The secret to developing strong, strategic relationships with your suppliers
Your company and its suppliers are mutually dependent, and favorable relationships amplify the capacity of both of you to create value and foster quality management. In fact, strong supplier relationships are considered so foundational to a company’s overall success that Supplier Relationship Management [SRM] is one of the ISO 9000:2015 Principles of Quality Management. Here we’ve identified three powerful benefits of strong supplier relationships.
1. Reduce costs by consolidating vendors
Forming strong supplier relationships makes smart financial sense. A company can reduce costs by consolidating its vendor pool into a smaller number of strategic partners and centralizing purchasing activity with those suppliers. Why does that matter? In a study by Hackett Group, top performing companies had 2.3 times fewer strategic suppliers than their lower-performing peers.
Consolidation of suppliers creates a more streamlined and efficient supply chain, reducing internal workloads and soft costs while increasing opportunities to reduce costs through economies of scale and leveraged spend.
By systematically reducing your supplier pool and partnering with key suppliers, companies can receive better pricing, lower shipping costs and increase their volume buying power. In the aforementioned Hackett Group study, reducing suppliers contributed to a 3.35% cost reduction for indirect spend and a 9.18% reduction for general equipment and supplies in the top quartile of companies participating.
2. Improve Supplier Quality
For many companies [manufacturers in particular] products procured from suppliers represents 50-80% of the total product cost. With so much investment trusted to suppliers, ensuring consistent quality is vital to a company’s success.
A collaborative SRM strategy offers significant opportunities to realize improvements in supplier quality. In part, this is a consequence of the investment in regular meetings with preferred suppliers to discuss and strategize all aspects of business performance. In addition, by openly sharing data related to product quality, shipping or billing errors, or late deliveries, companies can build a collaborative relationship that works toward continuous quality improvement, benefitting both parties.
In addition, with a smaller number of key suppliers, it’s much simpler to track vendor performance and ensure contractual performance is met, enabling you to maintain a consistent set of quality standards for the products and services your company buys.
3. Reduce supplier management costs
Companies who develop strong supplier relationships will have lower overall transactional costs. With fewer suppliers to handle, the costs involved in setting up a supplier in internal systems, completing transactions, and managing the ongoing relationships significantly decreases.
Having contracts with a smaller number of suppliers and centralizing purchasing consolidates and reduces the overall number of transactions, reducing processing costs and giving you more control over billing. Fewer contracts to negotiate results in significant time savings, as contract negotiation can consume up to 50% of procurement professionals’ time. And fewer orders are easier to track, requiring fewer hours of administrative work, freeing your resources for more strategic tasks.
SRM yields considerable value
In a global research study by Vantage Partners, 35% of the companies participating reported that their companies’ SRM programs yield “considerable” value, and 50% reported that they “consistently get the best people, best pricing, and best ideas from their key suppliers, thereby gaining a competitive advantage to their competitors.” A full 70% of respondents in the same study indicated that SRM will be “very important” to their company’s success over the next three to five years.
So, while Supplier Relationship Management is a topic of importance among companies, many struggle with the best ways to grow the practice. A 2018 survey of Chief Procurement Officers found that while 74% of respondents acknowledge the importance of obtaining more value from existing suppliers through SRM, a full 51% have only a low or moderate ability to meet this objective. In our next post, we’ll offer up proven methods for improving supplier relationships.
Today’s global supply chains are increasingly complex, making a data-driven approach to supply chain management a must. Data-driven SCM provides visibility from end to end for monitoring the flow of information, services and goods from procurement to manufacturing and delivery to the end consumer. Data isn’t the only driver of effective supply chain management; other factors such as good vendor and supplier relationships, effective cost control, securing the right logistics partners and adopting innovative supply chain technologies make a big impact, too.
Supply chain optimization isn’t a simple undertaking, but effective SCM offers numerous benefits that improve the bottom line. Here’s a look at eight of the most important benefits of effective supply chain management.
Better collaboration
Information flow is a prominent challenge for companies. According to Oracle, 76% of companies lack an automated flow of information across the supply chain, and half of companies say fragmented information results in lost sales opportunities. Integrated software solutions remove bottlenecks and allow for the seamless sharing of information, providing a big-picture view of the supply chain from end to end. Thanks to improved access to data, supply chain leaders have the information they need, in context, to make more informed decisions.
Improved quality control
Quality control issues follow the rule of 10, explains Arshad Hafeez, Global Expert for Supply Chain Management and Quality Control, SCM-Group Function [GF] in an article for CIO Review. According to the rule of 10, the cost to replace or repair an item increases by tenfold at each step of the progression, resulting in significant costs for companies when quality issues arise.
