Procurement managing suppliers and contractors

Procurement: Managing suppliers and contractors

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Procurement Supplier Management

Dealing with supplier approaches:

Suppliers can and do approach all parts of an organisation and yet most members of staff have no training about how they should respond.

There are clear benefits in ensuring that supplier approaches are handled well. Good handling can ensure that the benefits of new products and services are brought to the attention of the right person in the organisation. It can protect the organisation, keep work to a minimum, avoid souring relationships and add to the organisation's reputation for efficiency and good management.

Approaches are usually made about either existing products and services or about new products and services. Approaches are made by new suppliers or existing suppliers. The handling of the approach depends on whether it is an existing or new product or service and whether it is an existing or new supplier. Within this framework, the approach might range from a solicitation for new business to a complaint which could have legal consequences. Obviously different approaches need different responses.

Most organisations also neglect the opportunity which supplier approaches give to the purchasing organisation to condition suppliers. This is partly because many of the people whom suppliers approach are totally unaware of how they might condition a supplier and what the benefits might be to their own organisation. Good conditioning can help put the relationship on a sound footing from the procurement point of view and put the purchasing organisation in a strong position in future negotiations with the supplier.

Pre-qualification:

Pre-qualification is a part of pre-contract supplier appraisal. It is an essential step to deciding whether a supplier is sufficiently capable of timely and quality supply at an acceptable price. If the supplier meets the pre-qualification criteria, the supplier may be invited to tender or negotiate for the purchasing organisation's business.

There are two steps to pre-qualification: finding suppliers and verifying that they are suitable.

Finding suppliers: This is the identification of possible sources of supply. There are various databases available to do this as well as the internet and the more traditional sources. It is normal in this stage to carry out a basic check to ensure that the identified potential supplier has the capability to actually supply e.g. the supplier can supply plastic mouldings but can it supply the type of mouldings which we require?

Verifying suppliers: The extent of any verification exercise depends on whether the requirements to be purchased are essential to the organisation or whether they are basic purchases of non essential requirements. Essential requirements mean that the purchasing organisation is heavily dependent on the supplier and a more extensive pre-qualification is required. This is not to be undertaken lightly as it is both expensive and time consuming to do.

Before undertaking a pre-qualification, it is important to identify the aspects of the potential supplier which need to be verified. It is also important to identify how the aspect can be verified. This involves setting a standard and then scoring the supplier against this standard.

Managing Suppliers and Contractors:

The extent to which suppliers and contractors are managed depends on the type of relationship. Purchaser-supplier relationships exist on a continuum, called the purchasing power line. At one end, the purchaser possesses all the power and can decide what the relationship will be. In these circumstances, it is not unusual for the purchaser to single mindedly pursue its own advantage irrespective of the supplier. At the other end of the spectrum, the supplier has all the power and may single mindedly pursue its own advantage.

Note that at either extreme, the organisation with the power does not have to impose its power to the other party's disadvantage but it may do so if it wants.

Power in a relationship is determined by a variety of factors including

' 'Porter's five forces',
' the way in which a supplier sees the relationship between its current business with a customer and the prospect of future business with that customer
' the purchasing organisation's assessment of risk and relative spend for any particular purchase.

Careful analysis of these factors is important because it helps the procurement professional to understand the extent to which the relationship can be managed as well as whether it is worthwhile trying to manage the relationship at all. From this understanding, it is possible to determine the form and extent of any relationship management.

Supplier Performance Measurement:

Supplier performance measurement can be costly to implement if it is applied to all procurement unless there are sound IT systems which can help by capturing and analysing data originally input for other purposes.

All organisations need to be clear about why they want to measure supplier performance. Usually, it is to improve a supplier's performance (especially if the supplier has been performing badly), to ensure that timely action can be taken if the performance looks as if it will be inadequate (important if just in time is being used or on projects) and to provide a measure for helping to decide whether to continue to use the supplier or not (useful when compiling lists of potential tenderers).

Measurement should take account of the what is being purchased, the amount spent and the risk of failure of supply. A blanket approach is not recommended as it generates the same amount of information for non-critical supplies as for critical supplies. Even if this can be done cheaply, information for non-critical supplies can act as 'noise' obscuring the information for important supplies.

Criticality can change. So it is important that any system is flexible so that it can be extended to suppliers as the need arises.

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~ Stephen Cannon ~

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