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When it comes to business relationships, a lot goes into the customer side of the network. Whether it's about managing and nurturing customer relationships or knowing how to properly engage in marketing and customer service, there are numerous tools and strategies in terms of both customer retention and acquisition, aimed at maximizing income for the organization.
That said, the supplier side is oftentimes neglected by businesses and, in most cases, at the expense of their own competitiveness and bottom line. At its most basic, companies need suppliers to provide them with raw materials for the products and/or services they produce and sell, or to supply them with resources and services to run their own business.
However, one of the biggest advantages when it comes to strong and healthy supplier relationships is that you can gain better value for your business. The more a company knows its suppliers and the better they know and understand the company's needs, the likelier it is that the organization will have access to a more dedicated service, special terms, and preferential pricing. In this scenario, the organization's supply chain also becomes more efficient, cost-effective, and productive.
Building strong supplier relationships is about tackling procurement in a way that goes beyond just purchase agreements and contracts. The focus that is placed on how companies with their suppliers also differ from the logistical focus of supply chain management. Yet, things are rarely as simple as just signing a contract and sitting idly by as the process plays itself out.
At the end of the day, supplier management is about people management and the added value brought forth to the operations by the human-to-human interactions. By keeping this side of the supply chain running smoothly, companies can ensure that both themselves and their suppliers will work quickly to resolve issues, continuously look for ways to improve operations and help each other reap the benefits of the relationship. For this to be done as effectively as possible, however, businesses need to employ supplier relationship management software. But before we can go it that, let's take a look at what supplier relationship management is and how it's best implemented.
What Is Supplier Relationship Management?
Also known as SRM, supplier relationship management represents a systematic approach towards assessing suppliers' contribution to one's business. It helps to determine which suppliers are providing the best value and add the most to your success. SRM also ensures that they are performing well. Supply chain management uses SRM in project management, operations, and procurement.
Supplier Relationship Management came into life in 1983 when Peter Kraljic, a McKinsey consultant, called for corporate buyers to grow more proactive in supply management. He argued that buyers should look to understand their categories’ risk and profitability impact upon a company and devise supplier management strategies that best meet this need.
The SRM helps foster positive relationships with suppliers and helps guide the activities that need to be taken regarding each supplier. It functions similarly to a customer relationship management (CRM) tool, but instead of dealing with customers on a B2C level, it deals with suppliers on a B2B level.
SRM software is a communication tool for manufacturers, distributors, and retailers within a supply chain. If in the past, supplier management was about organizing vendors and suppliers into Rolodexes and color-coded index cards, now an SRM solution digitally manages this process with a state-of-the-art software suite. Its main purpose is to improve business processes between an organization and its suppliers. The needs and uses of an SRM can vary depending on each individual organization, but the main focus on developing a mutually beneficial relationship with suppliers, especially those who are strategic partners, remains constant. That said, supplier relationship management comprises of three important steps:
Supplier segmentation: mapping suppliers against profitability and risk exposure;
Supplier strategy development: distributing internal resources and plans to meet business needs;
Supplier strategy execution.
Step One: Supplier Segmentation
During this stage, businesses are looking at all of their suppliers and categorize them based on their importance. Different suppliers have different levels of influence on your business. For example, a company business that operates in the production industry will deem their raw material supplier as more important for their survival and profitability than their office supply vendor. In this scenario, any risk faced by the raw material provider will also translate as a risk to our business in question.
The process of supplier segmentation focuses on finding the key suppliers in terms of those who provide the goods and services that are essential to the daily operations of the business and those who are not. In doing so, businesses will know how to prioritize their relationships. This isn't to say, however, that other suppliers should be neglected either since all of them are important.
Step Two: Supplier Strategy Development
During this second stage, businesses will analyze their suppliers, working down the list from the most to least important, while developing a plan on how to work with each of them, individually. Since suppliers should be treated as partners, any strategy devised should include mutually beneficial methods that are able to keep all stakeholders happy. Among the best and most effective SRM strategies facilitate collaborative supplier relationships.
