Are you getting the best value out of your vendor relationships? - GWI

Are you getting the best value out of your vendor relationships? 

Buying and selling in the business world can range from being extremely simple, to mind bogglingly difficult. One of the greatest barriers to good procurement outcomes can be thinking that a single, simple process can be used to manage these complexities. However, as H. L. Mencken once said; ‘for every complex problem there is an answer that is clear, simple, and wrong’.

People often overlook or ignore the complexities in a particular system, especially when we are shown a simplified model diagram – most organisations have a version of the “procurement cycle”. But while the procurement cycle diagram can be a great model for explaining singular, arm’s length transactional interactions with suppliers, it is a vast over-simplification and woefully inadequate for communicating the risks and opportunities of procurement at the organisational level.

The reality is that Strategic Procurement, that part of the discipline that concerns itself more with long term organisational outcomes rather than the singular transactional interactions with suppliers, is a complex system with many tangential, parallel and intersecting relationships with other processes.

One of the often overlooked areas of procurement is contract and vendor management. Despite the current trend to label these two things together; they need to be treated quite differently to achieve maximum benefit for the buying organisation. Why? Contract management is about getting the benefit you contracted for, while vendor management is about developing and maintaining a long-term relationship. Lumping them together misses the important distinction – you rarely need a sound long-term relationship with everyone you contract with.

Contract Management is about managing opportunity and risk of a single procurement throughout the life of the contract.

Vendor Management is about managing opportunity and risk throughout the life of the many contracts.

The need for sound relationships in business buying and selling goes both ways; buyers need to develop good relationships with sellers that they depend on to stay in business and vice versa. The difficulty is that this dependency is rarely equal; one party will usually need the other more than the reverse. Sometimes that disparity in need can be markedly imbalanced. For example, you might need a steady supply of a component to build and sell products to stay in business. But there are only a few manufacturers of that component in the world and you are a small buyer of relatively insignificant value. Do you think an arm’s length contractual relationship will stand you in good stead when supply is short (consider the many natural disasters that immediately impact worldwide supply of computer components such as memory or hard disk drives)?

The buyer most likely to get the commodity in short supply is more likely to be the one who has developed a good two way business relationship with a good understanding and accommodation of what drives the seller. Of course, there’s also a chance that the seller will go for the quick win and sell to the highest bidder – which you are also more likely to predict if you have taken the time to understand the seller’s motivation. In fact, for critical inputs, it is worth considering the entire supply chain to understand where the risks and opportunities for your organisation may arise.

Vendor management is usually undertaken at a more senior level to contract management as any relationship with vendors outside the usual arm’s length contractual relationship does increase the risk of probity and conflict of interest, both real and perceived. For this reason alone, vendor managers should steer well clear of procurement decisions.

If you want to raise the stakes even higher, consider strategic vendor management. That is, how will an organisation manage that small number of vendors most critical to the organisation’s continued success? Getting things wrong with these suppliers has ended the life of many businesses when critical supply lines were cut for any reason, where just losing focus on the downstream supply chain could mean disaster. Developing a good strategic vendor management program may even point the way to further opportunities, such as formal partnerships or strategic alliances with critical suppliers.

Louis Hof
Senior Consultant