Supplier Relationship Management – The Secret to Effective Supplier Relationships
For the longest time, the procurement scale has tipped in favor of the buyer. However, the post-pandemic era has seen a dramatic shift in the business landscape. Constrained supply chains and the associated shortages have resulted in mounting pressures from the government and investors for organizations to diversify their supplier bases.
The supplier relationship management dynamic has changed, with procurement processes becoming increasingly supplier-centric. The balance of power has shifted. Suppliers are calling the shots.
The question becomes: What does this mean for your existing supplier relationships? Here’s everything you need to know about supplier relationship management.
Why Is Supplier Relationship Management Taking a Front Seat?
At the height of COVID-19, the estimated value for items out of stock in 2020 was $1.14 trillion. The leverage buyers once used against suppliers is no longer working in the current global inflationary economy. Supplier relationship management has never been more critical than it is right now.
Michael E. Porter’s book Competitive Strategy outlines what became known as Porter’s Five Forces—a framework used to analyze a business’ competitive environment. These five forces—suppliers, customers, potential new market entrants, competitive rivals, and substitute products—can be used as a business strategy guide for companies looking to increase their competitive advantage.
The balance of power has shifted
After all of the industry-wide supply shortages witnessed in the last two years, this delicate balance of power has shifted. At least two out of five forces have seen changes. Supplier power has increased, especially among businesses that supply in-demand products. Some are calling 2022 “the Year of the Supplier.”
Suppliers are leveraging this newfound power to push back against policies that have traditionally been forced upon them, particularly those they deem punitive. Some of these include annual pricing reductions, extended payment terms, and the lack of visibility and profit-sharing.
Many buying organizations falsely believe that all suppliers want to do business with them. They expect them to do whatever it takes to be considered and do little to improve the supplier experience. On the other hand, there are buyers who know the value of strong supplier relationships. Below is a brief overview of common frustrations suppliers face when dealing with buyers.
1. Buyer-Focused Procurement Best “Practices”
For years, so-called industry “best practices” have been buyer-centric. They’re focused on making procurement processes and supply chain systems more efficient and end up treating suppliers like a commodity.
2. Inefficient Supplier Portals and Surveys
Procurement departments constantly get feedback from suppliers on the inefficiencies plaguing their supplier portals. Most enterprise resource planning (ERP), procure-to-pay (P2P), and source-to-pay (S2P) are cumbersome and time-consuming to use. No two systems are alike, have no integration capabilities, and form fields often lack auto-fill or memory options.
3. Too Many Hurdles to Jump Through
Companies require suppliers to jump through whatever hurdles they place in front of them to have the “privilege” of serving the customer. Adding extra parameters such as those focused on diversity, risk, and environmental, social, & governance (ESG) has made it difficult for suppliers to comply.
Most of these requirements come about when buyers realize they don’t have enough information about their suppliers. Since they don’t have an efficient process to collect this data, their go-to method involves using a host of surveys to their supplier base.
This scramble for information is seen when new government regulations are implemented. Suppliers have no choice but to show they are compliant with every buyer they work with, regardless of the industry they serve.
4. Inefficient RFXs
Many buyers still send out RFXs in analog spreadsheets without collaboration capabilities or auto-fill features. As a result, suppliers end up with repeated requests for information that they have likely submitted several times before.
Are Suppliers Calling the Shots?
The short answer is—yes, and they’re looking for preferred customers. Here’s why.
We’re now two years into the pandemic. The worldwide supply chain still hasn’t recovered from the challenges plaguing it, key among which are the constant delays and disruptions. According to a HUBS report, 56% of companies experienced more disruptions to their supply chain in 2021 than in previous years.
Record high freight rates, out-of-place cargo containers, and choked shipping ports remain recurrent features in local and international news. This chaos has threatened the competitive position and survival of businesses, particularly those unable to meet customer expectations.
What happens when customers are frustrated?
Companies can be sure of this: a disappointed customer might never return.
These challenges have shifted the balance of power. Buyers need suppliers more than ever, and suppliers are fully aware of it. They use this newfound leverage to reject buying organizations extending one-sided terms.
- They are turning down companies requesting discounts in exchange for faster payments.
- They are placing strict limits on credit extensions and lengthy payment cycles.
- They are calling the shots in more ways than one, and buyers must get their act together to become the customer of choice.
What Makes a Good Customer?
So, how do you become the customer of choice? Here are a few ways to make your organization attractive to suppliers.
- Send out cohesive and well-laid-out RFXs
- Ensure your supplier experience is user-friendly and integrates with other tools
- Come up with better negotiation strategies
- Make fewer demands from your suppliers (think payment terms, contract terms, requests for information)
- Ensure that content on platforms and surveys are up-to-date
- Incentivize your suppliers to do better rather than punish them when they fall short
- Keep the information you collect from suppliers private and secure
- Use Arkestro’s PPO to run your sourcing events
How to Use Predictive Procurement for Effective Supplier Relationship Management
The single, most effective way to manage supplier relationships is to leverage the predictive procurement framework when addressing ineffective relationships between buyers and suppliers. The first step toward building sustainable and empowered relationships involves determining what suppliers actually want.
Here’s what they’re looking for:
- Clear instructions on sourcing events and the ones they should be bidding on
- Straightforward answers on award scenarios that don’t leave them wondering whether or not they’ve won or why they didn’t
- Better communication and relationship building
- Support when their portals are broken or the information being requested is unclear
- Anything that helps them streamline their processes and reduce their low-touch admin tasks
- Easy-to-use technology
With that in mind, here are some ways your organization can leverage Arkestro’s predictive procurement orchestration platform to promote effective supplier relationship management.
- Manage supplier profiles with live data feeds, including internal spend and external market insights
- Manage supplier profiles based on historical behavior across purchasing, sourcing, performance, and compliance datasets
- Get predictive real-time alerts to suppliers for emerging risk factors, performance-related issues, or price changes
- Get price suggestions to give suppliers a place to start and make it faster for them to enter their information
The secret to effective supplier relationship management lies in removing the hurdles suppliers have to jump through to be in business with your organization. It’s about fostering a procurement climate that makes you attractive to suppliers and treating them as equals, not commodities.
Get in touch today to see how Arkestro can make you your suppliers’ customer of choice.