In the contemporary business landscape, maintaining good relationships with suppliers is both more important and more difficult than ever before. Global sourcing has become widespread, and companies may be aligned with vendors whose practices they know very little about. This presents problems in terms of both supplier selection and the ongoing effort to optimize the procurement process for enhanced profits and operational leanness.
As companies work to ensure that the suppliers they've chosen are the right ones, they'll have to be sure they stick to best practices in order to avoid going off track. What are three of the basic considerations that procurement executives must make when managing vendors?
1. Cost reduction
A key supplier management principle to bear in mind is that "maintaining good relationships" doesn't simply mean keeping everyone happy. While it's true that a displeased supplier could make a business's life more difficult, ultimately, whether or not a procurement relationship is working is based on its cost-effectiveness. If the company can't financially support its decision to source certain goods from a given vendor, that partnership won't be viable in the long term.
In a post for Spend Matters, Hani Alexander of consulting firm Alvarez & Marsal pointed out that while procurement partnerships are often based on forecasted or negotiated savings, executives often fail to ensure that these cost reductions are realized. He recommended that firms use quantifiable criteria, including contract compliance, to determine whether or not these relationships are working.
2. Risk management
Every business partnership is accompanied by a certain level of risk, and minimizing risk is an integral part of procurement management. In a column for CFO, supply chain experts John Bugalla and Kristina Narvaez noted that cutting-edge technologies are helping companies evaluate supplier-related risks more effectively.
"Given the complexity of managing third-party risks across different business units, many companies are turning to predictive analytics to gain a better and more comprehensive view of long, complex supply chain and distribution networks," Bugalla and Narvaez wrote.
3. Strategic alignment
Lastly, it's important to bear in mind how hard-data considerations - how much a given supplier is saving the company in operating costs, how much risk a vendor presents to the business - relate to deeper strategic issues. Does sourcing goods from a given partner reflect positively or negatively on the company? Does the vendor share core values such as sustainability and social responsibility?
Short-term, immediate cost reductions are alluring - but a misaligned partnership can result in long-term issues that turn an apparently inexpensive supplier into a drain on funds.