Today’s businesses rely on bringing products to a focus group. However, that cannot happen without a stable stream of raw materials and other essential supplies. Hence, creating and maintaining strong bonding with vendors and suppliers is critical for organizations to survive the ever-growing retail competition. Additionally, staying on the same page with these suppliers ensures that the store shelves are well-stocked with quality products - thus bringing delight to consumers.
Supplier relationship management (SRM) is a systemic approach to managing work with suppliers who provide materials, goods, and/or services to manufacturers. It is a part of the broader supply chain management strategy that focuses on establishing strategic supplier collaborations benefiting companies and improving cost savings. This involves assessing each of those collaborations and finding out ways to fill the performance loopholes.
Research suggests that high-performing chief procurement officers (CPO) aim to spend over 60% of their time on strategic activities.
Modern manufacturers work with dozens of suppliers; as such, supply chains are growing more and more complex. The pressing need to trim prices for customers means margins are being squeezed like never seen. SRM helps organizations invest in relationships contributing to efficiencies and profitability.
Supplier Relationship Management: Key Elements
In general, an SRM program consists of three crucial areas:
Supplier Segmentation
It involves differentiating suppliers and gauging risks and opportunities using a business scorecard, most commonly the Kraljic Matrix. Also, businesses can use this method for efficient category management. Case in point, if a person runs a grocery store, the supplier who provides them with (in-demand) energy drinks will be the most crucial.
Supplier Strategy Development
This is where businesses create an optimal way to communicate with their suppliers based on their needs and identify the best possible solution, which varies from supplier to supplier.
Supplier Strategy Execution
In this step, companies effectively put the devised strategy into action to obtain desired outcomes. It comes under the sourcing blueprint and brings in the selected suppliers critical to business.
Types of Supplier Relationships
SRM incorporates the following primary buyer-supplier relationships:
Vertical
In vertical supplier relationships, the supply chain is linked in a conventional way between manufacturers and sellers. Each party focuses on ensuring the fulfillment of both individual and supply chain goals.
Examples of vertical supplier relationships include retailers, distributors, manufacturers, and suppliers. These relationships are involved frequently, with many providers working together regularly.
Horizontal
Horizontal relationships happen between companies that work in concert. Case in point, the suppliers for sprockets and tires both deliver components to the motorbike manufacturer. These suppliers collaborate to achieve mutually agreed objectives, and thus they participate in a horizontal supplier relationship.
Horizontal supplier relationships rest upon a foundation of mutual trust and risk. With each party having expertise in their particular area, integrating their processes results in a win-win.
7 Benefits of Supplier Relationship Management
SRM comes with umpteen benefits for organizations’’ supply chains, all of them leading to healthier bottom lines.
Better Risk Abatement
Using supplier relationship management to tackle risks goes past having risk analyses and contingency plans at disposal. It is about collaborating with suppliers continuously to help them mitigate risks themselves. If vendors rely on downstream suppliers to complement their offerings, they gain from getting involved in risk abatement as well.
A solid SRM roadmap brings businesses and suppliers together to ensure improved risk abatement outcomes, minimal turbulence, and tactically planned responses to fluctuations.
Data-driven Decision-making
Big data is the new oil in today’s business ecosystem. The more the (valuable) data, the better assessment of specific situations, ultimately, the more informed decisions business owners can make about the existing issue. Besides, leading-edge tools, including artificial intelligence (AI) and machine learning (ML), are finding immense use in delivering early warnings, real-time data, and reports with the press of a button.
If a company has a healthy relationship with its suppliers, it can easily develop mutually beneficial data-sharing approaches. Moreover, with access to supplier data, organizations can amp up quality control and evaluation.
Enhanced Procurement Outcomes
Focusing on supplier relationships helps businesses build up their understanding regarding which suppliers are the most important in their supply chains. Additionally, companies will strengthen their grip on the multiple pitfalls that can possibly trigger disruption.
This information is pivotal to all shareholders working across procurement functions in businesses. For instance, while looking for a new supplier, understanding the particular functions that must be replaced and the nature of the collaboration with the previous supplier will help fine-tune the search for a new one.
Cost Cutting
Relationships with suppliers are based on financial benefits. Similar to employee turnover, replacing a supplier or inking agreements with new suppliers comes with steep expenses.
By forging a mutually beneficial partnership with SRM, organizations can save money on sourcing, onboarding, and negotiations over the long haul. In addition, such collaborations can help reduce delays, availability issues, and quality issues.
