5 Steps to Manage Your Suppliers like a PRO

Why supplier management matters
Imagine never worrying about stock-outs, last-minute rush orders, or quality issues. Picture a supply chain where every link is strong, reliable, and responsive. This isn’t just a dream—it’s achievable with the right approach to supplier management. Modern supply chains are complex and global, making supplier management more challenging but also more crucial than ever. By managing your suppliers like a PRO, you can turn potential vulnerabilities into strengths, creating a resilient and efficient supply chain that supports your business objectives.

Transforming suppliers into strategic allies
A supplier’s performance can significantly influence your operational success, shaping your ability to meet customer demands and drive profits. Without skilled suppliers, the entire supply chain weakens, leading to missed opportunities. Suppliers should be strategic allies, not just vendors. In a competitive marketplace, delays and disruptions can cost you customers. Strong supplier relationships ensure reliability, quality, and efficiency.

SMEs face challenges
Small and medium-sized enterprises (SMEs) often struggle with less bargaining power, making it hard to get discounts and competitive pricing. Limited resources make managing, tracking, and evaluating suppliers challenging. Dependence on a single supplier increases the risk of supply disruptions.

The benefits of strong supplier relationships include:

• Enhanced efficiency: Effective communication and collaboration with suppliers streamline their operations, ensuring quality products are delivered on time and with shorter lead times.
• Product improvement opportunities: Tap into your suppliers’ expertise for new ideas to innovate your products.
• Improved reputation: When suppliers understand your needs and timing, you build a reputation for reliability. Well-managed suppliers consistently deliver quality products, fostering loyal customers who trust your brand

How do you develop a reliable supplier network? Here are the five steps to managing your suppliers like a PRO.

Step #1: Understand your inventory and supplier landscape

By integrating these three components—inventory visibility, classification, and mapping suppliers to inventory—you create a robust framework for managing your inventory and supplier landscape effectively. Each step builds on the previous one, ensuring a comprehensive approach to managing your suppliers more effectively.

Inventory visibility
The benefits of inventory visibility include:

• Improved forecasting: With a clear view of inventory levels, you can better assess customer demand. This leads to more accurate forecasts, which you can share with suppliers for effective production planning.
• Accurate ordering: Accurate visibility helps avoid surplus stock and stock-outs, leading to smoother order flow and better planning for suppliers.
• Data-driven orders: Use inventory data to evaluate supplier performance, identifying those who consistently deliver quality products on time. Build strong partnerships with top-performing suppliers.
• Better communication: Real-time data allows for quick identification and resolution of issues before they escalate.

Inventory classification
Not all stock is created equal, so inventory classification is crucial. Classify stock items based on their importance and value using ABC analysis. This step ensures you can prioritize management efforts where they are most needed.

By classifying inventory, you can adopt targeted strategies to optimize inventory levels and reduce costs. The top 20% of your stock items will typically contribute 80% of your revenue. These items have the biggest impact on your inventory value. Close monitoring of these items can significantly reduce the on-hand stock value. Add items with erratic demand or highly variable lead times to the A category to monitor them and prevent stock-outs.

The benefits of classifying stock to enhance supplier management
Identifying A, B, and C items helps prioritize relationships with critical A-item suppliers

• Prioritize suppliers: Focus resources on managing A-item suppliers for timely deliveries and better terms.
• Risk management: Identify and diversify key A-item suppliers to mitigate disruptions.
• Performance evaluation: Evaluate supplier performance by category, prioritizing high-performing A-item suppliers.
• Negotiation: Use insights to negotiate effectively, leveraging your business’s importance. Integrating ABC analysis aligns efforts to maintain optimal inventory, cut costs, and boost supply chain efficiency

Mapping suppliers to inventory

Mapping suppliers to specific inventory items is essential for managing lead times and safety stock efficiently. This ensures you know which suppliers provide which items, allowing you to manage lead times and reduce risks effectively.

Lead time length directly affects safety stock, as you can see from the reorder point formula, which is:

Re-order = Demand during lead time + safety stock

Where: The demand during lead time is the estimated sales during the time it takes to replenish the stock. For this, you need an accurate forecast.

The safety stock covers demand fluctuations over the lead time and replenishment delays. The size of the safety stock will depend on demand variability and the reliability of supply.

You need three basic bits of information to calculate the reorder point

These are:

• Average daily demand variability: Work this out by dividing the total sales by the number of days in the period.
• Lead time: The time it takes from the moment you place an order until the supplier delivers it.
• Safety stock: The extra inventory you need as a buffer in case of a delivery delay or a spike in sales.

