Apr 28, 2022

What Is Supplier Relationship Management (SRM)? Tips For A Strategic Process

by Arielle Kushner

supplier relationship management (SRM)

Supplier relationship management is the systematic strategy for analyzing suppliers that offer goods, materials, and services to a company, determining each supplier’s contribution to success, and establishing plans to improve their performance.

Supplier relationship management helps in determining the value of a supplier and understanding how they contribute to the success of a company. It also helps in setting up plans to improve supplier performance.

Individuals who need to care about supply management are those who regularly contact suppliers in areas like procurement, project management, and operations. They are best positioned to improve supplier performance. Because of this, these employees should try to maintain a good understanding of the supplier relationship management process.

In this article, we will discuss the following topics:

  1. The definition of supplier relationship management
  2. The benefits of supplier relationship management
  3. The process of supplier relationship management
  4. Tips for successful supplier relationship management

What Is Supplier Relationship Management?

Supplier relationship management, or SRM, is the method of evaluating your suppliers’ contributions to your company. It assists you in determining which providers have the most significant impact on your success and ensuring that they are functioning well. SRM is used in procurement, operations, and project management.

SRM aids in the development of healthy, trustworthy relationships with your suppliers and directs the activities you should undertake with each of them. On the front end, it functions similarly to customer relationship management, or CRM, in terms of dealing directly with customers.

SRM’s primary purpose is to optimize your ongoing business processes with your suppliers. You can boost productivity for both your company and your suppliers by creating a streamlined approach. Though the method for SRM varies for every company, the fundamental goal is to build a mutually beneficial connection with all of your suppliers, especially those regarded as strategic partners for your brand. Continuing ongoing relationships with these suppliers is important for both them and your organization.

Supplier Relationship Management Goals

Although each industry and corporation has its own definitions and classifications for what makes up a strategic supplier or vendor, the primary goals of supplier management are essentially the same for everyone.

Develop Supplier Relationships

This is the bread and butter of any supplier relationship manager. It’s crucial to figure out which suppliers are essential to business success and which aren’t, and then manage based on that scorecard. 

For example, a microprocessor supplier for an electrical corporation is far more important—and thus strategic—than a paint supplier. To that aim, a manager must establish a mutually helpful relationship to benefit both parties. This can help reduce waste and bureaucracy, communication breakdowns, and other issues that may arise.

Ultimately suppliers who fulfil their contract terms, meet deadlines, and have good prices are desired, but they also look to you to issue payments on time and stay in communication. 

Evaluate Supplier Performance

A key goal of supplier management is to identify how well your suppliers are performing. Therefore, it’s necessary to establish metrics and KPIs (key performance indicators) by which you can measure their success.

This allows for an apples-to-apples comparison, so you can see which supplier offers the best value. If a particular supplier isn’t meeting your standards, you can work with them to improve or find a replacement.

Ensure Continuous Improvement

Another goal of SRM is to ensure that your suppliers are continually improving. The most successful relationships are those in which both parties are constantly striving to get better.

This can be accomplished by setting goals and benchmarks with your suppliers. Then, as they hit these milestones, you can provide feedback and help them develop plans for further improvement.

Risk Management

Another one is to minimize the risks associated with strategic supplier relationships. This includes everything from financial risks to quality control risks.

One way to do this is by diversifying your supplier base. This way, if one supplier has a problem, you’re not left high and dry. You can also mitigate risks by writing contracts that protect your interests and establishing clear communication channels.

Optimize the Value Chain

Last but not least, SRM can help you optimize your value chain. The goal here is to get the most out of your supplier relationships in terms of cost, quality, and delivery.

This can be done by streamlining selection and onboarding processes, improving communication, and collaborating on projects. It’s also important to have a clear understanding of each other’s strengths and weaknesses so that you can play to them.

How to Implement Supplier Relationship Management

Now that we’ve gone over the goals of SRM, let’s take a look at how to actually implement it.

