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It pays to invest time in building good relationships with your key suppliers. If you can save money or improve the quality of the goods or services you buy from your suppliers, your business stands to gain.

How to build a good supplier relationship?

Here are some practical tips to help you build a good relationship with suppliers:

• Meet your contacts face-to-face and see how their business operates. Understanding how your supplier works gives you a better sense of how it can benefit your business.
• Keep in regular contact and update them on strategic changes or new products early on. This helps them to adapt and meet those changes.
• Ask about their plans for development or expansion. Will this affect the goods or services they're providing to you?
• Place orders in good time, be clear about deadlines and pay your suppliers on time.
• Make sure you have efficient systems for purchasing, stock control and payment procedures. See how to improve your supply chain efficiency.
• Keep an eye open for any business opportunities you can pass their way - in a good customer-supplier relationship they'll do the same for you.
• Make your business important to your suppliers and they will work harder for you.

Some suppliers may offer better deals if you promise to use them exclusively. However, keep in mind that this may cause significant problems if they go out of business. Don't ignore opportunities offered elsewhere. Keep your options open by monitoring the deals offered by other suppliers.

Use service level agreements (SLAs) to define expectations

Your SLA defines all the key metrics and commitments for your supplier. While they can take time and effort to create, SLAs can also help validate performance, manage expectation and improve communication. This, in turn, can help build a stronger, mutually beneficial relationship with your supplier. See more on supplier service level agreements.

Payment practices can indicate how strong or weak your relationship is with your suppliers. You should agree the terms of payment at the start of all supplier contracts and commit to fair payment practice as part of fostering a good relationship with suppliers.

Impact of late payment to suppliers

The practice of delaying payments to suppliers can be harmful to your business in several ways. Potentially, it can:

• damage your business' reputation
• strain your relationship with suppliers
• lead to less favourable terms and pricing in future supplier transactions
• lead to costly late-payment charges or compensation claims
• give the impression that you are in financial difficulties
• restrict the growth of the supplier's business and the economy as a whole

Importance of paying suppliers on time

A commitment to fair payment is likely to:

• help your relationship with suppliers
• make suppliers keen to work with you
• increase suppliers' confidence in you as a business partner
• enable you to negotiate better deals
• help you avoid late-payment interest charges
• signal sound financial wellbeing

To promote fair payment practice, you should:

• agree the terms of payment from the outset
• monitor your payment system - ensure it's flexible enough to meet any different payment terms agreed with suppliers
• pay undisputed bills by their due date
• foster good relations with clients - give them names of critical payment staff and tell them how your payment system works
• agree a system for resolving any payment disputes

You could also put together a payment policy that:

• includes clear instructions on payment of bills
• can be made available to suppliers upon request

Fair Payment Code

The Fair Payment Code is designed to encourage businesses to pay their suppliers on time. The Code replaces the previous Prompt Payment Code and introduces a tiered recognition system based on payment performance.

Awards are given to businesses that meet specific payment criteria:

• Gold Award - for businesses that pay at least 95% of invoices within 30 days
• Silver Award - for businesses that pay at least 95% of invoices within 60 days, with a commitment to pay 95% of invoices to small businesses within 30 days
• Bronze Award - for businesses that pay at least 95% of invoices within 60 days

To get an award, business must also adhere to the Fair Payment Code's principles of being clear, fair, and collaborative with their suppliers.

To apply for an award, businesses must and reapply every two years to maintain their status. Previous signatories to the Prompt Payment Code must apply separately to join the new Fair Payment Code.

Applications for the 2025/26 awards are open now, with the next application period starting in September 2025 for the 2026/2027 awards.

Supply chain efficiency focuses on the internal processes within the supply chain. It relates to using available resources (eg financial, human, physical etc) in the best possible way to meet the customer's demand at the lowest cost.

Technology can often play a pivotal role in optimising supply chains. By integrating modern solutions in chain management, you can make significant improvements in the efficiency and performance of your supply chain.

