In recent times procurement as a core supply chain function has seen a paradigm shift. Earlier various departments within procurement were segmented and operated in silos. Today, businesses have shifted to an integrated approach where all the departments of procurement are interconnected. From being centered on buying, now procurement has evolved to end-to-end management of all the material and services requirements that ensure the smooth functioning of the entire supply chain. Post-COVID companies are focusing on supply chain innovation to boost operational and financial performance with an optimum mix of cost, quality, and delivery.
There are multiple factors that contribute to a smooth and efficient procurement process. One of those factors is vendor selection and management. With supply chains becoming increasingly complex, it has become vital for companies to formulate and implement strategies that can mitigate vendor risks.
Challenges in Vendor Management
Howsoever, sound the strategy might look, businesses often face challenges while implementing it. Below is the list of three common vendor management challenges that businesses need to address:
- Authenticity – Finding vendors is easy. Finding authentic vendors is difficult. Not all vendors will be open and willing to share the information requested by businesses. And not all information shared by the vendors is correct. It is the responsibility of the businesses to assess the credibility of the vendors. Contacting references, checking the commitment to customer service, and asking for accessible inventory information are a few activities that can be carried out by procurement teams to gauge the authenticity of the vendors. Yet not all businesses spend the time and energy required to source quality vendors.
- Business Continuity – Even in the event of disruption businesses need to be certain about continuing their day-to-day operations without any hindrance. Businesses have to identify the gaps in the continuity plans of the vendors which might affect their business operations and take necessary actions to address those gaps. Businesses often fail to monitor the resiliency and recovery ability of their vendors which are critical for business continuity.
- Leverage – Negotiating with powerful vendors is extremely challenging for businesses. Well-established vendors try their best to abuse their position in the market by negotiating terms with businesses that are not mutually beneficial. In such a scenario, businesses need to have options available to not let such vendors take advantage of their power in the market.
Selecting and Maintaining High-Quality Vendors
Below are some useful steps that business can follow to select and maintain Vendors of high quality:
- Set the right expectations – Businesses need to set the standards before dealing with vendors. It is critical to choose a suitable vendor from multiple vendors who meet the business standards and criteria while promising to deliver excellent performance.
- Check the quality systems – It is a good practice to be aware of the internal quality systems and practices of the vendors. If a vendor has an ISO certification it is an added advantage, however, not all vendors will be able to afford it. It is a recommended practice that level of quality that is defined by the business must be maintained in the product or service that is being delivered, communicated to the vendor, and used to measure their performance.
- Maintain Transparency – The maturity of the vendor relationship is defined by the trust and transparency between the parties. Transparency is never one-sided. Businesses need to understand and address the apprehensions of the vendors to build better relations. This can be achieved by treating vendors as an extension of the business and making them a part of solution development.
- Check Alignment of business values – There might be budding suppliers willing to adapt to the business’s demands, there might be existing suppliers unwilling to change but interested in continuing the business, and there might be direct suppliers who focus on mutual benefit. When vendors of different sizes and capabilities are available it becomes difficult to choose small vendors over well-established vendors in the market. However, this may not be right for the business. Businesses need to assess the vendor-business fit before finalizing vendor contracts.
- Create Process Awareness – Business systems may vary from vendor to vendor, but the process remains the same. Businesses need to ensure that these processes are followed by the vendors without any deviation. Businesses should contribute knowledge and resources that will help the vendors to serve them better. Making vendor training and development an integral part of the procurement strategy will help to boost the vendor confidence, and increases the process efficiency by minimizing process errors.
- Take advantage of the Data – Businesses often have a wealth of vendor data scattered across the supply chain systems. This data can be organized into insightful information and utilized to get a consolidated view of vendor performance. Key vendor decisions such as business continuity, penalties, performance assessment, and improvement can all be based on this data.
