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Successful supplier relationships require balance between obtaining as much value from suppliers as possible, and maintaining positive and mutually beneficial relationships. Push too far and suppliers may feel less inclined to perform satisfactorily. Push too little and you could pay too much for not enough.

By conducting systematic supplier reviews, you can objectively judge suppliers’ performance in relation to cost. If the balance of cost and benefit weights against you, such findings can be used for re-negotiations, or as benchmarks for evaluating alternative suppliers.

Some supplier relationships may warrant more attention than others, but nevertheless, the following tips should help you begin to review suppliers.

1. Prioritise

Prioritise suppliers based on factors such as cost, complexity of the relationship, or its strategic importance to your business. The depth to which you review each supplier may be decided based on such considerations.

For more involved or important relationships, you might – or possibly should – have pre-existing contracts and service level agreements (SLAs) to guide your performance evaluation.

Suppliers that provide strategically vital resources, or perhaps those that carry the highest cost, are obvious candidates for deeper focus. But even less vital supplier relationships might be candidates for quick review and cost saving.

2. Analyse spend

Revisit and review past, current and projected future spend for each supplier. Not only should this provide an overall picture of where your money goes, it will also help when you come to conduct individual cost-benefit analysis for each supplier.

In cases where financial constraints exist, such information could also be used alongside cashflow forecasts to identify candidates for cost-saving. You could test different hypotheses, for example, determining how a 1 per cent decrease for your top 5 suppliers would affect overall cashflow.

3. Review metrics

Effective evaluation relies on effective performance metrics. Different suppliers may warrant different approaches, so it’s important to devise relevant performance metrics for each individually.

If a contract or service level agreement exists, key performance metrics are likely to be pre-defined, so in large part the supplier review will be a process of comparing these benchmarks to current realities.

If you don’t have a pre-existing agreement, consider factors such as the quality of the product or service supplied, customer satisfaction, reliability, customer service, the supplier’s level of innovation, or their ability to deliver on time and in full.

There are many such metrics, but try to find ones that link with value-creation; that is, where business or customer value should be created as a result of the supplier’s interaction.

4. Benefits and deficiencies

Now evaluate how each supplier performs across its performance metrics. This should provide a focussed list of both benefits and deficiencies for each supplier.

Keep an eye out for intangible benefits which may not be immediately recognisable. For example, a particular supplier might undertake development work behind the scenes to constantly innovate and improve their service, whereas another supplier might be more of a copier than an innovator. Such an advantage may be hard to recognise until it’s gone.

Numerous deficiencies may result from this process, or possibly from any anecdotal frustrations experienced by you or colleagues. These might ultimately be cited when renegotiating a supplier relationship or pushing for rebates or price reductions. Or, when a new supplier is sought, such weaknesses might be in focus to ensure they don’t re-occur.

5. Cost vs. benefit

So far we’ve prioritised suppliers based on their strategic importance, considered their cost, defined relevant performance metrics, and listed the benefits and deficiencies of each supplier.

These steps should provide you with the basic information you need to conduct an informal cost-benefit review, to compare the sum of the benefits you receive against the total cost.

Such a cost-benefit analysis is not always a definitive evaluation. Indeed, more in-depth or statistical approaches might be warranted for some supplier relationships. But, with clear information on both direct and indirect costs and tangible and intangible benefits, you’re more likely to gain a picture of overall satisfaction or dismay at a supplier, and thus make better-educated decisions.

6. Compare to competitors

If, after considering both the costs and benefits of a supplier, you feel that you are not receiving sufficient value, you can either renegotiate or go elsewhere. Either way, it might be useful to shop around and review the alternatives.

Your clear knowledge of what benefits you are receiving at what cost should help you evaluate alternative suppliers more robustly. It might even help to avoid falling blindly for competitors’ over-reaching promises. Use insights from your review to guide you; for example, focus on maintaining the strengths of your current supplier, whilst plugging the weaknesses.

A good start

Whether you want to cut costs, review suppliers with inadequate or expiring contract terms, or simply judge if you’re getting good value for money, an organised and systematic approach to supplier reviews keeps you fair, but also firm. As a result, you can achieve balance between your need to get good value and the need to maintain positive supplier relationships.

As mentioned, some suppliers may require more focus than others. And indeed, more in-depth processes of supplier management and return on investment analysis may be required as part of a longer-term, ongoing supplier review. But, if you are looking for a straightforward way to begin reviewing suppliers, these tips represent a good start.

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