Professional supplier management is becoming increasingly important in companies - also due to the German Supply Chain Act, which will come into force in 2023. This is because globalization and ever-increasing mass consumption are contributing to the topic becoming an increasingly explosive issue in business and politics. The global pandemic and the resulting supply bottlenecks also make consistent supply chain management essential.

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A company's CSR profile is closely linked to the activity of its supply chain. This is even more true in light of globalization in business and industry. Business partners today must take responsibility in sustainability in their national and international relationships and fulfill their duty of care. In concrete terms, this means taking greater account of ecological, economic and social aspects. In his article for the German trade journal "Industrieanzeiger," Altan Dayankac, an expert in sustainability, concludes: "CSR supplier audits are a must."

 

Managing suppliers sustainably

Reliable suppliers and partners make a significant contribution to customer satisfaction and the success of your company. Today, it is no longer enough to look only at your own quality capabilities. The quality of products and process chains can be significantly increased if both sides in the supply chain work together in a spirit of partnership and trust. A balanced supplier structure prevents supply bottlenecks, while high delivery capability and adherence to delivery dates stabilize the company's own manufacturing process. The correct selection, evaluation and qualification of suitable suppliers thus becomes a decisive competitive factor.

However, the implementation of systematic supplier management is still a challenge for many companies. Increasingly, there are difficulties with manufacturing and delivery processes as well as delayed delivery times. This has a negative impact on customer and supplier relationships and ultimately on the company's success. More than ever, it is therefore imperative for most companies to develop their supplier base sustainably and to coordinate it professionally.

A management system can help you structure and manage your supply chains with partner companies and suppliers. In the following, you will learn, among other things, how sustainable supplier management works, how you can use it to increase your sustainability and optimize your value chain.

 

What is supplier management? A definition

Strategic supplier management is an important success factor in any modern corporate culture. On the one hand, this includes the management of all measures for controlling, planning and regulating the supplier base. On the other hand, it also includes a strategic implementation of the relationships between suppliers and your company.

The goal is to establish solid, long-term partnerships with the most efficient suppliers in order to secure your own competitiveness.

The idea originally comes from the procurement process, i.e. the supply of a company with various materials, semi-finished and finished products and services from external sources. These materials and services are available to you under optimum conditions thanks to an efficient procurement process. In this way, your company can reduce costs and risks, while at the same time increasing the quality of the procurement objects.

When you start with supplier management, the procurement process therefore forms a major task focus. This is continuously developed over time and the relationship between suppliers and your company is actively shaped. In this way, you can create added value for both sides early on and cultivate good communication.

Because finding the right suppliers is a strategic decision that must be thoroughly considered, sustainable supplier management goes one step further.  After all, a good supplier contributes a great deal to customer satisfaction and thus to the success of your company through its performance and also its behavior.

However, as the competitive pressure is continuously increasing due to rapidly growing globalization, the range of tasks that fall under the area of supplier management is also growing. Supplier management is therefore an overarching term that encompasses several measures that facilitate the handling of suppliers.

The main objective is to establish a good partnership with your suppliers. They should also be able to contribute to various innovative processes. However, this also presents suppliers with new challenges. They occupy an active role and must demonstrate characteristics such as flexibility, quality and service in order to stand out from the rest.

 

Goals of supplier management

Consistent supplier management can create completely new forms of cooperation between suppliers and your company. This is an important success factor in view of the constant changes in the general conditions in the procurement process.

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Also interesting: Supplier evaluation under sustainability aspects - The six most important questions.

One thing is for certain: organizations are becoming more and more dependent on products that have to be delivered on time in order to maintain normal business operations. Increasing customer demands, the endless possibilities of the Internet and the expanding internationalization of global markets therefore require the early integration of external suppliers into processes.

