What is Supplier Management?
Almost every organization purchases goods and services from third parties, or suppliers. The outputs of one organization are often the goods and services that form aspects of other organizations’ goods and services. Therefore, how an organization engages, establishes, manages, and communicates with its suppliers is critical to success. However, even though how an organization manages its suppliers is a critical success factor, many organizations are regularly impacted by poor supplier performance and unpredictable supplier behavior. Fortunately, there are some simple things that every organization can do to improve the overall performance of its suppliers.
What Is Supplier Management?
Suppliers are independent legal entities that exist outside the boundaries of one’s own organization. Suppliers are organizations that sell goods and services another organization uses to support its own goods and services. Supplier management is the process that ensures that value is received for the money that an organization spends with its suppliers. Effective supplier management makes sure that several activities occur, including:
- Establishing policies to govern suppliers
- Negotiating and agreeing upon legal contracts between the purchasing organizations and its suppliers
- Suppliers produce goods and services in line with agreed expectations
- Contracts with suppliers match business needs
- Targets in contracts with suppliers align with targets set by the purchasing organization
- Managing relationships with suppliers as well as overall supplier performance
- Managing supplier performance and keeping accurate supplier records and information
Organizations that plan for and conduct supplier management according to defined processes and boundaries are more likely to receive predictable, high-quality goods and services from their suppliers in a timely manner.
Organizations that choose to ignore formal supplier management invite unpredictability and low-quality services from their suppliers. Whichever path an organization chooses, their suppliers potentially have a significant impact on the quality of the services delivered to the end customer. Suppliers not only offer the goods and services that organizations need to be productive and profitable, they also present numerous sources of risk. Consider an organization that has established a formal supplier management process. Because of this, the organization has a clear policy that defines how suppliers are engaged and managed. It sets relevant measurements for suppliers and evaluates them in the context of those measurements.
The organization regularly works with suppliers to improve overall performance. Because of these aspects of supplier management, the organization manages some of the risks associated with suppliers. Ultimately a supplier management process is one way that organizations can limit their exposure to the risks that are often associated with suppliers.
What Does ITIL® Say About Supplier Management
When ITIL v3 was released in 2007, a discrete supplier management process was introduced that is part of the service design lifecycle stage. This process was further updated and elaborated in the recent ITIL 2011 update. A few of the key aspects of ITIL’s current guidance on supplier management follow:
Definition and Policies
ITIL gives specific guidance on what supplier policies might include. ITIL indicates that supplier policies should define how an organization communicates with its suppliers at all stages of the relationship as well as how roles and responsibilities between suppliers and the purchasing organization should be defined. ITIL also discusses standards that suppliers must meet, rules regarding gifts from suppliers, what type of information might appear in agreements and contracts with suppliers, and which party owns data and any access policies around data relevant to the supplier relationship.
Contracts and their Contents
ITIL also describes the contents of agreements with suppliers which include basic terms and conditions. An effective contract also describes the overall scope of service that is provided along with any relevant standards that must be met by the supplier. Supplier agreements also include information on workload volumes and associated differential pricing as well as clear definitions of responsibilities and dependencies of both the supplier and the purchasing organization.
Storing Supplier Information
ITIL recommends storing supplier-related information in a supplier and contract management information system that is used in all aspects of engaging and working with suppliers. Having such an easily searchable repository of information aids in the definition and evaluation of new and existing supplier contracts, helps when categorizing and managing suppliers, and is a critical source of information during contract renewal and termination.
Of the numerous best practices that ITIL recommends for a supplier management process, one of the most useful pieces of guidance, relates to categorizing suppliers. ITIL recommends that suppliers be categorized as strategic, tactical, operational, or a commodity and that suppliers should be managed in accordance with their respective categorizations. Strategic suppliers are those that play a key role in the production and delivery of an organization’s services and due to their nature are managed at a very high-level in the organization. Communication between an organization and its strategic suppliers is likely to be frequent and might involve an ongoing management and improvement of supplier quality. Tactical and operational suppliers, by their definition, are important but have less of an impact on the purchasing organization’s business operations. Commodity suppliers are those suppliers that provide a good or service that is easily replaced. In other words, a purchasing organization should spend more time managing strategic suppliers that can have a significant impact on business operations vs. time spent managing commodity suppliers that are more easily replaced.
ITIL says much more about supplier management and gives several specific activities that can be applied to reduce the risk associated with suppliers. Additionally, ITIL includes lists of challenges, risks, critical success factors, and key performance indicators that an organization can use in its pursuit of effective supplier management.
There are five simple things your organization can do to improve supplier performance, and I’ll discuss each one over the next few weeks.
Reproduced and available for download from Global Knowledge White Paper: Supplier Management: Five Simple Things Your Organization Can Do to Improve Supplier Performance
5 Simple Ways to Improve Supplier Management Series