- On November 23, 2014
- communication, control, evaluation, innovation, management, negotiations, plan, supplier, supply chain management, trade conditions
While the economy was in high peak, the companies raced to upgrade the sales and marketing. The various marketing and sales strategies gave options for rapid steps ahead and exciting results. But the crises came and the temps dropped down. The companies started to search for hidden supplies. The huge supplies and possibilities for the economy are in supply chain and can be withdrawn by proper planning of production and deliveries, appropriate strategy for purchasing and planned logistics. To achieve savings we need to involve the suppliers too and to treat them as partners for successful realization of our projects.
Whether we are a productions or a trading company, we have suppliers and we are a supplier to someone. Linked in the chain, if any of us stumbles over, there is a change all of us to fall. Thus even a single company, we have to cooperate both with the companies before us in the chain (our suppliers) and these after us (our customers).
Some time ago we had a very arrogant supplier. As a crisis was stepping ahead, we optimized the processes, cut the profit but these were not enough to emerge. Then we asked all our suppliers to review the trade conditions and together to adjust to the market. The arrogant supplier refused any cooperation explaining that every firm works alone. Of course our reaction was to stop buying from him anything. Soon after we understood that almost all his customers decided to terminate any relationship with him which led to 90% decrease of his business. In other words, once we play the game we should follow at least the rhythm.
In supply chain we are all suppliers, just the final buyer is a pure client. And to make the customer continue buying our products, we all have to put efforts to keep him. Here are the main steps which may help to achieve is:
1. Investigate the suppliers
Suppliers impact the whole organization, not only on our department. That’s why we need to be sure that the suppliers which we shall permit to our firm will be high level players and shall comply with our requirements. As thoroughly as we write our homework, the easier it will be during negotiations and signing the contract. The finance stability, lack of violations, good image, capacity, know-how, management style – all these are among the criteria for evaluation of suppliers in the beginning of our relationship. The working habits and process organizations should be also evaluated in the beginning in order to assess how reliable the supplier is. If there is anything which bothers us during the investigation, we’d better discuss it openly and take a decision, rather than leave it spoil our further relationship.
During the negotiations in one tender, we explained to all participants that we audit the suppliers once every year about the processes which concern our business. One of the suppliers refused to accept this requirement and so he was out of the selection. One year later we understood that the general manager of this firm was investigated for fraud.
The supplier investigation is crucial for small and middle-sized companies because they have limited resources and every mistake in selecting a supplier may involve them in court trials or problems with state authorities which costs a lot of money and efforts for them to prove that the company was not a part of a scheme.
The contract is very important for us. And we should treat it as a pre-marriage agreement between the companies, e.g. we want to be sure that both parties will benefit from the long-term cooperation. But if something goes wrong, we need to be able to go out from this partnership with dignity and without loses. I’ve noticed that when we have a contract with a supplier, the discrepancies during its execution are smaller than if we don’t have a contract. It is so, because during negotiations we mark the major work parameters and when we put everything on paper, we recall some details which were not mentioned at negotiations. So, before we go to the partnership essence, we’ve already passed through the process and there are records how to proceed. The well described rights and obligations in the contract give us the option not to think about them afterwards and to work smoothly. On the other hand the contract is a protector if any party decides to breach the agreement.
We must not sign exclusive or fixed-term contracts – the chance to lose from such agreement is high.
Many of the small and middle-sized firms prefer not to sign contract, deeming that this gives them more freedom. Think about the following variant: conquering the company. One of your suppliers starts to deliver more and more different materials. It might be comfortable for you because you deal with one point of contact mainly. Usually one or two employees are responsible for purchases and they know what they buy, from whom and at what price. At one moment you find yourself with one supplier who has occupied the delivery of all your materials. You have verbal agreement for one-month credit period. If this supplier decides to ask for his money right now, you might be one step far from giving up the company, e.g. he might buy your company for small money. If you have a contract in which all purchased materials are listed and by counting the number of contracts you can easily see if your portfolio is well split. You’ll be protected by the contract also from greedy suppliers who want to take your company. These suppliers may stop the deliveries and you may face a temporary production interruption but at least there is no way a supplier to take your company legally.
Another trap in contracts is the forwarding to The General Conditions which are usually in favor of the supplier. Before we sign the general conditions or include them in the contract, we’d better evaluate the risk if we apply them to our business.
Elaborating the contract clauses is the base for a good future partnership – the parties know the limits and benefits and have the will to work together for common prosperity.
3. Proper communication between the partners
Not everything goes well in production process – breakdowns happen, deliveries are late, payments to suppliers are delayed and so on. The communication helps us to explain our issues and to understand the issues at our supplier’s site. With mutual allowances we may together solve the temporary drawbacks.
It has happened to wait for a delivery and the supplier to call in the last moment informing that the delivery will be late with 2 days. If the supplier is usually correct we’d better do not apply a sanction for the delay. The opposite situation is also possible – our consumption is not calculated correctly and we beg the supplier to deliver earlier. Then he will not charge us for urgent delivery. The communication itself is the key for success or failure of our common work. If we have problems with communication, we’d better search the problem in ourselves first – it is possible our employee to be unable to control the situations or to have imperative approach or not to stand the supplier’s employee. The option to smoothen the disagreements is in our hands from the beginning of our relations so we can build a pleasant working atmosphere. When a mistake occurs (inevitably it happens) we should be very careful how to address the problem. The overt blames and indignity have a negative effect, show poor breeding and gain enemies. So next time when the mistake is ours, we cannot rely on supplier’s cooperation. To avoid repeating unpleasant scenes, it is a good idea the companies to write plans for improvements.