The economic success of your organization is therefore largely dependent on professional supplier management. The goals you pursue with this are both operational and strategic: 

Operational goals

In operational supplier management, the aim is to minimize procurement costs and thus increase supplier performance. The basis for this is a detailed supplier evaluation, on the basis of which a comparability of your supplier base becomes possible in the first place. In this way, you can expand and improve relationships with your top suppliers and close down supplier relationships that are not working.

By concentrating on fewer suppliers, bundling potentials as well as lower administrative costs become apparent. You get accurate information about the different facets of each supplier's performance. In this way, you can improve your negotiating position.

Strategic goals

The strategic goals focus on optimizing the supplier base. Based on procurement strategies, you define precise measures for their development in order to increase the quality of supply performance and reduce procurement costs. For example, you can reduce supply risks in purchasing by improving cross-company processes.

If you want to reduce supplier dependencies, you can also start building alternative suppliers while regulating procurement volumes. On the other hand, you should secure relationships with hard-to-replace suppliers through integrative measures in order to keep your company competitive in the long term.

 

Supplier management along CSR criteria

Today, however, there is also an obligation to supplement strategic purchasing with an element of social sustainability. If companies lack an understanding of the sustainable structure and development of the supply chain, then another decisive factor is missing today in the selection of suppliers for the procurement of products and services. As an aside, the agility to add Corporate Social Responsibility (CSR) criteria to supplier management is also an indicator of the capacity for innovation in an organization.

For companies tasked with ensuring sustainable procurement, there are three possible reasons to review supplier sustainability performance:

  • Because they want to work only with CSR-compatible suppliers on their own initiative and on the basis of your own code of conduct
  • Because their own interested parties want to ensure compliance with the essential requirements for social responsibility and respect for human rights in the supply chain
  • Or because it is politically (legally) required to do so and there is, for example, a reporting obligation.

 

The German Supply Chain Act - a step in the right direction

Since mid-2021, the so-called Supply Chain Act has created a legal framework to improve the protection of environmental, human and children's rights along global supply chains. Unfortunately, many companies in Germany still violate fundamental human rights and/or damage the environment in their global business operations - without having to fear any consequences. Until now, those affected have had little opportunity to sue for damages in German courts.

The German Supply Chain Act on Corporate Due Diligence, or Supply Chain Act for short, is now intended to put an end to this. It was passed in June 2021 and will come into force in 2023. Initially, companies with 3,000 or more employees will be required to act, and from 2024, companies with 1,000 or more employees will be required to act. The aim is to make companies that source intermediate goods or finished products abroad also responsible for the production processes and working conditions at their suppliers.

In concrete terms, this means that from now on, companies must identify risks of human rights violations and environmental destruction by direct suppliers and, if necessary, also by indirect suppliers, take countermeasures and document these to the German Federal Office of Economics and Export Control (BAFA). They must trace back grievances and prevent and remedy them from the outset as soon as they identify them. In the event of violations, there is the threat of a fine or compensation for damages from competitors.

The law is undoubtedly a major step forward for the protection of human rights and the environment, because it:

  • Imposes environmental obligations on companies.
  • Regulates sound regulatory enforcement, according to which an authority monitors compliance with due diligence obligations and sanctions non-compliance. Companies should thereby change their behavior and avoid future damage.
  • Introduces a paradigm shift in Germany: Away from purely voluntary corporate social responsibility to binding human rights and environmental requirements for companies.
  • Sets out due diligence requirements that are based on the UN Guiding Principles on Business and Human Rights (UNLP) and basically cover the entire supply chain.

In addition to the German supply chain law, the EU Justice Commission is also planning a European supply chain law. This EU law should combine the best of member states' due diligence laws, for example the definition of the entire value chain from the Netherlands, strong regulatory enforcement from Germany and civil liability from France.

 

Sustainable supplier management

Also as a result of the Supply Chain Act, the issue of sustainability in procurement is now of strategic importance to many companies. Against the backdrop of global warming, increasing environmental changes and the general scarcity of resources, customers now also attach great importance to a sustainable orientation of work processes, which is also reflected along the supply chain. The task of sustainable supplier management is therefore to consume only the amount of resources that is absolutely necessary - without harming future generations.

