Supplier Relationship Management (SRM) is the practice of evaluating and managing relationships between the various buyer-supplier activities within a supply chain.
Often, this is a highly-coordinated activity led by a central purchasing office. However, SRM is equally as effective even if a central purchase office is not an option. And with the right spend management tools in place, anyone can be an effective Supplier Relationship Manager.
SRM gives supply chain and purchasing professionals insight into how their supply chain is performing. Within this practice, there are the many intangible and often difficult-to-measure outcomes, including:
- Increased trust: This results in less conflict and better customer service.
- Increased communication: This results resolving issues faster and improves buyer-supplier understanding. This in turn reduces operational costs for both parties.
- Free flow of ideas: This results in greater innovations, improved operational efficiencies, and higher quality.
But what exactly is Supplier Relationship Management?
Supplier relationship management is the practice of regularly and proactively reviewing supplier key performance indicators (KPIs). Often, these reviews are 360, and the supplier has the chance to present challenges and opportunities with the purchaser, too.
SRM should not be confused with supplier management. Supplier management, as defined for this situation, is reactively managing a supplier, likely due to a history of poor performance.
Efficient supply chains are a necessity today
Supply chains are critical, and they’re everywhere. In today’s globalized world, supply chains are rapidly growing in size as different economies become more interconnected. In our global economy, it is typically less expensive to source goods and services in certain parts of the world compared to others.
To do this effectively, however, requires a complex supply chain. And to manage that supply chain, it requires supplier relationship management. SRM is critical for creating a trusted and meaningful relationship with suppliers. This process results in a sustainable and repeatable competitive advantage for businesses.
However, to facilitate meaningful 360 SRM reviews, purchasers need access to a tool that has the capability to:
- Enter orders
- Create purchase orders
- Receive inventory
- Manage invoice payments
This tool must also use all this data to report on KPIs. And if your business can do this well, the benefits know no bounds. Here is how SRM can be used and how it can benefit your business.
1. Improve cost management
The first benefit of SRM is cost management and/or a reduction in costs. By analyzing your supply chain data with the intention of reviewing your relationship with suppliers, you can proactively address costs and:
- Minimize the costs of competing, negotiating, and finalizing a new contract;
- Evaluate your supply chain for pricing deltas;
- Create vendor or product rationalization; and
- Identify extra logistical cost savings.
Besides the obvious benefits of reduced costs, this has an added benefit of leading to increased efficiency in your overall supply chain, which leads us to our next benefit.
2. Streamlined operational efficiency
The second benefit of SRM is increased efficiency. Regular supplier reviews often leads to a better understanding of your supply chain as a whole. By consolidating items, reducing multiple vendors, and creating mutually-beneficial relationships with your suppliers, you reduce the time and effort of managing your supply chain.
Of course, as you grow, your supply grows both in size and complexity. Unfortunately, this can mean that companies end up with too many vendors to manage effectively. SRM, then, gives you the opportunity to engage your vendors on how they believe they can add value to your business, creating a win-win buyer-supplier relationship.
At the end of the day, your success is their success and vice versa.
3. Greater supply chain consolidation
The third benefit of SRM is consolidation of the supply chain. This reduces price volatility and creates a more efficient supply chain.
By holding regular SRM reviews, you can share your business outlook with suppliers, allowing them to plan for the future. By working together like this, a supplier is better armed to offer you the best deal possible for as long as possible. This process also lets you create agreements around pricing, such as open book or regular reductions, which alleviates the need for continual competition during purchasing.
4. Stronger (and longer) supplier relationships
The fourth benefit of SRM is improved relationships with suppliers. An often overlooked but very important function of SRM involves understanding cultural norms and differences for better buyer-supplier relationships.
We can’t stress this enough. Understanding how other cultures conduct business and understanding their values produces trust and mutual respect. And this leads to better relationships.
What’s more, better relationships leads to reliable business practices. By creating the space for regular and meaningful conversations about performance and communication, you can foster and nurture a culture of collaboration and innovation. This results in a relationship that can rocket both customer and supplier to be leaders in their areas of expertise.
5. Increase your potential to outsource
The fifth benefit of SRM is the potential to outsource. As a healthy relationship blossoms between customer and supplier, opportunities to transfer activities will naturally arise. A good example of this is a supplier’s willingness to hold kanban or additional inventory at no extra cost. For customers, this can reduce the cost of warehousing and logistics.
There is a downside to Supplier Relationship Management
There is a downside to regular SRM reviews, and that’s the time and effort to plan, organize, and execute these reviews. As outlined above, the potential long-term benefits far outweigh the efforts of SRM set up and maintenance.
And while it is possible to do this with spreadsheets, a proper spend management tool will capture almost all of the data required to plan SRM presentations. And after the planning, the relational fun part begins!
Without good SRM practices, you’ll struggle to reduce costs, improve efficiency, reduce pricing volatility, create lasting relationships, and become the best company possible.
To find out more about how Procurify can help build efficient supplier relationship management processes, book a demo today.
Editor's note Original publish date: April 29 2014 Original author: Matt Lim