Supplier relationship management is often referred to as the B2B equivalent of customer relationship management. We’ll define this crucial management concept and explain how you can implement and improve supplier relationship management to leverage business success.
What is supplier relationship management?
Supplier Relationship Management (SRM) is a management concept frequently used by procurement and supply chain professionals. As supply chains become more complex there is a greater need to cultivate clear, measurable ways to evaluate every supplier. SRM helps to determine how the organisation’s suppliers either contribute to or detract from the business.
Part of an overall supply chain management strategy, SRM focusses on optimising efficiencies and creating value for all stakeholders. It identifies critical suppliers to a business and serves as the foundation for collaboration between buyer and supplier. Identifying supplier relationships that align with corporate objectives can result in greater efficiencies all round.
Building mutually beneficial relationships takes time but with open and effective communication suppliers will gain a clear understanding of your company-specific needs. This knowledge helps to eliminate supply chain delays and if issues do arise, ensures troubleshooting is a relatively painless process because valuable relationships have been established.
What are the benefits of supplier relationship management?
The goal of SRM is to leverage supplier relationships to create value and profitability for your business. When done properly SRM can achieve greater efficiencies, reduce wholesale costs, and optimise supply chain performance. Supplier relationship management can:
- Mitigates risk
- Optimises performance
- Reduces costs
- Improves administrative efficiencies
- Onboarding efficiency
Providing greater visibility, supplier relationship management helps to identify and reduce potential risks. SRM and online inventory management enable businesses to track suppliers and gather vital data to easily verify supplier information, identify potential supplier risks, and track performance. Data received from performance tracking will also flag impending problems and identify areas for improvement.
With the aid of SRM technologies, supplier relationship managers can track and measure supplier performance against contractual obligations to ensure suppliers are meeting your business needs and complying with agreed conditions. This will enable you to shape optimal performance and select the best provider based on company requirements such as professional services, transportation, and shipping capabilities.
With increased visibility, you can identify hidden costs and take action to turn these into cost savings. Strong supplier relationships also help you to negotiate such things as better rates, rebates, discounts, delivery costs and volume thresholds. Likewise, buyers and suppliers can collaborate on contract length, payment terms and ancillary charges and other incentives to help increase your profit margin.
Greater administrative efficiencies
Supplier relationship management software will significantly drive efficiencies in administrative tasks. A central, online location for all supplier data helps SRM through digital record-keeping that reduces administrative labour costs, cuts down on errors, data duplication and loss of crucial supplier information.
Sourcing new suppliers, trialling products, and negotiating contracts can be costly and time-consuming. By optimising supply chain management practices through supplier relationship management, it is easier to obtain relevant data such as supplier capacity and capability information. Businesses can dramatically reduce the costs associated with establishing new supplier relationships, expedite onboarding activities and relevant procurement processes.
SRM helps to identify any existing suppliers with the capability and capacity to meet the company’s current and future needs. Ensuring stable costs and a reliable supply chain, which are both crucial factors in the profitability and sustainability of any trade.
Identify the right type of supplier relationship that will suit your needs
What are the types of supplier relationships?
In his article Strategies for Global Sourcing, David Pyke explored five types of sourcing relationships: buy the market, ongoing relationship, partnership, strategic alliance, and backward integration.
Buy the market relationship
This relationship is straightforward and best suited to commonly-found buyer-seller transactional arrangements for named goods or services. Often it only involves a contractual fulfilment, with little to no communication beyond talking about the requirement and order fulfilment.
An example of this is General Electric’s Trading Process Network (TPN), parts specifications are posted electronically and prequalified vendors can bid for the job. With this arrangement, there is little face-to-face interaction and costs are extremely low.
The ongoing relationship is a formally (or informally) recognised status where one supplier is preferred over others and have medium-term contracts. In these types of supplier relationships, both parties tend to share information and have a better relationship.
Typically longer-term contracts than ongoing and buy the market relationship, partnerships are characterised by increased trust and sharing of information and goals.
This is a long-term relationship where both parties agree to work together, usually exclusively, in order to meet business targets. It requires more collaboration than other types of supplier relationship.
Backwards integration involves a business owning the supplier as part of its business. This results in a unified culture and full sharing of information and plans.
Supplier relationship managers play a crucial role in forging beneficial relationships with suppliers.
What does a supplier relationship manager do?
A Supplier Relationship Manager is responsible for establishing and maintaining relationships with every company the organisation has a commercial relationship. Managers also work with key stakeholders within the business to ensure a clear understanding of what the business needs are and what suppliers are offering.
Key responsibilities of the Supplier Relationship Manager include identifying and segmenting key SRM partnerships, delivering leadership and expertise to SRM teams and providing oversight and ongoing governance for all supplier relationships.
SRM managers are accountable for establishing and implementing an overall framework for supplier and partner management. The manager assesses a supplier’s ability to meet contractual needs, measures supplier performance during the contract period, works to reduce supply-side risk, and tracks and enhances supplier performance. Working collaboratively to identify challenges while looking to build on and improve the relationship between supply and demand to improve commercial outcomes.
What is the supplier relationship process?