Showing Your Worth As a Customer
Showing your supplier that you are a good customer, that you're timely with paying bills, give them as much lead as possible, be transparent, and keep communications open and clear. If there are situations when paying bills on time is not possible, communication becomes even more important, as you will inform them when exactly they can expect payment. Every business relies on timely payments to keep its operations running.
The Risk Management Plan
Working with a vendor will always come with a certain risk attached. Mitigating some of this risk is also one of the purposes of the supplier selection process. It's at this time when the procurement team will analyze references, their previous work, financial stability, and their ability to handle order capacity, among other such selection criteria.
That said, things are guaranteed not to go according to plan sooner or later. That's an inevitable fact. Yet, having a plan put in place for possible risks, such as having a backup supplier, can help prevent an issue in one part of the supply chain reverberate throughout its entirety.
The Issue Resolution Plan
Issues are also bound to arise over the course of any relationship, no matter how hard everyone works on keeping in good standing. Whenever this happens, there needs to be a clear plan put in place that provides a direction on how to address the problem and get the issue resolved as soon as possible.
Who should be tasked with resolving the problem if it cannot be sorted out at the most basic level?
What other paths of escalation are available alternatives?
Who are the stakeholders at each company who will be involved?
By outlining this plan ahead of time, businesses will be in a better position to provide timely resolution with minimum disruption to the relationship or operations.
Centralizing the Point of Contact
Generally speaking, a business and its suppliers have multiple points of contact. While procurement handles contracts and negotiations, logistics and quality assurance tackle the issues regarding shipping and quality. Other business units will deal with ordering and delivery as needed. Instead of interacting with suppliers through multiple touchpoints throughout the organization, a business will be able to create a more efficient and less costly system that builds supplier trust and credibility, by centralizing everything.
It's easy for suppliers to become frustrated when they have to deal with multiple contacts at a time since there's often a lack of coordination. This can lead to unpredictable behavior, especially if there's inconsistency in terms of practices and/or policies across the organization.
Using Two-Way Balanced Scorecards
Working together with the suppliers to develop the metrics needed to measure and manage performance based on the value derived from both parties. By building a scorecard process, will not only give you the possibility to measure each other but also allows for data-driven conversation regarding any issues that may arise.
Step Three: Supplier Strategy Execution
During this step, you'll be following through on the plans developed alongside suppliers. It's advisable to have a dedicated relationship manager for different suppliers, ensuring that nobody has too much on their plate to address all the SRM activities for each individual vendor.
By assigning a manager to each key supplier, their job will be solely focused on maintaining a strong relationship with them, by keeping lines of communication open with everyone on both sides of the relationship. These managers should also be matching your company's evolving needs and plans with what they know about the suppliers so it will be easier to see when you need to change suppliers for a better fit.
Why Is Supplier Relationship Management Software Important?
The main key advantage of strong supplier relationships is that you can get better value for your organization. Yet, without a proper supplier management process, suppliers might start seeing their buyers simply as negotiators who are not interested in mutual growth opportunities. As a result, buyers suffer significant harm: disrupted supply chain, delayed product launch, damaged brand image, penalties by regulatory authorities, and more. Today, 31% of CPOs made a clear commitment to restructuring their supplier relationships.
The better you know your suppliers, and the better they know you, the more likely you are to benefit from dedicated service, preferential pricing, and special terms. Through this, your supply chain becomes more efficient, cost-effective, and productive.
So here are the main benefits of supplier relationship management software:
1. Reduced Spend
Often, organizations spend more on suppliers than on other internal costs. When your spend in any category is that significant, you need to be thinking of strategies to reduce it.
Having great relationships with suppliers can help organizations save a lot of money by taking advantage of attractive deals, incentives, and discounts.
In addition, the more well-run relationships with suppliers are, the less likely it will be to spend money on the unexpected costs that come with delays and mistakes in production.
2. More Informed Decisions
By making use of both quantitative and qualitative supplier data, the procurement department can quickly and effectively identify risks, vulnerabilities, and opportunities across the supply chain. This information can prove to be invaluable when it comes to improving their strategies and methods of supplier management.
