Supplier management includes all activities aimed at exploring, initiating, maintaining and further developing partnerships with suppliers. It also includes building and expanding a relationship. One concept that is part of supplier management is contract management. This focuses on managing agreements between an organization and a supplier. Contract management also focuses on intensive sustainable cooperation with suppliers, where mutual understanding, trust, open communication and profitability are central to a partnership. Entering into a contractual cooperation creates a mutual dependency. Both the organization and the supplier need each other to accomplish the agreed-upon work.

Factors in supplier management

Within supplier management, there are three factors that should be included in the process:

• Progress reports

Progress reports compiled from contract administration serve as the basis for evaluating improvement programs.

• Benchmarking

Benchmarking is a means of verifying that contract arrangements are market-based.

• Regular consultation

Regular consultation takes place to monitor the mutual cooperation and adjust where necessary to achieve progress. Both progress reports, benchmarking and regular consultation can improve the performance and agreements with the supplier. Once a contract between organization and supplier is terminated, the entire procurement process in a new collaboration starts again from the beginning. The experience gained from previous collaborations can be used in the creation of new contracts.

Example supplier management

Practice shows that contractual collaborations can be unintentionally disrupted because both organization and supplier do not handle each other well. Supplier output is determined primarily by relationship quality and to a lesser extent by such things as regulations, programs of requirements and contracts. There are a number of factors that determine relationship quality in purchasing and sales. The absence of these factors can lead to the following obstacles in contract relationships:

• An organization wishes to purchase products as cheaply as possible. A supplier wishes to be able to sell products for the maximum price. This makes it difficult to reach a mutual agreement and results in a conflict of interest;
• Suppliers promise to bring in many orders and make customers feel that their needs are completely understood. However, there is no assurance that promises made can be kept;
• Risks and setbacks are passed on to the other;
• Supplier pro-activity decreases when a contract is won.