The Ultimate Guide to Effective Supplier Lifecycle Management

How to Reduce Cost and Mitigate Risk in your Supply Chain

You’ve just onboarded a supplier. Now what? This e-book will guide you through the key stages of supplier lifecycle management, from supplier selection and segmentation to supplier performance management and, if necessary, termination or supplier offboarding.

To get the most out of your supplier relationships, you need to be able to effectively manage suppliers throughout the entire supplier lifecycle. That’s why it’s essential to understand all key stages and have a standardized supplier lifecycle management process in place that fosters strong relationships while mitigating risk and reducing costs. 

This e-book will explore the key stages and best practices for effective supplier lifecycle management. Plus, learn how your organization can leverage technology to streamline supplier lifecycle management processes and achieve optimal results.

What Is Supplier Lifecycle Management?

Supplier lifecycle management (SLM) is an essential part of procurement and supply chain management. While the supply chain lifecycle will focus on the life cycle of the entire supply chain spanning all threads and vendors, supplier lifecycle management focuses on individual suppliers or even a set of suppliers within a process module. This is the process of managing supplier relationships throughout the entire supplier lifecycle, from initial supplier selection and segmentation to ongoing performance management and, when necessary, supplier offboarding.

Maximizing the benefits from your suppliers, boosting their performance, minimizing risks, and sparking business growth is all possible with smart management of your supplier relationships throughout the supplier lifecycle. While each stage in Supplier Lifecycle Management (SLM) may look like a series of separate processes, your business will achieve the most significant returns through an integrated approach.

Vendor Lifecycle Management Stages

The stages of supplier lifecycle management typically include:

Supplier Segmentation

Most organizations depend on multiple suppliers—and some are more crucial to your bottom line than others. You may have several long-term partners, while others might work with you just a few times. 

Segmenting vendors based on their potential impact on your business is the first step in effectively managing the supplier relationship. Supplier or vendor segmentation is the process of classifying your vendors into distinct groups so you can dedicate the right level of resources to the partnership. In other words, where does this supplier fit in? How important are they to your supply chain? What risks do they pose? Once you understand this, you can tailor your interactions more efficiently.

Why Is Supplier Segmentation Important?

Any supplier that you can identify as key to your business requires more engagement than others. By segmenting them into groups based on your specific criteria, you can determine the type and level of attention needed and identify your risk exposure level.

3 Key Supplier Classifications

Suppliers can generally be grouped into three tiers:

Strategic supplier—These suppliers are critical to your business functioning and meeting its core objectives. This level goes beyond cost savings and adds value to your business over the long term. Ask yourself: If this supplier went out of business today, would your organization be able to continue operating? Strategic suppliers are the most difficult to replace.

Operational supplier—Although not as critical to your business operations, these core suppliers are required to sustain daily production or business needs, but there are alternatives. If these partners were to go out of business, it would likely be inconvenient for you, but you wouldn’t necessarily need to panic.

Transactional supplier—These suppliers deal with short-term needs or one-off procurement of goods or services. Generally, you have plenty of options with limited impact on your supply chain. For instance, a transactional supplier may be someone you use for a one-time engagement, such as an event venue, with many options and negligible transition costs.

Emerging supplier—Suppliers with the potential to have a critical impact on your business but who are in a pilot or testing period may fit best into this tier as they wait to move to a more permanent segment.

Identify Your Key Suppliers by Answering These Questions:

Once you understand the characteristics of your various suppliers, you can begin assigning them to specific categories.

No One-Size-Fits-All Approach

Keep in mind that there is no single preferred approach to segmentation—choose the one that best fits your business. For instance, you can classify a supplier based on any number of quantitative metrics such as cost, quality, time, availability, transaction volume, dependency, cost of maintenance and support, compliance, or qualitative metrics such as strategic alignment, industry knowledge, anticipated future engagement, and much more. Your industry will influence your approach as well.

It’s essential to be flexible and tailor your supplier relationships based on their needs and communication styles. Still, having some procurement processes in place for those different kinds of strategic suppliers will strengthen your working relationship as well as your work output.

Proper Supplier Segmentation = Better Reporting

When you take the time to classify your suppliers into the appropriate tiers, your reporting will become far more robust and meaningful where it matters most—with your most critical suppliers. You gain greater visibility into your supply chain by seeing how your Tier 1 strategic suppliers perform on specific performance metrics, such as quality, response time, or availability. This deeper transparency into supplier performance allows you to pivot quickly and make necessary changes when issues arise.

