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Supplier relationship management: the importance of collaboration in your supply chain

Why renegotiation, not re-tendering, might be the answer.
By Mick O'Donnell on 27 January 2021

“When life gives you lemons, make lemonade” is a proverbial phrase used to encourage optimism and a positive can-do attitude in the face of adversity or misfortune. Most of us have been in receipt of some lemons recently, or can expect some. It’s important to consider how we are (or will) react, and how a shift in perspective might yield lemonade.

Recent examples in the press, relating specifically to the relationship between suppliers and their clients, shows there is an increased amount of pressure. It seems that many organisations are considering withdrawing support from key suppliers or pushing for extended payment terms and price cuts in these uncertain times.

Now there is an obvious and, in many ways, justifiable response to each of these. But before we throw the baby out with the bathwater, let’s consider a different view.

First let’s look at why supplier relationship management is so important

The simple answer is – for continuation of service. But there is much more to it than that. Supplier relationship management (or SRM) is the practice of communicating with and managing an organisation’s third-party providers of goods, materials and services. If supplier relations break down, there could be substantial impact on supply chains, making the practice of supplier relationship management, and maintaining close contact with one’s suppliers, a key tool in mitigating risk in supply chains.

Added to this, poorly managed supplier relationships can mean that businesses are missing out on key benefits outlined in the original agreements. They could also be missing discounts for length of contract, and spending unnecessary time and resources in overseeing mis-managed contracts.

So how do we ensure good supplier relationship management?

The answer is collaboration. Good lines of communication and clearly laid out terms, processes and procedures for working together from the outset, creates a good foundation for a strong client/supplier relationship.

It seems simple enough; if you chose the right supplier in terms of cost-efficiency, category expertise, cultural fit and initial ‘chemistry’, you can expert good value for money.

That may be true in the early stages but the longer a contract runs for, the more important it is that both parties are communicating well and collaborating to ensure best value.

What is the primary trigger for a client to consider going out to tender?

It is worth considering the client’s motivations for looking elsewhere at this point. For the supplier this sort of messaging can be seen as abrasive, but perhaps it should be seen as a cry for help (the reasons behind the request may be obvious in the case of a client in a struggling industry) and potentially there may be a welcome opportunity to reset the supplier/client relationship and find mutual benefits.

The most common reason to look for an alternative supplier is to cut costs. There is considerable pressure from stakeholders to reduce spend on outsourced services and so the client’s first instinct is to consider a review to ensure market value.

Add to that external forces which may be at play – whether political, environmental or otherwise – and supplier relationships can become strained. Often the client feels there is no option but to consider an alternative service provider.

But is a lengthy, and often costly, re-tendering exercise always the answer? Perhaps it’s an opportunity to negotiate rather than read the riot act?

What to consider when entering into a contract renegotiation to maintain supplier relationships

So as not to get into specifics or make presumptions about any one case, let’s talk broadly about these situations, which are going to become commonplace. With the concept of cutting client costs in mind, as a procurement professional what can we trade in exchange for some supplier goodwill?

Consider the following:

  1. Are there services being bought that you know are complex/bespoke to your organisation and cause the supplier pain to provide?
  2. Is there an alternative supplier product (which they’ve been trying to sell to you for years) which is cheaper and more readily available that could be supported more easily?
  3. Could they provide a lower cost service model that would meet your requirements or deliverables and also improve their margin?
  4. Have you thought of offering a longer-term contract for a volume reduction or a decrease in price or those extended payment terms – by giving them more security they may be willing to trade some margin – especially important considering the current forecasts for the economy?
  5. Conversely, could you pay for products and services upfront for a price reduction? Cash flow will be a serious consideration for service providers so working with them in this may may benefit them too.

It’s so important to know where the buyer/seller power lies and not to deploy the same strategy with all. It’s all about deploying the right options with the right providers and ultimately ensuring the entire supply chain survives.

If you’d like to hear more about how to approach contract renegotiations, click here

Now more than ever we are seeing how external forces can cause substantial disruption in supply. But doesn’t that mean that now more than ever we need to work with our suppliers and service providers to ensure good supplier relationships?

Open lines of communication and a collaborative approach to buying goods and services can reap substantial benefits for both the client and the supplier. For this reason, placing importance on good supplier relationship management will play a key part in mitigating risk.

If you need additional help with managing your supplier relationships, you can book a free initial consultation using the link in the panel beneath this article, or you can find out more about our supplier relationship management service offer here

Image of BD & Sales Director, Mick O'Donnell

Mick O’Donnell

Mick spent 20+ years working for EDS and HP in the IT and BPO outsourcing industry, solutioning and managing complex Pan-European delivery models. This background has created a real passion for service excellence and delivering solutions that deliver true value.

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