Supplier relationship management: The small business owners' guide

Do you know what you’d do if your most important vendor suddenly stopped meeting your demands? Are you prepared to launch a new product with the suppliers you have in place? If you aren’t sure, you should start by examining your supplier relationship management strategies.

Any good supply chain strategy requires the most accurate and up-to-date information. Without a deep understanding of which suppliers are most important to your company’s success and without a way to evaluate them, you could be in trouble. Similar to how accounting software helps you know where your business’s money is, functional SRM provides an overview of your supplier's risks and strengths. 

Ready to learn how the process works and how you’ll benefit from it? Let’s jump in.

The supplier relationship management process

There are two kinds of SRM: reactionary and strategic. Most businesses won’t prioritize SRM until something bad happens, and they need to take a closer look at how their suppliers function. This is reactionary SRM. If you have to use reactionary SRM, you should continue to examine and improve these systems to avoid problems in the future. 

Strategic SRM is when you optimize processes involving vendors before problems arise. While this might not be possible for everyone, if you’re getting ready to expand into a new market, launch a new product, or you’re trying to figure out the most accurate inventory forecasting possible, you could begin thinking strategically to anticipate and fix issues.

Whatever kind of SRM process you’re in, the overall structure of it remains the same.

Segmentation

Segmentation is the process of examining your suppliers and figuring out which ones are most important to your business. Once you build these segments out, you can prioritize the most important ones. Focus on the suppliers and segments that are critical to the success of your business and those most likely to cause problems.

Set objectives

Setting objectives is one of the most critical parts of this process because it helps your company decide where to focus efforts, down to the most minute details. Once you set these objectives, you can measure supplier performance against them. 

Establishing your objectives can be a long process, but there are a few good places to start:

• Start with the problem and work backward: If late deliveries are the problem, set a benchmark that you’d like to see the supplier meet. Then look back at the process and identify any areas that could indicate earlier delay. You can set an objective saying you want to receive a status report every two weeks before shipping to ensure things are on schedule.
• Read the contracts you’ve signed with the supplier: Your contracts should lay out expectations and what happens if those expectations aren’t met. If a service level agreement (SLA) doesn’t work for your business now, change them during an upcoming renewal.  

Your objectives should include exactly how you will measure and evaluate your suppliers. These KPIs should help your team calculate how and where suppliers succeed or fall short. Using a scale is usually more helpful than a simple pass-fail system (though some metrics may be that clear), so work with your team to find a spectrum to place suppliers on.

Measure supplier performance

Now that you have your objectives, it’s time to look at your suppliers and see how they perform. If you’re in a reactionary SRM cycle, you’re probably seeing a lot of problems (or at least one big one). That’s OK – it’s why you’re doing this. 

To get the clearest picture of vendor performance, you’ll probably need to talk to stakeholders in your own company and your supplier points of contact. Get all of the information you need to accurately compare vendor performance based on your newly developed objectives. 

You may need to delegate performance tracking to team members who understand those vendors best. This might mean extra training to help them understand what supply chain KPIs they’re measuring and how you want that information formatted and delivered. 

Measuring performance can be one of the most complex parts of SRM because of the number of factors that contribute to how a vendor performs. The better you understand how, where, and why a supplier is failing to live up to expectations, the better your governance and engagement plan will be. 

Create a governance and engagement plan for suppliers 

This part of the SRM is both internal and external. The internal part helps your team  develop standards and processes for ensuring that deviations (late shipments, lower-than-promised quality) are properly tracked and reported. With specific and measurable standards, problems will be identified (and corrected) sooner than if you waited for an issue to bring production to a halt.

The governance plan is the external-facing set of guidelines your organization creates to ensure that a supplier meets the expectations agreed upon in conversations and contracts. This should include:

• Changing or updating contractual terms and conditions, including SLAs, to align with your company's objectives. You should anticipate some back and forth with your vendors to hammer out an agreement. 
• Talking to your suppliers more frequently to find ways to mutually improve the relationship. Remember, your main suppliers rely on your business just like you rely on it. 
• Flexibility within the plan. Use supplier feedback to help make changes that set everyone up for success while keeping everyone accountable.  

