Midsize business

What is supplier relationship management?

Supplier relationship management (SRM) is the process of evaluating supplier partnerships and identifying opportunities to strengthen supply chains. The purpose of SRM is to maximize the value of supplier relationships and to streamline procurement processes.

Without an effective SRM strategy, buyers risk disrupted supply chains, backorders, stockouts, and more. The key to improving SRM is taking a proactive approach (planning ahead) rather than a reactive approach (only engaging with vendors when problems arise).

This article will explore the growing importance of SRM and how you can improve it to get a competitive advantage and improve your bottom line.

What is supplier relationship management (SRM)?

SRM is a systematic approach to assessing vendors to ensure mutually beneficial partnerships that align with your unique business needs. SRM is essential for product-based businesses that purchase goods from external partners, such as wholesalers, manufacturers, construction companies, and retail or ecommerce businesses.

McKinsey consultant Peter Kraljic introduced SRM in a 1983 Harvard Business Review article titled  Purchasing Must Become Supply Management.

“Instead of simply monitoring current developments, management must learn to make things happen to its own advantage,” Kraljic wrote. “This calls for nothing less than a total change of perspective: from purchasing (an operating function) to supply management (a strategic one).”

You can think of SRM along the same lines as customer relationship management (CRM)—just as companies have to nurture relationships with customers across multiple touchpoints to generate sales, they also must interact with key suppliers across the relationship lifecycle to minimize supplier risk and maximize cost savings.

3 phases of creating an SRM program

There are three steps that organizations should take when creating an SRM strategy:

1. Supplier segmentation

This is the process of categorizing your suppliers into distinct groups to align your resources effectively. Most suppliers fall into one of four quadrants: commodity, strategic, standard, or key.

2. Supplier strategy development

Once you’ve identified the strengths, risks, and opportunities for your suppliers, map out how you’ll engage with them based on your business needs. For example, you might prioritize strategic supplier relationships if they create the most value for your company.

3. Supplier strategy execution

Put your plan into action and continuously refine it by keeping a pulse on metrics like supplier performance and return on investment.

Why supplier relationship management is essential in the post-COVID era

Over two decades ago, Peter Kraljic pointed out that companies can’t allow purchasing to lag behind other departments in response to global environmental and economic changes. “Such an attitude is not only obsolete but also costly,” he wrote.

That’s just as true today as businesses emerge from the COVID-19 pandemic.

2020 was a stark reminder of how vulnerable global supply chains can be across all industries.  More than 60%  of retailers faced moderate to heavy supply chain disruption during the pandemic.

While it’s true that no one can predict the future, organizations can proactively establish resilient workflows to limit the impact of future disruptions. That could mean more transparent supplier collaboration, sourcing from new suppliers, or investing in automation.

3 challenges of supplier relationship management

As your business processes become more complex, so does managing supplier relationships. Here are three common challenges businesses face during the supplier relationship management process.

1. Overemphasizing cost reduction

According to PWC , an overemphasis on cost reduction is the most severe challenge organizations face regarding SRM. While procurement often focuses on short-term pricing solutions, overreaching on spend management comes at the cost of sustainable, long-term supplier relationships.

2. Meeting compliance requirements

Staying on top of compliance can be complicated, especially for industries that involve pharmaceuticals, manufacturing standards, or environmental controls. Adhering to regulations can also become complex when you work with vendors in different countries.

3. Organizational alignment

SRM often becomes the sole responsibility of procurement teams or a supplier relationship manager, but SRM can’t work in a silo. Accordingly, your organization has to get everyone on the same page when devising an effective SRM strategy, from crucial stakeholders to junior staff members.

Now that we’ve covered the importance and challenges of SRM, let’s explore some strategies to level up your SRM process.

How to improve supplier relationships: 4 Tips

Here are five ways your business can foster valuable, mutually beneficial relationships with suppliers.

1. Take advantage of inventory management software

Knowing what inventory is coming in and going out guides your interactions with suppliers, especially when supply chain management becomes more complex.  Inventory management software  offers real-time data and can even automatically reorder items so you can spend more time managing relationships and less time creating purchase orders.

2. Pay vendors on time

Delayed payments are one of the quickest ways to cripple relationships with suppliers. This is a considerable risk for businesses that rely on manual invoicing. Fortunately, automating your accounts payable process can reduce invoicing errors so you can avoid late fees and even capture early-pay discounts, if your supplier offers them.

3. Put everything in writing

Have you ever spoken with a supplier, and a vital detail got buried in an email thread or lost altogether? Better contract management boils down to documenting as many interactions as possible in writing, even ones that seem trivial.

Instead of taking notes haphazardly, centralize your supplier communications in a shared platform. This keeps everyone accountable and protects both parties from negligence.

4. Establish a dedicated SRM process

SRM is highly dependent on soft skills, which can cause people to rely on their interpretations of what constitutes effective communication. However, if you want to streamline your SRM program, you need documented processes for managing supplier relationships.

This can include flowcharts or standards of practice (SOP) that establish a single source of truth.

A good SRM strategy is part of a smart growth strategy

Proactively managing supplier relationships might sound tedious in the short term, but it pays dividends in the long run.

“An attitude of ‘purchasing as usual’ will make the company vulnerable to competitive pressure,” said Kraljic back in 1983. “But enhanced strategic awareness, greater flexibility, and stronger entrepreneurial thinking can improve the supply security and lower the input costs of any industrial company.”

Suppliers aren’t just vendors—they’re partners on your path to growth and require the same attention to detail as your internal people and processes.

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