluating, and improving interactions with suppliers. Supplier management aims to maximize value and reduce costs and lead times from suppliers by assessing their strengths, weaknesses, and alignment with business strategies.
Consider a company partnered with a supplier that provides high-quality components but frequently misses delivery deadlines. Supplier management processes look to determine total value: Does the quality of components outweigh the ongoing delays? If so, it makes sense to continue the supplier relationship. If not, it may be time to find a new vendor.
The Benefits of Effective Supplier Management
Companies must develop efficient methods to assess suppliers on a large scale. This is necessary because the number of suppliers is increasing and global logistics are becoming more complex.
Businesses can create standardized frameworks by implementing effective supplier management practices. These frameworks set basic expectations that suppliers must meet to maintain their relationships. Additionally, these frameworks make it easier to evaluate supplier operations by using predefined metrics. This leads to cost savings, better efficiency, and improved business models.
In addition, best practices offer competitive advantages as they make it possible to scale up the number of suppliers used by businesses. Companies can use established methods to assess new suppliers’ reliability, avoiding the need to start from scratch.
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10 Supplier Management Best Practices
Every organization has its supplier requirements. Implementing these 10 best practices for supplier performance management can improve operations and decision-making.
1. Define your business requirements and goals for supplier management
When determining your organization’s supplier management objectives, it is important to consider these key questions:
- What objectives and expectations do you have for your suppliers?
- What criteria and standards will you use to measure and evaluate their performance?
- How do you envision collaborating and communicating with them?
These questions help you create a clear and consistent way to manage suppliers that match your business strategy and vision.
You need to clearly communicate your requirements to suppliers and internal teams, such as procurement, finance, operations, and quality. This ensures that everyone synchronizes and actively works towards accomplishing the same desired outcomes.
2. Create and maintain a centralized and digitized supplier database
Managing suppliers is challenging, especially for tracking important information and data related to them. From contact details to contracts, performance data, and feedback, the sheer amount of information can easily become overwhelming. However, with a centralized and digitized supplier database, you can effortlessly store, organize, and access this crucial information.
A supplier database is important to prevent problems with duplicate, inconsistent, and incorrect supplier information. These problems can cause confusion, miscommunication, and even disputes. Regularly updating your supplier database to ensure its accuracy and completeness is essential. Additionally, it is equally important to prioritize the security and compliance of your supplier database with data protection and privacy regulations.
3. Segment your suppliers based on key factors
Some suppliers are not equal. Some hold greater importance, present more risks, or come with higher costs compared to others. Divide your suppliers into groups based on their importance, risk level, spending, and other factors. Adjust your supplier management strategy accordingly.
One way to categorize suppliers is by using the popular Kraljic Matrix, a commonly used tool for supplier segmentation. This matrix allows you to categorize your suppliers into four distinct groups: strategic, bottleneck, leverage, and non-critical. Each category necessitates a unique approach to supplier management, including partnership, security, optimization, or simplification.
4. Implement a standardized supplier onboarding and approval process
To ensure that your new supplier meets all of your requirements and expectations, as well as complies with your policies and regulations, it is essential to implement a supplier onboarding and approval process. This streamlined process will prove invaluable in establishing a strong partnership with your suppliers.
Follow certain steps and protocols to verify and officially enroll a new supplier to approve and register them. The process is thorough.
It involves collecting and examining information and documents from the supplier. The information and documents include company details, financial records, certifications, and references. Additionally, audits, inspections, and tests are conducted to thoroughly evaluate their capabilities and performance.
The process of bringing in and approving suppliers needs to be consistent, fair, and clear for everyone involved. It should also be streamlined and impactful, minimizing delays, costs, and risks while maximizing quality and compliance.
5. Negotiate and sign service level agreements (SLAs) with your suppliers
After approving a supplier, it is crucial to negotiate and establish a service level agreement (SLA) with them. A SLA serves as a contractual document outlining the precise scope, exceptional quality, prompt delivery, and agreeable payment terms for the goods or services provided by the supplier.
An SLA should encompass the following components:
- A comprehensive description and detailed specifications of the goods or services, including quantity, quality, features, functions, and more.
- Clear expectations regarding delivery and performance, specifying factors such as time, location, mode, frequency, and others.
- Well-defined payment and invoicing terms, covering aspects such as price, currency, method, schedule, and more.
- Clearly outline roles and responsibilities for both parties, encompassing communication, reporting, escalation procedures, and other relevant aspects.
