Supplier relationships can make the difference between your business’s success or failure. Procurement typically invests heavily at the start of the relationship, but supplier relationship management is work that never ends.
Most enterprises lose 8.6% of contract value after signing. Preserving contract value is worth the effort, but when supplier relationships experience friction, businesses aren’t sure what happened or how to fix it.
Let’s explore how to improve supplier relationships from the bottom up with contract compliance audits.
Why Supplier Relationships Become Strained
When supplier relationships become strained, the root cause is almost always trust (or lack thereof).
Trust and transparency are abundant when a supplier relationship is thriving. Both parties go the extra mile to ensure success. When a relationship is deteriorating, trust has usually been eroded by challenges such as:
- Unsustainable economics
- Changes in processes
- Unexpected cost changes
- Quality issues
- Missed deadlines
- Miscommunication
If issues go unaddressed, they can start to fester. Unresolved trust issues cause resentment and negative feelings to build. One or both parties stop accommodating each other, feeling like they’re being taken for granted, and no one wants to go the extra mile.
This brings you to a crossroads—either repair the root issues or risk damaging the relationship.
A contract compliance audit is a critical first step to restore transparency and improve supplier relationships. While establishing transparency can be uncomfortable, a foundation of trust is critical for building sustainable relationships.
How to Improve Supplier Relationships with Contract Compliance Audits
Supplier relationships come with a built-in rulebook: the contract. Contract compliance audits compare actions with contract terms, relying on facts, not feelings, to restore transparency and mutual accountability. This process addresses and resolves conflicts by putting all issues on the table.
By cutting through the noise and laying out the facts, audits pave the way to rebuild trust and start fresh.
“Contract compliance audits are like marriage counseling for supplier relationships.”
Once audits clear the air, they also bring many benefits that strengthen supplier relationships.
Mutual Benefits of Contract Compliance Audits
While often carrying negative connotations (just like marriage counselors), contract compliance audits are mutually beneficial when performed correctly:
- Less risk: Adhering to contract terms protects everyone involved. Doing things that aren’t in the contract can expose both parties to unnecessary risk.
- Smoother processes: Audits can help find ways to do things more efficiently.
- Business security: Agreeing on transparent and sustainable pricing means that the relationship can maintain longevity.
- Fewer problems: Audits spot potential issues before they snowball. Addressing pain points quickly avoids unintended consequences and benefits all parties.
- Improved governance: Regular audits foster open communication and alignment between suppliers, business partners, procurement, and finance.
While the benefits of contract compliance audits are clear, the next step is to ensure these advantages are realized through effective monitoring and evaluation of the contracts.
Measuring & Incentivizing Supplier Performance in Contracts
Evaluating a relationship’s performance requires clear metrics, but there’s no one-size-fits-all approach. Your KPIs should reflect what matters most to your success—speed, cost, accuracy, or quality. Communicate these metrics to your supplier so they can prioritize accordingly.
More importantly, you must be able to measure and track these KPIs regularly. Otherwise, they don’t serve a purpose in your contract. KPI language is often ambiguous and subjective. Use clear, measurable terms to avoid misunderstandings. Communicate how often you’ll review these KPIs and encourage your vendors to review you similarly.
How to Address Non-Compliance Without Damaging Supplier Relationships
When non-compliance is identified in a contract audit, it’s often unintentional actions or mistakes that can be resolved. Unfortunately, research shows that enterprises in the US are more likely to terminate a contract or re-source to another supplier than repair a relationship when faced with a non-compliance issue, even though that may cost them more—likely due to the perceived hassle of dispute resolution.
Frame these non-compliance issues as opportunities to learn and optimize the relationship instead of causing friction. It’s normal for processes, people, and relationships to evolve. However, if processes and contracts become misaligned, then governance suffers. The crucial next step is to evaluate what changed and why so that change can occur within a proper governance framework.
When a relationship or process changes, you have two options:
- If it’s for a positive reason, you must change the contract to match the new process
- If it’s an unwanted change, you must alter the process to align with the contract
Unfortunately, resolving a dispute or non-compliance issue can be challenging if the supplier relationship is strained. That’s where a contract compliance auditor can help. They act as a neutral third party to evaluate the issue and facts unbiasedly.
See them as partners, not suppliers
Transactional supplier relationships tend to erode the second you encounter supply chain disruptions. So, it’s critical to establish collaborative partnerships with your suppliers to protect your business and establish deep, meaningful relationships.
Many procurement leaders are getting squeezed between internal cost pressures and the desire to maintain supplier relationships, but these two priorities are interconnected. Inadequate supplier relationship management can cost up to 75% of sourcing savings within 18 months.
Investing in supplier relationships through strategies like improved onboarding processes, regular contract audits, and increased collaboration brings big benefits.
- Top-performing procurement teams that prioritize supplier relationships enjoy 35% more collaboration and 58% higher supply chain visibility than their peers
- Engaged suppliers provide more accurate information, reducing costs associated with errors
- Investing in existing relationships helps retain suppliers, avoiding the disruptive and costly process of replacing them
The bottom line? Suppliers whose relationships are proactively being managed are more likely to go the extra mile, work together, be more transparent, and share new, innovative ideas.
3 More Strategies to Improve Supplier Relationships
1. Pay your suppliers on time.
Yes, this seems obvious, but it’s an ongoing issue. A 2023 report found that 53% of the total value of B2B invoices were overdue. Not paying your suppliers according to agreed payment terms can significantly strain the relationship. The cash-flow benefits companies realize from delaying supplier payments are often more than offset by hidden supplier cost increases or the opportunity cost of missed partnership opportunities.
Many procurement teams never see an invoice after a supplier is onboarded, so you may not even know that suppliers within your vertical are waiting to get paid. That’s why it’s important to communicate regularly. The faster you know about an issue, the faster you can solve it.
2. Ask your suppliers what you can do better.
Lack of communication is consistently named a top issue for suppliers, and as noted above, can cause issues to snowball quickly. Spending time with your suppliers also builds rapport with the people who make up a critical part of your operations.
Define a point person and schedule regular meetings or check-ins with suppliers to discuss performance, seek feedback, and collaborate more closely.
3. Use technology to make their lives easier.
Tedious administrative processes burn out suppliers. 33% of suppliers log on to 10 or more systems per client. And we already know that happier suppliers typically translate to better results and service levels. Try to make their lives easier, not harder.
A streamlined supplier portal with an electronic invoicing process can reduce the administrative burden on your team and your suppliers, especially when compliance requirements on Data Security, Data Privacy, ESG, and others have never been higher.
Start Repairing Your Supplier Relationships with a Contract Compliance Audit
Ready to engage an expert partner that can help unlock value for both you and your suppliers? Connect with our Contract Compliance Audit team to restore trust and transparency in your supplier relationships for sustainable, long-term success.