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What is Supplier Management and why is it important?
Jocelyn Spenneman published on January 16, 2023
Many suppliers contribute in order to make your final product. Think about packaging materials, employment agencies, logistics and, not to forget, energy and gas. What happens when one of them falls out or comes up with a sudden price increase?
In this blog, we will tell you more about supplier management, why it is important and how the right data can help you gain more insight into your suppliers and their markets.
What is Supplier Management?
Supplier management is the coordination, integration and optimization of integral flows that impact your production or process. All your suppliers impact your product or service, and therefore, impact your numbers.
Supplier management is about establishing a solid relationship with these suppliers, because they play an important part in a smooth running of your organization. You want to create a win-win situation for both you and your supplier.
Why is it important?
Within supplier management you determine which supplier is most important to you, where there is room for (financial) improvement or which supplier can help you innovate on the long term. You create a foundation to maximize your partnerships so that you get maximum value for the money you pay, to achieve your goals.
Understanding the playing field of your suppliers will get you ahead of the market, as almost all rising cost items are initiated by your suppliers. This market view (i.e., your suppliers competitors) puts the data in perspective and helps to understand if, for example, the price levels they present you are fair.
Key topics within supplier management are:
- (Bargaining) power
- Ease of switching to an alternative supplier
- Security of supply
- Fairness of prices, knowing what you pay for
- Ability to participate in goals to achieve with your supply chain (e.g. sustainability)
As you can see there is much more to procurement management than negotiating good prices. A solid supplier strategy is important because it helps you achieve continuity, effectiveness and the ability to innovate and stay ahead.
What metrics to look into for your supplier strategy
Now that you know why it is important to work on your supplier management, we would like to show you the three most valuable metrics to look at when reviewing your suppliers:
- Net Sales Development: this metrics shows the supplier’s size and growth performance. It helps you to understand how important your supplier is to you, and how important you are to your supplier. For example: smaller companies are more flexible and able to maneuver more quickly through sudden shocks than bigger organizations, while the bigger companies for example will be able to offer bigger security of supply.
- Profitability: shows the margins of a supplier. It helps you to understand the price level of your supplier and, when you compare it to their competitors, if the price you pay is fair. Diving into the competitive field of your supplier makes your bargaining position stronger.
- Financial Health: Looking at the Quick Ratio and Solvency of a supplier shows the risk of that supplier. It helps you to gain insight in the financial stability of the sector and how resilient your supplier is. This will help you to determine which supplier fits your company’s strategy best.
In supplier management you want to stay on top of what is happening in your supply chain:
- How is supply developing?
- How will I be affected via my supplier?
- Is my supplier able to keep up with my goals?
Supplier management offers you the tools to determine which suppliers fit your company’s goals and to show up at the bargaining table informed and with confidence.
If you want to know more about supplier management or the metrics we’ve shared: download our Procurement Report here.