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As supply chains are growing increasingly complicated, the need to cut prices for the buyer means margins are being squeezed like never before. To maintain profitability and drive efficiencies, organizations are turning to supplier relationship management (SRM) as a controlled and systematic approach to sourcing the goods and services needed.
The fact of the matter is that supplier relationship management is no longer a new concept with nearly 31% of CPOs committing their organizations to restructure their supplier relationships.
Without a proper supplier management process, suppliers may end up seeing their buyers simply as negotiations who are not interested in mutual growth. If this happens, they may not feel inclined to invest their best efforts in fulfilling your company's expectations. From disrupted supply chains to delayed product launches, and damaged brand image, among others, corporate buyers can suffer significantly, as a result.
The need for rapid procurement processes has been accelerating and the benefits of a supplier relationship management platform are becoming increasingly clearer. These have made the implementation of such a solution a must since it helps improve processes between buyers and their suppliers.
It should come as no surprise that many businesses of various sizes and industries have already turned to SRM software as a means of gaining high-quality output, decrease supply costs, and other such benefits. The decision-making process has had a lot to gain from SRM. The entire process is easier and faster, given that all relevant data is in a centralized location.
In addition, with effective SRM, many repetitive tasks can be done automatically, greatly reducing the time spent. Likewise, it will allow the organization to improve its entire supply chain, helping them gain a competitive advantage in its respective niches and/or industries. It should also be mentioned that an SRM platform helps businesses understand the strategic importance of each of their suppliers and act accordingly to that information. But before we can go further into the main benefits of supplier relationship management platforms, we'll take a quick look at what SRM is and why it's important.
What is Supplier Relationship Management (SRM)?
Supplier Relationship Management (SRM) is the systematic approach of assessing suppliers’ contributions and influence on success, determining tactics to maximize suppliers’ performance, and developing the strategic approach for executing these decisions. As part of vendor management, supplier relationship management is where companies segment their suppliers and determine important supply categories, in order to devise strategies capable of managing their suppliers and supplies more effectively.
Supplier relationship management is comprised of three main steps as follows:
Supplier segmentation: This is about differentiating suppliers as a means of identifying risks and opportunities.
Supplier strategy development: Devising an optimal way to interact with suppliers based on business goals and needs.
Supplier strategy execution: Executing the designed strategy, at the previous step, in an effective way to obtain desired results in line with the company's goals.
Why is Supplier Relationship Management (SRM) important?
Purchasing plays a key strategic role in keeping the business going by generating revenue, while also managing the company's expenses. However, if supplier relationships are bad, both parties can stand to lose a great deal of time and money. Therefore, building and managing good supplier relationships will generate great value for the entire organization.
Supplier Relationship Management is about helping to create positive buyer-supplier relationships and determines which activities to engage in with each supplier.
The goal of SRM is to streamline and improve processes between a buyer and its suppliers. Buyer Relationship Management focuses on developing a mutually beneficial relationship with suppliers, especially those deemed as most strategic to the brand, to promote quality, efficiency, innovation, and other benefits.
That said, it's always important to remember that relationships with suppliers should never be one-sided. They should always be based on mutually beneficial agreements. In the best-case scenarios, there's a win-win situation in which both parties are satisfied by their business relationships.
The Benefits Of An Effective SRM
Modern businesses work with a wide range of suppliers while their supply chains are becoming increasingly complicated. The increased need to cut prices for the consumer also means that margins need to be tightened by as much as possible. To maintain profitability and drive efficiency, companies need to turn to SRM as a controlled and systematic approach to sourcing the goods and services needed to run their business.
There are several benefits associated with supplier relationship management, which ultimately lead to a healthier bottom line. Among these, we can include the following five:
1. An optimized procurement process
Most processes, no matter how well-thought-out, can be improved. A positive supplier relationship leads to the sharing of ideas and feedback which can be used to improve operations and go-to-market times. In time, this will lead to lowered costs.
Procurement professionals are finally acknowledging that developing partnerships with their main suppliers can deliver significant benefits to both the buyer and the supplier.
Up until now, organizations were neglecting SRM because their main focus was on nurturing customer relationships and reducing costs. Now, organizations have recognized the considerable benefits a good supplier relationship management can bring.
Research made by PWC showed that there is a positive link between good buyer relationship management and the following positive outcomes:
an increase in market share;
responsiveness to market changes;
increased return on investment;
shortening order fulfillment leads times.
2. Reduced costs
There are usually significant costs involved in setting up deals with new suppliers, but a supplier relationship management platform can eliminate most of them.
By entering a mutually beneficial relationship with key suppliers, an organization can strive for cost savings in the long run. Good relationships with suppliers will not only deliver cost savings, but they will also reduce availability problems, delays, and quality issues (which means a better service for the consumer).
3. Reduced waste and minimized price volatility
Waste can be created due to inefficiencies in how the processes between the buyer and the supplier are established.
Contracts set out what has been agreed upon in terms of what should be delivered and for what price. An SRM platform can identify sources of waste and eliminate them, further lowering costs and improving services.
