“Keep your friends close and your suppliers closer”

Michael Dell

There are two main approaches to managing suppliers: the distant and the close one. Hiring companies that keep suppliers at an arm’s length tend to withhold strategic information which makes it harder for suppliers to grasp on their needs and issues. These companies also use negotiation tactics that pressure the supplier into lower pricing structures.

On the other hand, as Tim Giehll and Sara Moss highlight in their book Human Capital Supply Chains, there are organizations such as Dell and Toyota which “have taught us that there is another, more positive and profitable way to work with suppliers, and that is to partner with them”.

Giehll and Moss describe three main points in transforming suppliers into partners. The first is consolidating. This stands for not having too many suppliers. After consolidating suppliers, some organizations have placed the remaining into tiers, depending on their ranks per skillsets. Tier-1 vendors may have the right to not refuse or refuse first, and then the order can be distributed to tier-2 or tier-3. Each tier shouldn’t exceed the five to eight range in number of suppliers.

“Analyzing existing human capital suppliers on a quarterly basis, reviewing long-term vendor performance, and refreshing pricing and terms with a fewer number of vendors can have a meaningful and positive impact on the cost and quality of the portion of the workforce that is provided by outside suppliers. Establish a process where, based upon quarterly performance, suppliers can move up or down the supply chain tiers.”

Giehll and Moss, Human Capital Supply Chains

After consolidating suppliers, it is necessary for hiring companies to establish long-term relationships with the selected vendors. This is the only way to really foster a partnership since both companies must benefit from the interaction and unless they are in for a long-term benefit, the relationship might not be as fruitful as required.

A long-term relationship allows companies to get to know each other better, and with time their interaction will flow better and results will be perceived sooner.

Hiring companies should also consider suppliers as advisors, since they are third party outsiders that can provide a different perspective on labor market trends and news.

And lastly, managing each supplier’s performance is crucial when moving on to a partnership. Hiring companies must establish a clear supplier performance program with defined standards. These standards and its key indicators must be understood by suppliers, as each supplier must clearly understand how they add value to the client’s business.

To really improve supplier performance, feedback is essential. Automating supplier management processes may be a good vehicle for managing suppliers and their performance. But never allow the vendor management system to interfere with the dialogue. In the end, suppliers are organizations, with people, and a personal level of understanding might take the relationship a longer way forward than an optimum automated system.