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 can be beneficial for businesses to do regular, planned reviews of the suppliers that they have paid for goods or services in the previous year. The purpose of any procurement or sourcing 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 can position businesses to maximise their outcomes from their commercial transactions.
Reviewing your supplier expenditure
Most small and medium sized businesses can benefit from following a simple yet comprehensive process to maximise the value for money they obtain from their expenditure as part of their supplier relationship management processes.
Step 1: Categorise expenditure
Categorise overall expenditure into different spending buckets. This can be an iterative process where overall categories like operational, marketing or office expenditure are created. Sub-categories can then be used within these overall categories to further break down supplier expenditure.
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. Businesses need 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 a business is sourcing from too many suppliers should be subject to scrutiny as should any area when a business 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.
Step 3: Evaluate outcomes and take action
Once the expenditure analysis has been complete, for each type of category, a business should reflect on how many of the suppliers it has a beneficial business relationship with. 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 business may not reflect the level of expenditure the business has with a supplier. Confirming this may inspire a buyer/business owner to enter into supplier negotiation for a better deal.
Managing your supplier relationships for long-term strategic success
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, businesses will 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 business 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.
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.
Get in touch
For those that feel like trying this, please let me know how you get on. Anybody who would like to discuss how they might start a process like this, drop me a line or pick up the phone for a conversation.