What is the Importance of Supplier Relationship Management (SRM)?

Supplier relationship management falls under the larger supply chain management function your business requires to operate. Not to be confused with supplier risk management, supplier relationship management refers more to effectively managing supplier relationships to achieve better business outcomes. It’s an important area to evaluate and keep focus on to determine if suppliers are helping your business be as successful as it could be.

What is Supplier Relationship Management?

Put simply, supplier relationship management (SRM) is a systematic approach to evaluating the suppliers your business works with that provide your organization with goods, materials and services. Performing SRM requires assessing each supplier’s value and contribution to your success, often through the use of a scorecard.

Peter Kraljic, a director at McKinsey & Company, coined the term “supplier relationship management” in 1983 in an article that proposed segmenting a business’ supplier base and mapping it against risk and profitability. Since then, technology and changes in the landscape of business have evolved SRM, but the primary goal is still the same: determine if strategic suppliers help meet your business goals in a satisfactory manner, and streamline the supply process as needed. Though each industry may abide by a different means of scoring, that goal can be broken down further into three general objectives:

• Develop and strengthen relationships: This requires looking at which suppliers are critical to the business and which aren’t. The more valuable a supplier is, the more the business needs to work to ensure the relationship is mutually beneficial.
• Minimize risks: A key part of SRM is risk management. Performance, quality, compliance, ethics, geographic challenges, and more must be considered in regard to each supplier to assess their value versus risk potential.
• Maximize value: Businesses depend on reliable, high-performance vendors. To ensure a mutually valuable and lasting relationship, an SRM manager must continuously create ways to leverage the relationship and strengthen the business value chain as a whole.

What is the Supplier Relationship Management Process?

There are three steps to managing supplier relationships. Let’s break down that process.

1. Segment the Supply Base

The first step in the SRM process is to take a look at your suppliers and determine the appropriate categories to score them on based on your goals. These can be unique to your business or industry, but factors like quantity, quality, location, and price are commonly used. Being able to score each supplier based on the factors that affect your success gives you visibility into the overall value of each supplier and how to strategize and optimize the relationship. You have to figure out which suppliers are most important to business success.

2. Create and Maintain a Strategy

The person in charge of supplier relationship management must determine a strategy for each supplier so that the relationship remains efficient. Not every segment or every supplier should be managed the same way. What you invest in one may be different than what you invest in another. Those in charge of SRM must establish a strategy that generates a beneficial relationship for both parties.

3. Run and Maintain the Strategy

Both the performance of the supplier and the performance of the strategy around maintaining that supplier relationship must continuously be evaluated so any changes can be made in real time. This requires establishing KPIs and specific metrics of success to assess performance against.

Supplier Relationship Management Benefits

There are many benefits to supplier relationship management, all of which contribute to a healthier business.

• Reduced costs: Creating and maintaining an effective strategy with each supplier that is valuable for both parties inevitably leads to cost savings, as well as a reduction in delays, quality issues, availability challenges, etc.
• Less price volatility: When you have a good, healthy relationship with a supplier, you can work together to minimize commodity prices, exchanging fixed prices for a longer contract term, for example. Reducing price fluctuations establishes better trust with consumers.
• Increased efficiency: As with any kind of relationship, having a good relationship with suppliers leads to better communication, understanding and ability to work together to achieve the best outcome for both.
• Outsourcing: When you trust a supplier, you can transfer to them time-consuming activities like managing inventory levels or certain aspects of customer service.
• Supplier consolidation: When you and a supplier work well together, you better understand what the other needs to operate efficiently and can work to accommodate. This streamlines supply chain processes and can sometimes lead to reducing the number of suppliers you need to work with – resulting in increased buying power.
• Ongoing improvements: Teamwork between both parties allows for the feedback to continuously optimize factors that make both of you happier and more profitable.

What Are Some Supplier Relationship Management Challenges?

The need for effective supplier relationship management is arguably greater than ever due to supply strains of  geopolitical issues, chip shortages, port congestion and other supply chain disruptions. However, there are some ways those in charge of SRM falter, causing SRM to become difficult or not as beneficial. Common SRM issues include:

• Approaching it as more a means of cost reduction than developing mutually beneficial relationships
• Having a strategy that lacks clear success metrics
• Working with a lack of supplier diversity
• Carrying too much inventory to address potential supply disruptions
• Changing sources of supply and burdensome supplier rationalization
• Having inconsistent supplier sourcing and onboarding processes
• Establishing excessive premium freight charges to meet customer delivery expectations
• Inhibiting ability to accurately track and trace purchase orders, shipments, receipts and invoices
• Mismanaging documents and accruing processing errors, leading to slow cycle times
• Having inefficient procurement workflow and processing, causing unproductive supplier relationships
• Creating a dynamic in which buyers spend too much time fighting fires and addressing unexpected supply disruptions

A tool that significantly optimizes SRM for a variety of industries is an ERP software solution. ERP software collects and organizes supplier data in one central location so you have better visibility into KPIs and can make more strategic supplier decisions. QAD’s ERP solutions are designed to improve all aspects of supply chain management, including managing supplier relationships.

To see how beneficial enlisting the efficiency of an ERP solution would be to your SRM efforts, we offer a diagnostic test consisting of 12 questions to see how well your business is currently able to manage supplier relationships. Take the SRM diagnostic assessment here, or get in touch with QAD to learn how ERP software can improve your SRM for a healthier bottom line.