Step 1: Segment your Suppliers

This stage involves evaluating all of your suppliers and categorizing them according to their importance to your company. Supplier segmentation focuses on identifying your main suppliers — those that offer the goods and services that keep your business functioning—so you know where to spend your efforts. However, don’t overlook specific vendors, as they’re all vital.

Many businesses will work with wholesalers, manufacturers, retailers, and more. All told, there are four main types of suppliers:

  • Product suppliers: These companies provide the raw materials or products you need to produce your goods or services. This is the type of supplier used in direct procurement.
  • Service providers: These companies provide the services you need to run your business, such as janitorial, IT, or security services. This is the type of supplier used in indirect procurement. 
  • Financial providers: These are the banks, lenders, and investors that provide the financial backing you need to keep your business afloat. 
  • Business partners: These are the companies you team up with to help you market, distribute, or sell your goods or services. 

Segmentation allows you to focus your SRM efforts on the most important suppliers to your business. By identifying and classifying your suppliers, you can build relationships with them.

There are a few methods you can use to segment your suppliers. One is the Kraljic Matrix, which considers the supplier’s importance and the buyer’s vulnerability.

Another method is to use the Pareto Principle, which states that 20% of your suppliers will account for 80% of your spending. This is a good starting point for segmentation because it allows you to focus on the suppliers that have the most significant impact on your business.

Once you’ve segmented your suppliers, you can start working on building relationships with them. 

Step 2: Develop Supplier Strategy

The next step is to develop a supplier strategy. This will help you identify your objectives and the steps you need to take to reach them.

There are four main components of a supplier strategy:

1. Governance

2. Objectives

3. Performance management

4. Relationship management

Let’s take a closer look at each one.

  • Governance refers to the framework that will be used to manage supplier relationships. It includes things like policies, procedures, and roles and responsibilities.
  • Objectives are the goals you want to achieve with your supplier strategy. These could be anything from reducing costs to improving quality or delivery times.
  • Supplier performance management is how you’ll measure whether your suppliers are meeting your objectives. This could involve setting KPIs and conducting audits or reviews.
  • Relationship management is the actual work of managing supplier relationships. It includes things like communication, negotiation, and conflict resolution.

As you can see, there’s a lot that goes into developing a supplier strategy. The ideal supplier management strategy attempts to make collaborative supplier partnerships easier while also meeting your organization’s goals.

Demonstrate You’re a Good Customer

One of the best ways to build strong supplier relationships is to demonstrate that you’re a good customer. This means issuing and paying your invoices on time, being polite and professional when you communicate, and generally making things as easy as possible for your suppliers.

Of course, you can’t always control everything on your end. There may be times when you have to make a last-minute change or have delays in payment. But if you’re generally a good customer, your suppliers will be more likely to continue to work with you even when these things happen.

Come Up with a Risk Management Plan

No matter how strong your relationships with suppliers are, there’s always a chance that something could go wrong. That’s why it’s crucial to have a risk management plan in place.

This plan should identify the risks that could impact your business, such as supplier failure or natural disasters. It should also outline the steps you’ll take to mitigate these risks.

For example, if you’re concerned about supplier failure, you might choose to work with multiple suppliers for each product or service. That way, if one supplier has an issue, you can rely on the others to keep things running smoothly.

Create An Issue Resolution Plan

Even with a risk management plan in place, it’s important to have an issue resolution plan as well.

This plan will outline the steps you’ll take to resolve any issues that do come up. It should include things like who to contact, what steps to take, how long it should take to resolve the issue, and what needs to be done to prevent the problems from happening again.

Having this plan in place lets you ensure that issues are dealt with quickly and efficiently, minimizing any negative impact on your business.

Centralize Point of Contact

If you want to build strong supplier relationships, it’s essential to have a centralized point of contact. This is the person who will be responsible for managing all communication and interactions with your suppliers.

