When a company grows to midsize, it often grows faster than its partners and suppliers, and fails to adjust its outsourcing processes to its growing needs. Here are four simple steps midsized companies can take to manage vendors.

Originally posted on Forbes online.

Outsourcing can turn ugly.  It begins as a wonderful tactic for startups to better focus on core competencies, but can quickly become disastrous for midsized companies.  When a company grows to midsize, it often grows faster than its partners and suppliers, and fails to adjust its outsourcing processes to its growing needs. One stumble by a key supplier can become a nasty black eye for a midsized firm, and cause an operational meltdown.

Take for example a cosmetics company that decided to outsource its manufacturing.  Improper manufacturing procedures by its vendor caused a big, urgent shipment to fail quality assurance.  The shipment had to be destroyed, and all the company’s consumers had to go without product for the 8-week lead-time.  Most of its consumers found another brand.  In another case, a contract warehouse (3PL) became undercapitalized and couldn’t keep up with its big, high-growth customer.  Shipments became delayed, and lack of space and infrastructure caused massive shipping failures.

Most midsized firms assume that so long astheir vendor is supplying correctly, everything must be fine, and they turn their focus on their own internal problems and processes.  But at midsized, by the time a supply chain problem arises, the impacts are costly and will persist for weeks or months.  Midsized firms must prevent execution problems before they happen by extending the same diligent management processes they are learning to use internally to their outsourced operations.

Consider the case of W&M Environmental, a Texas-based environmental consulting firm.  The firm brings its expertise and clipboards to the job site, but relies on subcontractors to remove hazards such as contaminated soil, mold or asbestos.  Most of the time, local subcontractors have the capacity to respond to all needs in its region, but in emergencies, the subcontractors can only get to a limited number of sites. To eliminate this potential problem, W&M, anticipating natural disasters, proactively reached out to its subcontractors and negotiated service agreements to guarantee top priority response.  Also, W&M’s policy of paying its subcontractors even before W&M is paid by its clients is a conscious effort to be first in line when emergencies occur.

The agreements and relationships between W&M and its subcontractors were put to the test when hurricane Harvey landed on Texas’s shores in August of 2017.  W&M’s clients needed help immediately after the hurricane passed to get their offices and facilities assessed and remediated.  W&M’s clients, including some large firms with dozens of locations affected, were served immediately by W&M and its subcontractors and were back in business promptly.

Large companies have complex systems and processes for managing vendors.  Midsized companies can start with these four simple steps:

Step 1: Choose a few key vendors/partners

Don’t try to create a program for all vendors.  Instead pick vendors/partners who are critical to your business.  Focus in on sole-source vendors where an interruption or degradation of service would be most harmful.  Skip over huge firms like FedEx who are more likely to be managed with discipline, and focus on small or medium-sized suppliers.

Step 2: Write up a review process

With a written review process, your vendors will know they are being managed – and they should be, since you’re the customer.  Items to include in the process are establishment/review of legal agreements, a vendor’s financial statement review, a review of their operating processes including their quality assurance process, an insurance review, disaster recovery plan review, HR policies and practices, throughput capacity review and their forecasting process, and pricing.

Step 3: Have the discussion, conduct the audit.

One size does not fit all.  For some vendors, it may be sufficient to have a few two-hour discussions and one facility visit.  For others, much more rigor and negotiations may be prudent.  Image if your work constituted 60% of the supplier’s entire business, and they supplied an essential element for 80% of your needs, and next year’s demand was forecast to rise by 40%.  You’d need to dig deep and look very carefully.

Step 4: Take action

If the audit comes through thumbs up, certify the vendor and give them a pat on the back along with your continued business.  In other cases, you may find risks and gaps that require attention.  In those cases, project manage your vendor intensely, jointly setting deadlines in writing and following up.  They’ll either comply and be certified or you’ll begin the process of finding another supplier.  Each year, repeat steps 3 and 4 as both your business and your vendors change with time.

Many midsized business leaders feel uncomfortable addressing the topic of risk mitigation with a vendor who has been doing a good job so far. But that’s no reason not to have a conversation.  Start the conversation from a perspective of addressing mutual dependence.  Explain that both companies depend on each other, and that any significant change in the year ahead could be harmful to both parties.  At a high level, tackle the challenge of joint planning for the year ahead, including planning to survive all the risks of doing business.  Chances are, they are as worried about keeping stability in the relationship as you are.

Don’t wait for a disaster to spur you to action.  Do the homework to ensure your key vendors and partners are prepared to come through for you when you need them most.