Covid-19 has been a wake-up call when it comes to the importance of supplier diversity. Small businesses could be part of the solution, yet many struggle to maintain positive working relationships with large organisations. So how can firms work towards more lasting arrangements?
Preventing over-reliance on a single supplier or region of the world is a key argument for supply chain diversity. But there’s also the need for a deeper understanding of the advantages and disadvantages of using smaller suppliers, says Deepak Shukla, CEO of London-based digital agency Pearl Lemon.
“There’s obviously a difference in size and therefore speed in terms of adaptability,” he says. “This has a drop-down effect in terms of people, budgets and time allocated per project. On the flip side, the greatest thing you can get with SMEs is that they are very nimble and they can often identify problems that you can’t.”
And it doesn’t stop there. For those organisations that successfully strike up workable relationships, the benefits include “proximity, agility and innovation responsibility”, says John Pearce, CEO of not-for-profit manufacturing body Made in Britain. “Furthermore, working with homegrown businesses makes developing new product iterations and modifying specifications easier because you can pick up the phone to call the person who is responsible for the product or, potentially, even go and see them.”
So despite offering value for money, high levels of customer service, opportunities for innovation, and often more localised operations, why do so many larger firms struggle to onboard or maintain relationships with SMEs?
According to some small businesses, dealing with larger organisations can be a source of frustration – during the initial stages of applying for tenders and throughout the working relationship itself – putting both sides at risk of missing out on what could be a positive and mutually beneficial partnership. For SMEs, dealing with bureaucracy is a recurring theme.
Cut the red tape
“One of the biggest challenges SMEs can have when working with blue-chip organisations is the extremely long processes and time frames involved in getting things done,” says Richard Osborne, founder and CEO of UK Business Forums. He says, on one occasion, it took his firm almost seven years between an initial engagement and being able to raise its first invoice.
The reason for this, says Shanker Singham, CEO of trade law and economic policy consultancy Competere and consortium partner of Digital Trader Services, is that large firms often run procurement projects as if they are governments or public sector organisations. “Smaller firms find it more difficult to cope with big government-style procurement programmes, and these cannot be administered at pace in any event,” he says.
“The advantage of an entirely private-sector process is it can be tailored to the specific needs of the supply chain itself. Larger companies should avoid setting up procurements based on pre-agreed frameworks or pre-qualification of firms, as this operates as a barrier and shores up incumbent advantage.”
Research by software firm Ivalua backs this up, revealing that two-thirds of suppliers find procurement systems challenging to use. By speaking to smaller firms to understand their particular pain points, organisations can try to improve the customer experience to reduce the cost and complexity of interactions and introduce a simpler way for smaller companies to benefit from their involvement.
Review the purpose of your processes
Convenience is a luxury of larger firms and a barrier for SMEs. In a step away from normal practice, Pearce urges large firms to seek different ways of selecting suppliers, such as avoiding the temptation to buy from as few vendors as possible. This streamlining makes hard work for small vendors and means bigger businesses could miss out on what others have to offer.
“Trying to procure, say, 100 related goods required for delivery all on the same day and at the same location demands that the sourcing be with far fewer than 100 suppliers – ideally just one,” Pearce says. “This one-stop-shop approach hurts SME manufacturers that only make goods in one or two specific categories. Facilitating temporary cooperative arrangements is a good way to help and encourage SME suppliers to work together and takes away the common ‘multi-product, volume purchase’ barrier to entry.”
Another well known issue is payment terms, not least as SMEs are often expected to fund the cost of orders several weeks or months before they receive payment. Ivalua’s research finds 30% of suppliers have seen payment problems worsen since the pandemic, and 65% feel late payments are putting them at financial risk.
“While larger suppliers have the equity to hold out for longer without payment, SMEs can’t always last, and face the risk of running out of funds altogether,” says Thompson. “Late payments can sour SME relationships, too, limiting effective collaboration and a willingness from suppliers to share innovations with late-paying customers. To work successfully with SMEs, larger organisations should look to provide transparency into when suppliers will be paid.”
This could involve not extending an SME’s standard payment terms or including clauses in contracts stating that interest on late payment cannot be charged, says Osborne. “Larger buying organisations must be more aware of the challenges that their stringent processes and producers place on SMEs,” he says. “This is so important, now more than ever. There have been some positive changes to even the playing field, such as invoice financing, but larger companies need to be more amenable to other options.”
Pursue partnerships over deals
In the long term, reviewing internal approaches will help but investing in external development can also contribute to richer relationships. Singham suggests that, for instance, some larger businesses can help smaller ones by supporting their customs processes, as a service, where international trade is involved.
“It is in their interests to do so, as their just-in-time supply chains are dependent on these smaller companies being compliant with customs processes,” he points out. “Larger companies could also revise the terms of trade to accept the burden as the importer of the customs process and not leave this to the supplier.”
Such partnerships can help ensure security of supply in an uncertain marketplace. “Maintaining a diverse supply chain is vital to avoid the continuing supply chain disruption that businesses will face in the upcoming year, and to mitigate other regulatory, environmental and geopolitical risks,” says Thompson. “Businesses that work closely with SMEs can promote growth and become customers of choice.”