Supplier Management
In Chapter 5, we examined the contribution to the service made by external suppliers. The agreements that govern what level of service is provided by these third-party suppliers are called underpinning contracts. As we saw in that discussion, failure by a supplier may result in an impact on the service that the service provider delivers to their customer.
Large service providers may have dozens or even hundreds of supplier contracts. The elements of the service that these contracts provide are often critical to the overall service delivery. It is essential, therefore, that the service provider obtains the level of service specified in the underpinning contract and is sure that the contracts it has with its suppliers represent “value for money.”
ITIL defines supplier management as the process responsible for obtaining value for money from suppliers, ensuring that all contracts and agreements with suppliers support the needs of the business and that all suppliers meet their contractual commitments.
The supplier management process describes best practices in managing suppliers to ensure that the services they provide meet expectations. It is included in the design phase of the service lifecycle, because it is important that this aspect is considered while the service is being designed. The type of supplier relationship will be part of the strategy phase, and a close relationship with suppliers will be required for a successful service transition. Once the service is operational, the day-to-day delivery against the contract must be monitored and managed, and should there be any issues, the improvement plan will be the responsibility of continual service improvement.
The Purpose and Objectives of Supplier Management
The purpose of supplier management is to ensure that suppliers provide value for money. By managing suppliers, the service provider can ensure the best delivery of service to their customer. Managing suppliers ensures that the necessary contracts are in place and enforced.
Ensuring that suppliers deliver the service paid for is a key objective of this process. It also ensures that the cost of the contract is controlled, by using objective selection criteria when choosing these suppliers.
Care must be taken to ensure that the terms of the contract are in alignment with the business requirement and underpin the service level targets.
- Renegotiate the SLA with the customer to be a 12-hour fix, thus aligning the business requirement with the contract and removing the need for the service provider’s own staff to swap out the equipment.
- Renegotiate the contract with the supplier to be an eight-hour fix, again aligning the business requirement with the contract and removing the need for the service provider’s own staff to swap out the equipment.
- Renegotiate or replace the contract with a much cheaper service, where faulty equipment is picked up weekly, repaired, and returned. Once the equipment was swapped out, it made little sense to have the supplier on a 12-hour fix, because the business requirement for an 8-hour fix had already been met.
Supplier management is involved in selecting suppliers and agreeing to the terms of the contracts. It is also responsible for the ongoing relationship with suppliers, including monitoring and managing their performance through regular reviews. These reviews are very similar to SLA reviews, but in supplier management the service provider is the customer.
Supplier management will draw up a supplier policy and keep all the information regarding suppliers and contracts in a supplier and contract management information system (SCMIS). The SCMIS forms part of the overall service knowledge management system.
What Is Covered by Supplier Management?
Supplier management’s scope includes all the suppliers and contracts that are required in order to deliver the service to the provider’s customer. It is important to identify which suppliers are particularly critical in delivering the service and ensure that they receive the appropriate attention. Some such suppliers will provide a critical element, such as network connectivity. Other suppliers may not appear to be as critical, but they may provide elements of several services, so the combined impact of poor service across several services could be extremely detrimental.
Many suppliers can be managed at the operational level, with service reports and reviews to ensure that they are delivering to the contract. Key suppliers will work closely with the business and the service provider, understanding and supporting the business and service strategy. We will look in more depth at different categories of supplier later.
As shown in Figure 6.7, the process includes categorizing suppliers and assessing and managing any risks that are identified. (The decision to award a contract to a new, untried supplier may result in a risk that the supplier may not be able to fulfill the contract, for example.) The selection of suppliers, following an objective assessment, and the negotiation of the contract are also included.
FIGURE 6.7 The supplier management process
Based on Cabinet Office ITIL® material. Reproduced under license from the Cabinet Office.
During the lifetime of the contract, supplier management will manage the supplier performance and any disputes that arise and will renew or terminate the contract at the end of its term, as appropriate. Where improvements need to be made, supplier management will identify them and ensure that they are entered in the continual service improvement register. (For more details on the CSI register, see Chapter 13.)
As part of the overall process, supplier management will draw up standard terms and conditions and contract templates. There will also be a supplier policy document that is produced and maintained as part of this process. Supplier management information is kept in the SCMIS. Throughout the process, the supplier manager will work within the overall financial and procurement framework in place within the organization.
Supplier Categorization
As discussed, some suppliers are more important than others. Some offer a specialized service and would be hard to replace. In some cases, the technical strategy of the service provider is largely dependent on the technical developments delivered by a particular supplier. Other suppliers provide standard services and could be replaced with little or no impact on the business, should another supplier offering better value be found.
It is an essential part of supplier management to devise a method of categorizing suppliers so that the appropriate time and attention is allocated to each—key suppliers are prioritized over less important ones. One of the best ways of categorizing suppliers is based on assessing the risk and impact from using the supplier and the value and importance of its services to the business. As shown in Figure 6.8, this assessment results in suppliers being assessed as strategic, tactical, operational, or commodity suppliers.
FIGURE 6.8 Supplier categorization
Based on Cabinet Office ITIL® material. Reproduced under license from the Cabinet Office.
- Suppliers who are assessed as high value and high risk are strategic suppliers. The relationship between the business and a strategic supplier is one of “partnering.” Both parties share confidential information to enable long-term cooperation to take place. These relationships are key to achieving the business objectives and, as such, will be managed by senior levels of management through regular meetings, strategy discussions, and improvement plans. An example of a strategic supplier may be one that is providing cutting-edge technology to provide its customer with a competitive advantage. For the customer to develop the new product, the supplier may need to provide information that it would normally keep confidential, such as the strategy for developing the technology. The customer similarly shares information regarding their strategy and plans. This cooperation enables the customer to benefit from new products before they are announced, and the supplier benefits from having a real case study of the new technology in use to use as marketing material when the product is launched.
- Suppliers assessed as medium value and medium risk are tactical suppliers. The relationship with them, although not as critical as with strategic suppliers, involves significant commercial activity. Middle-level managers will be responsible for managing these relationships through regular service reviews. Examples of this kind of supplier might include a server hardware maintenance organization.
- Operational suppliers are managed by junior managers through regular reviews. Failure by these suppliers would have relatively low impact. An example of such a supplier might be a PC or printer repair service.
- Low-value, low-risk suppliers of standard services, which can be easily sourced elsewhere, are commodity suppliers (for example, paper or toner suppliers). These require little management; a supplier that fails to meet the contract will be replaced by another that can.
From this, you can see that supplier management must have a clear understanding of how each supplier’s services underpin both the SLA and the overall business objectives. Sufficient time and attention must be given to the more important suppliers, with little time wasted on the least important. With many organizations outsourcing elements of their service provision, the role of managing suppliers effectively has never been more essential.