Navigating Strategic Change: Recognizing Warning Signs and Maximizing Benefits in Vendor Relationships

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In today's dynamic business landscape, where global supply chain disruptions have become increasingly prevalent, severe, and long-lasting, the importance of robust vendor relationships is likely to continue to become ever more critical.

When buyers and suppliers work together effectively, not only can new value often be unearthed in unexpected areas, but such alliances also might provide a buffer against the next unforeseen supply chain disruption. Yet, despite their value, vendor relationships can deteriorate over time. Consequently, businesses must revisit and recalibrate these relationships if they are to enhance efficiency, cut costs, and weather operational challenges. 

Determining when to reevaluate a partnership and whether it serves the best interests of both parties is often part art, part science. Focusing solely on cost improvements as the only evaluation criteria is likely no longer sufficient in today's volatile marketplace. Instead, vendor resiliency has become a strategic imperative for many organizations and requires a more robust evaluation process.

Many CPOs recognize that strengthening vendor relationships and collaboration adds value and avoids supply chain disruption. 

Evaluate signs that might indicate a need for change in vendor relationships and the benefits that might be gained by making such strategic changes.

How to Assess a Vendor Relationship

While there are subtle yet important differences between procurement and supply chain, high-performing suppliers might help companies succeed. 

One of the first steps in evaluating a vendor involves analyzing their performance, approach to pricing, and responsiveness. For organizations that maintain vendor scorecards, the quantitative and qualitative data can be relatively easy to access and analyze. 

As part of this effort, interviewing operations executives who deal with the supplier can often provide further insight. Encouraging them to share a candid performance assessment might uncover pervasive problems even the most sophisticated vendor scorecard system can fail to reveal.

Next, organizations might consider reviewing and evaluating their business goals and whether the vendor’s operations align with current and future strategic objectives. Does the vendor meet current needs? Can they support the organization's future requirements? 

As part of this analysis, it often makes sense to revisit why the vendor was initially chosen and engaged. For example, if a vendor was engaged because it could support goals for international expansion that are no longer planned, it may not make sense to continue the relationship.

Innovation and resiliency might also be a focal point. Agility and the ability to respond to fast-moving markets are critical, especially during periods of economic uncertainty. If a vendor appears unwilling or has previously resisted making changes to their operations, it can be helpful to understand the underlying reasons.

While many businesses can evaluate vendors without outside assistance, engaging a suitably qualified third party to conduct an impartial assessment may make sense. In addition to their neutral position, a firm specializing in vendor assessment will use a defined methodology coupled with experience to develop an all-encompassing view of each supplier. If their report leads to a vendor’s replacement, their unbiased perspective can help mitigate internal resistance to the change.  

Replace Vendors to Unlock New Opportunities

When replacing a vendor, evaluating the potential return on investment (ROI) associated with the change is essential. A simple way to approach this analysis involves quantifying the direct and indirect costs and benefits of the current relationship and comparing them to their replacement. Quantifying those costs and benefits and including them in the ROI calculation establishes a benchmark for performance and can make a compelling case to mitigate institutional resistance to change. 

Engaging new vendors may also open doors to long-term strategic alliances that heighten performance and grow margin gaps. For example, if a vendor integrates into a customer’s production system, there may be an opportunity to reduce waste, lower costs, and increase efficiency and quality. 

Furthermore, tightly aligned suppliers might make scaling in response to market demands far easier. When a customer and a supplier share demand and supply data, such transparency makes it far easier for both parties to anticipate and resolve problems quickly.

The Takeaway      

Every vendor relationship requires nurture and management. While some suppliers can consistently perform and evolve to meet their customers' needs, others struggle with management bottlenecks and inefficiencies and need to be replaced. 

During periods of uncertainty, proactive vendor management can help vendors to add value and remain aligned with their customers. This means monitoring vendors closely, evaluating their performance, and making well-informed decisions about continuing or severing the relationship.

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