Supplier relationship management (SRM) is the discipline of strategically planning for, and managing, all interactions with third party organizations that supply goods and/or services to an organisation in order to maximise the value of those interactions. In practice, SRM entails creating closer, more collaborative relationships with key suppliers in order to uncover and realise new value and reduce risk of failure.
The SRM office and supply chain function are typically responsible for defining the SRM governance model, which includes a clear and jointly agreed governance framework in place for some top-tier strategic suppliers. Effective governance should comprise not only designation of senior executive sponsors at both customer and supplier and dedicated relationship managers, but also a face-off model connecting personnel in engineering, procurement, operations, quality and logistics with their supplier counterparts; a regular cadence of operational and strategic planning and review meetings; and well-defined escalation procedures to ensure speedy resolution of problems or conflicts at the appropriate organisational level.
The concept of SRM was first introduced in 1983 by McKinsey consultant Peter Kraljic in a Harvard Business Review article titled “Purchasing Must Become Supply Management.”
“Instead of simply monitoring current developments, management must learn to make things happen to its own advantage. This calls for nothing less than a total change of perspective: from purchasing (an operating function) to supply management (a strategic one)” Kraljic wrote.
This is essential to understanding of SRM. Relationships need to be strategic, they need to be growth-focused. That’s something that spend managers and senior staffers should never forget, whether they’re buying physical materials or software.
Later, in 1998, in study highlighted two approaches to the supplier management process:
Reactive Approach – Where companies start managing the supplier relationships only when unpleasant situations with suppliers occur and try to figure out how to improve the performance of unreliable suppliers. This approach consumes quite a lot time and resources, which could have been better spent on more important business processes.
Strategic approach – Where supplier relationship management starts even before an agreement with supplier is signed, in order to ensure the competitive advantage of the company in the long run. This is a forward-focused approach, which can lead to a successful relationship even in the early stages.
The strategic approach to supplier relationship management has always been key to successful businesses that rely on third-party suppliers, regardless of industry. For example, by making long-term relationships with its suppliers an integral part of its supply chain strategy, Apple, developed a well-deserved reputation as a global leader in supply chain management, and ensured that it could deliver seamlessly in vast quantities when launching new products.
The Importance of Your Supplier Management System
Suppliers can actually have a huge impact on a company’s processes. Suppliers play a central role in driving revenue, and that should never be ignored. Being able to work with reliable, high-quality suppliers can help a business grow at scale. Unreliable suppliers can create bottlenecks in your workflow, and have a greater negative impact on clients and consumers than you probably realise.
Supplier Management Solutions and Strategies for Better Relationships
Having long-lasting, trusted relationships with dedicated suppliers should be a primary goal of any business that strives to succeed in the market, so let’s find out which strategies can help achieve this.
1. Your suppliers are not just vendors
They are your partners, and this partnership should be based not only on financial transactions, but also on mutual trust and loyalty. Make your suppliers feel like they are a part of your business. Inform them about your processes, such as releases of new products and promotions, and listen to their concerns.
2. Technology makes supplier relationship management simple
Invest in supplier management software to keep track of information about your suppliers in one place. You can even go further and install advanced purchase order management software, which you can use to create, process, and track purchase orders with your suppliers. Some software solutions, like Purchase Control integrate these supplier management solutions functions into the same platform.
3. Realise that timely payments are crucial
If you don’t want to lose your suppliers, step one is making sure to pay them on time. This way, you will prove that you are a reliable customer and that you’re easy to work with. If for any reason you cannot make the payment on a date agreed, then inform the supplier as soon as possible with the date on which they can expect the payment. Suppliers like timely payments just like you like timely action on their side. It really is that simple. If you’re having other issues, like controlling spend, software solutions like AP automation can help you easily match payments with invoices and reduce errors.
4. Relationships should be strong and deep
Make sure to maintain strong and regular communication with each of your suppliers. Keep them regularly informed and up to date, on your strategy and plans so that they know where they fit in and how they can help, plan for and benefit from those plans. Make them your partner. If you appreciate their work, let them know. If something’s not working for you, let them know. A stronger, deeper relationship with clear and frequent communication allows this communication to become more organic.
5. Price is what you pay, value is what you get
Nothing is better for growing your profits than getting a quality service or materials for the right price. If you have the financial flexibility use it. You can buy in bulk and get better pricing but you will have more stock on your balance sheet, or you can arrange to pay a vendor earlier in order to get a bigger discount. Sometimes its better to pay a little more because the supplier is giving you a better service which pays for itself because you need to provide less time to manage them, or because they can be trusted to deliver directly to your customer.
6. Detailed agreements make supplier relationships easier
If you are buying from a vendor on a regular basis, Supplier Relationship Agreements are a must. Write down everything that both parties expect from your partnership such as Item or Service Description, Price, Delivery Terms, Payment Terms, Communications, and so on, and then have both parties sign it.
This can be a simple or complicated document depending on your business requirements. A well-documented Supplier Relationship Agreement will reduce the possibility of confusion or disputes.
7. Evaluate the risks
Always evaluate the risks of dealing with a supplier, especially if you have a complex supply chain. Ask for references, examples of their previous work, years in business, areas of expertise, how they deal with a crisis, what they did the last time they had to deal with a crisis, and so on. Are they competitively priced? Do they have the right experience? Do they have the capacity to deal with your orders? Are they financially stable? These are just some of the questions you should be asking. Maybe the supplier you select is not the cheapest but guarantees 100% on-time delivery with a money back offering; you can live with that because a chain is only as strong as its weakest link, and if your vendor lets you down you whole supply chain may be at risk, which can affect your ability to deliver to your customers.
8. A dedicated SRM process is a worthy investment
According to 2017 Global SRM Research Report by State of Flux, people and their soft skills are the core of SRM, so whether you need a whole department to manage vendor relationships, a dedicated Supplier Relationship Manager, or even if it’s only a part of someone’s role, having people in your organisation who are responsible for the SRM process is essential.
Create a documented process that will help guide your team through the management and administration of suppliers. In a large organization this can include Flowcharts, SOPs, Policy Documents and agreements, or simply a 2 to 4-page document that covers all of the points of agreement for you and the vendor. Make sure that all the steps are followed and that documents are signed off when completed.
The report also states that 37% of supplier relationship specialists have a higher level of engagement from suppliers when they engage with them in this way, and this creates a stronger bond with the vendor, where both parties have a vested interest in maximising the outcomes.
9. Not all suppliers are made equal, think global – act local
As the world becomes ever more connected, we increasingly find ourselves dealing with vendors that are further afield, either across the country or across the globe. Every city, state or country has different rules, laws and terminology. For example Vendor is more commonly used in the USA while Supplier is the more frequently use term in Britain, in Brazil and many south American countries, every document must be stamped physically on receipt.
If some of your vendors are located in another country, then you and/or your SRM specialists should consider cultural differences when communicating with those suppliers. Attitude toward work always varies from culture to culture, so be aware of this and make sure that you are ok with this. You should also consider differences in currency, VAT rates, and other financial differences. Finally, take into account the time zone differences, i.e. know about the time slots in which the supplier is available for communication.
10. Most importantly – Get everyone on board
Having a Supplier Relationship Management Process is important but getting everyone in your organisation on board is critical.
A report by American Express and AT Kearney estimated that $533 Billion a year is spent outside of proper procurement channels, this is called maverick spending, and it means that the procurement is not happening according to the agreements made with vendors, which results in additional costs. Specifically it stated that while 95% of firms surveyed had preferred supplier lists, only 50% of them had procurement systems in place.