Higher Profit Margins
Strong supplier relationship management techniques help ensure better profit margins in multiple ways, such as:
- Trimming expenses by making it simpler to negotiate better contracts with suppliers
- Boosting the efficiency of procurement teams by keeping them from spending significant time sourcing suppliers
- Reducing expenditure on PR or fighting legal matters
- Avoiding things, such as out-of-stock (OOS) events, that might lead to a total business collapse
Minimized Price Fluctuations
Commodity prices can undergo drastic changes, and nothing irks consumers more than the increased cost of products/services. By implementing SRM principles, manufacturers can set a fixed price for materials, so that the costs will remain the same despite market volatility. Several suppliers offer fixed pricing or scaled increases in return for long-term agreements, minimum order levels, or other criteria.
Constant Process Improvement
Most business operations, no matter how well-oiled, can be leveled up in some way. Having a long-term, constructive supplier relationship allows for the free flow of ideas and feedback. Over time, this will improve processes, go-to-market times, and customer services.
The areas of product development - triggering new ordering processes and inventory management - can become a joint venture, thus, delivering numerous operational and financial benefits to both parties.
8 Supplier Relationship Management Best Practices
The synergies companies have with their suppliers demand investment and sustenance. Building a network of trusted suppliers helps ease tensions and promote a leak-proof supply chain. Following are some best practices organizations must implement to step up supplier relationship management.
Establish Business Needs
Procurement should be business-specific and complement the enterprise’s strategy by adequate asset usage, coping with risks, ensuring seamless supply, and contributing to revenue growth. Companies can successfully execute by fostering cross-team communication and mutual business objectives.
Once the procurement specialist understands the business requirements, they can avoid strategic errors in picking new suppliers or negotiating contracts. Moreover, adequately aligned enterprise objectives will help prioritize and gauge suppliers’ performance.
Create and Manage Supplier Database
Having an in-depth and up-to-the-minute supplier database will come in handy in planning, cost-cutting, choosing new suppliers, and maintaining healthy supplier relationships. Besides, it will be beneficial to store the following information:
- Proposals and agreements
- Contact information
- Data on supplier capabilities
- Supplier performance insights and feedback
- Shipping coverage and supplier locations
- Invoices and transactional information
Categorize the Suppliers
Decision-makers must create a set of parameters to categorize suppliers and prioritize their supplier selection and relationships based on those criteria. They can group suppliers by type, size, quality of service, risk factors, potential future value, and deliverability speed. Grouping suppliers will help businesses pick the suitable supplier for every situation, according to specific goals or objectives.
Plan for Disruptions
Disruptions are inevitable, whether due to natural disasters, raw materials shortages, or pandemic-induced interruptions. Businesspersons must join forces with their suppliers to manage and alleviate those risks. While doing so, they will form a more robust and more transparent collaboration with them and be well-placed to tackle the disruptions when they occur.
Assign Responsibilities for Each Employee
Setting up a clear and concise reporting network and transparent workflow would be a wise move. Every team member should know their roles and responsibilities, and the degree of their contribution should be well-communicated. That way, businesses can ensure seamless operations and prevent internal disputes. As an alternative, mapping the workflows and responsibilities will help analyze employees’ capacity and spot hiring loopholes early on.
Embrace Technology
Harnessing the power of automation and technology will help companies build an efficient process and minimize communication gaps.
For instance, advanced purchasing tools will enable procurement teams to raise buying requests and establish purchase orders (PO) that will be automatically sent to the relevant vendor. Besides, the in-built portals help suppliers mail invoices for the received orders, receive POs, and upload attachments.
Evaluate Supplier Performance
One of the great ways to assess supplier performance is by developing a supplier scorecard, which incorporates the following elements:
- Adherence to compliance and policies
- Commitment to your organizational goals
- Tangible metrics to gauge performance
- Set of requirements for the supplier
Perform Risk Analysis
While supply chain disturbances have always been a vital factor to account for, COVID-19 and subsequent stressors brought even more uncertainty into the mix of potential threats. Hence, organizations need to detect possible pain points at the beginning and rank them based on their severity.
Additionally, they should single out strategically critical suppliers or goods/services and work on a set of contingencies that can protect their business from supply chain disturbances. In due course, they should ensure that their team knows how to act in such scenarios and make fast and sound decisions.