6 Reasons To Outsource Your Supplier Relationship Management
Last updated: December 19, 2018
From office supplies to the equipment needed to run the machines that produce your company's core products, it's very likely that your organization needs to work with outside vendors or suppliers to provide it with the gear it needs to operate on a day-to-day basis. Obtaining the equipment and supplies your business needs to run smoothly and efficiently requires more than simply placing an order now and then.
Ideally, your company will establish relationships with the suppliers you work with. The concept of supplier relationship management came about in 1983 when Peter Kraljic wrote "Purchasing Must Become Supplier Management" for the Harvard Business Review. In his article, Kraljic argued that supplier management was increasingly important in a world where technology was constantly changing, where the availability of products was unknown and where the relationships between purchaser and supplier were challenged.
Although Kraljic discussed the benefits of supplier relationship management, what he didn't address in his article was the importance of outsourcing supplier relationship management. While supplier relationship management can help your company lower costs and improve its profitability, there is also a lot that goes into establishing and maintaining those relationships. For some companies, managing supplier relationships can be a considerable drain on resources and time.
One way to enjoy the best of both worlds — the benefits of supplier relationship management, minus the challenges — is to outsource it.
Hiring a third party to manage your company's supplier relationships might seem like an expensive endeavor or that it would defeat the purpose of developing relationships with suppliers in the first place. In reality, outsourcing supply chain and supplier relationship management has multiple benefits.
When you aren't an expert in a certain area, it takes time and money to build up knowledge and experience, or at least time and money to learn as much as you can about a supplier and how one supplier is different from another.
Hiring a firm that specializes in supplier relationship management means you can take advantage of the company's already-established know-how and expertise. Often, it is more cost effective for businesses to bring on an outside procurement firm than it is for them to build an in-house supplier relationship management program from scratch. The outsourced firm usually already has programs in place to provide the best solutions for a company's supplier needs.
Another way that hiring a consulting firm to manage your supplier relationships can help you reduce costs is by allowing you to find less expensive supplies. You are most likely focused on the needs of your business and don't necessarily have time to go price shopping or to compare and contrast the products offered by one company versus the products offered by another.
But that is exactly what a company that offers supplier relationship management services is equipped to do. It's very likely that a firm will either have a list of contacts or know of various suppliers and which ones are best to work with depending on the circumstances and your cost goals.
Finally, outsourcing supplier relationship management can help to reduce your costs by optimizing the process your company uses to obtain materials and inventory. A supplier might have tried to take advantage of your company's lack of experience or knowledge of inventory management by encouraging you to purchase more than you need or by encouraging you to purchase only when you need things so that your business isn't able to take advantage of volume discounts or other cost-saving programs. A third-party company that specializes in supplier relationship management can introduce you to the best way to manage your inventory, saving your business money immediately and in the long run.
One of the more common reasons why companies get started with supplier relationship management is because they have identified a need to improve efficiency when it comes to the speed or transparency of a transaction. Transactional efficiency is often cited as one of the benefits of supplier relationship management.
But increased efficiency doesn't always happen right away. It takes time for the purchaser and the supplier to develop that relationship and to smooth out any kinks or issues along the way. Having a third party step in and take the reins can make it more likely that a company will enjoy increased efficiency right away.
When a company outsources supplier relationship management, it can take advantage of the firm's experience in working with suppliers and its established connections with certain suppliers. From the supplier's point of view, efficiency can increase because they are provided with a complete understanding of how the purchaser operates from the start and can be better equipped to meet the company's needs with as little lag time as possible.
Outsourcing supplier relationship management can also improve efficiency on the personal or individual level. If interacting with suppliers and obtaining equipment and other goods is usually on your list of things-to-do, you can focus your energy and devote your time to working on other tasks that might be more pressing or urgent.
Prices of supplies and goods can fluctuate. A shortage of a certain material or a sudden demand for a particular item can mean that suppliers are compelled to increase their prices. Without established supplier relationships in place, your business might find itself constantly uncertain how much it will be paying for certain items from one month to the next.
When you outsource relationship management, the firm will work on your behalf to stabilize the cost of the supplies and services your business needs the most. That means that you are less likely to experience surprise bills or invoices that are considerably higher than anticipated.
One way that working with a third party to manage your supplier relationships reduces price volatility is by creating a fixed price agreement with the supplier. A consultant might negotiate a set price with the supplier for a defined period. Since price increases are often unavoidable, another option to reduce price volatility is to have the supplier agree to gradual price increases, spaced out over months or years. For example, your company might pay $100 per month for a service for the first six months. After the first six months, the supplier might agree to a price increase of five percent per year.