The planning of coming activities and volumes helps us and our suppliers to optimize the production. That is why if we exchange information for the needed volumes for months ahead, not only we’ll ease both parties’ work but will be able to load the machines and generate savings. A supplier may ask what our plans are for the following 6 months, so that he knows how much and when to buy raw materials. When we use stock traded materials, the planning of volumes is very important for building supplies and getting lower prices. The supply risk stays at supplier but we help him to reduce this risk. Here is the place to mention the negative impact of supermarket chains. On one hand they want relatively small quantities (especially for private labels), on other hands they hardly give forecasts, but at the end if the delivery is not what they have ordered (nevertheless it has nothing in common with the forecast), the fees are big.
The shared information is confidential and the parties should ensure that it will not outflow the borders for both companies.
Suppliers often offer new products and services or upgraded models. All these improvements give chance to our company to go ahead and the result from the well-done job recharges the parties for more brave ideas. Here the partnership is obligatory. If one of the parties offers a project which the other party may implement but the project requires investment, both parties are engaged with the investment for a certain period, because both parties will benefit in future.
6. Periodical checks of trade conditions
Doesn’t matter how happy we are with the goods and services from our current supplier or even reaching a friendly relationship, we must periodically check the market. Some time ago my acquaintance told me that he has been working with one supplier for 10 years already and for the last 5 years he has not checked the market prices because he was a friend with the supplier owner. Somehow I managed to convince him to check the current market prices. And surprise…the prices were significantly lower than the current purchase prices of my acquaintance. Why his “friend” had not informed him? Because friendship is friendship but cheese costs money. Apart from that, what might force the supplier owner to inform all his “friends” that prices are lower now? If he does it, the company income will drop down, his income will drop down and some of his employees might be released from work. If we don’t ask and require, nobody will give us better price just because of our blue eyes.
In another company, the owner was responsible for deliveries. He had friendly relations with majority of his suppliers. The “friends-suppliers” were earning well because they had caught his negotiation style and he was afraid to ask for lower prices because he was feeling uncomfortably.
Everywhere I warn the companies to avoid sole supplier situations. In every case with a sole supplier or subcontractor, he benefits a lot from his customer. It doesn’t matter how big the company is, it depends only on us not to allow sole suppliers (except the state monopolists). We must have alternatives for everything – from raw materials to paperclips. Our growth is not guaranteed if we have more alternatives but we shall have broader view, we shall be close to the market and shall choose the better solution.
It is my favorite topic – the control, how to dose it and what happens when it is not applied. Yet during the negotiations and contract signing, the suppliers should know what would be expected from them and how their performance would be controlled. They should know that we may inspect them about our products at any time. By leaving the supplier uncontrolled, the moment of our failure is not far. There was a company which was not checking even the invoices issued by the supplier. The general manager explained that if every invoice should be checked that means one accountant to do only this. This company bankrupted while it suppliers did not.
It is necessary to measure and control what we can in order to decrease the effect of non-depending on us factors. An easy and acceptable way of control is to measure KPI. The parties agree about the parameters and the end-month results speak clear about the performance. The parameters have to be adjusted to each industry and to be changed when there is a significant market deviation in the region.
8. Supplier evaluation
It is a good practice to evaluate and give feedback to all our suppliers so that we develop together the strong sites and decrease the effect of the weak sites. But this exercise requires lots of resources and that is why we usually evaluate only the suppliers with big impact on our business. Every company has to know what exactly will evaluate, but the standard criteria are: price, delivery, quality, service. By the annual assessment we sieve the suppliers and group these to whom we may rely in difficult periods and for new products. Apart from that we develop the weaker performers in order to ensure stronger alternatives in future. For this purpose, we create plans for improvements and measure the progress against the plans.
9. Conflict of interests
There are cases of conflict of interests and corruption practices in the business relations. It’s a pity but humans succumb to greed. Some suppliers offer whatnot with the aim to enter a certain firm. The good news is that there is a way to protect our company from indecent proposals to our staff by implementing procedures and strong control.
10. Keep the distance
Big role for effective supplier management plays the distance and the differentiation between business and friends relationships. One colleague was in very good relations with an employee from a supplier’s firm. They visited each other’s homes, spent the holidays together, ect. But at work when it was time for pushing the suppliers this colleague was unable to achieve better conditions from that particular supplier. The unduly entrance in personal territories harms the business especially when our task is to push for better products and services.
Supplier management is two-way process – they manage us by trying to meet our expectations and keep us for clients, we manage them by pointing what we want and by controlling the performance. The good practices show that it is possible two companies to work in unison without losing each other’s identity.
Independently from the industry, suppliers play a significant role and the best path for successful business is building a stable partnership. Applying the above mentioned tactics support our higher performance on the market while ignoring them may lead to non-functional relations and potential business crash.
The input time, money and efforts for development of partnership between the parties cannot be measured directly. But the well managed relations with suppliers increase customer satisfaction about our improved products and services and reduce our costs. So everyone in the chain is happy.