Supplier relationship management processes employ strategies to manage relationships with key suppliers. Aiming to leverage these relationships to guide and deliver increased value for the supply chain and increase business profitability. There are four key steps in the SRM process:
- Segmentation and classification
- Supplier strategy development
- Supplier strategy execution
- Evaluation, measurement, and feedback
1. Segmentation and classification
Supplier segmentation helps to assess suppliers against profitability and risk exposure and to determine the suppliers best suited to strategic long-term partnership arrangements. General areas of segmentation include annual supplier spend, the nature of the product or service, process integration, knowledge sharing capabilities and potential supplier risk.
2. Supplier strategy development
Supplier strategy development informs the objectives, expectations, and governance frameworks of the buyer-supplier relationship. Allocate the internal resources and plans required to meet business needs, and support these with meaningful KPIs and service measures that are aligned to the delivery of business outcomes.
3. Supplier strategy execution
This is part of your sourcing roadmap. It charts the activities, meetings, and collaborative implementation of projects to ensure value is delivered and goals are met. This step is undertaken with selected suppliers who are vital to your business.
4. Evaluation, measurement, and feedback
This final step is about regular review and evaluation of supplier performance. Additionally, this will include an internal evaluation to ascertain if the SRM partnerships are delivering the planned and desired value to all areas of the purchasing organisation.
It is important for businesses to regularly analyse supplier relationships and focus on those that offer a greater benefit to the organisation. Ones that provide companies with the leverage to negotiate such things as lower costs in exchange for higher minimum order levels or a longer contract term.
Five practical ways to improve supplier relationships
A structured SRM strategy should focus on supplier trust and collaboration as a lever to deliver value and build partnerships with key suppliers to achieve greater innovation and value. Each supplier relationship should be managed individually and align supplier activities to common goals of the company. Here are five practical ways to help organisations optimise supplier relationships.
1. Consistent communication
Promote clear and consistent communication. To build effective, long-term relationships with suppliers, the purchasing company should communicate with their suppliers based on an equal partnership. Keep suppliers regularly updated on your strategy and business plans so they know their role to support, plan for and profit from those plans.
Effective communication helps support long-term goals by building a strong and trusting relationship between buyers and suppliers. Communication is important in building the trust necessary so that both parties are happy sharing information and working together to support agreed goals.
2. Leverage technology
The demand for SRM leaders to deliver quality, sustainability and enhanced value in supply chain management is considered business-critical. Meeting these needs requires dynamic tools to gain better insight into suppliers’ activities and to help form relevant intelligence for ongoing analysis and decision-making.
SRM like nearly all other management strategies under the scope of supply chain management, are generally part of a digitised and integrated process of business systems and solutions. This digital supply chain is a collective digital environment, integrating numerous technologies, activities, and outputs to help build strong networks and collaborative partnerships across the entire supply chain.
A key feature of an integrated supply chain is cost effectiveness and the value-add to services. The right integration of individual systems and consistent monitoring will reduce governance costs and improve overall efficiency and performance.
3. Focus on sustainability
SRM strategies should serve as a foundation for building long-lasting relationships with sustainably operating suppliers. This means implementing a systematic method of determining supplier performance while upholding sustainable values that support people and the planet.
SRM strategies must also ensure suppliers can deliver on quality without compromising on sustainability value. This can be achieved by streamlining supplier assessments, ranking suppliers on sustainability initiative and regular auditing of supplier actions, standards, and compliance.
4. Quality and performance
SRM should enhance the quality and performance of both the buyer and the supplier to deliver on business critical KPI’s and performance measures. Create meaningful KPIs by focussing on activities that will impact both the organisations internal KPIs and your suppliers KPIs.
Performance indicators establish the criteria for regularly tracking and evaluating suppliers and can include documented product specific procedures, or metrics to evaluate performance such as the percentage of on-time performance and the number of times a quality product is received.
Supplier scorecards help businesses to maintain profitable, metrics-based supply chains. They offer an in-depth analysis of all suppliers and quickly highlight the different pricing strategies used by each. Identifying the suppliers who offer fixed pricing, will eliminate concerns over cost fluctuations and offers pricing stability.
Quality and performance measures should be monitored internally from SRM managers and procurement officers down through production operations and retail activities.
5. Risk management
Supply chain risks present in many forms and can be driven by events either upstream or downstream in the supply chain. Uncontrollable factors can make supply chain risk resilience hard to gauge such as natural disasters, geopolitical events, and as the current Covid-19 situation has shown, global pandemics.
However, individual supplier risk is simpler to evaluate and manage. Before engaging a new supplier, it is imperative to do your research, ensure that they are financially stable and have the experience and capability to meet your needs. Mitigate risks by evaluating each supplier’s risk profile and employ a robust Supplier Relationship Agreement to ensure any crisis that may arise, can be dealt with in the best way with minimal business disruptions.
Efficient supplier relationship management will save your company both time and money and the impact it can have on revenue and profit margins should not be underestimated. Having a robust process, following best practice, and implementing online, digital software solutions will help you to streamline your supplier relationship management.
Additionally, it will provide employees with clear purchasing procedures and provide the insights and transparency to increase your suppliers value to your business.