Supplier management is a process that ensures value is received for the money that an organization spends on its suppliers. Supplies play a crucial role in the smooth running of an organization where both supplier and organization need to engage appropriately and effectively.
Building a proper relationship, managing the requirements, and communicating clearly with suppliers is necessary to the organization, indicating a comprehensive supplier management policy.
The objectives of supplier management are:
- To ensure maximum value is obtained from all the suppliers and contracts.
- To ensure underpinning contracts (UCs) and agreements with the suppliers are aligned with the business needs and agreed on goals of the organization.
- To manage the relationships with various suppliers and monitor their performance by keeping detailed records.
- To negotiate with the suppliers, finalize and manage contracts throughout their lifecycle.
- To establish and operate a policy regarding suppliers and maintain a supporting Supplier Contract Management Information System.
What is the Supply Management Process?
The supplier management process is a group of activities to qualify, segment, monitor, and manage the third-party suppliers of an organization. An ideal supplier management process is a well-defined governance model that sets a two-way mutually beneficial buyer-supplier relationship using trust and accountability.
The concept of supplier management may seem complicated. Between risks, relationships, software, and systems, there’s a lot to examine.
We’ll describe why it’s important and how having an effective supplier management process in place can benefit your business.
What is a Supplier Management Process Flow?
A supplier management process flow comprises the steps involved in an effective buyer-supplier relationship. The four steps in a supplier management process flow are:
Step 1: Supplier Qualification
Supplier qualification is the first stage of the vendor management process. It is used to evaluate suppliers and decide if they are capable enough to supply the necessary goods or services to the standards fixed by the buyer.
Step 2: Supplier Classification
Supplier classification is an essential part of the supplier lifecycle management process. It is the process of dividing suppliers into specific supplier quadrants based on a predefined set of metrics like supply risk, total spend, Total Cost of Ownership (TCO), quality, profitability, performance, and more.
Suppliers can be classified based on the following:
- Evaluation of the risk and impact which is associated with a particular supplier.
- The importance and quality of the supplier and the service they offer to the business.
The suppliers are given the below-specified classifications based on the roles they perform:
- Strategic: For primary ‘partnering’ relationships that involve senior managers sharing strategic information that is confidential to facilitate long-term plans.
- Tactical: For the relationships which involve a significant amount of commercial activity and business interaction.
- Operational: For suppliers of operational products and services.
- Commodity: For suppliers who provide low-value or easily available products or services.
Step 3: Supplier Collaboration
Supplier collaboration paves the way for the mutual development of vendors and buyers through process enhancements and product/service innovation. According to a recent survey by McKinsey, companies that collaborate strongly with suppliers grow two times faster than their competitors who ignore supplier collaboration.
Step 4: Supplier Evaluation
Supplier evaluation is the final step of the vendor management process flow. This step is used to measure a supplier’s performance and ensure they adhere to preset contract terms. Evaluation is performed based on several metrics like delivery time, price, production, quality, technical, and services.
Roles and Functions
The following roles are essential for the supplier management process:
Static Process Roles
- Supplier Process Owner: The owner of the supplier process initiates the supply process responsible for defining the strategic goals and allotting all the resources required for a process.
- Supplier Process Manager: A supplier process manager is in charge of the whole process and responsible for the effective performance of the process.
- Supplier Management Team: The supplier management team is associated with the supplier management process.
Dynamic Process Roles
- Supplier Owner: The supplier owner is liable for managing the overall supply process and ensuring to carry it out as per requirements. The supplier owner can be replaced with the help of a hierarchical escalation.
- Supplier Agent: The supplier agent is bound for a task within the supplier’s activity. A supplier agent can be replaced by a functional escalation if needed.
- Supplier Advisory Board: The consulting body for category two and category three supplies is the supplier advisory board. The supplier advisory board members are permitted to participate in the activity called Supplier Strategy.
- Supplier Authority: The supplier authority has to approve a supplier based on their credentials.
- Supplier Requester: A supplier requester provokes a supplier using a Request for Supplier (RFS) form, which can be equal to a service or customer-specific role.
Process Activities in Supplier Management
To determine the new supplier and the needs of the contract. The requirements of the business are identified by
- Creating a Statement of Requirement (SOR) or Invitation to Tender (ITT)
- Ensuring that they correspond to the overall business strategy.
- Planning the initial business case with all the details such as costs, targets, timescales, benefits, and risk analysis.
To estimate the new suppliers and contracts to ensure that they align with the organization’s requirements. This is achieved by
- Recognizing the system of procurement
- Setting the criteria which will evaluate the product/service
- Assessing the alternatives available.
- Selecting the most favorable alternatives.
To classify the suppliers and contracts and conduct maintenance on the supplier and contract management information system (SCIMS). This is done by
- Evaluating the supplier and contract
- Ensuring that the changes are passed through service transition
- Classifying the supplier
- Updating the Supplier and Contract Database
- Handling maintenance on the Supplier and Contract Database
To establish the new contracts and suppliers as per the policy. This is done by
- Establishing the supplier service and contract
- Preparing for the transition to the service
- Finally, organizing contacts and relationships.
To manage the supplier contract and supplier performance. This is done by
- Supervising and regulating the operation and delivery of the service or product
- Supervising and reporting the service quality and the costs incurred
- Evaluating and enhancing the service
- Managing the relationship with the supplier
- Preparing for potential renewal or termination of the contract.
To renew the contract if the supplier provides a quality service or to terminate the contract if unfavorable.
Advantages of Supplier Management
The following advantages are provided by supplier management:
- Supplier management offers value for money to all the parties involved
- It ensures that the targets in the supplier agreements and contracts align with the company’s needs and within the service level agreements.
- It provides seamless delivery of quality IT services which are aligned to the expectation of the company.
Challenges in Supplier Management
Supplier management has several challenges to face. Those are:
- The business needs and IT industry are constantly changing. Managing this change and delivering services promptly is a challenge.
- To work with an imposed contract that has poor targets or non-existent definition of supplier performance targets.
- Inadequate maintenance of expertise in an organization
- Interference in the running of operations
- Losing the strategic perspective and focusing on operational issues resulting in a lack of focus on strategic relationship objectives.
Risks in Supplier Management
The risks encountered by supplier management are:
- Lack of resources or budget for the process
- Lack of commitment from the superior management to the supplier management
- Supplier staff or organizational culture which is not in line with the requirements of the business.
- Lack of support from suppliers who are not willing to take part in the supplier management process
- Contracts that are poorly written and do not support the needs of the business.
Supplier management ensures maximum value is obtained for the money spent and that the contracts with the suppliers align with the business needs. By maintaining relationships with various suppliers, it helps to monitor their performance.