The ROP in inventory management triggers the next order and should balance your stock at the ideal level. The right inventory level balances the stockout risk with the cost of holding surplus inventory.

The advantages of mapping suppliers to inventory include:

• Improved communication: Quickly identify the supplier for queries, orders, or negotiations.
• Reduced risks: Identify which components are at risk if a supplier faces issues and find alternatives if necessary.
• Better forecasting: Understand lead times to improve demand forecasts, ensuring suppliers have enough time to plan production.
• Strategic procurement: Analyze your supplier base for diversification and consolidation opportunities, potentially cutting risks and negotiating better terms.

Step #2: Mitigate supplier risk and diversify your supplier base

The next step is to identify the suppliers that pose a risk to your business continuity and sales. Risk identification starts with Key Performance Indicators (KPIs).

Supplier KPIs should include the following:

• On-time delivery
• Lead times
• Rejects and defects
• Communication responsiveness
• Supplier financial stability

Internal factors are not the only risk elements
The following external factors could also affect your supply risk:

1. Supplier location: Is there a chance of political instability or natural disasters? Could transport become an issue?
2. Single supplier dependence: A single supplier could pose a risk of disruptions like factory shutdowns, natural disasters, and overpricing. Supplier competition can drive better pricing and payment terms. Diverse suppliers can also bring interesting ideas and help you with quality and process improvements.

Ask yourself:

• Are you able to measure how well your suppliers perform?
• Do you know which stock items are affected by poor-performing suppliers?
• Do you know your inventory’s average lead time per item per supplier?

4 Strategies for diversifying your supplier base
Finding reliable suppliers starts with understanding the products and qualities you want from a supplier. Look beyond price and find suppliers that support your company’s values.

1. Look outside your usual network: Attend trade meetings, use online directories, and connect with industry associations. Invest in your suppliers by communicating and building a trusting relationship. Review your supplier base regularly.
2. Be selective: Evaluate their qualifications. Look for certifications, industry experience, and a history of reliability. Assess prospective suppliers’ financial stability. A financially stable supplier is less likely to face internal disruptions that affect your business.
3. Location matters: Proximity impacts lead times and the landed cost of products. Local suppliers can also respond more quickly to requests for expedited orders.
4. Supplier selection is a two-way street: If businesses view you as reliable and professional, you will attract better suppliers willing to invest in your business and your success.

Step #3: Enhance supplier relationships

Building strong supplier relationships goes beyond just communicating openly. It requires ongoing effort and a real commitment to mutual success.

Step #4: Increase supplier visibility and performance monitoring

Supplier visibility refers to the business’s ability to track and monitor suppliers. The objective is to gain a real-time view of supplier activities, risks, and performance.

Use supplier performance insights to identify improvement opportunities. Work with suppliers to improve delivery performance, component quality, and other performance aspects.

Supplier visibility helps to:

Methods to track and measure supplier performance
To ensure your suppliers meet your expectations, tailor your performance tracking methods to your business needs.

Here are common Key Performance Indicators (KPIs) used to measure supplier performance:

Supplier performance measurement starts with agreed performance metrics. Work with your supply chain partners to constantly seek improvement areas. Ensure your supply agreements describe your expectations. It should include service levels and specifications.

Supplier performance methods
Ongoing supplier management is a necessary part of ensuring consistent supplier performance.

Use tried and trusted methods to consider:

1. Real-time data sharing: Use technology to share data in real-time with your suppliers. Include information like inventory levels, production forecasts, and shipment tracking.
2. Performance scorecards: Develop a supplier scorecard containing the most crucial supplier KPIs. Track the KPIs to measure performance. Find areas for improvement on both sides. Engage with the supplier and agree on change management activities.
3. Supplier audits: Regular supplier audits will reveal capacity gaps and ensure adherence to quality standards. Schedule quarterly audits remotely or at the supplier’s premises.

Step #5: Leverage technology to improve supplier management

Invest in the right demand and supply planning solutions to simplify your processes and improve visibility.

Critical features software should enable:

• Measure and track supplier performance: Instantly identify suppliers who are short-delivering or delivering late on every item ordered. Use your system to build a supplier risk profile and use the information for future supplier selection.
• Optimize lead times and safety stock levels: As you evaluate supplier performance, use your system to respond to changing lead times. Automatically change safety stock levels to ensure up-to-date optimized inventory. Reduce the risk of stockouts without carrying excess inventory.
• Information sharing: Share planned orders with suppliers, enabling efficient supplier planning. Netstock ensures more accurate forecasts on which you can depend.
• Create scenarios: Understand what will happen under various scenarios. Take proactive steps to ensure the best outcome.