Supplier relationship management (SRM) can streamline business operations and reduce the costs of acquiring materials. It can also help you focus on strengthening the supplier relationships that matter most to your business rather than wasting unnecessary time and resources on low-value suppliers.
But what is supplier relationship management, why do you need it, and how can you implement it effectively in your organization?
Understanding Supplier Relationship Management
Below is the definition of supplier relationship management and how it benefits your organization.
What Is SRM and Why Is It Important for Businesses?
Supplier relationship management is an approach organizations use to build mutually beneficial partnerships with suppliers. SRM is also called supply chain relationship management.
The supplier relationship management process involves tracking suppliers’ performance, determining their value to your business, and devising ways to improve their performance. For this reason, it helps you get the most out of your supplier partnerships.
In industries where suppliers are scarce, organizations often fight for the best ones. Because SRM focuses on strengthening your relationships with suppliers, it can help you get preferential treatment from them as a customer of choice. This, in return, becomes a huge competitive advantage in the supply market.
With SRM, you can build a network of reliable and efficient suppliers who provide a solid base for sustainable business growth.
Key Components of Supplier Relationship Management
A supplier relationship management strategy is complex, but you can break it down into three basic components:
Supplier Segmentation
Supplier segmentation is putting suppliers into categories based on specific factors, such as:
- Value: The importance of a supplier to your business operations (critical or non-critical)
- Risk profile: How seriously a supplier’s financial stability and reliability can threaten your organization’s operations
- Spend: The amount you spend on each supplier
- Performance: How well a supplier meets your partnership agreements and standards
When done right, the segmentation enables you to prioritize the management of your most important suppliers and strengthen your relationship with them.
Performance Monitoring
Performance monitoring helps you monitor how well your suppliers are doing. It involves tracking metrics like delivery times, product quality, and supplier responsiveness in emergencies like sudden increases in demand. The goal is to ensure suppliers meet your expectations.
Regularly reviewing supplier performance can enable you to spot issues early and inform suppliers of areas for improvement. This feedback can ensure you consistently get the best value and quality from your suppliers.
Relationship Development
Building strong supplier relationships is a critical element of SRM. One way of achieving this is through clear, effective communication. Your organization and its suppliers should be on the same page regarding expectations and goals. This provides a solid foundation for long-lasting partnerships with suppliers.
How SRM Improves Supplier Collaboration and Reduces Costs
SRM streamlines working together with suppliers and minimizes sourcing expenses. Here’s how:
Reducing Procurement Costs While Maintaining Quality
SRM can cut down procurement costs through performance monitoring. With supplier performance data at your fingertips, you can identify inefficiencies that drive up expenses, streamline processes, and minimize waste. You’re also in a stronger position to negotiate better pricing and terms.
All these things can reduce the amount you spend on obtaining raw materials without compromising on quality.
Enhancing Innovation Through Supplier Collaboration
Supplier management is not just about businesses getting as much value as possible from their suppliers. It’s also about an organization working together with a supplier to find new sources of value that benefit them both.
For instance, they can jointly create innovative products that increase each party’s profits. They can also redesign their processes together to find more effective ways of minimizing waste and eliminating redundant efforts.
Fostering Strong Supplier Relationships
Relationship development, one of the critical components of SRM, ensures suppliers know an organization’s needs and expectations. The organization, on the other hand, continuously monitors supplier performance and offers constructive feedback to improve the partnership’s results. This strengthens supplier relationships and makes them long-lasting.
What Are the Five Types of Supplier Relationships?
There are multiple types of supplier relationships, but here are the most common ones:
Transactional
A transactional relationship focuses on individual purchases with no guarantee of buying from the same supplier again in the future. You go to a supplier and grab what you need, and that’s pretty much it — there’s not a lot of thought about building a long-term partnership. Communication between your organization and the supplier is usually just about the orders you’re placing.
Strategic
Strategic supplier relationship management involves a business working with a supplier to enjoy mutual benefits. Both parties may collaborate on improving product quality, cutting down costs, or coming up with new ideas. With this kind of alliance, you set up long-term agreements that govern the strategic relationship.
Tactical
A short-term tactical supplier relationship focuses on solving the problem rather than building long-term partnerships. You may need it when addressing situations like meeting a sudden spike in demand and responding to a supply chain crisis.
Partnership-Based
A partnership-based supplier relationship is a long-term business arrangement between you and suppliers. You share ideas, resources, benefits, and even risks tied to that collaboration. As the name suggests, you treat each other as partners.
One-Off or Occasional
A one-off relationship involves an organization buying a product or service from a supplier for a single time. This kind of relationship is typical when businesses need unique items that their regular suppliers don’t carry. It’s also common in scenarios where organizations urgently need materials or components and can’t wait for their usual suppliers to deliver.
What Are the Steps to Successful Supplier Relationship Management?
Implementing SRM can be tricky, especially if you don’t know where to begin. The good news is that you can effectively manage supplier relationships in three steps:
Step 1: Assess Supplier Performance and Segment Your Supplier Base
According to Gartner, businesses typically overinvest in low-value suppliers and underinvest in those that matter the most. To avoid this, evaluate how the performance of each supplier impacts your organization. You can then use the insights to categorize them into critical and non-critical suppliers.
That way, you can allocate more resources to the acquisition and management of suppliers with the most value.
Step 2: Develop a Supplier Collaboration Plan
A supplier collaboration plan shows how your business will work with suppliers to meet specific expectations or achieve shared goals. To create and implement the collaboration strategy, you need to:
- Define supplier relationship management objectives: What are your collaboration goals?
- Determine communication channels: Outline how your organization will communicate and share information with suppliers.
- Set performance metrics: How will you track progress when working with suppliers?
Step 3: Integrate SRM Tools and Technology
SRM technologies like GAINS make it easy to manage supply chain complexity. The reason? They bring all your supply chain operations together for a unified view. You can use them to automate supply chain tasks, streamline communication with your suppliers, and easily track supplier performance. This saves you time and gives you valuable SRM insights.
When looking to manage supplier relationships effectively, consider the following best practices:
- Understand your supplier’s business to know how to collaborate with it better.
- Clearly define expectations. This will ensure everyone is on the same page regarding performance metrics, delivery schedules, and quality standards.
- Regularly evaluate suppliers based on key performance indicators and provide constructive feedback to help them meet your expectations.
- Create mutually beneficial agreements to create a win-win situation for both your organization and the supplier.
Why Investing in SRM Matters for Business Growth
In a business environment where supply chain disruptions can happen at any moment, a robust SRM strategy is vital to staying resilient. Effective supplier relationship management can reduce procurement costs, enhance innovation, and improve supply chain efficiency.
One way to make your SRM effective is through powerful supply chain management technology like GAINS. Unlike traditional enterprise resource planning systems with data silos, the software centralizes your supply chain operations in one platform so you can make smart supply chain decisions quickly.
Learn more about GAINS and see how it helps optimize your supply chain.