5 Steps of the Supplier Management Process

Supplier Management Process January 08, 2021

Hanh Truong

Writer

To develop a productive and lasting relationship with suppliers, organizations need to establish proper communication and standards for these entities. Having a supplier management process enables business owners to address this and assess their distributor's overall performance.

Effectively managing suppliers can empower an organization to control their operation, as well as ensure high-quality products and services are delivered promptly.

What is Supplier Management

Supplier management is the process of making sure organizations are receiving value from the money they spend on their suppliers.

Suppliers are critical to a business's success because they provide the company with the goods and services they need to meet consumer demand. Therefore, proper management is necessary to prevent delays in the supply chain.

Managing suppliers also entail strategizing and establishing policies and contract agreements to ensure that both parties have an equal understanding of business expectations and goals. Additionally, these standards set measurements that indicate how well a supplier is performing and informs organizations about what they can do to improve their supplier's efficiency.

Benefits of Supplier Management

Having a well-developed supplier management system provides many benefits.

Reduce Risks - Since business owners must maintain and regularly assess supplier activity, they will be able to identify any suspicious behavior quickly.

Minimize Costs - With a management system, executives can foster transparent and productive relationships with their suppliers. In turn, suppliers will be more likely to offer discounts and savings.

Boost Efficiency - Managing vendors will improve communication, which means both parties will have a better understanding of the business they are working with. This will enhance operational flow and can minimize delays in the supply chain.

Lessen Price Volatility - Oftentimes, suppliers will provide fixed prices in exchange for certain criteria, such as longer contract terms. By effectively managing supplier relationships, businesses can take advantage of this and minimize unpredictable price fluctuations.

Consolidation of Supply Chain - Efficient supply chain management can enable businesses to reduce the number of suppliers they work with, allowing them to streamline their purchase orders and budgeting.

5 Steps to Managing Suppliers

Businesses can strategically manage suppliers by following the 5-step process.

1. Identify All Business Goals and Objectives

Managers should first identify the set of objectives and expectations they have for each of their suppliers. It is also helpful to understand what every department within the company needs from its suppliers.

This will allow management teams to match vendors with certain needs and goals without duplicating resources and efforts.

Setting objectives will also help later in the process when executives need to evaluate supplier performance.

2. Determine Criteria for Selecting Suppliers

Next, business owners should establish the criteria for choosing the best supplier that will provide the maximum value.

Generally, these standards for selection will change, depending on the organization, its industry, and expectations. However, managers will tend to compare supplier prices, quality of past work, experience, and reputation.

At this stage of the process, business owners will also submit requests for quotation (RFQ), which is a document that organizations send to potential suppliers to request pricing and payment information. Companies may also send out requests for proposals (RFP). This document outlines a business's project and solicits bids from interested suppliers who want to provide their services or goods.

3. Evaluate and Choose Suppliers

All relevant suppliers are then evaluated based on the established criteria. If the organization submitted an RFQ or RFP, then managers will assess the quotes and proposals that the suppliers sent in.

When evaluating, businesses should analyze supplier information, such as their strengths, weaknesses, and how they plan to meet objectives and requirements. It is also helpful to consider external factors that could impact the supplier's performance, such as environmental changes.

Organizations should then choose an effective supplier they believe best aligns with their goals and who they think will provide the most value.

4. Negotiate and Create a Contract

After the suppliers are chosen, the business's procurement and finance teams need to create a contract that outlines all of the requirements that the supplier must fulfill. The contract should also define payment details and pricing to ensure that both entities are on the same page.

During the process of creating a contract, executives should also involve relevant stakeholders. These groups and individuals can provide insight into how the contract can guarantee suppliers deliver maximum value.

5. Evaluate Supplier Performance

It is important that organizations regularly evaluate supplier performance to make sure that they are meeting the prestablished requirements. Creating key performance indicators (KPIs) can help executives measure how well a supplier is doing and to see if any improvements need to be made.

With a well-structured supplier management process, businesses can foster a strong and lasting relationship with their third party providers and ensure a productive operation.