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February 25, 2019
Own the supplier relationship before it owns you
By: Kristin Ruehle

Over the past decade, ecosystems have become increasingly vital to a company’s growth and competitiveness. And for many companies, suppliers represent an important and large part of the ecosystem. At the same time, suppliers are coming under greater scrutiny as a host of new regulatory requirements come into effect, such as the Office of the Comptroller of the Currency (OCC) guidance around Third-Party Relationships, conflict mineral usage and European data privacy laws.

Yet many companies often struggle to effectively manage their supplier base. That makes companies vulnerable to potential supplier-related risks, not to mention erosion of sourced benefits.

Procurement organizations should complement their strong sourcing and contracting capabilities with a formal way to manage their supplier base on an ongoing basis.

It is cost prohibitive and non-strategic for a company to manage all suppliers equally. Organizations should apply industry leading practices to evaluate business impact and supplier risk through performing category and supplier segmentation.

One key area of focus is contract compliance. A company should be able to monitor how well each supplier is meeting the terms of its contract. Is it consistently charging the agreed-to prices? Has it submitted its business continuity plan? Has it provided all the necessary documentation regarding required certifications? The frequency of monitoring can vary depending on the type of supplier or the company’s requirements, but it should be done regularly.

Risk management is another critical aspect. There is a wide range of supplier-related risk requirements a company needs to consider. Is the supplier’s financial health a concern? Does the supplier lack proper and effective information security or engage in questionable business practices that could reflect badly its customers? Is the supplier operating in a country with high geo-political risks? Is the supplier or sub-supplier using child labor? Each risk should be evaluated to the extent that’s consistent with the type of supplier and included in a formal risk mitigation plan for tracking and resolving issues.

With suppliers playing an important role in companies’ ecosystems, strong supplier management is equally critical.
 
 

Finally, there’s the matter of overall supplier performance. A company should have a formal scorecard that maps out how each supplier performs across the key dimensions for its segment and presents the results via an easy-to-use management dashboard. Has the supplier delivered on its contract obligations? Has it effectively mitigated key risks? If it’s a strategic supplier, has it materially contributed to the company’s innovation agenda?

Underpinning all of the above is data. Reconciling invoices, payments, and purchase orders with contract terms, assessing a supplier’s financial health, and gauging the quality of goods or services delivered all require a lot of data to be gathered, synthesized, and analyzed. And the sources of that data can be internal or external, and quite varied.

For instance, business users or people at the loading dock will likely be the ones who know if a supplier’s shipment is always short or parts are faulty, and some of that information doesn't naturally make its way back to procurement. Pending legal matters or reputational issues gaining attention on social media could indicate potential risks with a supplier. And a financial health assessment is dependent on highly detailed data buried deep in a supplier’s financial statements.

The fact is, with suppliers playing an increasingly important role in many companies’ ecosystems, effective management of them becomes equally critical. That’s especially true for strategic suppliers, on which companies lean ever-more heavily for new ideas and whose performance has a major impact on that of their customers. A formal supplier relationship management capability—which would be different from company to company—can help protect a company from supplier-related risk that could damage its brand and finances, as well as from erosion of hard-won sourced benefits. But arguably even more important, it can play a key role in helping a company improve its supplier base to drive greater innovation and growth.

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