By T. Leigh Buehler | 12/22/2023
In today’s world, vendor and supplier relationships are critical to ensure a sense of harmony for all. Trust, good communication, and a commitment to mutual understanding and growth are necessary to build relationships with suppliers and vendors and provide good service to customers.
The Importance of Managing Supplier Relationships and Vendors
Before discussing how to build reliable relationships with vendors and suppliers, it’s necessary to understand the importance of these relationships. There are strategic partners within your business strategy who influence product quality, pricing, and customer satisfaction.
Strong vendor and supplier relationships are important because they can influence the longevity of your agreements. In addition, good relationships make it easier to increase successful collaborations and accomplish your organization's goals.
Companies in today’s business economy buy more components and services from their suppliers than ever before. Also, businesses rely heavily on their suppliers to reduce costs and increase their products’ quality, so good supplier relationship management is a necessity.
When you take the time to develop a great supplier relationship, you will help to develop cost savings and reduce availability problems, quality issues, and product delays. Ultimately, that leads to better service and customer satisfaction.
A reliable partnership is not one-sided; however. It has advantages for all parties involved.
For instance, the CEO of an auto parts supplier for Chrysler®, Ford®, General Motors®, and Honda® stated: “Honda is a demanding customer, but it is loyal to us. [American] automakers have us work on drawings, ask other suppliers to bid on them, and give the job to the lowest bidder. Honda never does that.”
But supplier and vendor relationships are not limited to large organizations like Honda. Even small businesses must practice good supplier relationship management to retain good relationships with their vendors and suppliers and provide great customer service.
For example, a small bridal store must retain consistent communication channels with its vendors out of Asia to ensure proper delivery time of wedding gowns to brides. Missing delivery due dates can cause a great deal of frustration and anger for brides, leading to possible refunds, lost profits, and potentially negative customer testimonials and online reviews.
The Value of Building a Solid Supplier Relationship Agreement
Supplier relationship management grows even more important as the complexities of global markets increase. Supplier relationship agreements are more than contractual obligations. They are strategic tools that impact the success, resilience, and efficiency of your business.
When I ran inventory and supply chain logistics for a locally owned bridal store, I was always amazed at the wonderful vendor and supplier relationships the owner maintained. She developed these relationships when she first opened her store.
Her great supplier relationships and continued loyalty to the brands she sold always paid off in times of a “bridal crisis.” It was rare that a supplier would not bend over backward to ensure the shipment of dresses or accessories so that her brides would be happy.
She was always happy to continue a contractual agreement with vendors and suppliers who enabled her to deliver excellent customer service. In turn, they were happy to continue their exclusive contracts because of her ability to sell their items.
But how do you go about building a robust supplier agreement? Every organization’s supplier agreement will be different, and some businesses may need more terms than others.
Expectations
A supplier agreement is a blueprint for two or more partners to craft a healthy relationship. It should outline the expectations, responsibilities, and deliverables in detail to minimize the risk of misunderstandings. Clarity ensures that both the buyer and the supplier have a shared understanding from the beginning, which develops trust.
For a business like a bridal store, agreeing to purchase a minimum number of sample dresses for the showroom floor must be established in a supplier relationship agreement each year. Vendors want their dresses displayed for brides, but the stores must be careful not to purchase too many samples since dresses get ruined during fittings.
Also, the store runs the risk of carrying too much dead stock. Items that do not move from the backroom take up space and eat into budgets.
Risk Mitigation
Risks are inevitable in any business. By practicing good supplier relationship management and developing a strong supplier agreement, you can add risk management tools to address any potential challenges.
This effort may include supply chain disruptions, unforeseen circumstances, and market fluctuations. Clearly defined protocols for handling these risks contribute to a trustworthy supplier relationship and a positive contract relationship.
Cost Efficiency
All agreements should discuss pricing structures, discounts, and payment terms. By stipulating pricing mechanisms, penalties for delays, and other financial details, the agreement ensures fairness and transparency, which leads to more efficient allocation of resources for both parties.
Going back to the bridal store example, vendors typically create discounts around the amount of sample dresses they’ve purchased. The more the store buys, the bigger the discount.
