Most supplier relationships start with good intentions on all sides for a productive engagement that will deliver good outcomes. Yet some supplier relationships, whether contracted formally or not, do not proceed successfully. Difficulties regarding performance, commercial or other issues, can start before the work has even begun. Or they may emerge after many years of effective partnership.
Occasionally, the buying organization does not wish to work with some suppliers any more, even when they have strategic importance to their organization.
At ADR International, our global team has noticed that increasingly organizations are assigning a “do not use” status to certain suppliers. In some cases this is a “word of mouth” recommendation and in others it’s a formal “blacklisted” or “banned” classification in organizational systems, such as supplier information portals. This depends on the reason for the classification.
Typical reasons suppliers get banned from future use by buying organizations:
- Severe financial instability of the supplier
- Chronic poor performance of the supplier
- Failure to meet the buying organization’s corporate and social responsibility standards or misaligned business practices (especially in terms of values or ethics)
- Association with the supplier exposes the buying organization to risk of profit reduction or reputational damage
- Formal supplier rationalization program
Before deciding on such a “ban”, there is often an extended consultation between the buying organization’s end users, budget holders, specification-owners and other stakeholders who are involved in the supplier relationship.
Before a “supplier ban”, the following conditions often exist:
- The concerns are felt universally by internal stakeholders or by key opinion leaders
- There is evidence of a violation of organizational standards
- The situation is considered unresolvable
However, even when such conditions prevail, there may be reasons why the buying organization decides against a supplier “ban” even when the relationship is troubled.
Reasons to avoid a “blacklisted” supplier classification in some challenging relationships:
- Reciprocal relationships (the supplier is also an important customer to the organization)
- Customer direction (the supplier has been nominated by the end customer of the organization)
- The supplier is a government monopoly
- Market, capacity or capability constraints restrict the buying organization from switching source(s) or will limit future competition
- Intellectual property constraints restrict the buying organization from switching source(s).
- High expense or risk of switching source(s)
Therefore, is it pragmatic to apply a “banned” status to suppliers? Certainly it’s a decision that should carry health warning and requires objective and balanced judgement rather than being the result of an emotional outburst.
A good practice checklist to consider before assigning a “banned” status to a supplier:
- The first action, as always, is to check the portfolio position of the supplier and / or category / commodity.Where the supply market difficulty is “high”, the effort and time taken to resolve the challenge would typically be greater. This is because it is likely to be challenging to find a credible alternative source.
- Ensure all important stakeholders have had the opportunity to input on the definition, impact and severity of the concern with the supplier.
- Involve legal colleagues to determine the contractual implications and / or apply contractual remedies.
- Check that the impact of the concern has been measured and objectively assessed. For example, is there evidence of increased claims from end customers, or an impact on quality, or impact on health and safety?
- Document concerns using organizational tools such as a risks / issues register, corrective action planning, corporate security involvement and management escalation.
- Evidence repeated attempts to improve the situation to show that the supplier has consistently failed to engage or improve within the agreed timescales.
- Identify whether the relationship can and / or should be terminated, and the costs / risks involved.
- Check that supplier senior management have been engaged and had the opportunity to provide a “their shoes” perspective.
- Agree a business continuity plan with stakeholders, including an immediate back-up plan in the event of unexpected supply failure.
- Apply the organizational guidelines regarding current and / or future use of suppliers.
Organizational guidelines may not stipulate a definitive communication that a supplier is now “banned”. But any supplier relationship that exposes the organization and its stakeholders to harm should be assessed immediately, regardless of the decision about how to classify the supplier.