How to improve supplier relationships
Keeping suppliers onside is essential in most industries. So how can you build effective relationships and develop better collaboration with your suppliers? Read our top tips here.
Types of supplier relationships
Almost all organizations have suppliers in one form or another, whether they’re wholesalers, retailers, distributors or sub-contractors.
Relationships with suppliers can be based around anything from a single deal to a long-term, strategic partnership where the supplier is an integral part of the way a company works. But while it’s important to build good relationships with all suppliers, not all types of supplier relationships are the same and they don’t all need the same degree of collaboration and nurturing.
Types of supplier relationship include:
Arms-length
These relationships are based purely around transactions. Arms-length suppliers simply provide goods or services when they’re required based on market value. The supplier and buyer are completely independent and don’t have any relationship that’s separate from the deal.The buyer may or may not go on to buy more from the supplier.
Ongoing relationship
An ongoing relationship is one that a buyer has with a preferred supplier. These suppliers will have medium-length contracts and will need more attention than arms-length suppliers.
Partnership
Buyers will have longer-term contracts with partner suppliers, and will need to build stronger relationships with them.
Strategic alliance
In a strategic alliance, the buyer and supplier work together to make use of each other’s strengths. Partners in a strategic alliance may collaborate on product development, marketing and research and development. These are vitally important relationships which will demand a high degree of collaboration.
Just-in-time
This type of supplier relationship is common in manufacturing. Unlike an arms-length relationship, it requires the supplier to be an integral part of the company’s operations, including product development. Just-in-time suppliers provide materials in line with the buyer’s production process. This method makes sure buyers only buy what they need and when they need it and aren’t stuck with an excess of materials.
Outsourcing
Many businesses outsource, whether it’s using freelancers, subcontracting parts of the business or offshoring – outsourcing part of the business to a partner company overseas. These are business critical relationships, so it’s crucial to keep them on track.
Why is it important to keep good relationships with suppliers?
Strong, collaborative supplier relationships are vital for productivity, performance and the bottom line. A McKinsey survey of large organizations in multiple sectors showed that companies that collaborated with suppliers regularly were more profitable and had higher growth and lower operating costs than others in their industries.
On the flipside, poor supplier relationships can lead to increased costs, lower-quality products and services, and even reputational damage.
So it’s vital to build and, above all, nurture relationships with suppliers. After all, it takes a lot more time, effort and expense to find a new supplier than it does to make a success of a relationship with an existing one.
Having strong relationships with suppliers can help with:
Service
A happy supplier will be more likely to put in extra effort to provide your business with the goods and services it needs.
Efficiency
When buyers and suppliers have taken time to understand each other, communication between businesses will be easier and processes will run more smoothly, saving time and resources.
Cost savings
Effective supplier relationship management will enable you to identify and cut out any unnecessary costs. You might also be able to negotiate discounts or better rates with your suppliers.
Minimizing disruption
The after-effects of the pandemic, rising costs, war in Ukraine and extreme weather have all contributed to disruption in supply chains. Having a close relationship with your supplier will help you identify risks early and take steps to mitigate them.
According to Plante Moran, which surveys companies in the automotive industry, manufacturers with the best supplier relations are able to optimize their production schedules for profitability during supply chain disruptions.
All-round improvements
When suppliers and buyers have a good relationship, they can share experiences and swap ideas, improving service and making the supply chain run more smoothly.
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Managing supplier relationships: 10 top tips
Successful supplier relationship management relies on a mix of good communication, awareness and trust. Here are some tips for making your supplier relationships stronger.
Set the ground rules
The contract between you and your supplier forms the bedrock of your relationship, so it’s vital for your business collaboration that things are transparent. Make clear what you expect the supplier to deliver and when, and make sure they understand and are able to meet the terms.
Set KPIs
Suppliers need to understand what you want to achieve from the outset. Set clear goals for your supplier and continuously measure their performance against them. Make sure you share your findings with your suppliers so they can focus on areas for improvement.
Communicate effectively
Being able to discuss, plan and share information with each other is key to successful relationships with suppliers. Having the right tools will enable you to communicate clearly and consistently with your suppliers.
Give feedback
Let your suppliers know when they’re doing well. And address any problems straight away. You may think that things are starting to go wrong with your supplier but feel reluctant to say anything in case it damages the relationship. This is a mistake. Addressing issues as soon as they arise will ensure that you both can nip problems in the bud.
Pay on time
Cash flow and late payments can be a huge problem for suppliers, especially small businesses – according to a research by the UK’s Federation of Small Businesses, 52% of small businesses experienced late payment in 2022. Making yours the business that always pays on time will put you in the good books of your suppliers and make them more likely to go the extra mile for you – they may even offer you a discount.
Behave fairly
Supplier relationships are a two-way street, so make sure you keep to your side of the bargain. Share the information they need to deliver with your suppliers, always meet the agreed terms of payment and make sure the expectations you have of your suppliers are reasonable.
Don’t focus only on transactions
Treating your longer-term suppliers like partners and showing appreciation for good performance will help build better communications and stronger relationships.
Understand how your suppliers work
Take time to get to know your suppliers’ businesses and how they go about their work. This will help you understand their perspective, as well as helping you build rapport and giving you an insight into their processes and capabilities. It will also help you understand the differences between you and how you can navigate around these to make the relationship work.
Get the right software
Supplier relationship management software can help you develop your supplier strategy and evaluate supplier performance, while having the right collaboration tools will help you communicate seamlessly and share information with your suppliers.
Enjoy working together
By aligning yourself with your suppliers and seeing your relationship as a business partnership, both parties are likely to achieve higher success rates. Strengthening relationships means higher productivity and capability for innovation – a win-win for everyone involved.
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