What Is Supplier Management and Why Is It Important?
Supplier management is concerned with the management of relationships between an organization and its suppliers, who provide the business with its products and services. “The objective of supplier management is to ensure that all contracts with suppliers support the needs of the business.” (Source: ITIL® Process Map).
Supplier management is, however, moving more towards supplier relationship management (SRM) and, more recently in leading-edge organizations, towards supplier experience management (SXM). SRM is focused on managing relationships at scale, although the focus here tends to remain on the needs of the enterprise as a customer. On the other hand, supplier experience management is concerned with a deeper collaboration with suppliers and considering how the entire ecosystem can contribute towards common goals, for example, ESG sustainability or diversity. Regardless of the size of the company, supplier management is vital for any business as they all require multiple suppliers to purchase goods, services, or raw materials, especially as they scale.
Significance and Implications of Supplier Management
The approach you decide to take when onboarding, managing, and communicating with your suppliers is essential to ensuring the success of your business and as such requires careful consideration. Nevertheless, organizations often disregard the discipline of supplier management, dismissing it as an unnecessary cost and a time-consuming exercise. However, this can lead to unpredictable supplier behavior and complications within the supply chain which could, in turn, have numerous negative effects.
Supplier relationship management is, however, complex when you are dealing with multinational supply chains and a base that incorporates thousands of suppliers. Therefore, it can be tempting to focus solely on the suppliers which are perceived to be most strategic and profitable in order to maximize their ROI. Nevertheless, this can expose your company to greater risk than anticipated.
With that in mind, here is some guidance on the benefits for making a business case, the risks of not doing so and some recommended next steps.
What Are the Benefits of Effective Supplier Management?
Organizations that dedicate sufficient time to putting supplier management processes and systems in place for all their suppliers are more likely to reap benefits, such as:
- Having more productive supplier relationships which will allow your company to thrive, grow and increase its profitability.
- Greater predictability and better understanding of the supply chain, as well as easier supplier control.
- Access to higher-quality products.
- Having the ability to make strategic decisions, predict and avoid disruptions or complications.
What Are the Risks?
On the other hand, organizations which do not allow enough time and resources for building meaningful supplier relationships, processes and policies put themselves at risk of:
- Not quickly identifying inefficient and unreliable suppliers which, in turn, becomes costly in terms of revenue, time, and even reputation.
- Potential frequent disruptions and complications due to unpredictability of suppliers.
- Ineffective communications with suppliers, followed by avoidable aggravation.
- Inability to meet deadlines and customer demands.
Next Steps: Setting Up Effective Supplier Management Processes
General guidelines for setting up more productive supply management processes within organizations will vary depending on multiple factors, however, they include:
- Defining internal policies for supplier governance.
- Setting clear terms and conditions between the organizations to establish an effective working relationship from its inception.
- Actively managing and nurturing relationships with existing suppliers, rather than merely tracking their performance.
- Putting into place supplier information management practices, which includes maintaining accurate and complete records at all times for the lifecycle of the supplier.
For now, we will part with some food for thought – you are only ever as good as your suppliers and processes for managing them because the impact they have on your organization and the contribution to your brand and brand value is profound.
Article updated March 2021