  • The modern understanding of sustainability is based on the principle of a three-pillar model comprising ecological, economic and social sustainability:
  • Ecological sustainability pursues the goal of conserving the environment as well as natural resources as best as possible. Environmental damage should only be to the extent that it can be replaced. Thus, companies, their suppliers and also the countries in which they are based should make conscious use of finite raw materials, water and energy.
  • Economic sustainability calls for good business practices in order to generate sufficient profits. However, maximizing profits must not be the only goal of sustainability. Rather, long-term strategies must be pursued that promote fair trade and help improve the quality of life. Thus, the aim is to promote a society that - economically speaking - does not live beyond its means in order to protect future generations.
  • Social sustainability puts people at the center. It calls for action oriented toward the common good in the form of fair payment models and the implementation of the different interests of employees. This social pillar of sustainable supply management also has the task of resolving conflicts and tensions in a peaceful manner.

For companies that want to remain successful in the long term, it is elementary to design their supply management in compliance with these ecological, economic and social aspects. However, in times when companies are becoming more dependent on their suppliers, these processes face major challenges. For example, your company's sustainability is directly correlated with the fact that many products have increasingly shorter life cycles. In addition, innovations are being brought to market at an increasing rate, which requires continuous development and research.

As a result, a company can only be as sustainable as its external suppliers and partners. Here, sustainability at all levels along the supply chain is crucial to ensure competitiveness.

 

The supplier management process at a glance

The ultimate goal of supplier management, then, is to increase collaboration with suppliers. This not only enables you to work more sustainably, but also to develop, procure and manufacture your products or services better, faster and at lower cost.

To achieve this, it is essential to identify and maximize the potential for success between you and your suppliers. In order to identify and eliminate opportunities and risks at an early stage, a systematic approach has proven its worth.

A six-step supplier management process enables you to achieve demonstrable profitability successes - in particular by improving product and service quality:

 

Supplier identification: To ensure that you can implement the supplier management process as effectively and efficiently as possible, it is important to have a sound statement about your company's products and suppliers at the outset. You must therefore analyze, structure and classify the procurement goods and procurement sources in advance.


In this way you can create transparency concerning your materials and suppliers. This, in turn, lets you derive a strategy and work out corresponding action alternatives, for example, to assess the use of IT tools that are fit for purpose and to transparently define the strategic behavior towards the suppliers.

 

Supplier evaluation: Here, you evaluate your suppliers according to strategic and operational criteria that have been defined in advance together with other departments such as development, purchasing, quality, production or logistics.

 

Supplier classification: The results from the supplier evaluation are important for supplier classification. Here, a hierarchical structure of all potential and already involved suppliers is created. This forms the basis for a new supplier admission or the retention of a supplier in the network.

 

Supplier development: You develop existing suppliers further or establish new suppliers. Here, you can derive a statement or estimate of the temporal, monetary and capacitive scope of a further development of suppliers.

 

Supplier selection: The final decision on the inclusion or retention of a supplier is made during supplier selection with the participation of all involved departments.

 

Supplier integration: The sixth and final phase within the supplier management process considers the integration of suppliers into your internal company network. Here you define and implement measures for optimized communication, involvement in internal business processes, and transparent controlling of hard and soft facts.

The simultaneous use of preventive risk management in the implementation of the supplier management process enables you to identify critical factors such as start-up problems with new developments, supply bottlenecks or quality problems in good time and take countermeasures at an early stage.