Vendor Management Strategies
The complexity of vendor selection and management grows with the growth in the size of the business. In such case, strategizing vendor management needs a fresh outlook. Below are some vendor management strategies that businesses can follow:
- Sustainability over cost – Businesses should always give preference to long-term relationships over short-term gains and marginal cost savings. Being fickle about the vendor choices negatively impacts the vendor confidence, and harms the cost and quality. Focusing on sustainability will benefit the businesses to build trust, get preferential treatment, and enjoy the mutual success of the businesses.
- Diversification of the supplier base – Businesses have to broaden the range of suppliers to improve the choice and availability. COVID-19 has once again highlighted the need and importance of diversification of the supplier base. In case of any unforeseen events, excessive dependence on any one supplier for key components or services jeopardizes the entire operations. Having a diverse supply base can help businesses to save costs, makes them flexible and respond faster to changing trends, and choose vendors irrespective of their size who offer a better price, quality, and speed of delivery.
- Avoid Repetitive Buying – It is a simpler decision to make whether to go for a new supplier or buy from an existing supplier when there is no issue with the current supplier. However, this practice may endanger the vendor-business relation when vendors start becoming complacent with increased leverage. Businesses need to plan their orders intelligently and avoid giving undue leverage to vendors.
- Contract Management – If neglected, Vendor Contracts become a source of high risk to the businesses. For businesses and vendors to deliver as expected, a contract must clearly outline the deliverables, costs, terms of confidentiality, and competitive work. It is a good practice to periodically review the vendor contracts and address the gaps if any. This ensures that the business continuity is not impacted even when there is a change in personnel handling the contracts.
- Performance Review – Good Relationship with strategic vendors is vital for business performance. Improper management of large strategic vendors can adversely impact both the vendor and business performance. Businesses do not need to review the performance of all the vendors regularly. It is recommended that they review the performance vendors who have a strategic significance and are critical for the business. In addition to the established Key Performance Indicators (KPI’s) such as measures of quality, service delivery, and customer support, businesses need to review the financial health and operational stability of the vendor’s business. There multiple tools that can help businesses to gauge the supplier’s overall health. One of the widely used tools is the Carter’s 10 C’s model. Below is the list of 10 C’s listed in this model:
- Capacity – The ability of the vendor to deliver the order
- Competency – How competent are the people, systems, and processes in comparison to their peers
- Consistency – The track record of the vendor in delivering expected service consistently over a sustained period.
- Control of process – Does the business has a well-defined and streamlined business process.
- Commitment to Quality – What are Quality Standards being followed by the vendors. Do they have good internal quality practices and systems in place?
- Cash – Does the vendor have enough cash in the bank to sustain any unforeseen external events?
- Cost – Can the vendor offer a competitive price over a sustained period?
- Culture – Are the values of the vendor and business are in alignment?
- Clean – Is the vendor ethical and environmentally responsible?
- Communication Efficiency – Does the vendor have good communication channels to extend support?
How to start and not stop at the end of this article piece?
I would recommend starting simply by just taking this approach, which has negligible risk, simple and yet an amazingly effective positive step towards our goal of a proactive strategy
A) Take pen -paper or manual method (start now)
Start implementing the recommended strategy using your existing technology resources for a known and low-risk segment of Suppliers within your supply chain business to find out what works and what doesn’t. Indeed, this causes efforts, but this will pave the way for better clarity around unknown risks.
B) Take help from technology
Work towards making it unattended, assisted by using Super-fast digital solution such that it works autonomously without losing its efficacy by engaging a solid, affordable Business and Technology solution partner.
If you are a CEO/COO/CIO/Managing Director/General Manager who is spending more time in reactive/preventive mode than future-facing, please reach out for an exploratory conversation.
Our Contact details
Yashomudra Patel (Mentor Procurement)
Pradeep Mishra (Director and Co-founder)
pradeep.mishra@aurionsystems.com.au
Ashok Mulchandani (Partner – Business Success and Strategic Transformation)
ashok.mulchandani@aurionsystems.com.au
Amit Bhagat (Director – Business Strategy)
amit.bhagat@aurionsystems.com.au
Please feel free to leave your suggestions and thoughts in the comment box below!
