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What is Supplier Relationship Management in Procurement?

Philip Ideson : August 22, 2024

Blog Post Learning Article

Relationships are the glue that bind the modern networked supply chain together. In a world where market conditions can change overnight, the need for trusted business relationships between buyers and suppliers has never been greater. 

Supplier relationship management gives procurement teams a framework to build trust and shared value in supplier relationships. Let’s go through what this entails, starting with definitions and key concepts.

 

What exactly is Supplier Relationship Management?

Supplier relationship management (SRM) is the process of strategically collaborating with suppliers in order to drive mutual benefits, continuous improvement, and innovation.

why supplier relationship management in procurement

 

Within the broader field of supplier management, SRM gives a framework for engaging with different providers consistently to maximize value throughout the relationship lifecycle. It often involves assessments of suppliers’ strengths, performance, and capabilities to better align commercial value with your business strategy. 

Modern day supplier relationship management focuses on creating mutually beneficial partnerships with strategic suppliers. A deep partnership with suppliers gives grounds for greater innovation and competitive advantage that helps both parties move beyond cost reductions.

 

Simplified supplier relationship management process

You can see SRM as a process comprising several key components that work together to create and maintain effective relationships with suppliers. 

supplier relationship management process

 

This simplified process should consider factors such as spend, criticality of supplied goods or services, and potential for partnership, helping you to allocate resources and determine appropriate management strategies for different supplier tiers.

  1. Supplier Identification and Segmentation: The process begins with identifying all suppliers and categorizing them based on strategic importance, spend volume, and risk. This step helps prioritize resources and determine appropriate management strategies for each supplier segment.
  2. Success Definition: Next, you need to establish clear, measurable key performance indicators (KPIs) for each supplier segment. These KPIs should align with organizational goals and cover areas such as quality, delivery, cost, innovation, and sustainability. This step sets the foundation for objective performance evaluation and improvement.
  3. Strategy Development: Based on the segmentation and defined KPIs, you can develop tailored strategies for each supplier segment. To do this you may need to determine the appropriate level of engagement, collaboration, and resource investment. 
  4. Supplier Engagement: This step involves putting the developed strategies into action. Procurement teams then implement the planned initiatives, which may include joint innovation projects, cost reduction programs, or risk mitigation efforts. They also establish regular communication channels and collaborative platforms to facilitate ongoing engagement with suppliers.
  5. Monitoring and Evaluation: Procurement teams continuously track supplier performance against the established KPIs. This involves collecting and analyzing data on various aspects of supplier performance, such as quality metrics, on-time delivery rates, and cost savings achieved. Regular performance reviews are conducted to identify areas of excellence and opportunities for improvement.
  6. Feedback and Continuous Improvement: The final step involves providing feedback to suppliers based on performance evaluations and collaboratively developing improvement plans. In this step you engage directly with suppliers to address any performance gaps and capitalize on identified opportunities. 

This process forms a continuous cycle, with insights from the final step feeding back into the initial stages, allowing for ongoing refinement and optimization of supplier relationships. 

Naturally, nothing in procurement is ever as easy as a linear process. This kind of simplified six step SRM process gives you a roadmap to follow and revise based on your own team’s needs and resources. You can modify it as you see fit.

 

Why is SRM important

Supplier relationship management is one of the topics that often comes up in the discussions with procurement leaders on the Art of Procurement podcast. 

Here are a few notable conversations you can learn from:

While most procurement executives believe that businesses should treat suppliers responsibly, there are many approaches to SRM across different industries.

 

The role of SRM in strategic sourcing

SRM is a core component of strategic sourcing. SRM helps build deeper commercial relationships beyond traditional transactional procurement to create long-term partnerships that drive value for both parties.

The primary goal of SRM in strategic sourcing is to maximize the value derived from supplier interactions. This includes not only cost savings but also improvements in quality, innovation, risk management, and operational efficiency.

By implementing effective SRM practices, you can:

  • Reduce costs beyond price reductions through economies of scale, process efficiencies, and joint cost-reduction initiatives
  • Improve product quality and consistency through closer collaboration and shared quality standards
  • Take advantage of more innovation by tapping into supplier expertise and co-developing new solutions
  • Mitigate supply chain risks through better visibility and diversification strategies
  • Increase agility and responsiveness to market changes through improved communication and aligned objectives

As markets become increasingly complex and competitive, effective SRM will continue to be a differentiator for successful organizations in their strategic sourcing efforts.

 

How SRM can elevate the role of procurement

Supplier relationship management is especially popular in procurement organizations undergoing transformation, or looking to develop more mature levels of competency. In these cases SRM can help Procurement transform its role from a cost center to a value creator, becoming a more strategic asset to business.

Here are a few ways SRM can strengthen the position of procurement:

  • Innovation Catalyst: Procurement has a unique position to leverage supplier expertise to drive product development, process improvements, and market insights, positioning procurement as a source of competitive advantage. By fostering close relationships with suppliers, procurement becomes a conduit for innovation.
  • Business Partner Role: Through SRM, procurement can be positioned as a true business partner. They become actively involved in shaping business strategy, driving growth, and contributing to overall organizational success.
  • Data-Driven Decision Making: SRM typically involves data analysis, strategic planning, and advisory. This consultative approach enhances procurement’s ability to provide valuable insights to senior management, supporting evidence-based decision-making across the organization.
  • Sustainability Champion: As organizations increasingly focus on sustainability, SRM allows procurement to lead initiatives in responsible sourcing, ethical supply chains, and environmental stewardship. This positions procurement as a key player in corporate social responsibility efforts.
  • “A Seat at the Table”: Effective SRM often requires executive sponsorship and involvement. This increased interaction with senior leadership raises procurement’s profile and influence at the highest levels of the organization.

 

Bottom line on SRM

Supplier relationship management looks to maximize value from every supplier interaction and foster collaborative relationships that create more value and reduce risks. While this is easy to plan, effective SRM is easier to talk about than to achieve.

Effective SRM can elevate the role of procurement teams. It can provide a path from transactional purchasing to strategic partnerships. 

SRM ultimately offers procurement executives a way to orchestrate the resources of internal and external stakeholders to a common cause. With a clear focus on mutually beneficial relationships, everyone can be a winner.

 

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