- KPIs and metrics are used to measure and evaluate the supplier’s performance in quality, cost, delivery, and service. These indicators help determine how well the supplier is doing in these areas.
- A system that rewards or punishes suppliers based on their performance, including bonuses, discounts, fines, and other measures.
- The agreement includes a clear clause for resolving disputes. This clause explains the steps to take if there are problems or conflicts. These steps may include arbitration, mediation, or cancellation.
An effective Service Level Agreement (SLA) should be crystal clear, concise, and all-encompassing. It covers all aspects and details of the supplier relationship, leaving no room for confusion or ambiguity. It should be able to change and adjust based on the needs and circumstances of both parties.
6. Monitor and evaluate your suppliers’ performance using key performance indicators (KPIs)
Monitoring and evaluating the performance of your suppliers regularly is a crucial element in effective supplier management. This can be achieved by using key performance indicators (KPIs) that are aligned with your business goals and SLAs.
KPIs are measurable values that show how well a supplier is meeting your expectations and fulfilling their commitments. They can cover various aspects of the supplier relationship, including quality, cost, delivery, service, innovation, and more.
Choose and define KPIs that match your business goals and SLAs carefully and thoroughly communicate these KPIs to your suppliers and stakeholders.
Gathering and analyzing data and information on your suppliers’ performance is crucial. This can be done through various sources and methods such as reports, surveys, feedback, and audits. Generally, it’s recommended to regularly review and evaluate your suppliers’ performance on a monthly, quarterly, or annual basis.
Collaborating and engaging in discussions with your suppliers and stakeholders is crucial for nurturing teamwork and promoting progress. By working together, you can close gaps, address concerns, and achieve better outcomes for your business.
7. Provide feedback and recognition to your suppliers and encourage continuous improvement
Building and nurturing a successful supplier relationship involves more than just managing the logistics. Provide valuable feedback and recognition to your suppliers, fostering a culture of continuous improvement and innovation.
Recognizing the efforts of your suppliers not only enhances communication but also acts as a powerful motivator and reward. This fosters trust and loyalty, laying the foundation for a long-lasting and fruitful partnership.
To maximize the impact of your feedback and recognition, it is crucial to provide it consistently, promptly, and constructively. Use various ways to show appreciation and give feedback, such as talking, writing, online platforms, and in-person meetings.
Recognizing your suppliers’ efforts is important for effective supplier management and future business success.
8. Use a supplier portal or a digital platform to collaborate and communicate with your suppliers
Maximize your collaboration and communication with suppliers by utilizing a cutting-edge supplier portal or digital platforms. Innovative solutions empower you to seamlessly exchange real-time information, documents, orders, invoices, and payments. Using a web or cloud system, you can easily connect with suppliers for smooth interactions and workflows.
Implementing a supplier portal or digital platform will revolutionize your supplier management processes, effortlessly streamlining and automating tasks. Access a central hub for accurate supplier information and get a complete view of your supplier data and activities.
9. Implement a supplier risk management strategy
Managing supplier risks involves identifying, assessing, and mitigating potential dangers that could disrupt or harm your supply chain. These risks arise from the actions or carelessness of your suppliers. The goal is to minimize the impact of these risks on your supply chain. Supplier risk management is important for protecting your supply chain, brand reputation, revenue, and customer satisfaction.
Some of the common types of supplier risks are:
- Operational risks
- Financial risks
- Compliance risks
- Strategic risks
10. Adopt a supplier relationship management (SRM) solution
Supplier relationship management (SRM) involves the strategic management and enhancement of interactions and relationships between you and your suppliers. By doing so, it aims to create value and achieve mutual benefits for both parties involved. Ultimately, SRM represents the ultimate goal and desired outcome of effective supplier management.
SRM encompasses a wide range of activities and strategies, including supplier segmentation, supplier performance management, supplier feedback and recognition, supplier collaboration and communication, supplier risk management, supplier innovation and development, and more.
Improve your supplier management with Certainty
Effective supplier management starts with Certainty Software. Using our intuitive platform, tighten your communication with your suppliers while ensuring they maintain their compliance requirements. With Certainty, make more informed decisions with our cost-effective audit and inspection management tool. Reduce supply chain risks with customizable audit and inspection forms, efficient supplier assignment, action management, and detailed reporting access.
Learn how Certainty can support your business processes and supplier management by booking a personalized demo here.
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