Types of technology in supply chain management

A range of technologies can help you to manage your supply chain. Examples include:

• logistic management software - such as warehouse management software, fleet management software, vehicle tracking systems, route optimisation systems, etc
• radio technologies - such as Radio Frequency Identification (RFID) can help you effectively monitor each product from the point of production throughout the supply line
• advanced weighing technologies - such as high-precision systems or onboard truck scales that measure payload weight and truck's gross weight
• computerising shipping and tracking systems - these can help to automate planning and execution of deliveries, consolidate shipment and integrate all transport management operations from one panel
• inventory planning or forecasting systems - these allow you to use your inventory records to forecast the market demand for your product
• online analytical processing systems - these can help you analyse past sales performances and compare the forecasts from different suppliers

Benefits of using supply chain management technologies include:

• better visibility and tracking
• better collaboration with your suppliers
• real-time monitoring of processes such as shipping and invoicing
• real-time analysis of sales, orders or market trends data
• reduced expenditures
• reduction of errors
• greater ability to forecast and react quickly to changes in demand
• greater customer satisfaction

The greatest efficiency in supply chain management often comes from being able to exchange information with your suppliers in real time.

Enterprise resource planning (ERP) in supply chains

ERP systems can help you plan and schedule your entire supply chain. By connecting your order and purchasing system with that of your suppliers, you can automatically place and track orders and the supplier will automatically issue an invoice.

These systems can be very expensive. You can rent ERP systems from an application service provider. However, it's worth keeping in mind that you may incur extra costs for software implementation, staff training, maintenance etc. Find out more about supply chain management software.

Securing supply chain data

If you're sharing data and using connected information systems within your supply chain, remember that you will have duties and obligations to keep this data safe. You will need to set up strong data governance policies and put in place rules and measures to help you comply with the UK General Data Protection Regulation (UK GDPR).

Supplier performance reviews serve to assess how the supplier is performing against the agreed key performance indicators (KPIs) and service level agreements (SLA).

The reviews are a key component of supplier performance management, which seeks to measure and monitor the performance of suppliers to:

• reduce costs
• mitigate risks
• drive continuous improvement

If your business outsources a considerable amount of work, it is essential to review the performance of your suppliers regularly.

Advantages of supplier performance reviews

Regular reviews of supplier performance will help you:

• monitor compliance with agreed KPIs and SLAs
• identify performance gaps and areas where they fail to meet expectations
• pre-empt issues that lead to underperformance
• agree on actions needed to deal with performance failures
• benchmark the suppliers' performance against others in the industry
• motivate suppliers to improve performance
• prevent complacency, especially in long-term arrangements
• hold suppliers accountable for any failures or breach of agreed terms

If you have an SLA, performance reviews may help you to assess the business/supplier relationship in the most objective way possible. See supplier service level agreements.

How to review supplier performance?

You can use supplier management software to create review forms for different services or suppliers or create a form that is specific to your business.

Common supplier review evaluation criteria will include categories for suppliers':

• performance - eg efficiency (KPIs) and delivery (SLAs) of contractually agreed services
• incidents - eg events that have negatively impacted your business
• billing - eg accuracy and timeliness of billing, order processing, etc
• quality - eg supplier responsiveness, customer service, supplier knowledge, etc

Sources of data to help you review different aspects of the supplier's performance include:

• supplier scorecards
• customer feedback
• customer surveys
• incident reports
• action plans

If, after the review process, you find that your suppliers are underperforming, service level agreement will usually provide for compensation, often in the form of rebates on monthly service charges.

Frequency of supplier performance reviews

You should carry out a performance review quarterly, bi-annually or annually. The frequency should depend on the supplier's services and the potential risks to your business.

The initial performance review often takes place approximately three months after the services began. Before the review, it's worth monitoring if the supplier is performing to your expectations and documenting any failings or incidents that take place. This may help you create an action plan for the ongoing performance reviews.