This doesn’t mean that other people in your organization can’t interact with suppliers. However, having one central point of contact will help to ensure that all communication is coordinated and consistent and everyone is on the same page.

Step 3: Implement Your Strategy

Now that you have a supplier strategy in place, it’s time to implement it. This will involve creating policies and procedures, setting up performance management systems, and training your team on how to use them.

You might also need to make some changes to the way you do things. For instance, you might need to start placing orders through a centralized system or begin using a new method of communication.

Making these changes can be daunting, but it’s important to remember that taking the time to implement your strategy will pay off in the long run. By doing so, you’ll be able to build solid and lasting relationships with your suppliers.

Using an SRM Software

One of the best ways to implement your supplier management strategy is to use SRM software. This type of software provides a central place for all communication, documentation, and collaboration.

When working on supply chain management, the correct SRM software will provide transparency and facilitate data sharing between the firm and the supplier. It can also help you automate many of the day-to-day tasks associated with managing supplier relationships, such as procurement and supplier performance monitoring. That means you’ll have more time to focus on other parts of your business.

When shopping for SRM software, make sure it has the functions you demand while also requiring minimal training. Onboarding should be straightforward. In addition, there must be supplier-facing functionality and communication to create stronger involvement. Lastly, reporting capabilities should include extensive supplier performance metrics to aid in improved procurement and other decisions.

There are many different SRM software programs on the market, but not all of them are created equal. Therefore, be sure to consider things like price, features, and ease of use when choosing your SRM software.

Supplier Relationship Management Benefits

Increasing efficiency is a key component of running a successful business. However, this is easier said than done, especially in manufacturing, where outside vendors are in charge of supplying your company with the ingredients you need to produce items.

Companies use supply relationship management and other approaches to run a better business, which helps them enhance efficiency and profits. SRM has numerous advantages, all of which add to a higher bottom line.

Cost Savings

Financial incentives are used to create vendor relationships. The initial expenditures of establishing new vendor partnerships might be substantial. The goal is that the cost savings and efficiencies gained over time will more than offset these expenses. SRM should lead to reduced procurement costs as well as lower administrative and inventory carrying costs. In addition, better-managed suppliers should provide higher quality products and services at competitive prices. 

Developing these cooperative connections with vendors can also help with availability challenges, delays, material quality issues, and other concerns, all of which benefit customers.

Improved Quality

Supply chain management is a complex undertaking that often involves multiple stages and many different players. To streamline the process and ensure that finished products meet customer expectations, quality must be a top priority at every stage.

Working with vendors to establish SRM can help enhance the quality of materials and components used in manufacturing. This, in turn, can lead to improved product quality and increased customer satisfaction.

Greater Efficiency

Efficiency is essential in any manufacturing process. When your company can produce more products in less time, you’ll be able to save on labor costs and increase profits.

SRM can help you achieve greater efficiency in your manufacturing process by reducing the need for rework, improving communication, and streamlining the flow of information.

Improved Flexibility

Flexibility is another important characteristic of a successful manufacturing operation. When your company can quickly adapt to changes in customer demand, you’ll be better positioned to succeed in today’s ever-changing marketplace.

SRM can help you achieve greater flexibility by improving communication and collaboration with your suppliers. This will allow you to obtain the materials and components you need in a timely manner, making it easier to respond to changes in customer demand.

Final Thoughts: Achieving Success

One strategy to gain a competitive edge is to use a solution that helps with supplier relationship management. With an automated solution that helps you streamline vendor and supplier onboarding, selection, and all communication will give you the relationships and insights you need. You’ll also notice improved risk management and financial rewards as a result of the speedier time to market.

Most essential, approach your supplier relationship management like a live, breathing organism to continue reaping the rewards. To ensure continuous mutual advantage, categorize and evaluate providers on a regular basis.

Interested in implementing a spend management system that simplifies and streamlines your business’s existing process? Check out Approve.com and request a free demo today!

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