How to Enable Strategic Supplier Management in Your Organization

Supplier segmentation and prioritization

By segmenting your suppliers into categories based on strategic importance, performance, relationship quality, business impact, risk level, and other such attributes, you can better tailor your approach to sourcing. This will help you understand which companies you are most likely to build long-term, mutually beneficial relationships with that will offer ongoing value. 

Many companies use the Kraljic Matrix as a strategic tool to classify suppliers or the goods they provide based on supply risk and profit impact. This helps you prioritize your suppliers, dividing your purchases into four categories: 

• Non-critical

• Leverage

• Bottleneck

• Strategic items

After prioritizing and categorizing your suppliers, sort them into these tiers: 

• Transactional suppliers are those that you make one-time or short-term purchases from, fulfilling a need quickly and at low cost. These suppliers are not motivated to offer the best possible service or the greatest quality because they understand that they may never interact with you again. These businesses are vendors more than partners. 

• Preferred suppliers work more closely with your organization. You might find them through a formal selection process by using a Request for Proposal (RFP) or Request for Quotation (RFQ) and then track their performance over time. 

• Strategic suppliers are often more like partners for your business, with both parties working to build the relationship and align on long-term targets and goals. Ideally, both companies should feel that they will benefit from maintaining a healthy and collaborative relationship. 

Supplier selection, alignment, and qualification

You need to make sure that your long-term strategic partners align with your operational goals, quality standards, and sustainability targets to create a beneficial relationship. Begin by being clear on your requirements, including the capabilities you need from them, compliance obligations, risk tolerance, and expectations on performance. 

Set up a formal Request for Information (RFI) process to scope out your prospective suppliers’ experience and potential offering. From this preliminary procedure, you can dig deeper into more detailed offerings with an RFP and compare pricing and terms with an RFQ. 

Consider that strategic sourcing should go beyond a simple up-front price comparison. Think about the total cost of ownership throughout the proposed relationship. While one supplier may be cheaper, you need to consider how reliable their supply is, the quality of their materials, and other such factors that could cost you more over time due to delays, recalls, and so on. 

Also, think about whether multi-sourcing or single-sourcing is a more beneficial strategy. For example:

• Using multiple suppliers for the same material reduces dependency on one partner, improving resilience, but increasing complexity. This is useful for mitigating risks like shortages and geopolitical disruption.

• Using a single supplier strengthens your strategic relationship and allows you to negotiate better pricing for bulk orders, but increasing risk if they face disruption. This works well when the supplier has unique capabilities. 

Carry out due diligence on suitable strategic candidates to assess their financial stability, ethical practices, regulatory compliance, and technical competencies. This means that you narrow it down to only reliable and strategically valuable supply chain partners. 

Relationship management and governance

It is essential to build a transparent relationship with your strategic partners. Ensure there are clear communication lines and that you develop a collaborative partnership where each party can have their say and make suggestions to improve the working relationship. Working this closely together creates more trust in the partnership, which is important for the long-term prospects of the project. 

Implementing a jointly agreed governance structure will help both you and your supplier understand what is expected of both of you within the relationship, including the documentation requirements, agreed methods of working, a framework for assessing, resolving, and preventing issues, and alignment on potential risk areas and mitigation strategies.

This instills accountability and strong supplier relationships into the process on both sides, which means everyone is encouraged to work effectively towards the same goal.

In your strategic supplier contracts, ensure you include: 

• Key performance indicators that dictate optimal service standards, quality thresholds, and delivery expectations

• Scope of work to give a detailed description of the goods and their specifications, timelines, and expected milestones

• Pricing and payment terms, including whether they are fixed or flexible, and invoicing and payment schedules

• Risk and compliance clauses to cover sustainability matters and regulatory concerns

• Dispute resolution processes

• Confidentiality and intellectual property rights information that protect both parties

• Termination clauses, notice periods, and protocols for handling broaches of the agreement

• Review and renewal terms for the agreement

• Force majeure terms for unforeseeable events that could disrupt the supply chain

• Continuous improvement commitments to encourage innovation, cost-saving, and other performance aspects. 

As this is a collaborative effort, you should look for win-win negotiation strategies to ensure both parties feel they will benefit from the relationship. These include:

• Focusing on total value rather than price to emphasise the importance of quality and reliability

• Share long-term forecasts to give better visibility and help with long-term planning on both sides

• Negotiate flexible payment terms, giving favorable pricing for faster payments or reduced financial risk, for example

• Bundle contracts to include multiple needs in one agreement and achieve mutual efficiency gains. 

Risk management

Having identified the risks for your strategic suppliers, you can develop mitigation strategies for those particular occurrences. Implement contingency planning to keep your supply chain running, even in the face of disruption. 

Use live shipment tracking to understand where your goods are in the world in real time, and to get ahead of any potential disruptions. It might be that a strategic supplier is held up by an unforeseen event. In this case, you should have the capacity to pivot to a transactional supplier instead for the time that the partner is indisposed. 

Using predictive analytics will help you maintain this oversight on where the bottlenecks are and allow you to make quick proactive decisions that minimize the disruption to your operations. 

Create a crisis communication plan to align both parties in the case of a disruptive event, agreeing the messaging of your responses to potential risks and your policy for keeping customers, investors and other stakeholders informed of your efforts to resolve the problem. 

Compliance, ethics, and sustainability

A sustainable approach to sourcing is key to a successful strategic supplier relationship. Make sure you consider the ESG performance of potential suppliers, as this directly impacts the sustainability of your company. Legislation such as the Corporate Sustainability Due Diligence Directive in the EU and various conflict mineral laws rely on companies having supply chain visibility and being able to assure regulators that all entities in the chain comply. 

Be sure to understand what the laws are in your jurisdiction, that of your strategic suppliers, and that of their suppliers too. This will help you gain oversight on how ethical and compliant their operations are.