Suppliers are often cited as one of the main causes for failing to meet client deliverables, and whilst this may sometimes be true, the inconvenient truth is that the root cause is almost always a failure in supplier management. Companies often focus on nurturing the customer relationship, but the supplier relationship is just as crucial.
Whether making a conscious ‘make or buy’ decision or simply undertaking business-as-usual procurement, outsourcing supply does not relieve the company from any of the associated responsibilities. It’s therefore critical that the supplier management processes are robust enough to build a strong, well-functioning supply chain that is an extension of your own standards. Strong supply chains are built on four fundamental aspects:
- risk management
- sustainable relationships
- understanding demand
- ethical and sustainable practices.
The latest developments seen in ISO management systems show the general shift of management focus towards more risk-based thinking. The reality is that risk based thinking has always been part of good management. It is not a new philosophy or fad, but simply making good decisions by understanding the impact of possible failure.
Managing suppliers is no different, and risk management is one of the fundamental focusses of developing a strong external supply chain. Understanding the risk associated with each outsourced service / component allows you to put the right number of supply options, resources to manage, and inspection and audit focus and mitigation plans in place. Some of the key aspects to consider are:
- What aspect of our commitment to the client can be affected by supplier failure? Cost, quality, delivery?
- Can the component / service be obtained from other sources?
- Is the lead time on the critical path?
- How volatile is the availability / cost of raw materials for the supplier?
- How accessible is the supplier in the event of an issue?
- How has the supplier performed previously?
Not every client-supplier relationship needs to be one that is fully integrated and collaborative. It’s important, however, for both sides of the relationship to ensure the current and desired state of the relationship is understood. Miller Heiman identify five potential supplier relationships (the Buy-Sell Hierarchy):
Ensuring that both sides have aligned expectations is an integral part of forming a sustainable and successful relationship. One or the other party growing disillusioned or failing to see the long-term benefits will ultimately lead to a declining relationship and depreciating value of supply.
Being able to manage and forecast demand throughout the supply chain increases the ability for each subsequent tier to accurately and efficiently deliver against requirements. Armed with timely information about product requirements, quantities and timings, a supplier can make informed strategic planning decisions to ensure the best value can be provided through raw material procurement, batch production and staffing level strategies etc.
Above and beyond the legal requirements set out regarding ethical behaviour, large companies producing their own code of ethics is becoming common practice. To sustain their brand image and reputation, it is increasingly important that they do not become associated with any unethical practices either directly or indirectly via their supply chain. The result is that client-supplier relationships at all tiers of the supply chain are experiencing the same demand for transparency, ethical behaviour, high moral principles and exemplary organisational values to manage this risk. When considering ethics in the supply chain, the following key areas should be taken into account:
- the eradication of child labour
- safe and hygienic working conditions
- appropriate pay and working hours
- equal opportunities
- anti-bribery and corruption
- environmental awareness and sustainable practices.
Benefits of strong supplier management
For most companies, establishing strong, mutually beneficial, open and honest relationships through effective supplier management is a critical step in improving performance and one of the greatest opportunities to improve performance, support growth and generate cost efficiencies. Here are just some of the benefits:
- lower costs
- improved service levels
- consistent high-quality levels
- on time, right first-time deliveries
- smooth, efficient internal production
- reduced supply risk.
Executive Compass® offer a full range of supplier management services to support you in establishing, developing and maintaining supplier management strategies to support your business growth. If you face challenges with your supply chain, contact us today to see how we can help.