It is common to carry out a performance review approximately six months before renewing supplier contract. This provides an opportunity to identify performance gaps and resolve issues with the supplier before agreeing to the new contract.

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See also best practices in supplier quality management.

Service level agreements (SLAs) are agreements or contracts with suppliers that define the service they must provide and the level of service they must deliver. They also set out responsibilities and priorities you and the supplier agreed to.

SLAs are contractual obligations often built into a legally binding contract. They can be included in the contract as one or more clauses, or as an entire section. You can use SLAs in any supplier contract where they provide you with a service.

Service level agreements in supply chains

A supplier service level agreement should provide a comprehensive description of all aspects of the supplier's service. Typically, the SLA will set out:

• the type of service to be provided
• the acceptable and unacceptable levels of service
• the metrics associated with the supplier's service and performance
• the timetable for delivery
• responsibilities of service provider and customer
• provisions for legal and regulatory compliance
• mechanisms for monitoring and reporting of service
• payment terms
• how disputes will be resolved
• possible corrective actions
• confidentiality and non-disclosure provisions
• termination conditions

If suppliers fail to meet agreed levels of service, SLAs usually provide for compensation, commonly in the form of rebates on service charges.

Service level agreement best practices

Establishing an SLA will typically take a good deal of time and effort. Be diligent in gathering information, negotiating and building consensus with your supplier. An SLA will work best if both parties mutually commit, so try to reach an agreement in good faith.

Your SLA should be specific, measurable, achievable, relevant (SMART) and time-bound. Go into detail with anything that matters in the service and avoid SLA loopholes and ambiguous wording.

It can help to highlight the most critical components of the deal in an SLA, so you can apply the strictest penalties to these. Work out all the 'what if' scenarios and remember to include a clause that allows you to periodically review your suppliers' performance.

In some cases, you may need to accept a supplier's standard SLA. For example, you are unlikely to be in a position to negotiate a customised SLA with your telecoms provider. If the SLA does not guarantee the service quality you require, you may need to look for alternative suppliers or make contingency plans to deal with any problems.

See also best practices in supplier quality management.

Supplier quality management (SQM) is a critical activity for any business that relies on suppliers in the provision of their goods or services. It involves managing, monitoring and responding to changes in the supplier's ability to fulfil customer's needs on time and to the agreed quality specification.

Key practices for managing supplier quality

You can use several strategies to monitor and improve quality throughout your supply chain. For example, you can:

Measure the cost of quality

Find out how much it costs to manufacture a quality product. Then look at how much poor quality costs - for example, scrap, rework, sorting and processing, warranty and recall costs.

Introduce a cost recovery system

Agreeing a cost recovery process can boost accountability throughout the supply chain. It may allow you to recover the cost of poor quality from a supplier, and encourage them to look at and address issues causing poor quality quickly and efficiently.

Audit your supplier

Agree a procedure to quality check your supplier against non-conformances in manufacturing, quality, service provision, compliance etc. Audits can identify areas for improvement and help you agree corrective actions, response and resolution processes and targets, etc.

Introduce supplier scorecards

Standardised scorecards may give you a way to rate suppliers on performance and benchmark one supplier against another. Scorecards can measure supplier's key performance indicators (KPIs), non-conformance or risks. They can help you track improvements or failures in quality over time and identify areas for improvement, as well as agree corrective actions to minimise quality risks in the future.

Integrate IT processes

Instead of separate financial, quality and operational systems, an integrated enterprise solution can enable communication, collaboration and quality control across the supply chain from procurement to delivery.

How to monitor supplier's performance

In monitoring the performance of suppliers, it often helps to keep track of critical metrics and KPIs, such as the percentage of:

• returned products
• products delivered on time and complete
• products in compliance with regulations or quality standards
• new products introduced in the market that met time, volume, and quality targets

Other supplier performance metrics may include: order fill rate, lead-time variance, received vs ordered units, ordered price vs invoiced price, accuracy of advanced shipment notifications, etc. Find more tips to help you review your suppliers' performance.