Companies that have greater control over not only their direct suppliers but also their suppliers’ suppliers benefit from improved quality control. Implementing standard minimum quality criteria, for instance, enables direct suppliers to identify and partner with secondary suppliers that meet those requirements. Likewise, process guidelines can help suppliers comply with your company’s quality requirements. Some companies go beyond simply providing criteria, conducting periodic audits or requesting documentation verifying suppliers’ compliance steps. Hafeez recommends implementing a Management Operating System [MOS] for monitoring key performance indicators including:
- On-time delivery
- Scrap rates, reworks and similar issues at suppliers
- Final product quality [as received by end customers]
- Time for complaint resolution
- Findings from supplier quality assessments
By analyzing performance data, companies can partner with the highest-performing vendors and suppliers to maintain strict quality control.
Higher efficiency rate
Having real-time data on the availability of raw materials and manufacturing delays allows companies to implement backup plans, such as sourcing materials from a backup supplier, preventing further delays. Without real-time data, companies often don’t have time to initiate plan B, resulting in issues such as out-of-stock inventory or late shipments to end consumers.
Implementing smart automation solutions also results in higher efficiency. Healing Hands Scrubs, for example, implemented 6 River Systems’ collaborative mobile robots, doubling productivity and reducing unnecessary walking by 75%. Investing in the right automation solutions and leveraging data to minimize delays supports a positive customer experience and boosts your company’s reputation.
Keeping up with demand
“If consumer sales increase by 5 percent in a given week, a retailer could end up ordering 7 percent more product in response to the increase and a feeling that demand will continue,” according to a report by VISA. “The next link in the chain, observing what appears to be a 7 percent increase in demand, then orders a larger increase on his supplier. Eventually the factory may observe an inflated 20 percent increase in orders.”
Known as the bullwhip effect, this phenomenon often results from delays in communicating supply and demand changes. Supply chain leaders with access to real-time, accurate information and integrated data can better predict demand and readily respond to changing market conditions to avoid challenges like the bullwhip effect.
Shipping optimization
According to Logistics Management’s The State of Logistics Report, freight transportation costs increased by 7% from 2016 to 2017, while private and dedicated trucking costs increased by 9.5%. Less-than-truckload costs rose by 6.6%, and full truckload costs rose by 6.4%. Due to rising costs, shipping optimization is a priority for supply chain leaders. Identifying the most efficient shipping methods for small parcels, large bulk orders and other shipping scenarios helps companies get orders to customers faster while minimizing costs. Not only do those cost savings boost the company’s bottom line, but savings can be passed on to consumers as well to improve customer satisfaction.
Reduced overhead costs
With more accurate demand predictions, companies can reduce the overhead costs associated with storing slow-moving inventory by stocking less low-velocity inventory to make room for higher-velocity, revenue-producing inventory. Warehouse fulfillment costs contribute significantly to overhead. Reduce these costs by optimizing your warehouse layout, adopting the right automation solutions to improve productivity and implementing a better inventory management system.
Identifying unnecessary spend is another way to achieve leaner operations. If you’re facing high logistics costs, for instance, switching to another provider offering the same service level and quality at a lower cost is a quick win.
Improved risk mitigation
Analyzing big-picture and granular supply chain data can reveal potential risks, enabling companies to put backup plans in place to readily respond to unexpected circumstances. By taking proactive action, rather than reacting to supply chain disruptions, quality control issues or other concerns as they arise, companies can avoid negative impacts. Understanding risks also helps companies achieve leaner operations. For instance, 87% of companies believe they could reduce inventory by 22% if they had a better understanding of risks in their supply chains.
Improved cash flow
The importance and benefits of supply chain management systems discussed above allow companies to make smarter decisions, choose the right partners, accurately predict and respond to market and demand changes and reduce supply chain disruptions, but that’s not all: they also improve the company’s bottom line. For example, working with reliable suppliers not only means fewer disruptions and more satisfied customers, but it also improves cash flow by allowing you to invoice [and get paid for products and services] sooner. Implementing more cost-effective solutions to eliminate wasteful spend and reducing overhead costs also contribute to positive cash flow.
Supply chain disruptions have a domino effect, impacting every juncture throughout the supply chain, but the same is true for the positives: effective supply chain management has direct and secondary effects that support the efficient, seamless flow of information, goods and services from procurement through final delivery.
Learn about the benefit of flexible warehouse automation in your operation: read our white paper The Business Case for Collaborative Mobile Robotics. Interested in more? Let’s discuss the solution that’s right for you. Contact us today.