How poor supplier management can cost your business

Effective supplier management is crucial for businesses of all sizes. However, many companies underestimate its impact on their bottom line. Our research reveals that small and medium-sized businesses (SMBs) typically have nine times more suppliers than employees, presenting a significant management challenge. 

This ratio highlights the complexity of modern business operations and the need for streamlined processes. Let's explore how inadequate supplier management can lead to unnecessary costs and how implementing better practices can improve your business operations and financial health.

Understanding supplier management

Supplier management, also known as vendor management, involves selecting, working with, and evaluating the companies that provide goods or services to your business. It's not just about cutting costs; it's about building strong relationships that benefit both parties. This approach, often referred to as supplier relationship management, is key to long-term business success.

Effective supplier management encompasses various aspects:

• Vendor selection and onboarding

• Performance monitoring and evaluation

• Contract negotiation and renewal

• Risk assessment and mitigation

• Continuous improvement of supplier relationships

By focusing on these areas, businesses can create a robust supplier network that supports their growth and operational efficiency.

The impact of poor supplier management

Ineffective supplier management can negatively affect your business in several ways:

1. Unnecessary Costs: Many businesses only actively use about a quarter of their suppliers, wasting resources on managing inactive relationships. Our analysis suggests that this could result in potential management costs of over £964,440,000 across SMBs.

2. Increased Fraud Risk: A poorly managed supplier list can make your company more vulnerable to fraudulent activities. This is particularly true for suppliers who have never been used or paid, as they may gain access to sensitive data without proper vetting.

3. Inefficient Processes: Manual handling of supplier-related tasks is time-consuming and prone to errors. For instance, manually processing invoices can lead to delays, mistakes in data entry, and missed payment deadlines.

4. Missed Savings Opportunities: When different departments work with the same supplier independently, you might miss out on bulk discounts or better rates. This fragmented approach to purchasing can significantly impact your bottom line.

5. Cash Flow Challenges: Poor supplier management can lead to inconsistent payment practices, potentially straining relationships with key vendors and affecting your ability to negotiate favourable terms.

Best practices for effective supplier management

To improve your supplier management and reduce costs, consider these strategies:

1. Regular Supplier Reviews: Annually assess your supplier list to remove inactive vendors and consolidate spending with preferred partners. We recommend reviewing your supplier list every 12-18 months to remove any supplier that hasn't been used or paid within that time.

2. Automation: Implement a system that automates tasks like invoice processing to save time and reduce errors. Automated procurement platforms can significantly reduce the risk of human error and streamline your processes.

3. Strategic Payment Methods: Choose the most cost-effective payment method for each supplier relationship. For recurring payments over £500, invoicing might be more cost-effective, while card payments are ideal for one-off or smaller recurring expenses.

4. Centralised Spend Visibility: Use a platform that gives you a clear overview of all company spending across suppliers. This visibility is crucial for identifying cost-saving opportunities and making informed decisions.

5. Robust Supplier Onboarding: Implement a systematic vendor onboarding process with automated rules and cross-team collaboration to minimise risk and ensure compliance.

Active vs. passive spend management

There are two main approaches to managing business spending: active and passive. Passive spend management often leads to fragmented purchasing and missed savings opportunities. It typically involves letting individual employees handle their own expenses without much oversight.

In contrast, active spend management involves taking control of all company spending and leveraging your collective purchasing power for better deals. This approach allows finance teams to consolidate payments and negotiate as a single entity, securing more favourable rates and terms from suppliers.

Benefits of active spend management

Implementing an active spend management strategy can offer numerous advantages:

1. Time Savings: Automation frees up your team to focus on more important tasks. For example, automated invoice processing can significantly reduce the time spent on manual data entry and document transfers.

2. Improved Accuracy: Automated systems reduce human error in data entry and invoice matching. This is particularly important for avoiding duplicate payments and ensuring compliance with tax regulations.

3. Better Cash Flow Management: Gain visibility into upcoming payments for more effective financial planning. A spend management platform can identify when invoices are due and schedule payments automatically, optimising your cash flow.

4. Enhanced Supplier Relationships: Consistent, timely payments and clear communication build stronger partnerships. This can lead to better terms, priority service, and increased flexibility from your suppliers.

5. Data-Driven Decision Making: Access to comprehensive spending data helps identify cost-saving opportunities. This insight allows finance teams to optimise supplier selection and negotiate better contracts.

6. Improved Compliance: Automated systems can help ensure that all purchases comply with company policies and regulatory requirements, reducing the risk of non-compliance issues.

7. Easier Audits: With all spending data centralised and easily accessible, preparing for audits becomes much less stressful and time-consuming.

Implementing active spend management

To shift from passive to active spend management, consider the following steps:

1. Assess Your Current Processes: Evaluate your existing supplier management and spending practices to identify areas for improvement.

2. Choose the Right Tools: Invest in a comprehensive spend management platform that offers features like automated invoice processing, virtual cards, and real-time spending visibility.

3. Train Your Team: Ensure that all employees understand the new processes and the importance of adhering to spend management policies.

4. Start with Key Suppliers: Begin by implementing active spend management practices with your most important or highest-spend suppliers, then gradually expand to others.

5. Regularly Review and Optimise: Continuously monitor your spend management processes and make adjustments as needed to maximise efficiency and savings.

Poor supplier management can significantly impact your company's finances through hidden costs, inefficiencies, and missed opportunities. By shifting to active spend management and using modern tools, SMBs can streamline their supplier relationships, reduce costs, and gain better control over their finances.

Investing in effective supplier relationship management is not just about cutting costs – it's about building a more resilient and competitive business. As the business landscape evolves, companies that excel in managing their suppliers will be better positioned for long-term success.

By embracing active spend management practices and leveraging technology, businesses can transform their supplier management from a potential liability into a strategic advantage. This approach not only improves financial health but also enhances operational efficiency, allowing companies to focus on growth and innovation in an increasingly competitive market.