30 Nov The importance of effective supplier relationship management
To adapt a quotation from the poet John Donne, no business is an island. Success in business is defined by relationships. Each individual company sits in the middle of a chain of relationships formed with suppliers and customers, taking raw materials, products and services from one end, and adding value to generate profit out the other.
Much is made of the customer side of this network; about how to manage and nurture relationships through marketing and customer service to maximise income.
But the supplier side is just as important. At the most basic level, an enterprise needs suppliers either to provide the resources for the products or services it sells, or to supply resources needed to run the business.
The key advantage of strong, healthy supplier relationships is that you can gain better value for your business. The better you know your suppliers, and the better they know you, the more likely you are to benefit from dedicated service, preferential pricing and special terms. Through this, your supply chain becomes more efficient, cost effective and productive.
Laying the Foundations for Strong Supplier Relationships
Building strong relationships with suppliers means thinking about procurement in terms other than the mechanics of purchase agreements and contracts. The focus on how you interact with the supplier is also distinct from the logistical focus of supply chain management.
Things are rarely as simple as signing a contract and sitting back as a process plays itself out automatically. Supplier management is about people management, and the added value that human aspects of business can bring to operations. Keeping this side of things running smoothly will help ensure the two sides work quickly to resolve issues, continually look for ways to improve operations and help each other to reap benefits from the relationship.
Good people management, and so the basis of strong relationships, requires a certain mindset. Here are the foundations for building better relationships with suppliers:
Effective, open two-way communication is at the heart of any strong business relationship. If you don’t talk to your suppliers, you can’t learn enough about them to build mutually beneficial arrangements.
A mutual appreciation and willingness to consider the needs and opinions of the other party clears the ground for suppliers and buyers to work in ways which maximise the interests of both.
An essential part of effective relationship building is being open and honest with one another. Sharing information and being transparent about intentions and goals again increases the likelihood of reaching agreements which benefit everyone.
Business relationships break down when one party or the other feels they are not getting a fair part of the bargain. Ensuring all benefits are split straight down the line is crucial to making a “You scratch my back” approach work for all involved.
All of the above help build trust. Trust is the cement which will hold a strong relationship together, affording suppliers and buyers the confidence in one another to seek innovative ways to working and problem solve together.
To make a relationship a success, you need to be prepared to change the ways you work to accommodate the other party. Very rarely will two organisations strike the perfect accord straight away. Strong relationships take time and a willingness on the part of both parties to listen, to adapt and to embrace innovation as a means of improving.
Choosing the Right Supplier
As people, we’re not all compatible, and the same is true of businesses. Even if you go into a relationship committed to good communication, openness and fairness, but the supplier does not, then this is still likely to result in an unsatisfactory arrangement. Good relationships depend in part on picking the right people.
Businesses often choose suppliers based predominantly on cost, and seem happy to chop and change to get what they see as the best price for the product or service. However, rarely will this be the most efficient way of doing things, since searching for and arranging contracts with new suppliers introduces further costs. And the longer term cost from reputational damage due to poor quality control and order fulfilment can make any initial price-based saving inconsequential.
Aim to form longer, stronger bonds with a smaller number of suppliers. This offers better value than regular turnover in contracts. So again, looking for quality and reliability, value for money, and most importantly strong service and clear communication from the off is critical for getting the most out of your supplier relationships.
Tips for Building Better Relationships
Relationships with suppliers should be viewed as a two-way street. From your perspective, you want the reliability of knowing your goods will arrive when you need them, along with the flexibility of being able to respond to changes in demand. You want quality of service so your business is prioritised when it needs to be, along with the knowledge you are getting the best possible value.
For their part, suppliers also want regular, reliable customers, as repeat orders give them stability. Fluctuations in order size and regularity can pose more headaches for them, but they will be prepared to accommodate trusted customers as long as sufficient notice is given.
Strong relationships depend on both sides appreciating these needs and working together to ensure both sides get what they need. Here are tips for achieving that goal.
Pay on Time
Late payments are bad news for any business. Not getting money you are owed when expected can have a serious knock on effect on cash flow and leave a business financially exposed. Paying late undermines trust and therefore damages the likelihood of building long-term relationships.
It is also in your best interests to help ensure your suppliers maintain a ready flow of capital. If you don’t pay on time, they may not be able to replenish stocks from their own suppliers. If you have a sudden demand, your supplier may not be in a position to help out.
Above all, paying on time is about showing respect.
Be Flexible with Payment Arrangements
All businesses have their preferred payment terms. When these are at considerable odds – a customer insisting on 90 day payments while a supplier wants it within a fortnight, for example – the relationship is put under a huge amount of strain.
You will have your reasons for your payment terms, but understand your supplier has theirs. Be open about your reasons, respect theirs, and communicate to find a compromise. Flexibility on payments may also involve how you pay. For example, if you put in a large unexpected order with a quick turn around time, the supplier may ask for cash payment upfront. Being able to reach agreement again shows you are prepared to be fair about meeting each other’s needs.
Have Credit Available
Following on from above, having pre-approved credit available is a valuable contingency to have in place should you need flexibility from your suppliers. It gives you the ability to absorb some of the risk of placing unexpected orders, helping your supplier keep up with your needs. It also puts you in a strong negotiating position, as you have the capital available to back up your requests. Pay4’s revolving credit facility is an ideal financial solution to pay any of your supplier invoices upfront or on time, whether that be for stock, services or even a new asset.
Give Plenty of Notice
You cannot control demand, so there will be times when you need to place last minute orders unexpectedly. But in general, try to give your supplier as much notice as possible, even with orders that are out of the ordinary. This is about showing respect, and understanding that you will not be your supplier’s only customer, they have other responsibilities to meet.
Review Terms Regularly
Part of good communication is holding regular discussions about business arrangements to check both parties are satisfied and that everything is working as it should be. This is also an opportunity for both parties to look for improvements that could be made.
The Benefits of Managing Supplier Relationships Effectively
When successful relationships are built with suppliers, both parties benefit from reductions in costs and risk. Cost benefits arise because businesses which know each other well can hone their mutual processes to work more efficiently, and because strong relationships tend to bring direct benefits such as preferential pricing. Risk is reduced because there is inherent stability in regular, repeat business between two parties .
Looking more broadly, the benefits of good supplier relationship management can be summarised as follows:
Supply chain consolidation
Focusing on a smaller group of trusted suppliers cuts complexity and the risk of duplication.
From the hidden expense of constantly looking for new suppliers in the search for better value, to the logistical costs of a complex supply chain, investing in long-term arrangements replaces cost inputs with relationship inputs.
Simpler supply chains reduce the risk of waste and error, but good supplier relationships also afford greater efficiency as businesses adapt to suit each other.
Good relationships with clear, open communication reduce availability problems, delays and quality issues, and allow for swifter resolution.
In conclusion, good supplier relationship management matters because it is about seeking optimum performance and value from an integral part of your business network. Relationships are crucial in business, and the better any enterprise becomes at building them, the bigger the benefits are.
By recognising suppliers as a key strategic partner with a stake in your overall objectives, businesses can break the mould of fixed, static, even restrictive procurement practices and begin to find ways to add value.
Conversely, by recognising that supply partners have their own needs and objectives, companies can communicate from a point of mutual understanding, and over time develop together innovative, bespoke services which reduce costs, increase efficiency and ultimately boost profitability for both.