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Processes

Which supplier management techniques help control costs?

Niek Dekker
6 Min
supplier-management-techniques

Effective supplier management has always required a careful balance between cost control and risk mitigation. But, with ongoing geopolitical stability and climate-related disasters, disruption to international supply chains is likely to continue. It might be harder to strike that balance, but it’s more crucial than ever.

And Chief Financial Officers (CFOs) have a big stake in striking it. Without tight, efficient supplier management, their organisations’ profitability and business continuity could be in jeopardy.

So what can CFOs do within the current landscape? Let’s explore some of the most reliable supplier management techniques for streamlining the procurement process, controlling costs and minimising risks.

What is the importance of effective supplier management?

As a CFO, managing the supply chain is a critical responsibility that directly impacts a company’s financial health. Poor supplier management can lead to increased costs, supply chain disruptions and decreased profitability. Effective supplier management, on the other hand, can improve cost control and risk mitigation, and ultimately lead to improved financial performance.

One of the primary ways that effective supplier management can improve cost control is by optimising supplier relationships. Strong relationships with suppliers form a critical foundation for achieving better pricing and contract terms. This can include volume discounts, early payment discounts and longer payment terms, reducing overall costs.

Strengthening these relationships also increases the likelihood that you can access the materials and services necessary for maintaining operations and meeting customer demand, even in the face of supply chain disruptions. It also increases your chances of having open, clear communication with suppliers, which helps you keep customers in the know – a crucial capability if disruptions do end up impacting you or your customers.

Effective supplier management is also crucial for mitigating risk beyond potential supply chain disruptions. For instance, your vulnerability to risk is directly linked to whether your suppliers are reliable and compliant with regulations. During procurement and supplier assessment, due diligence is important for identifying potential risks, such as labour or environmental violations. The earlier you can identify these, the easier it will be to work with suppliers to mitigate these risks, which helps avoid costly legal and reputational damage.

But effective supplier management isn’t just about avoiding bad outcomes. It can also improve overall supply chain efficiency, saving money and helping you retain customers at lower costs.

Streamlined supplier management processes – such as electronic invoicing and automated ordering – help reduce the time and resources required to manage the supply chain. This frees up resources for other critical business functions and improves overall productivity.

Poor supplier management, on the other hand, can have significant financial implications. Supply chain disruptions can lead to lost sales, production delays and higher costs – needing to source materials from alternate suppliers can be time-consuming and expensive.

Now that we’ve established the importance of effective supplier management, let’s dive into the practicalities: what, exactly, can you do to better suppliers and control costs?

How to reduce costs associated with supplier management

Here are five steps for reducing costs associated with supplier management:

  1. Consolidate suppliers. Consolidating suppliers enables you to negotiate better pricing, reduces the amount of time and resources spent on managing suppliers, and improves your purchasing power.
  2. Implement a supplier performance management system. A supplier performance management system empowers you to track and measure supplier performance, identify areas of improvement and hold suppliers accountable for meeting performance metrics. This makes it easier to identify underperforming suppliers and potentially replace them with new, more cost-efficient suppliers.
  3. Negotiate better contracts. Mutually beneficial contracts are the bedrock for mutually beneficial partnerships – they clarify expectations and help both parties understand their obligations from the outset. Make sure you’re thinking carefully about payment terms, volume discounts and service level agreements.
  4. Improve communication. Supplier misunderstandings and mistakes aren’t just time-consuming, they can be incredibly time-consuming, too. Effective communication can reduce the time and resources spent on resolving issues. And this goes back to clear contracts and performance management systems – you’ll want a variety of established channels for communicating your expectations and raising any issues before they become too severe to fix.
  5. Automate procurement processes. Automating procurement processes, like implementing an e-procurement system, can save time and minimise the costs associated with manual processes.

What are examples of supplier risks?

Before we explore which strategies you can implement to better mitigate supplier risk, let’s explore some examples of the kinds of risks CFOs should be looking out for.

