Companies are dealing with a growing number of suppliers due to globalization, mergers and acquisitions, product proliferation, and multi-sourcing efforts to secure supply and reduce overall costs. Additionally, supply chain leaders are facing overwhelming supply chain volatility driven by the COVID-19 pandemic which has led to unprecedented and pressing challenges in balance the need for cost optimized supply chains that are also reliable and resilient. Supplier performance is more critical than ever to ensuring quality and service to customers, particularly in manufacturing organizations where heavy outsourcing is involved. With pricing pressures in many industries driving the focus on cost reduction, strategic procurement and strong supplier relationships are a critical factor in delivering financial objectives. Procurement leaders need to balance both delivering on the demands of today while also shaping the supply base to support the future and ensure strong supplier performance over time. Below we outline considerations for supplier management best practices.
Supplier Management Best Practices
Supplier Risk Management
It’s important to leverage a risk calculation to prioritize suppliers’ importance and overall business impact if there’s a supplier failure. Understanding the highest risk suppliers provides an opportunity for strategic risk mitigation. Evaluating all suppliers holistically also reveals supply base risk themes that will guide decisions around key investment areas to reduce the overall risk profile. Evaluation of these factors over time provides year-over-year trend insights on the impact of performance improvement and procurement strategies.
Factors should include quality and delivery performance, sole or single sourcing, volume and revenue risk, impact to customers in the case of a defect, geo-political risk, and financial health of the supplier. Industry-specific considerations should also be incorporated – for example, in the medical device industry, component risk and device classification will factor into the risk management and supplier auditing approach. Additionally, life sciences companies will take into account the product life cycle, as the risk and impact associated with a product in development or clinical phases versus commercially available will vary greatly.
Performance Monitoring and Management
Performance monitoring requires integrating both strategic and tactical criteria to assess supplier performance. Tactical metrics at a minimum should be tracked, reviewed, and responded to with regularly frequency using a risk-based approach. Some tactical metrics include first-pass yield, on-time delivery, and purchase price variance, and they’re ideally tracked real-time to enable quick reaction to urgent issues and trends. Strategic metrics, such as price reduction initiatives, new business awards and timeline attainment, sustainability efforts, vendor managed inventory programs, will indicate performance over longer time horizons. Tier 2 suppliers, or the suppliers of your suppliers, can also affect supplier performance and should be evaluated for risk. At a minimum, having visibility to Tier 2 suppliers is a best practice with any of your critical, strategic suppliers.
An Approved Supplier List is also important to have, and actively maintain, as part of your ongoing supplier performance monitoring. This will often be part of a company’s quality system and allows for controlled management of supplier status; it can also be tied to ongoing audit results and performance metrics.
Segmentation by Category
Category management is a strategic approach to procurement, where supplier spend is segmented into categories based on the type of product, services, materials, or commodities provided. Segmenting and studying suppliers by category enable a more strategic and relevant approach to supplier selection and sourcing decisions, contracts and negotiations, cost improvement initiatives activities, and risk mitigation planning. It also offers data-driven supply base insights for procurement leaders to align resource allocation and invest in subject matter expertise based on the scale and business impact of the various categories being purchased.
Separate Strategic and Tactical Teams
Tactical problem solving and firefighting urgent supplier issues can consume significant time for procurement professionals, especially during periods of supply chain disruption. Teams will find themselves chasing down unexpected component shortages, frantically rescheduling purchase orders, managing major spikes or dips in demand, and urgently arranging supplier calls to address quality issues. This tactical management distracts from strategic initiatives that can focus on cost reduction, quality improvement, sourcing strategy design, product innovation, sustainability, supplier diversity, and countless other opportunities to deliver sustained benefits to the organization.
A leading practice is to design the organization to separate strategic sourcing and category management roles and responsibilities from day-to-day procurement operations and purchasing activities. This distinction allows for focus on both elements that are critically important to short- and long-term success and promotes progress in both your tactical and strategic supplier relationships.
Key Strategic Partnerships
Strategic suppliers can provide a mechanism to leverage spend volume, secure supply, provide direction for quoting new business, proactively invest in capabilities and capacity, and drive collaborative innovation in new products and services. Involving strategic suppliers early in the design process and working in partnership to bring a product to market often results in accelerated timelines, advanced innovation, improved product performance, reduced lead times, and optimized cost built into production processes.
Factors to consider when identifying strategic partners include percentage of spend, diversification across categories and business units, historical performance and relationship experience, industry and process expertise, risk potential, and proprietary innovation. These strategic suppliers warrant greater relationship investment, data transparency, longer-term partnership agreements, regular business reviews, and strategic planning sessions that include representation from key cross-functional stakeholders.
The Importance of Supplier Management
In summary, strategic procurement and strong supplier relationships are critical factors in navigating today’s complex supply chain and delivering on financial objectives. Implementing programs for risk management and performance monitoring allows for both short- and long-term management of your supply base and reduction of overall supply chain challenges. Category management and key strategic partnerships are important investments for growing organizations to drive strategic quality, service, and cost objectives. Suppliers are the lifeblood of operations, and investing in these supplier management best practices can ensure companies are protecting their supply chains.