In addition, there would be a year-end bonus if the store sold a certain number of custom dresses (not from the samples they purchased). This bonus would carry over to the next year, creating a larger discount on the number of new sample dresses purchased for the showroom, which would help the store save money on inventory purchases.
Quality Assurance
Quality is non-negotiable for many businesses these days. A supplier agreement should establish strong quality guidelines with testing procedures and compliance requirements. Quality assurance can include any part of the supplier process from manufacturing to human error to security improvements.
If a shoe manufacturer discovers during a quality check that soles on shoes come loose, the manufacturer should start an investigation with internal and external teams. Is the problem on the supplier’s end, perhaps because a new type of material has been used? If it is not the supplier, then a quality team needs to continue testing the issue to solve the problem.
Clear guidelines for quality assurance help to maintain consistency for all parties and ensure that the buyer receives goods that meet their standards.
Legal Protection
To maintain good relationships, it is always prudent to have legal protections in place. While most companies hope there will not be any relationship disputes, you never know what may occur down the road.
A supplier agreement establishes the legal framework for the business partnership. It includes dispute resolution mechanisms and outlines consequences for breaches of contract. These legal protections are to cover both parties.
One legal clause that many supplier agreements should carry is intellectual property terms, which is usually done through an indemnification clause. This clause is a legally binding agreement specifying that one party will compensate the other party for any losses or damages that may arise from a particular circumstance.
The clause might read in this way: “The service provider shall indemnify the customer from any and all claims, causes of action, suits, damages, or demands, arising out of any infringement of intellectual property rights used by the service provider in the course of delivering the services.”
Continuous Improvement
Many businesses mistakenly create a static supplier agreement. The agreement needs to allow continuous improvement and innovation by incorporating tools to quickly communicate and collaborate.
Suppliers often have valuable insights into supply chain management. To help a business grow, a supplier agreement can provide a platform for both parties to contribute to each other’s success.
Identify and Monitor Any Risks in Your Supplier Relationship
While it is important to maintain solid supplier and vendor relationships, all businesses need to understand that these partnerships are not without risk.
You can experience supply chain disruptions, financial instability, and other issues that could affect your company’s internal operations. Being able to identify and monitor these potential risks in your vendor and supplier relationships will be advantageous.
You should not wait until an agreement is established to run a risk assessment. Before entering into an agreement, identify and evaluate any potential risks of existing suppliers or vendors.
Look for any conflict of interest or potential supply chain issues – even political risks are important today. That will help you decide whether the value of the partnership outweighs any risks.
Imagine that you have the opportunity to carry a high-end, well-known brand in your store, and you jump at the opportunity to help bolster your store’s image. But you failed to investigate whether the brand has any supplier issues or is produced in a politically volatile area of the world.
Is it worth the aches and pains of waiting for long periods for stock that you’ve paid for and now risk out-of-season or unwanted items just to say you carry that vendor? This type of consideration is very important when you're working to maintain a strong supplier relationship and please your customers.
Supply Chain Vulnerabilities
In today’s global world, supply chains are in constant battles with disruptions such as:
- Natural disasters (hurricanes and wildfires)
- Geopolitical tensions (terrorism, wars, or new leaders)
- Unforeseen events like pandemics
These disruptions impact the timely delivery of your goods. When goods are not delivered on time, you risk financial loss and damage to business credibility and your company’s reputation.
For instance, the recent pandemic hit Nike’s distribution channel, third-party manufacturing, and logistics hard. Nike was forced to close stores in its China market and around the world. Their inventory levels grew, and Nike faced reduced shipments to wholesalers.
To combat these issues, Nike enhanced their direct online sales channels. Nike Brand Digital was its fastest-growing channel. The company were able to clear inventory by offering discounts, canceling factory orders, and shifting products away from storefronts to fulfill online orders.
Financial Stability
A supplier’s financial health directly affects your business. If you use a supplier that has frequent financial difficulties, you could face a disruption in your supply chain or experience quality issues. These issues can leave your enterprise in a vulnerable position, risking your financial stability.
