Supplier Relationship Management is a step by step approach to measure contribution made by each supplier and their role in the success of your business.
It also includes the tactics involved to increase the performance of suppliers and preparing a strategic approach to working effectively as per this determination.
With the help of SRM, a positive supplier-buyer relationship can be created and determining the various activities to engage each supplier. Supplier chain professionals use supplier relationship management in various areas such as project management, procurement, and all other types of operations where managers are required to deal with the suppliers daily. Supplier relationship management consists of both software and business practices.
Objectives of Supplier Relationship Management
The definition can be different in different organizations. However, the main goal is to regulate and enhance the processes between suppliers and buyers.
Similar to Customer Relationship Management, the organization that supplies goods and services work towards to improve the relationship between the organization and its customers.
The focus of underlying supplier relationship management to develop a mutually beneficial relationship with all its suppliers, especially with the suppliers which are more important for the image of the brand.
It encourages efficiency, quality, innovation, and other benefits. The importance of Supplier relationship management is increasing as the network between suppliers and buyers is becoming global, and it depends on both the parties involved.
SRM works on creating a common frame of reference to ensure effective communication between the organization and its suppliers and to gauge the performance of each supplier.
The process of Supplier Relationship Management (SRM)
The processes related to the strategic sourcing of Supplier Relationship Management (SRM) varies as the definition of Supplier Relationship Management from one organization to another.
However, we can use these broad categories to understand the following mentioned supplier relationship management (SRM) processes:
#1 Segmentation of suppliers:
Categorized your suppliers based on their importance to your business.
#2 Developing performance management and governance models:
It is important to develop governance and performance management models to simplify and make parallel all your business processes and assigning stakeholders following your business goal.
#3 Improving Relationship with your supplier:
You need to constantly work on to improve and maintain the relationship between you and your suppliers. You should share all your strategic information with your main suppliers so that they can develop quality products and services for your business.
The first step of SRM is to determine the contribution made by each supplier and what is their contribution to the success of your business. Different suppliers make a different contribution to the success of the profitability of the organization.
Let us understand this with the help of an example. A smartphone company’s profitability is less influenced by the stationary supplies of the company.
On the other hand, main electronic supplies make a huge impact on the success of the smartphone company. Any problems that occurred in the operations of electronic makers of the organization will impact the performance of the organization.
Therefore, we can say that the electronics maker is the key supplier for the Smartphone company. There are various supplier relationship levels and types.
Some people in the organization believe that Supplier Relationship Management focuses only on the key suppliers, and others believe that the discipline covers all suppliers.
However, there will always be a difference in the degree of attention, time, and resources allocated to suppliers. The strategic suppliers will be given more importance as compared to transactional suppliers.
Once the segmentation of suppliers is done, the stakeholders must focus on determining the core processes and strategies. Working with key supplier requires assigning a specific group of employees to maintain a relationship with the suppliers and also setting up internal governance process.
By reviewing the supplies sent by suppliers, we can make sure that all processes are working just fine. Another benefit of working with strategic suppliers is that innovation can be increased through the processes of product development, process improvement, etc.
It is not necessary that supplier relationship management is applicable to only strategic partners. It can be applied to partners at various levels. However, the goal might vary from one partner to another.
For example, with transactional supplier, you should not spend your significant resources on maintaining the relationship, the main focus should be to get the cost as lower as possible. But a key supplier might require a partnership approach which reflects its strategic approach.
Example of Supplier Relationship Management
Practicing supplier relationship management can help the organization to lower the cost of production and increasing the quality of products and services. Let us understand this with the help of a study of automakers which provided clear support for this notion.
As per the research study on supply relationship management, discussed in May 2014, the relationship between automakers’ SRM approach and their profits is examined.
It showed that if the relationship between suppliers and buyers is good than the profitability of the organization is high and low profitability in case of bad relationships.
The study found out that the Chrysler Group lost $24 billion as an unrealized income from the year 2001-2012 because of the bad supplier relationship during the unrestrained ownership changes in the organization.
Supplier Relationship Management (SRM) Software
Many companies provide Supplier Relationship Management (SRM) software.
The major organizations among them are SAP Ariba, SAP Supplier Relationship Management, and Oracle PeopleSoft and there are many other less famous SRM software available in the market that can be used initially in or in small organizations.
Challenges of SRM:
Even having so many benefits, SRM is not free of challenges. Followings are the various challenges in Supplier Relationship Management (SRM).
- Executive Sponsorship.
- Establishing Business Cases.
- Developing a Supplier Relationship Management (SRM) sales pitch.
- Calculating Return on Investment (ROI).
- Finding vendors who have SRM capabilities.