An engagement plan means optimizing communication with your supplier and finding ways to learn more about your supplier to better understand how their process works in regard to your business. Regular supplier surveys and interviews can help you learn more about how they function, what their priorities are, and how your company can better interact with them.

Collaborate and continuously refine

SRM is not a one-and-done project – it succeeds or fails based on both companies being willing and able to collaborate. As you and your vendors work together to improve the quality of the relationship, you may find that factors outside of your control impact the arrangement. With a productive working relationship, these hurdles should be easier to overcome. 

You’ll want to keep refining your SRM to always have the best suppliers. This might mean searching for other vendors or strengthening existing partnerships.  

Benefits of great supplier relationship management

Great SRM means you’ll experience many benefits, including saving money and being better equipped to weather potential supply chain or distribution challenges. Here are more examples of how vendor relationship management can help.

Better relationships with suppliers: Everyone benefits when you and your suppliers are on the same page and working together. Better relationships can mean better prices or priority over others.

Reduced supplier risks: Knowing how risky working with a supplier is means you’ll make better decisions about who to work with now and in the future. Your SRM can help current vendors improve their business, thereby improving your business.

Better overall value chain: SRM can help you find areas of improvement in your overall value chain. This keeps costs low and efficiency high.

Improved scalability: Knowing what your vendors can handle will make scaling easier. Knowing where the pain points in your supply chain are before expansion will save money, time, and frustration.

Improved brand image: When every step in your production and distribution process works efficiently, your brand improves. Reliability and predictability are two significant factors for retention and earning new clients.  

Faster time to market: No matter what industry you work in, another company will always be ready to take your market share. With an optimized SRM, you can get to market sooner and maintain your customer base.

Managing supplier relationships isn’t completely straightforward or even easy, though. There are challenges to overcome along the way.

Supplier relationship management challenges

Managing professional relationships can be difficult, but those problems can grow when each business has clear objectives. Remember that you may not be your supplier’s most important client, even if they’re vital to your success. But that isn’t the only challenge that SRM can present: 

• Lack of supplier transparency: Not all suppliers will be willing to share all the information you may need to set objectives, gauge their work, and develop a new strategy for improvement. If you notice a lack of visibility, try explaining the benefits for their company and yours. 
• Difficulty aligning with suppliers: Some suppliers may not be willing to make the changes you would like. This might be because they prioritize other clients or don’t want to take on extra work. You may need to begin searching for other vendors willing to work with you.
• Focusing only on cost reduction: Reducing costs is one of the big perks of SRM, but it shouldn’t be your sole focus. If you look for the lowest prices, you won’t end up with the best products. Try balancing cost with reliability and quality to find vendors that deliver on more than price.
• Unclear objectives and measurement systems: No SRM system is perfect, and it is easy to not be exact enough, especially when you’re getting started. For every objective, look for ways to bring cost, time, defect rate, and other tangible factors into the equation. The same goes for measuring success – if no number is attached, it isn’t specific enough. 

Over time, your SRM practice will improve, especially when it comes to your internal criteria.  

Supplier relationship management tools and best practices

There are several tools and supplier relationship management best practices that will make the process more successful, including:

• Supplier relationship management software: SRM software consolidates all relevant information in one place. That makes it ideal if you have multiple people on an SRM team or several stakeholders adding and accessing information separately. 
• Creating an SRM position or department: The scope of SRM is big enough that you may need a dedicated SRM manager or even an entire department to get the most value out of the process. 
• Value mapping: This practice evaluates vendor risk and growth potential to see the true benefits (or drawbacks) of using a supplier.

One of the best practices is to regularly evaluate supplier relationships and your company’s SRM process. It’s a balancing act ensuring your requirements are being met while still fostering good working relationships with the companies that are an integral part of your supply chain.

Optimize and strengthen your supply chain

Examining and optimizing your supplier relationship management practices is an important part of your supply chain management. Another part of it? Using job costing to determine just how profitable your products are and whether they could become profitable with a different supplier.