From business services and office supplies, to utilities and logistics, almost no modern business can do without a range of indirect products and services across a variety of categories. Therefore a variety of indirect suppliers are essential to almost every working organisation.
For most companies, establishing strong, mutually beneficial long-term relationships with strategic supplier relationship management is a critical step in improving performance across the supply chain, generating greater cost efficiency and enabling the business to grow and develop.
With this in mind, we take a look at the six key benefits of long term supplier relationships and effective supplier relationship management:
1) Reduced costs
In many large contracts the initial set-up costs can be substantial, with deals taking many months to complete. By concentrating on establishing and developing long term relationships these costs can be offset, with both parties actively looking to avoid any unnecessary costs which may arise from re-tendering, re-negotiating or being forced to exit an existing contract early. Better relationships and increased interaction will lead to less incidents or issues of poor performance, which in turn lead to lower costs for managing the relationship and reduced costs through failures.
2) Increased efficiency and communication
The longer a supplier provides a customer, the better their understanding of the customers market, business and business processes will be. This will allow greater integration of business, IT and financial processes alongside increased effective stakeholder involvement from both parties. As a consequence the service will improve, becoming more efficient, with “grey areas” disappearing and any issues which do arise can be handled more effectively.
3) Pricing volatility mitigation
Price volatility is a sensitive issue for many procurement teams. It requires careful weighting of price volatility against the contract length, volumes and the importance of the procured product (or service) to the buying organization. For many companies it is vital to establish how much volatility can be absorbed? Is it better to have a stable, high contract price, or can the organization handle volatility in exchange for the chance of price drops?
The reverse is of course also true for a supplier, so many suppliers will commit to more modest and / or flexible pricing models for long term contracts in order to mitigate their risk and exposure. By taking into account their margins and interests you can protect those of your business. Open book policies and negotiated margins (as opposed to fixed contract pricing) are the logical conclusion to this type or partnership and allow both parties to benefit from fluctuations in the market and pricing.
4) Supply Chain Consolidation
As supplier relationships develop, so does the buyers understanding of the suppliers business models, products and services increases. In return the supplier will develop an increased understanding of the buyers needs. This allows both parties to look for areas of consolidation across existing products and services, as well as the potential addition of potential new product and service offerings.
For buyers, consolidation allows for reductions in supplier numbers, creating a more streamlined and efficient supply chain. This can reduce internal workloads and soft costs, whilst providing increased opportunity to reduce costs through economies of scale and leveraged spend.
Relationships with trusted suppliers can enable organisations to outsource non critical activities, allowing buyers to harness specific industry and/or product or service expertise, whilst simultaneously reducing internal workloads and increasing efficiencies. Examples can include everything from small business services such as document production to full blown services such as logistics and supply chain management.
6) Continual Improvement
Long term relationships provide the opportunity for buyers to engage suppliers in a process of continual improvement of both products and services provided and of the accompanying service levels. This can be achieved through product development, development of new processes and procedures and through developing KPI’s and SLA’s over the course of the contract. By taking an active approach to ensuring that contractual performance is met, buyers can ensure that suppliers continue to improve in the ways which provide the most substantial improvement to the customer organisation’s products and services.
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To find out more about how our unique long term supplier relationship model can benefit your indirect supply chain go to our dedicated Tail Manangement site.