Supplier Contract Management

Too often, supplier contracts fall through the cracks because they’re filed away in drawers or indexed and forgotten on a spreadsheet. If there’s no system for proper contract management, no one is likely aware when a contract period is expiring. Or an evergreen contract may automatically renew when your organization wants to renegotiate or stop doing business with that supplier. 

That’s why it’s ideal to have a central location for securely storing your contracts and supplier information. For one, having a centralized digital database like Graphite Connect for secure data collection and contract management offers stakeholders from legal to procurement complete visibility of supplier performance and compliance. And you’ll know exactly when a contract is up for renewal so you can renegotiate or terminate as needed. Plus, your organization will be able to more easily identify business-critical suppliers, ensure the necessary certifications are in place, and that KPIs agreed upon at the start of the contract period are being met.

Penalize for Failing to Meet Agreement

Although it may not work for everyone, you may see continuous improvement if you can enforce penalties implemented during the contract process. For example, if you’re working with a furniture supplier that doesn’t meet its SLA, you could set up a financial penalty around lead times. If you’re anticipating a 90-day lead time, and they miss by “X” percent, there could be some kind of penalty that comes back on the next purchase order you place. This would escalate as the average lead times increase. You could put different types of penalties in place based on lead times.

Building the appropriate penalties into a contract at the beginning of the supplier relationship helps protect everyone upfront in case issues pop up. When you don’t have these penalties built into your contracts and things start going poorly, you have no grounds to penalize anyone other than threatening to cut off business. Depending on the criticality of the supplier, this may be very painful.

Go Out to RFP

If the supplier relationship isn’t working, it may be time to consider supplier offboarding. If your contract allows for termination and you decide to go out to RFP to consider other partners, we recommend including the underperforming supplier. This allows the supplier to reevaluate and return to the negotiating table.

Price Increases Trigger a Bid Process

Often, especially in the current economy, you have a high-performing supplier who presents price increases. What should you do?

While inflation is happening and prices are rising, it may be advantageous to let the supplier know that you will accept price increase proposals but that your first move will be to take it out to bid to ensure the higher prices are accurate and can’t be beaten somewhere else. Doing so allows you to be fair with your vendors while still protecting your organization.

The supplier may come back immediately saying that it’s ok, the material did increase by X percent. Or their response may be to hold off on the price increase.

Remember, you need to be fair with your suppliers, but you also need them to understand that you will not blindly accept price increases.

Supplier Performance Management

Performance management is the process of analyzing and measuring supplier performance throughout the contract period to spot weaknesses and curb risks. Once you’ve worked with a supplier long enough and have enough data, you’ll want to meet with them every quarter to ensure business operations are running smoothly. 

Quarterly check-ins will help in tracking supplier performance and ensuring your supplier is meeting Key Performance Indicators (KPIs) as outlined in the supplier contracts and Statements of Work (SOW). 

Key Performance Indicators

Depending on your type of business, there are many different KPIs. Examples include:

Factors to Consider When Choosing KPIs

When selecting which KPIs to monitor, consider the following:

Meeting with Suppliers

Crucial to effective supplier relationship management is regular meetings to address account health, performance reviews, potential issues, and anything else relevant to the supplier relationship. These meetings can happen on whatever cadence best fits your business and should always have a predetermined agenda.

Questions to Ask in a Supplier Performance Review

Once you’ve determined the KPIs you’ll use to track and measure supplier performance, you can prepare for a performance review as the focus of one of your regular meetings. Whatever your supplier performance review process looks like, it’s essential that you develop a consistent and repeatable approach. Doing so will make sure that all of your suppliers are graded consistently against each other and through time. To ensure you’re getting the most out of the engagement, try asking the supplier to self-rate in different areas with questions that include:

And just as importantly, ask the reverse, “Are we being a good customer to you?”

Accountability for All

Ultimately, it’s not only about holding your supplier partners accountable but holding your organization responsible as well.

“One of the things I’m very passionate about is accountability for all. I don’t beat up suppliers,” says Danielle Salyers, 2nd Vice President of Strategic Sourcing at Allied Solutions. “That’s just not a methodology for success. I hold suppliers accountable, no exception, but I also hold my business just as accountable.”

When vendors see that, they’ll want to work with you because they know you’re an excellent customer to partner with.

Track and Measure Performance with Scorecards

Use supplier data analytics and reporting to ensure everything runs smoothly. For example, using supplier lifecycle management software and scorecards are valuable tools to help you track and measure supplier performance. When used consistently, scorecards allow you to objectively identify and resolve issues, control costs and build a mutually beneficial relationship with your supplier—particularly the ones who are strategic to your business.

