Size isn’t everything when choosing suppliers.
There’s a poignant scene in The Lord of the Rings in which the Elven Queen Galadriel turns to Frodo Baggins, a frightened young hobbit, and gently reminds him that ‘even the smallest person can change the course of the future’.
Against all odds, and to the dismay of many powerful leaders in Middle-earth, Frodo is entrusted with the monumental task of destroying the One Ring within the fires of Mount Doom. His relentless determination, unorthodox methods and the faith of his closest friends all contribute to his ultimate success.
What can procurement take away from this? Most importantly, when it comes to selecting suppliers, size isn’t everything – something any one of the 30.2 million small businesses operating in the United States could tell you.
Traditionally, big works with big. But companies today are recognizing that they are selling themselves short by restricting their supply base to large organisations.
Benefits of working with SMEs and start-ups include:
- Small businesses are more agile and innovative because they are less confined by rigid or bureaucratic processes.
- Improved sustainability and added social value, which benefits the local economy. This is because SMEs are likely to have a good understanding of the community in which they operate.
- Better value for money as a result of lower admin costs and increased flexibility.
- Capacity to deliver highly specialised solutions.
- Closer buyer-supplier relationships.
- Increased efficiency in terms of product cycles and the provision of services.
- Improved supplier diversity: 45% of US-based SMEs are minority-owned businesses.
Despite the many advantages, some procurement leaders remain wary of partnering with smaller businesses due to increased risks. Others simply struggle to effectively build and nurture these partnerships.
Here are my 4 tips for procurement to build successful relationships with SMEs and start-ups.
1. Build close relationships with your suppliers
One of the many benefits of working with smaller vendors is that it’s easier to build meaningful, lasting relationships – often directly with the CEO. These drive innovation, reduce cost and mitigate risk.
Procurement professionals should take advantage of this through regular communication and collaboration with suppliers, particularly in the pursuit of innovation.
Negotiations, contracting and pricing are a necessary (and important) part of any buyer-supplier relationship. But meeting your suppliers in person to seek innovations will drive value for your organisation.
In reality, you might be surprised at how much additional value a supplier can contribute when you abandon standard approaches to SRM and commit to listening and learning.
2. Pay your suppliers on time
According to a recent study, 11% of all invoices sent by SMEs are not paid on time, which comes at a cost of over $1 trillion each year. On top of this, the research found that 7.5% of all SME invoices are written off as bad debt.
SMEs are dependent on good cash flow. Many fail as a direct result of clients delaying payments. So paying your suppliers on time should be an absolute priority for procurement professionals.
Similarly, procurement should be cautious about driving harsh payment and contractual terms with small businesses that may be unequipped to negotiate with large corporations. Remember SMEs are likely to deliver long-term value in other ways.
3. Be flexible
In order to prioritise innovation and other benefits associated with SME partnerships, procurement teams must be willing to adapt their processes to be more accommodating.
Many corporations are accustomed to only dealing with other big companies. This leads to the assumption that only large suppliers are capable of meeting demands and managing risk.
In reality, as long as suppliers are financially secure and can deliver your requirements, your flexibility in accommodating them is the more important factor.
Procurement teams can do this by:
- reducing contract complexity
- limiting turnover thresholds and removing high insurance and health and safety requirements
- sharing risk appropriately between buyer and supplier
- keeping KPIs simple, concise and supportive.
4. Mitigate potential risks fairly
There’s no question that there are risks associated with working alongside SMEs and start-ups. But with careful consideration and forward planning, these can be mitigated. And without negative impacting prospective suppliers to a point where they are compelled to walk away.
For example, an SME might present a higher financial risk than a big supplier. These concerns can be alleviated by requiring financial due diligence and detailed discussions surrounding the company’s finances to ensure complete transparency.
Similarly, it’s worth asking for an overview of the supplier’s recent and ongoing projects, including a first right of refusal to buy the company should it go bankrupt. Commit to regular meetings and use incentives instead of penalties.
So, the next time you’re approached by an SME or start-up, don’t reject them on the assumption that they will be too small to meet the needs of your organisation.
Just like Frodo Baggins and the Fellowship of the Ring, an SME just might turn out to be the most valuable partnership you ever create.
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