What You Really Need To Know About Your Suppliers – And Why
The importance of structured and effective supplier management has been increasing for major organizations in the last couple of years. Businesses are starting to realize that managing suppliers well and building true partnerships with them, especially at scale, requires the right systems, policies, processes and procedures to be in place.
Managing both the risk and value generated by suppliers is more vital than ever. It is also a core requirement for Procurement and their organizations. The purpose of supplier management is to ensure that you have all the information needed about your suppliers, to be able to recognize relevant areas where additional information may be required, to maximize value and to minimize risk to the organization for the lifetime of the relationship with the supplier.
This piece will cover:
- The three key types of supplier information
- How this relates to new regulations, changes to the law and maintaining good reputation
- An Example: How regulations changed banking
- Why Supplier Master Data is the foundation
Three key types of supplier information
Procurement has evolved over recent years from being purely transactional and tactical to taking on more strategic activities. Organizations have started to consider ways in which they can increase the value of their supplier relationships, which has led to the need for more supplier information, beyond basic contact and payment details.
This trend has been accelerated further by the introduction of various rules, regulations and policies. Governments have introduced legislation in a host of areas to protect citizens or to drive policy agendas, leading to greater information and data demands on both suppliers and buyers. Without this information, organizations leave themselves increasingly open to prosecution or fines.
The three most common types of information that have been subject to this closer scrutiny are:
- Basic Business Information: Relates to data about what the business does and items they supply, contact details, prices, references, certifications, payment details, and the signed contract. This information is mostly collected before the organization and supplier start collaborating.
- Performance: Data related to factors such as production and output information, KPIs, customer satisfaction, service-level information, delivery-related data, quality information, contract compliance and progress reports. These are collected throughout the partnership.
- Risk Management: Data related to a supplier’s financial situation as well as business approach and beliefs. This will include information about stance and practices on modern slavery, environmental concerns, health and safety, human rights issues, etc.
Regulation, reputation and law
The regulatory and compliance burden has increased in recent years in terms of organizations needing to understand much more about their vendors and supply chain. Rather than buying organizations wanting information purely for their own benefit, now governments and related third parties are insisting, with regulatory backing, that buyers must have certain information, data, and understanding related to their supply base.
If the organizations fail to comply, they could be faced with severe penalties, ranging from fines which can run into millions of pounds, to exclusion from bidding for government contracts, as well as the reputational damage that can follow. Essentially, what was once ‘nice to have’ information has become defined by law.
Public procurement legislation in the EU has normalized asking questions about whether company directors have convictions, or if the firm has been investigated over tax matters, which is now a routine part of public sector supplier qualification processes.
However, various regulations affect different types of businesses, both public and private. Issues such as modern slavery, GDPR, conflict minerals, and environmental concerns have put a real focus on the need to manage appropriate information about vendors.
As a result, organizations should segment their supply base for the purpose of considering these risks and understand that it’s not just the ‘most strategic’ suppliers that can be a source of issues in some of these regulated areas.
How regulations changed Banking
In the 1990s banking regulators were totally disinterested in the precise supply arrangements of the main UK high street banks. But from the late 1990s onwards, and with accelerating interest through the last financial crisis, regulators decided that they would check more diligently that banks understood their suppliers better.
The reason was that understanding key suppliers was seen as an important element in understanding how secure and well-managed the funds of the banks’ own customers might be. Today, there is considerable regulation across many aspects of banking, including supplier management.
According to the European Central Bank, the interest centers on, “the people, processes and technologies required by the entity to deliver a core service which, if disrupted, could have a detrimental impact on financial stability, the entity’s safety and soundness, the entity’s customer base or the entity’s market conduct.”
The ‘people, processes and technologies’ necessarily, therefore, includes suppliers and their activities, hence the need for much tighter management and better knowledge about vendors than was required in the past.
This is an example of a specific industry, however, there are other regulatory developments that apply to all organizations, and it is vital they understand their responsibilities and take action. Having effective visibility of the supply base and the appropriate level of knowledge around specific suppliers is an absolutely fundamental element of this essential regulatory compliance and cannot be ignored.
Supplier Master Data as the foundation
New regulations and laws have been driven by several trends in the economy and have affected all kinds of businesses in different industries. More regulations and laws are yet still to be introduced. The reputational and operational risks have made organizations realize that they must ensure supplier information processes, systems and policies are, at a minimum, adequate.
The foundation upon which all supplier-related information can be built and which will enable this is Supplier Master Data. Ensuring that the right information is gathered at the beginning of the relationship, then further relevant information is added where necessary, all in a structured, controlled manner, and continuously kept up to date, must be the goal for organizations. To enable this, the right systems, policies and processes for Supplier Master Data Management must be established.
For more detail relating to this topic, a full whitepaper on the importance of understanding suppliers, in partnership with Spend Matters, can be found here.
Article updated February 2022