3. Increased efficiency
Using automation, organizations can eliminate much of the unproductive administrative effort. This means managing suppliers, reducing the risk of errors, increasing communication, increasing control, allowing for categorization, ensuring tasks are performed consistently, solving issues promptly, and increasing the visibility that will facilitate sourcing and other aspects of the process.
The higher the organizational efficiency, the better the organization will perform.
4. Loyal suppliers
Suppliers play a significant role, and it’s crucial that organizations do whatever they can to keep the good ones around.
And it’s not easy finding good suppliers. So the last thing you want is to lose them and have to source new suppliers who might not be as pleasant to work with, as cost-effective, or as efficient.
Properly managing and strengthening relationships with the suppliers you want to keep long-term is vital to the success of your organization.
5. Boosting Supplier-Led Innovation
Generating innovation is a top priority among many organizations. Relationships developed through SRM typically encourage suppliers to innovate in order to bring extra value to the table. Open lines of communication usually mean that suppliers can share their ideas for product improvement, supply chain innovation, as well as service quality innovation.
6. Supply Team Consolidation
When the two parties understand each others' business, they'll be in a better position to help each other when there's a need for it. A good relationship often leads to adaptation and increased interoperation. In most cases, this also leads to a reduced number of suppliers, which can significantly lower costs.
7. Ongoing Process Improvement
No matter how optimized, most processes can still benefit from further improvement. A positive supplier relationship will lead to the sharing of feedback and ideas, which can, in turn, lead to improved operations, go-to-market times, customer services, and lowered costs.
8. Improved value
The goal of procurement is to receive the best value from suppliers, and that is precisely what a good supplier relationship management software achieves.
Again, automation enables organizations to gain insights that will allow them to make the best decisions that will provide the highest value. This provides greater visibility into supplier performance, including risks, behavioral patterns, and service levels, so potential issues can be quickly rectified.
How Does SRM Software Help Organizations Improve Supplier Relationships?
Supplier relationship management is a complex function that involves assessment, advanced evaluation, and subsequent action planning to continuously optimize long-term strategic supplier relationships.
1. Improving processes
Unfamiliarity with a supplier’s process can create friction, but technology can solve this.
For example, usually, suppliers have no insight into the progression of their invoices. This can cause unrest, along with an increase in supplier queries. However, this can easily be avoided by automatically routing electronic supplier invoices to the appropriate verifiers or approvers from the moment of creation. This improves the transparency on your end, while also reducing the stress for the supplier.
2. Educating people
51% of procurement leaders think their teams don’t have the capability to deliver their strategy. Supplier relationship management software allows procurement executives to lift at least part of the burden off of employees’ shoulders by making their jobs easier.
Before implementing a supplier relationship management solution, consider some of the competencies that your team has, and which ones are needed to both establish and manage the SRM.
3. Building strong relationships with suppliers
Proper communication is essential in the supplier management process. Hence, it’s highly recommended to build strong and trustworthy relationships with suppliers and treat them as trusted partners.
The most effective way to build constructive communication with suppliers is by sharing your plans, strategies, or goals. Show them you’re willing to be transparent; transparency will not only strengthen the trust but will also open new opportunities for suppliers to understand where they fit in your greater plans. And what better way to ensure transparency than using supplier relationship management software?
Organizations can automate a significant number of processes that would require a lot of time and effort if implemented without the help of software. At the same time, e-procurement platforms can enable a much more fact-based approach to the supplier relationship by having key facts related to the suppliers in one solution.
By using a fully integrated procure-to-pay system, procurement executives can access information that they would typically have to request from their suppliers. This also saves time, as they no longer have to contact a supplier by phone or email.
By simply logging into a platform, they can get what they need right then and there.
Technology also simplifies basic tasks, like ordering more supplies and renewing contracts.
Digitizing key processes like these eliminates the chance of error and creates a satisfactory transaction system for both parties, reduces supplier risk, supplier cost, and improves supplier performance, quality, and service.
If you’re ready to improve your supplier relationships, get started with Prokuria today!