 

Management systems in supplier management

Risk prevention is an important part of your supplier management. If the number of your suppliers is still manageable, you can assess the risks relatively well. But with many different suppliers, global supply chains and complex corporate structures, this is hardly possible without a professional strategy. Only an approach tailored to your specific processes can keep potential risks under control. Efficient risk management has proven its worth in this respect:

  • Identify critical suppliers: The first and certainly most important step in setting up a risk management system is to identify critical suppliers. Here, you take a close look at your entire supplier base and consider each individual supplier on a company-specific basis. Do not evaluate suppliers solely on the basis of purchasing volume.
    Even a "small" supplier with a comparatively low purchasing volume can have a high potential for damage. Here you should clarify how dependent your company is on the respective supplier.
  • Identify alternative suppliers: Are there alternative suppliers if a supplier fails? Identify all suppliers with whom a "single source relationship" exists. After all, this is where your dependency is greatest and it can take a long time to find a replacement. Filter out critical suppliers in this way and classify them as critical, medium-critical and highly critical.
  • Classify risk situations: Once you have identified your critical suppliers, you need to classify the risk of failure of these suppliers such as financial situation of the company, location or sub-supply chains. For a comprehensive supplier assessment, your internal knowledge from purchasing should be incorporated, but also external information such as data from credit rating agencies.
    Define strategies and measures: To be able to react quickly to changes, you should introduce an "alert function" for which you define strategies and targeted measures in advance. One approach could be to identify a replacement supplier for critical suppliers, for example.
  • Monitor the success of the risk assessment: Supplier risk assessment is not a one-off project that you simply complete at some point. Rather, supplier risk management is an ongoing process that requires regular monitoring. Develop your own KPIs and review them at regular intervals. Implement control and reporting measures as appropriate. This will make your current risk situation measurable and traceable.

Once you have introduced such a system, it will also reduce the risk of finding new suppliers. This is because they are quickly classified accordingly. This makes it possible to check whether a supplier meets your requirements in terms of technology or quality and the acceptable risks.

 

Conclusion: Optimizing the value chain through supplier audits

Supplier audits have become an important component of sustainable supplier management. Such an audit supports you in implementing uniform corporate guidelines and creates transparency along the entire supply chain. With a supplier audit by DQS, you can quickly identify risks and opportunities within your organization and present them transparently. This stabilizes your internal processes and can sustainably improve the future viability of your company.

DQS has decades of experience in auditing processes and certifying management systems. Industry-experienced auditors from the worldwide DQS network provide you with value-added insights into your sustainable supplier management.

Our audit not only serves to evaluate the technical and organizational performance of your external service providers, but also to illustrate compliance with agreed processes and rule-specific requirements.

Also the topic Corporate Social Responsibility (CSR), i.e. the commitment to economic task of the auditor to create a reconciliation for the important and indispensable sustainability aspects of your company and the processes of your suppliers. For this purpose, we design instruments, criteria and procedures that are individually tailored to your company.

 

DQS: Simply leveraging Quality.

As an internationally recognized certifier for management systems and processes, DQS audits on more than 30,000 audit days per year. Our claim starts where audit checklists end: Take us at our word! We look forward to talking to you and will be happy to show you what the performance and quality of our audits are based on. Namely on

 

  • Competent auditors with integrity and industry experience
  • Tailor-made solutions that are appropriate for your organization and your management system
  • Targeted identification of potential weaknesses and risks
  • Objective, comprehensible results and substantial decision-making aids
  • Internationally recognized certificates with high market acceptance
  • The follow-up of audit/analysis results including effectiveness checks of measures taken
  • Individual development and creation of criteria catalogs and evaluation systems
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DQS Supplier Audits

Our supplier audits focus on the question: What do the market, customers and your interested parties demand from you in terms of sustainability? Find out. Free of charge and without obligation.

Author
Altan Dayankac

DQS product manager and expert on numerous sustainability, climate, environmental and occupational safety topics. Altan Dayankac also contributes his expertise as an author and presenter on environmental and occupational health and safety committees, and at numerous professional events.

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<p>DQS standard expert for environmental management and occupational safety</p>