Benefits of Supplier Performance Management Scorecards:

Scorecards can help you align your expectations and generate more value from your supplier partners. They offer an objective lens for assessing and tracking supplier performance by allowing you to:

5 Core Supplier Performance Criteria

Although there’s no one right way to build a scorecard, consider these five core criteria that every scorecard should include: 

To get the most from your supplier scorecards, keep these three things in mind:

Stellar Performance? Keep Going!

Good supplier performance management leads to ongoing collaboration and innovation. Seek suppliers you can have an ongoing partnership with rather than someone who is simply providing you with a product or service. 

“I’m looking for suppliers who want to partner with my organization and improve us. I want them to be as invested in our organization’s success as our employees are,” says Salyers. “A partnership mindset leads [procurement officers] to be most successful.”

You can continue building on the partnership when things are going well. Salyers adds, “For someone who’s performing well compared to other suppliers on scorecards, we’re more willing to cooperate when contract negotiations come around.”

Poor Performance? Now What?

But what happens when a supplier is not performing to your standards? You have to be able to swiftly identify poor performance and supplier risks and step in to mitigate any associated risks. Consider the following to guide you:

Increase the Frequency of Performance Reviews

For an underperforming supplier, you may want to turn up the frequency of performance reviews, but make sure that you allow enough time between reviews for the supplier to make the required changes. Performance reviews keep you informed about your supplier’s performance and let the supplier know you’re watching closely.

Create a Remediation Plan

Include hard performance metrics to measure against so you can specify exactly which areas need improvement, whether meeting SLAs, reducing response time, or improving customer support—and how much improvement is necessary before terminating the supplier contract. When a supplier is underperforming, remediation plans should be built into your regular meeting schedule.

Supplier Risk Management

Supplier risk management is the process of spotting, analyzing, and mitigating risks in your organization’s supplier base. We recommend that as you begin working with new suppliers, you define the risk. It’s essential to have the ability to actively monitor new and existing suppliers and to have a contingency plan in place to prevent supply chain backlashes.

It’s important to understand that if you’re willing to sever a relationship based on whatever risk topics you monitor, ensure those are included in the initial supplier contract. The contract will be difficult to break if you didn’t specify those risks upfront. 

Furthermore, ongoing communication amongst your business units so everyone is on the same page and understands that the implications of terminating a supplier relationship are extremely important. Before taking action, be sure to have all stakeholders in the room for that conversation.

“It’s important to understand the evolution of supplier risk, as the supplier relationship grows over time. As you layer different levels of products and services or engagement, you have to expand the scope as it applies,” says Conrad Smith. “This includes new services or completely offboarding a supplier you no longer work with.”

Automation can transform supplier risk management to give teams more time to focus on other matters. Graphite validates critical supplier data, automatically scores risk and due diligence data based on your organization’s criteria, and regularly monitors changes in supplier information. Whenever a supplier’s risk exceeds a pre-defined threshold, Graphite triggers an risk remediation workflow and alerts team members.

Supplier Offboarding

Perhaps you run a report and see your company hasn’t used a particular supplier in two years. It’s time to deactivate the account. Supplier offboarding removes access to your systems, data, and infrastructure when terminating a contract. 

Today, most companies don’t offboard suppliers with whom they no longer engage. But this makes your company vulnerable by leaving suppliers with access to sensitive information that can result in data breaches, compliance violations, and more. 

By creating a documented process that you can apply uniformly across your business, you ensure that suppliers you no longer use are properly offboarded. Use this checklist to help you take the right steps to secure and close the relationship:

Supplier Offboarding Checklist

Build Stronger Supplier Relationships

By setting the right parameters in place and properly segmenting your suppliers, you will better understand who your most important partners are. That way you can spend more time optimizing supplier relationships with those who add the most value to your business. When you take the time to understand each stage in your vendor lifecycle management and create a standard process to manage each phase, not only will you build stronger supplier relationships, but you’ll also mitigate risk, reduce costs, and add deeper business value. 

Level Up Vendor Management with Supplier Lifecycle Management Software

A reliable supplier lifecycle management software like Graphite Connect can help you simplify your procurement processes. An advanced network architecture helps you to eliminate tedious redundancies, mitigate supplier risk, and increase the impact of your procurement team. Explore how Graphite can help you manage your supplier base more efficiently throughout the entire supplier relationship and lifecycle management process. Request a demo today to see the full power of Graphite for yourself.