Check to see if the vendors in your supplier network fulfill orders slowly. If a pattern of untimely deliveries emerges, your supplier or vendor could be having cash flow problems. They may be behind on timely payments to their suppliers, leading to issues with fulfilling orders.
Quality Assurance
Quality assurance is essential in securing a supplier agreement and conducting risk assessments of vendors and suppliers. Poor products can have severe consequences, such as regulatory fines and unhappy customers. If a product fails to meet industry compliance standards, your organization risks damage to the public perception of your brand and financial loss.
Any product that does not meet its intended specifications or fails to perform as it should is considered poor. Examples include cracks in the paint on a car or the coat zipper that continually breaks. Quality is the most important factor for any business.
Reputation Management
Your vendors’ and suppliers’ actions — or lack thereof — reflect directly back on your company. If you use a supplier that is involved in unethical practices, human rights violations, or environmental controversies, it can also tarnish your brand and lead to a loss of customer trust.
For instance, a 2016 investigation found rampant human rights abuses in the supply chains of online fashion merchant ASOS, the British luxury retailer Marks & Spencer, and Japanese casual wear retailer Uniqlo. Each company faced customer protests and the loss of public trust.
Strategies for Identifying and Monitoring Risks
Risk is a multifaceted phenomenon that should be considered holistically. It involves assessment, profile development, and routine audits, coupled with a sourcing diversification strategy, all of which work together to help mitigate risk.
Comprehensive Supplier Assessment
You will want to conduct a thorough evaluation of potential suppliers before you sign agreements. Assess their financial stability, reputation in the industry, and operational capacity.
You may want to use a third-party assessment or evaluation to validate a supplier’s compliance with quality standards, environmental regulations, and ethical practices.
Risk Profiling
Create a risk profile for each potential supplier partner. A risk profile will describe any potential concerns. Consider factors such as:
- The stock of an organization’s operations
- Its capacity to deal with significant high-level risks
- The geographic location of the supplier
- The economic stability of the region
- Procurement solutions
- Cultural differences
- Supplier data
When you identify suppliers whose potential failure could impact your business, prioritize monitoring those suppliers accordingly. The potential for natural disasters like earthquakes, floods, or droughts can affect many regions and lead to a delay in the delivery of goods. Political risks, like civil unrest or a new leader, can prompt new laws and regulations that require your company’s response.
Regular Audits and Inspections
When you implement regular inspections and audits of your suppliers and vendors, you ensure that the agreed-upon standards are in order within your supplier network. Establish open and collaborative relations and regular communication with your suppliers to encourage transparency and cooperation during inspections.
Diversification of Suppliers
Diversifying the suppliers within your supplier network is a great way to reduce your dependency on any single supplier. You may not be able to use this strategy with all of your vendors or suppliers, but more diversification creates a bigger safety net for your company.
Develop contingency plans and alternative sourcing strategies to help mitigate risks associated with a specific supplier. If you are a coffee company, source your beans from multiple farmers and countries to ensure a steady flow of beans. If you rely on only one farmer or area, you risk geopolitical or natural disaster issues.
Great supplier relationships do not happen overnight. It takes work and effort to create a good relationship. Developing reliable vendor and supplier relations is a business strategy, one that is a cornerstone for sustained growth and helping your fellow businesses succeed.
If your company is large enough, you may want to appoint a dedicated supplier relationship manager. Good supplier management leads to a resilient business. Effectively managing a working relationship with suppliers ensures a seamless supply chain and reduces the risk of disruptions to your company.
Using open, effective communication and building trust can cultivate a mutually beneficial business relationship with your vendors and suppliers that can bring long-term success. Regular inspections, continuous improvements, well-developed supplier management, and a willingness to adapt to changing circumstances are key to building reliable and trustworthy relationships.
Relevant Articles:
Chrysler is a registered trademark of FCA US LLC.
Ford is a registered trademark of the Ford Corporation.
General Motors is a registered trademark of General Motors, LLC.
Honda is a registered trademark of Honda Motor Co., Ltd.
Nike is a registered trademark of Nike, Inc.