Supplier quality assurance and certification

Some suppliers may have a quality-related accreditation, such as the ISO certification. This is a globally recognised mark of quality excellence, which declares that the supplier:

• is operating to verifiable standards
• has a solid quality management system in place

Choosing quality-certified suppliers offers you the reassurance that they have the right processes in place to provide you with consistent, reliable, quality service. See more on quality management standards and choosing the right suppliers.

Importance of supplier quality management

Managing your supplier quality can bring many benefits to your business. It can increase your product quality, boost your bottom line and enhance your business' reputation. On the other hand, poor supplier quality can lead to lost sales, costly recalls, penalties for non-conformance or legal action.

Termination of supplier contracts can be voluntary or involuntary and may happen for many different reasons. If you have a contractual agreement with a supplier, ending this contract early may present significant financial and operational risks for your business.

Reasons for terminating supplier relationships

Common reasons for ending a contract with a supplier include:

• their failure to meet the terms of the contract - eg supply you with goods or services
• provision of sub-standard or defective products or services
• consistent late delivery issues
• supplier bankruptcy, acquisition or considerable management change
• availability of cheaper (or more reliable) service elsewhere

In most cases, the relationship between a supplier and their customer is contractual, ie based on a commercial agreement. Terminating this deal early and without justifiable cause may open your business up to potential penalties.

Termination of supplier contracts - key considerations

If you're considering terminating a contract with a supplier because of their unsatisfactory performance or excessive costs, it may be worth talking to them first. They may offer to resolve the issues or reduce the price in an effort to keep your custom.

If you are determined to end the relationship, however, it is critical that you:

• document the supplier's failures and shortcomings
• review the contract and the termination provisions
• assess all the possible threats to your business
• consider an exit plan that will minimise the potential for disruption

It is also important to identify a new way of getting the goods or services for your business before you exit the existing supplier relationship. If you do not have a new supplier ready to take over, it may take time to set up new processes, which can lead to operational difficulties.

Termination clauses

Your supplier contract should include a service level agreement (SLA), setting out the expected standards of service, mutual responsibilities as well as conditions for termination.

Exit or termination clauses should clearly describe:

• when ending a contract may be valid
• the length of notice you will need to give
• any penalties that may apply if you end the contract early

Contracts will typically specify the notice period that you must give to terminate the contract. It's vital that you follow the agreed notice procedure. If you fail to give proper and timely notice, you supplier could argue that you have breached the terms of the contract.

In absence of termination clause in the contract, or of the written contract altogether, the law will require you to give 'reasonable' notice. What is meant by 'reasonable' will depend on the specific circumstances of your supplier relationship. For example:

• the length of your relationship
• the formality of the arrangement
• the current market practice
• the duration of negotiations about termination

Early penalties for ending supplier contracts

Exiting a supplier relationship early can cost you a considerable sum. You should check the contract to see if there are exit fees for terminating the deal early, and if the termination clause can reduce what you have to pay. For example, you may be able to rebate service fees due to poor supplier performance.

Beware of signing contracts with excessively high exit fees. Severe penalties may effectively lock you in with that supplier. If their quality and effectiveness decrease, your business may suffer.

How to manage the end of supplier relationship

Have guidelines in place for how you handle the termination of a supplier contract. Following best practice and negotiating a mutually beneficial and cordial end to the relationship can leave open the possibility of working together again the future.

Important things to discuss and agree with the supplier include:

• stock held in their warehouses or distribution centres
• assets or equipment which they or you need to return
• subcontractor arrangements or third-party contracts
• disputed or outstanding payments
• use or return of confidential information
• intellectual property rights

In negotiating the exit, make sure that the existing supplier gives you all the information you need to make the transition smoother. If possible, arrange that they take responsibility for handling the changeover process, including handover of goods, to a new supplier.

Consider seeking legal advice when drawing up important contracts. See how to choose a solicitor for your business.