Supplier management explained

As supply chains grow more complex, businesses need reliable ways of evaluating how their suppliers contribute to overall business success.

Focused on identifying and nurturing high value relationships between companies in the supply chain, supplier management plays an important role in overall supply chain management.

Table of Contents

What is supplier relationship management?

Supplier relationship management (SRM) is the process of identifying your crucial suppliers and managing the relationships with those suppliers.

Supply chains today are globally integrated and have outgrown traditional cost reduction tactics. Businesses need to look at supplier relationship management as a way to capitalise on hidden business opportunities.

7 benefits of supplier relationship management

Spending time and resources on your supplier relationships should always be done with measurable benefits in mind. Here are the main ways supplier relationship management helps a business.

1. Reducing costs

Looking for new suppliers and negotiating contracts is costly and time-consuming. By identifying existing valuable suppliers, you’ll be able to continually optimise operations for both you and your supplier.

2. Securing stable prices

Analysing supplier relationships and fostering a relationship with the most beneficial suppliers gives your business leverage to negotiate longer contract terms, more suitable minimum order levels and more.

3. Driving growth

Good supplier relationship management has transparency at its core. This encourages both parties to monitor their performance with a view to improving the relationship – and growing each of the businesses.

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4. Minimising supply chain risk

When businesses have more transparent relationships with their suppliers, they are better placed to identify and manage supply chain risks. They’re also less likely to be compromised by unethical or irresponsible activity by other firms in their supply chain coming to light.

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5. Encouraging innovation

Great supplier relationship management creates opportunities for both your business and your suppliers that create long-term value.

6. Staying compliant

A strong relationship with your suppliers and better transparency within the supply chain allows your business to stay on top of its regulatory commitments.

7. Increasing efficiency

As your suppliers gain a better understanding of your business needs, they can actively minimise supply chain delays. And if any problems arise, your established relationship will make problem resolution less difficult.

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The supplier relationship management process

To get more value out of supplier relationships, SRM is generally broken down into a set of complementary processes, namely: supplier segmentation, SRM governance, supplier performance management, and supplier development.

Supplier segmentation

Suppliers should be separated into different tiers according to their needs, characteristics, or behaviour. They can also be classified based on:

  • Money spent
  • Volume of supplied goods/services
  • How complex the goods/services are
  • The breadth of the supply base

This segmentation process is an essential first step in effective SRM. Suppliers who are more important to your business need a higher level of engagement. Grouping suppliers based on different criteria allows you to devote limited resources to the right supplier groups. Suppliers are typically split into three tiers, with the most important being tier one. This is where most of the supplier relationship management effort will lie.

Segmentation is an essential first step in effective SRM!

SRM governance

The next step is to agree who owns the relationship with the supplier internally – this can be a single person or several stakeholders. The relationship owner/s define and drive the strategic roadmap. At the top level, this is where both your business and each tier one supplier set mutually agreed objectives and operational measures and metrics as part of the supplier performance management process.

Supplier performance management

This stage involves setting up and continuously tracking the operational measures established by the relationship owner/s. These few critical measures are recorded in a supplier scorecard. The scorecard is shared across both the business and its suppliers at all levels. This allows the business and its suppliers to have a global shared view of supplier performance.

Both parties should monitor and review supplier scorecards regularly, identify any deviations from minimum performance requirements, and address the root cause.

Supplier development

Suppliers are often an untapped resource for innovation, continuous improvement and cost reduction.

Once supplier segmentation, SRM governance and performance management are established, it may become possible to leverage additional value-added activities. This typically involves activities that create long-term value for both organisations, such as:

  • New market penetration
  • Product development
  • Mergers, acquisitions or joint ventures

Putting a supplier relationship management strategy into practice

For many companies the best-practice SCM approaches taught in business schools and used by top firms can seem out of reach. However rather than taking an all-or-nothing approach, it’s often better to apply some of the elements of the SCM process based on the resources currently available.

Here are some of the main personnel and practices involved in day-to-day SCM that can be used in a typical small-to-medium enterprise.

