Keystone Column 93 – Getting Value for Money from Suppliers

Keystone Column 93 – Getting Value for Money from Suppliers

This week we look at Supplier Relationship Management and why it is used by buyers. It is useful for buyers and suppliers to acquaint themselves with the core principles from time to time. We frequently find ourselves talking with suppliers new to the process who find it difficult to cope with. The bigger the contract, the more likely formal supplier relationship management processes will be deployed to ensure the (buying) organisation obtains value for money.

 

What is Supplier Relationship Management?

Supplier relationship management refers to the formal and informal means by which businesses manage their suppliers. The suppliers each business deals with support the buying organisation in some kind of way that helps them to succeed. Notwithstanding this, not all suppliers are equally important. Businesses need to consider how tactically aware they are in the management of their expenditure with their suppliers.

It is beneficial for organisations to do regular, planned reviews of their key suppliers. The purpose of any supplier review is to gain insight into how much is being spent by the business on its suppliers and whether it is spending the cash well. This process can include whole-life costing (i.e. how much the total contract cost entails (maintenance / service management, operational expenditure and upfront expenditure). Effective supplier relationship management helps businesses maximise value for money.

 

How to review your supplier expenditure

Most organisations can benefit from following a simple yet comprehensive process to maximise value for money by following these simple steps:

Step 1: Categorise expenditure

Categorise overall expenditure into different spending buckets. This can be an iterative process where overall categories like operations, marketing or office expenditure are created. Sub-categories can then be used within these overall categories to further break down supplier expenditure as required. For small organisations this can be quite a quick process, it becomes a more time intensive process with buying scale and complexity.

Step 2: Analyse expenditure

The next step is to determine, in total cash terms (as a percentage of both turnover and total expenditure), how much is being spent with each supplier. The buying organisation needs to understand in each area whether they have too many suppliers, the right amount of suppliers or too few suppliers. Any expenditure category or sub-category where they are sourcing from too many suppliers should be subject to scrutiny as should any area when the buying organisation is sourcing from a single supplier (or relatively few suppliers for commodity goods or generic services). This sifting exercise (the endgame is consolidation where possible) is the essence of effective supplier relationship management. The objective here is to formally seek better value for money by tendering work to a supplier or placing sufficient work with suppliers to obtain economies of scale.

Step 3: Evaluate outcomes and take action

Once the expenditure analysis has been complete, for each type of category, the buying organisation should then rapidly appraise which suppliers they spend significant sums of money with – this can be from a point of view of their own expenditure and/or the supplier’s company turnover. Where expenditure is relatively significant for a business and the buyer is not being offered discounts, special offers or some other form of reward, they may want to think about whether or not they are getting sufficient value for money from the relationship.

In other cases, the level of discounts and benefits available to a buying organisation may not reflect the level of expenditure the business has with a supplier. Confirming provides the buyer with the basis for a negotiation to obtain better value for money from their expenditure. Suppliers should reflect on their key customers regularly and satisfy themselves that their customers believe they are getting good value for money.

 

Managing your supplier relationships to maximise value for money

The approach taken to supplier relationship management depends on the strategic importance of the relationship and the goods/services that they are offering. Differentiating between suppliers that are strategically important business partners and those that are generic suppliers of widely available products or services can help to ensure that the approach to supplier relationship management aligns with the buying organisation’s long-term commercial strategy.

Once all the expenditure is analysed, buyers have a clearer view of the suppliers that are critical to their operations and those that are not (maverick expenditure can be tackled as a result of this allowing them to consolidate their expenditure). It is worth ensuring that strategically important suppliers know their importance to the organisation that is buying from them. In such cases, it can be mutually beneficial to develop a close business relationship with the supplier(s). An alignment of the respective commercial strategy of each company can be to the benefit of both parties – clearly this latter point refers primarily to the private sector but it can also occur within public contracts once it is transparent and doesn’t breach core procurement principles.

Suppliers that are not strategically important are best kept at some remove from decision-makers. This distance makes it much easier to play hardball during a supplier negotiation, multi-source and/or go to tender without having to explain the reasoning for doing so.

Keystone recommends:

www.etenders.gov.ie – register to obtain the latest tenders from State bodies

www.supplygov.ie – the latest lower value tenders for trades / supplies from local authorities

www.tenderscout.com – a tender engine highlighting opportunities in Ireland and overseas