  1. Financial instability. Suppliers facing bankruptcy or insolvency could disrupt your supply chain and impact your bottom line. Financially vetting your suppliers is indispensable.
  2. Quality issues. Suppliers that provide low-quality goods or services could impact your company’s reputation and result in costly recalls or product returns.
  3. Compliance issues. Suppliers that do not comply with regulations could lead to fines, legal disputes and damage to your company’s reputation.
  4. Supply chain disruptions. Even when a supplier is financially stable and compliant, you’ll still need to consider local factors and whether they’re more likely to experience natural disasters, geopolitical events or transportation issues – these can all affect your bottom line.
  5. Cybersecurity posture. Your security posture is only as strong as your suppliers’. If a supplier is involved in a cyber incident, it’s significantly easier for malicious actors to dupe your employees into making fraudulent payments or giving up sensitive data.
  6. Ethical concerns. Suppliers that engage in unethical practices could damage your company’s reputation and result in legal or financial consequences.

What strategies should be used to manage and mitigate supplier risk?

As a CFO, managing and mitigating supplier risk is a key priority.

Supplier risk can have a significant impact on your organisation’s financial performance, reputation and operational efficiency. That’s why it’s important to develop effective strategies to manage and mitigate supplier risk.

Here are some approaches and steps to consider.

  1. Conduct extensive research on suppliers. Before engaging with any supplier, conduct a thorough due diligence process to understand their financial stability, reputation, and compliance with regulations. This should be done at the outset of any new supplier relationship, and periodically throughout the relationship.
  2. Develop and maintain strong supplier relationships. Establish clear lines of communication with your suppliers. This allows you to identify potential issues early on and work together to mitigate any risks. See five key approaches that help strengthen your supplier relationship.
  3. Implement supplier risk management policies and procedures. Develop and implement policies and procedures that formally outline how you’ll manage supplier risk. This should include clear guidelines on how to identify, assess and mitigate risk.
  4. Monitor supplier performance regularly. Regularly monitor supplier performance to ensure they’re meeting expectations and that both parties have a chance to identify and address issues promptly. This includes establishing key performance indicators (KPIs) around on-time delivery, quality of goods or services and compliance with regulations. Conduct regular reviews and check-ins with each supplier.
  5. Use technology to manage supplier risk. A variety of technology solutions and software can help you monitor supplier performance, automate supplier risk assessments and track supplier compliance with regulations. For example, Eftsure can help you streamline the onboarding process, allowing you to view, add and manage suppliers all in one place.
  6. Diversify your supplier base. While it’s efficient to consolidate suppliers where possible, overreliance on any one supplier can put you at greater risk. Attending trade shows and networking with industry contacts allows you to identify a variety of vendors that meet your organisation’s needs and requirements. This ensures that you have access to multiple sources of supply, helping you move quickly in the event of disruptions or quality issues.

The bottom line

Managing cost control and mitigating supplier risks are interconnected challenges. And they can be even more challenging when you’re contending with economic headwinds, ongoing supply chain disruptions, geopolitical instability or natural disasters. Since organisations are often managing a large number of suppliers, it can be even more difficult to effectively evaluate each one.

Solutions like Eftsure can help you streamline procurement and onboarding processes, making it possible for AP teams to quickly and confidently verify supplier payment information, reducing manual legwork and the risks associated with it.

This includes features like bulk supplier invitations, form completion, document collection and more efficient verification through real-time approvals and comprehensive fraud checks.

By prioritising supplier management as a key aspect of your financial strategy, you can control costs, reduce risks and ensure smoother supply chain operations.

Streamline your supplier onboarding with our checklist
Having accurate supplier onboarding is vital for finance teams to reduce risk, detect fraud, comply with regulations, and maintain strict accounts payable controls. The payment process starts with supplier onboarding, which is time-consuming but necessary.

Download our procure-to-pay checklist to simplify your onboarding process.

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