3 Simple Supplier Management Initiatives With Great Impact

Creating real value in procurement with real impact on the business is key if procurement wants to earn a chair at the leadership table. This will only happen if procurement delivers real value, and not ‘only’ cost savings.

It is a far easier approach than having to replace existing suppliers, as the new suppliers need to be implemented fully before real value can be generated. Today supply chains compete against supply chains, which means your suppliers should be part of your battle against your competition.

You only get them to join this battle by engaging them and working with them towards greater value creation. That is why we are describing the first 3 steps of supplier management initiatives which will bring your business great value.

1. Ask your CEO to be measured on value creation in supplier management

This might not sound simple to you, but it can be a lot easier than you expect. Great CEOs like to be challenged, if you have great arguments. You should ask your CEO to be measured not only on cost savings, but also other metrics related to value creation.

First your CEO needs to understand that your company is not an isolated entity that can work completely independently and be competitive in the market without external partners and suppliers. A company is part of a larger supply and value chain. A supplier is an extended ‘team’ that is part of your company’s value chain.

A supplier contributes in the value chain, like an internal team does, to the overall aim of serving your end customers. A supplier just happens to be a team that works in a different legal entity outside the company, but the supplier can still have a significant influence on the overall performance and competitiveness of the company.

Or in other words: Supply chains compete against supply chains. Your suppliers are an important part of your supply chain, and they should join you in your battle against the competition, and these new metrics should reflect this.

If you only measure suppliers on cost savings, there is a lot of value creation potential from suppliers that will not be realized, and a lot of hidden costs not visible that will continue to be added.

2. Make the most of your time with supplier segmentation

You must segment your suppliers into different supplier segments (could be named strategic, tactical and tail suppliers), which you must manage differently using different approaches and resources.

Segmentation of suppliers is key and a way to help you ensure the proper alignment of your resources and time. Start by identifying those suppliers with whom you can work to achieve greater levels of value creation for your company – let’s call them your strategic suppliers.

These are typically large spend suppliers but could also be smaller, critical suppliers that may be able to deliver innovation or services that could have great value for your company, thus making your company more competitive in the market.

Next identify your tactical suppliers, such as suppliers you frequently buy from but who have limited spend, and where there are alternative suppliers available in the market.

With tactical suppliers you want to maintain a solid relationship but probably adopt a standardized approach that can be semi-automated. The tail suppliers are the rest of the suppliers. Do not focus resources and time on these.

“The point of segmentation is to make clear decisions on how to manage the suppliers in the different supplier segments differently”

3. Create 1%+ real cost savings without any RFQ

The secret of creating 1%+ cost savings without any RFQs is the following:

1. Carry out business review meetings with all your strategic suppliers.

2. Ask suppliers nicely for 2% cost savings, explain carefully that you are under pressure to deliver these savings, and then ask them what you can offer them in return. The last question is very important!

3. You probably have something non-financial to offer that has great value for the supplier – maybe you have not realized you have this, so be creative here.

The suppliers will probably not give you the full 2% you asked for, but they will give you something if you approach them constructively. And then the 1%+ cost savings happen – like magic.

Conclusion

Creating real value in procurement with real impact on the business is key if procurement wants to earn a chair at the leadership table. This will only happen if procurement delivers real value - and not ‘only’ cost savings. Implement supplier management initiatives and see the results.

There are more simple actions you can take to develop great supplier management. Check our SRM Handbook to help you get your suppliers and stakeholders engaged, uncover examples of other value creating metrics that could be applied and propositions for supplier segmentation.

It’s your turn to make a change!