Working with a consulting company to reduce price volatility isn't only good for the purchasing company. Lower price volatility can also benefit the supplier. Often, suppliers feel the need to raise prices because they are uncertain how often a customer will purchase from them. When purchaser and supplier establish a contract or agreement, the supplier has the benefit of knowing that they have a fixed customer and a fixed source of revenue, which can allow it to keep prices lower.
Is it better to purchase from multiple suppliers or as few as possible? In many cases, consolidating your supply chain so that you work with fewer suppliers is often more cost-effective and lower risk. When you work with more suppliers, you need to spend time onboarding them, processing multiple invoices and ordering from numerous sources. There is also the chance that a smaller supplier will go out of business or be unable to provide you with the materials and equipment you need.
When a purchaser consolidates its supply chain, it more likely than not increases its purchasing power. For example, if a purchaser was previously ordering Widget A from Supplier A and Widget B from Supplier B, it most likely wasn't able to take advantage of volume or multiple purchase discounts. But if it turns out that Supplier B also offers Widget A and the purchaser decides to buy both Widget A and Widget B from Supplier B, the purchaser has more leverage. Since it is giving Supplier B more business, it can negotiate a better price on both Widgets or a discount. Supplier B benefits from the arrangement as well, as it sees an increase in sales.
Another benefit of consolidating the supply chain is that doing so gives a purchaser more energy to focus on building its relationships with suppliers. Instead of being spread too thin and trying to manage multiple suppliers, the purchaser and the consulting firm can zero in on what is working about the relationships they have established with just a handful of suppliers.
Outsourcing supplier relationship management gives you the ability to consolidate your supply chain by providing you with a better understanding of what a supplier is looking for in a customer and by allowing you and the supplier to work together to come up with an agreement that benefits both parties.
A survey from 2013 found that flexibility in a supply chain was the top priority for companies, ahead of reducing costs and maximizing delivery performance. A flexible supply chain means that a company can react quickly and with limited disruption should something unexpected take place. For example, if a natural disaster disrupts production or the operations of one supplier, company that has flexibility in its supply chain can quickly make adjustments and changes so that the impact on its operations are minimal.
Achieving flexibility in a supply chain often involves getting multiple parties on the same page. The person in charge of the supply chain typically needs to get the opinions of people in logistics, marketing, manufacturing and sales so everyone has the same understanding of goals and schedules. There is a lot to juggle when it comes to being flexible.
Outsourcing supplier relationship management can help to improve flexibility by providing the purchasing company with access to the consultant's expertise and contacts. The third party can listen to the needs of everyone at the purchasing company and synthesize those needs in a way that makes the most sense and that allows for the greatest flexibility.
Additionally, when a purchasing company outsources its supplier relationship management, it can benefit from the consulting company's network of suppliers and a more extensive list of resources, which can also help to improve flexibility and allow a company to bounce back from any setbacks or challenges with ease.
Wondering if your company is getting the best price on a particular product or whether there is a supplier out there who can better meet your needs takes time and energy. In some cases, companies end up paying more than the market rate for products because they don't have the time or resources to compare and contrast their options.
Outsourcing supplier management can mean that your supply chain is continually improving, which helps your company get the best service and the best products at the best possible price.
For example, if you outsource supplier relationship management, one thing the consulting firm might do for your company is supplier benchmarking. Benchmarking gives you an idea of the typical prices paid for certain products and services and can help you see if a supplier has been overcharging you. With that information in hand, you are in a better position to negotiate with a supplier to get a better rate.
Alternatively, a consulting firm can direct you to suppliers who are going to be a better fit for your company based on the services they offer, the contracts they typically use or whether or not their mission aligns with yours.
If it has been a while since your company has taken a close look at who is it purchasing from or why it is purchasing from a particular company, working with a third party consultant can give you a chance to shake things up and make drastic improvements to your supply chain.
When it comes to procuring the supplies and services your business needs, it's likely that you have multiple goals. You want to purchase the products and services needed, but you also want to get the possible price. Additionally, it's likely that you don't want to spend a lot of time comparing different suppliers and weighing the pros and cons of working with one over another.
Outsourcing your supplier relationship management needs means that you can have the best of both worlds. You can get the best price on products and services and take advantage of an established, on-going relationship with your most important suppliers. You also get to see things from the supplier's point of view, which can improve negotiations and make it more likely that you can reach an agreement that works to everyone's best advantage. Working with a consultant means that you aren't spending time or money that could have been better used towards growing your business on managing your suppliers.
Dryden Group has a full understanding of the challenges that often affect the relationships between purchasers and suppliers. Our supplier relationship management services help to maximize your business' value as a customer to supplier while also allowing suppliers and purchasers to work together to achieve their goals. To learn more about our services and how outsourcing your supplier relationship management needs can benefit your company, contact us today.