Supplier relationship management metrics

Improving supplier performance starts with measurement. Track these key SCM metrics to begin improving your supplier performance.

  • Average lead time by supplier
  • Overdue orders
  • DIFOT rate
  • Rate of supplier returns
  • Lead time variance

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The supplier relationship manager

In a larger firm the supplier relationship manager is a full time role, while for many SMEs the role is fulfilled by a procurement manager, purchasing manager or operations manager.

Whatever the case, a supplier relationship manager’s role is to develop and improve supplier processes to enhance relationships. They understand their suppliers’ business and goals. They are also able to see issues from the suppliers’ perspective while balancing their own business’ priorities. Their responsibilities can include:

  • Developing a supplier scorecard
  • Coordinating supply chain activities between partners
  • Providing technical guidance to stakeholders in the supply chain

Organisational structures for supplier relationship management

There are a few ways to set up SRM at an organisational level. There’s no one-size-fits-all approach as it depends on how big your business is, what goods/services you provide, the complexity of your supply chain and more.

The following are some of the typical roles in an SCM hierarchy.

A formal SRM team

At a corporate level, this group facilitates SRM activities across functions and business units. Since SRM is inherently cross-functional, this team needs a combination of commercial, technical and interpersonal skills. Their soft skills will be crucial to managing change, and developing strong and trusting relationships.

A formal SRM manager

This role can be a full-time dedicated position, as described above, or responsibilities can be included within a broader role — for instance a procurement manager. Again, this depends on the complexity and importance of the supplier relationships in question, and the size of the business.

A cross-functional steering committee

This team forms a link between supplier relationship management strategies and overall business strategies. If a dispute arises between a relationship manager and the supplier these may be escalated to the committee.

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7 tips for supplier relationship management best practice

1. Align your business strategy and supplier management strategy

Ensure all business stakeholders are committed to supplier relationship management and understand the requirements and activities — both inside and outside the organisation. Your focus should be on the extended supply chain so you can monitor the entire network of suppliers.

2. Manage change

Entering into a strategic supplier relationship will change each partner organisation. Develop a clear communication plan to make sure all business units are aware of their roles and responsibilities in SRM.

3. Encourage collaboration

Train your employees in conflict management, problem solving, networking skills and other so-called soft skills. These will all help any staff who are in contact with suppliers (and indeed, customers) to form and nurture constructive relationships.

4. Choose meaningful metrics

Supplier performance metrics and KPIs should be based on mutually defined goals. Make sure performance on KPIs is communicated openly and frequently.

5. Use a service level agreement
Incorporate appropriate service levels and metrics into agreements so that when unexpected problems arise, you can refer to established and agreed-upon standards.

6. Pay attention to supplier information management

Make sure you have accurate and detailed supplier information stored on a centralised platform. Information can include contact details, contracts, office locations, quotes, performance ratings, risk scores and more. This helps your business create a more holistic assessment of suppliers, and interact with individual suppliers more consistently.

7. Use technology to simplify the process

Supplier relationship management can be admin-heavy and time consuming. Use technology to minimise non-value-adding activity and get the best results from your SRM efforts.

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Supplier management software solutions

A supplier management solution – or supplier management software – is any platform that helps manage your supplier relationships. Depending on the package it may also help you control business processes across the supply chain, plan and forecast demand, and more. Common features of supplier management solutions include:

  • Supplier sourcing
  • Supplier-purchaser collaboration
  • Supplier information management
  • Purchase order management
  • Inventory management
  • Warehouse and transportation management
  • Supply chain planning
  • Shipping

Specific supplier relationship management solutions include apps such as SourceDay and SupplyHive. These focus on digitising the SRM process itself.

Other solutions include SRM within a larger supply chain management ERP. Examples of these larger, more complex programs include solutions like Access Financials.

Meanwhile a third group includes so-called ‘best of breed’ apps that create an end-to-end supply chain solution by combining a suite of integrated cloud-based apps. Unleashed is an example of this approach. Often combined with cloud accounting tools such as Xero or QuickBooks, Unleashed includes supplier performance reporting, and supplier management amongst a host of other functions such as inventory management, purchasing, sales order management and more.

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