In Part 5 of the procurement series, Anna Van Cleef discusses the supplier management process and best practices for procurement professionals.
Sourcing and Procurement professionals engage with suppliers each day to drive toward company goals and objectives. Given the right relationships, it can drive competitive advantage, productivity, and ultimate customer satisfaction. To enable these things, we leverage Supplier Management.
Supplier Management drives toward a win-win relationship between customers and suppliers to maximize return on investment (ROI) and minimize risk in the supply chain. There are various aspects to Supplier Management. We will be discussing negotiations, policies, performance management, and communication in this article.
Negotiations
As noted in part two of this series, knowing your company’s strategy and position is key before negotiations start. Think about how you will manage the supplier during the relationship. How will the negotiated contract create value to your organization and the overall supply chain? Embedding your company’s goals and objectives into the negotiation and the contractual agreement will help you to better manage the relationship from the start.
Be sure to include performance criteria within the contract. This allows you to review the performance measure with your suppliers throughout the life of the relationship.
Policies
Supplier Policies, or codes of conduct, define the standards you hold all suppliers to with which your company does business. These policies might include labor or work standards, ethics, environmental, guiding principles, or other key aspects that are important to your company. Type in “Supplier Code of Conduct” into Google to see various examples from companies of various sizes for examples.
Regardless of what is included for your company, aspects of your company’s Supplier Policy should be closely monitored and clear incentives for superior performance or penalties when suppliers do not meet the standard should be defined. Ensure that your company’s policies are called out within your contract and the positive or negative consequences that can result.
Performance Management
Performance Management is a critical part of the Supplier Management process. As noted above, including performance criteria within your contact is important to objective management of the supplier relationship.
As an example, if the supplier is supply goods to your company, you may have a tolerance within which each good needs to fit. You may include a performance criteria that defines the expectation for delivering goods that meet the specified tolerance. If you have a services supplier, you might tie their performance criteria to quality of work or another key measure.
Remember, “What gets measured gets done” which has been attributed to Peter Drucker, Tom Peters, Edwards Deming, Lord Kelvin, and others. Just because something is easy to measure, doesn’t mean it is the right thing to measure. Based on the desired outcomes for your company, determine what the right measures are that would not have negative or adverse secondary consequences.
For example, if a contract has a performance measure to “deliver X lines of codes in Y days”, developers can simply write lines of code that are never called and meet the criteria for the performance measure. In this example, these additional lines could create little value in the overall supply chain and drain resources. Select the right performance measures for your business to ensure that the goals are achieved.
A final point about performance measures would be to meet with the supplier regularly to discuss progress toward the measures in the contract. Support your statements with data to back-up your position of their excellent, good, average, or poor performance to remove frustration about subjective opinions.
Communication
Just like most things in life, communication is key. Communication with your suppliers is important to creating value in the supply chain so everyone is working toward the same goal.
Leveraging an example from Michael Polyani’s “The Republic of Science”, the most efficient way to solve a jigsaw puzzle is not to have many people work separately on different pieces of the puzzle. Rather, it is by everyone working together in cooperation. Each time a piece of the puzzle is fitted in, others will immediately watch out for the next step that becomes possible in consequence. In this system, each participant will act on her own initiative, by responding to the latest achievements of the others, and the completion of their joint task will be greatly accelerated.
In summary, not communicating key pieces of information doesn’t just impact those without that knowledge, but it could impact both parties toward achieving the goal efficiently and effectively.
But what is the right level of communication? This is based on many things such as the type of contractual relationship, the type of good or service being purchased, the goals and objectives for the relationship, confidentiality requirements, and much more. Ultimately, it is a judgement call for each situation how much is the right level of communication and cooperation.
