Given that the procurement function has such a significant role to play in both optimizing expenditure / leveraging value and maintaining a steady flow of materials and services to feed the companies production processes – supplier selection and vendor management are a key competency and represent a cornerstone in a businesses supply chain strategy.
But what strategy should you adopt? Perhaps to start with the core businesses strategy should be determined – is it one that requires minimum risk exposure – is the material price the most important aspect? Is any support with design or technical services required? Different strategies can be adopted depending on the requirement – however there are some fundamental options open to you:
Restructuring supplier relationships
Many organizations will fail to capitalize on the opportunities that strong relationships with their supply chain can bring. Underdeveloped Supply Chain strategies will often be typified by adversarial relationships centred on cost. Company data (such as sales forecasts or product planning) is not readily shared and the supplier is often literally used as a “hole in the wall” service when material is required supported by a simple spot ordering process.
Effective partnering can develop the supplier relationship into something that can support the business over the long term – breaking down the adversarial barriers, sharing data, strategic vision and goals allowing the supplier to align their capabilities, capacities and in some cases organization in order to suit. Participating in the development of the company and ensuring it is agile and effective against the buying companies need.
Clearly this approach may not work for all – and it’s typically more prominent in suppliers where either spend is a considerable proportion of turnover or where there is a strategic advantage in forming this style of relationship (Competition within the market for example).
Long term supplier relationships and effective partnering can also bring about stability and risk reduction enabling participating organizations to equip and plan for future requirement.
Another effective, and common, method of reorganizing a supplier base is through increased use of competition.
Where cost is a primary issue – tendering work packages and commodities can provide an effective method for suppliers to compete against each other and drive down cost.
However – cost should never be looked in isolation as this attitude may promote some suppliers to submit a low price purely to secure the work with a view to future potential orderbook. This is some cases can sabotage quality or lead time needs and in some extreme cases result in suppliers renegotiating as the award proves unsustainable. As always capability, capacity and product quality should be included at the forefront of any acquisition process.
Restructuring the Supplier Base
Another approach to optimizing the supplier base is simply to restructure it – select different suppliers and regions from which to procure.
For manufacturing companies one of the most import aspects to this is the make buy process – this is effectively a business case that supports whether a part is manufactured and assembled internally within the organization or whether it is procured. (note: some organizations may choose to part procure and part assemble).
This is a fundamental factor in supplier selection and commodity management. Make Buy decisions are often prioritised around cost but companies should also consider their own capabilities and core competencies.
Once you’ve decided that you’ll procure an item then the next question is from where – locally, nationally, internationally. Do you buy from the OEM from a distributor, do you buy from a low cost economy, are there ethical considerations you may need to apply? What are the qualities that you want from your suppliers.
Many SME’s may look to procure locally believing that this allows for better resolution of issues that may arise – this isn’t always prudent and most supply chain strategies should include some consideration of global procurement.