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Relationships hold supply chains together. Market conditions can change overnight. When this happens, trusted business relationships between buyers and suppliers become critical.
Supplier relationship management gives procurement teams a clear framework. It helps build trust and shared value with suppliers.
Let's explore what this means. We'll start with key definitions and concepts.
What exactly is Supplier Relationship Management?
Supplier relationship management (SRM) is the process of strategically collaborating with suppliers to drive mutual benefits, continuous improvement, and innovation.
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.
SRM sits within the broader world of supplier management. It provides a framework for engaging with different suppliers consistently. The goal? Maximize value throughout the entire relationship.
SRM involves checking your suppliers' strengths, performance, and capabilities. This helps you align business value with your strategy.
Modern supplier relationship management focuses on win-win partnerships, especially with your strategic suppliers.
Deep partnerships with suppliers unlock innovation. They create competitive advantages. Both parties benefit and move beyond simple cost-cutting.
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.
This supplier relationship management process should consider key factors:
- Spend
- Criticality of goods or services
- Partnership potential
It helps you allocate resources and determine the right management strategies for different supplier tiers.
Here is a 6-step supplier relationship management process:
- Supplier identification and segmentation: Start by identifying all your suppliers. Then categorize them based on strategic importance, spend volume, and risk. This helps you prioritize resources and determine the right management approach for each supplier group.
- Success definition: Establish clear, measurable KPIs for each supplier segment. These KPIs should align with your organizational goals. Cover areas like quality, delivery, cost, innovation, and sustainability. This sets the foundation for supplier performance evaluation and improvement.
- Strategy development: Based on your segmentation and KPIs, develop tailored strategies for each supplier segment. Determine the right level of engagement, collaboration, and resource investment for each group.
- Supplier engagement: Put your strategies into action. Implement planned initiatives like joint innovation projects, cost reduction programs, or risk mitigation efforts. Establish regular communication channels and collaborative platforms for ongoing engagement.
- Monitoring and evaluation: Continuously track supplier performance against your established KPIs. Collect and analyze data on quality metrics, on-time delivery rates, and cost savings achieved. Conduct regular performance reviews to identify excellence and improvement opportunities.
- Feedback and continuous improvement: Provide feedback to suppliers based on performance evaluations. Work together to develop improvement plans. Engage directly with suppliers to address performance gaps and capitalize on opportunities.
This SRM process creates a continuous cycle. Insights from the final step feed back into the initial stages. This allows ongoing refinement and optimization of supplier relationships.
Nothing in procurement is ever as easy as a linear process.
This simplified six-step SRM process gives you a roadmap to follow and revise. You are welcome to base it on your team's needs and resources and 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:
- Next Level Supplier Relationship Management
- Looking at Procurement from Our Suppliers’ Eyes
- Should Procurement Care about Supplier Experience?
- Combatting Hostile Supplier Behavior
- How to Create Stronger Supplier Relationships
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, supplier 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.
Related Articles and Resources:
- Art, Science and Practice of Creating Strategic Supplier Relationships with Kate Vitasek
- Next Level Supplier Relationship Management
- How to Create Stronger Supplier Relationships
- 5 Tips to Maintain Your Supplier Relationship After a Tough Negotiation
- Sourcing and Negotiations Technology Insights Hub