Additionally, businesses can use supplier relationship management in order to take advantage of fixed pricing or scaled increases in exchange for minimum order levels, lengthier contract terms, or various other criteria. In doing so, businesses minimize price volatility, which can often scare consumers. By having a clear and unambiguous cost base, companies can set their own pricing structures, which often translates to happier and more loyal customers overall.
4.Improved efficiency
As the relationship between an organization and a supplier develops, communication will also improve. As the supplier gets to know more about the organization they are working with, that enables them to increase the efficiency of their service.
Order issues are reduced, and in case they do arise, the strong relationship between the two will make it easier to solve the issues.
5. A strengthened supply chain
As suppliers and buyers work together, this allows both parties to better understand the inner workings of the other.
In some cases, both parties will be able to adapt their working practices and operations to better accommodate the other, which can lead to further efficiencies and operational advantages.
A strengthened supply chain allows buyers to reduce the number of suppliers they purchase from - streamlining the purchasing process and making budgeting a far simpler task.
How To Improve Supplier Relationship Management
Having long-lasting, trusted relationships with suppliers should be a primary goal of any organization that strives to succeed in the market. However, it's also important for businesses to understand why some relationships go bad. Among these reasons, we can include things such as:
Promising too much and delivering too little. This is a typical situation where expectations don't meet reality.
Having a communication gap. This is where things get derailed when crucial information isn't funneled correctly or there's no clear communication path. Even small misunderstandings can lead to major disruptions.
Agreed-upon terms are not respected. This includes things such as wrong delivery terms, overdue payments, price lists not agreed, and more.
Inconsistency. Things such as skipping regular meetings, phone calls, or performance reviews, which means that there's no more personal interaction.
Companies that want to improve their supplier relations should also set a clear set of improvement objectives and find out which solution would provide the most value for the organization.
Supplier Relationship Improvement Objectives
Increase visibility into supplier relationships.
Accelerate the procurement processing time.
Store and maintain all supplier data such as contracts, certificates, memos, conversations, and more, in a centralized location.
Similarly, moving discussions, emails, and other communications from personal inboxes and into a single, centralized account.
Monitoring supplier spends and decides volume allocations.
Support supplier negotiations by using all of the other objectives mentioned above.
Keep any other potential suppliers on the radar.
Supplier Relationship Management is a critical aspect of the modern procurement function. There are strategies for effective supplier management that can improve your relationship with your suppliers as follows:
Invest in a buyer relationship management platform
There is no doubt that technology is a driving force in today's era. Businesses that aim to succeed in terms of sourcing must also integrate technologies into their processes. Investing in a supplier relationship management platform to keep track of information about your suppliers will really benefit your relationships in the long run.
Use detailed agreements
If you’re buying from a supplier regularly, Supplier Relationship Agreements are a must. Writing down everything that both parties expect from your partnership (such as item or service description, price, delivery terms, payment terms, communications, and so on), will reduce the possibility of confusion or possible disputes.
A best practice would be to also explain the process to your team, so everyone knows their duties and can recognize if something goes wrong in the workflow.
Evaluate the risks
Always evaluate the risks of dealing with a supplier. Ask for references, examples of their previous work, years in business, areas of expertise, how they deal with a crisis, what they did the last time they had to deal with a crisis, and so on.
Are they competitively priced?
Do they have the right experience?
Do they have the capacity to deal with your orders?
Are they financially stable?
These are just some of the questions you should be asking.
The supplier you select may not be the cheapest, but if he guarantees 100% on-time delivery with a money-back offering that is more valuable to your business. If your supplier lets you down, your whole business may be at risk.
Understanding supplier interests
Quite often, companies don't consider their suppliers' interests. Yet, they usually do so at their own disadvantage. By understanding the interests of suppliers, companies can build long-term relationships. This information also gives the necessary directions to organizations when it comes to supplier interests.
Aligning suppliers to the strategic plan
If businesses want to succeed, they need to align their suppliers with the company's strategy. Organizations should aim to choose suppliers who have common goals and objectives. When the company's strategy is aligned with its supplier selection process, organizations will be able to better implement their sourcing policy.
Aligning suppliers to client requirements
Organizations should also aim to align the needs of their own customers with what the suppliers provide. The goods and raw materials that are purchased by the organization must fit with customer requirements.
Coordination
More recently, suppliers have started playing a more important role in the decision-making process of organizations. They must coordinate when it comes to certain areas of the business, such as is the case with crafting a new product design, the delivery of finished goods, or the production process, among others.
Help suppliers help you
If there are any performance gaps of suppliers, SRM can help businesses help their suppliers in enhancing their efficiency. The supplier's performance plays an important role when it comes to the success of the company.
Takeaway
Supplier relationship management is important because a long-term relationship between your organization and its suppliers allows for the free flow of feedback and ideas. Over time, this will create a more streamlined, effective supply chain that will have a positive impact on costs and customer service.
To manage all your suppliers in one place, use Prokuria. After joining and inviting your suppliers on the platform, you’ll be able to communicate more easily and establish better long-term working relations. Contact us today and let’s work together to figure out a solution that will fit your exact needs.