To achieve true operational excellence, businesses must look beyond their own operation and strive to build more profitable relationships with suppliers. After all, the performance of your business is hugely dependent on your supplier delivering as agreed.
Once your obsolete stock has been eliminated and your assortment has been optimised, it’s time to kick off the third improvement project. Here, the focus should be on building more profitable relationships with your suppliers. After all, the performance of your business is hugely dependent on your supplier delivering as agreed.
Consider the following observations:
• You order more inventory than necessary because the supplier has a minimum order quantity
• You order additional stock to offset the uncertainty in demand during the long delivery time
• You hold additional safety stock to accommodate for any deviations in the supplier delivery agreement
In all of these scenarios, your business has to make huge investments in stock in order to compensate for poor supplier performance. But is this really the best approach? To help you adopt more effective and collaborative supplier relationships, we have outlined 4 key focus areas to help you optimise your supplier management strategy.
Step 1: Determine your negotiating position
Renegotiating contracts and changing product requirements often depends on both your relationship with the supplier and how dependent the supplier is on you. If for example, an item that you identified through your ABC analysis was an A item for you but only a C item for your supplier, this obviously leaves you in a weak negotiating position. It is also important to know if your suppliers are manufacturing goods just for you or if they supply you from stock.
Step 2: Measure the real performance
An important tool to consider when assessing suppliers is their delivery performance. The most common KPI’s to measure here is the On Time In Full rate (OTIF): what percentage of complete cases are delivered on time?
Additionally, the deviation in actual delivery time is also important to consider: did the order arrive on the agreed delivery date as expected? After all, there is a big difference if the supplier delivers a day earlier or later compared with if the arrival is delayed by several weeks.
Just by measuring the delivery performance of your suppliers, you should see a natural improvement. However, if not, it is time for a stern conversation.
Step 3: optimise order quantities
In the previous project, we highlighted how you can determine the optimal order quantities. However, in reality, it is not possible to realise these levels if suppliers have in place “strict” minimum order quantities (MOQs). But who actually determines these MOQs? In many cases, a simple call to the supplier will reveal that these are rarely set in stone and may not even be relevant any more. There is always room for negotiation!
Step 4: Sharing information
Your suppliers can often provide a faster and more reliable service if they know what orders to expect from you. By sharing forecasts, the supplier can better anticipate future demand. There are many advanced technologies for harnessing collaboration. However, simply forwarding an email of the demand forecast can also yield great results!