What is Supplier Relationship Management: The term “supplier relationship management” or SRM, emerged in 1983 when McKinsey & Company consultant Peter Kralich persuaded corporate customers to become more proactive in purchasing activities in the framework of supply chain management.
Peter claimed that corporate customers should understand the importance of product group management and the way it may impact the company’s risks and profitability. At that point, he also stated that corporate customers should develop a supplier relationship management strategy in such a way as to minimize risk and increase profitability.
For better understanding, let’s review an example. Stationary is something that does not affect a company’s profitability, and the absence of stationary in the office does not represent a significant risk for a business. Consequently, it is not necessary to focus on developing a complex relationship strategy with a stationery supplier.
Now imagine Foxconn, a major electronics manufacturer, has shut down the production. It would immediately affect the operations of such well-established brands as Apple. Indeed, the business processes of Foxconn and Apple are so closely interconnected that these two brands have formed a strategic alliance.
This form of partnership provides a wide range of obligations to purchasing company, such as participation in the supplier’s activities, precise coordination of planning, and holding plenty of negotiation processes. Managing such a form of partnership requires much more effort than stationery procurement, even so, it can generate much more value for the business at large.
One of the methods for optimizing both procurement and supplier interaction cost is the automation of these processes. The greatest effect is achieved through the use of SaaS solutions: for example, through the use of SRM module of Acquirell, a procurement automation software.
SRM is a critically important process for the organization because it allows to identify the key product supply categories and establish long-term strategic relationships with the suppliers of these key products.
SRM involves three steps:
- Supplier Segmentation. Juxtapose supplier’s capabilities to your company’s capacity and risks.
- Suppliers interaction strategy development. Evaluate the company’s internal resources and review the plans for accomplishing business needs.
- Implementation of the supplier’s strategy.
It should be underlined that the SRM approach is not equivalent to building relationships with key strategic partners for their benefit. Sometimes the procurement department executives of large corporations promote an idea that the SRM concept should be designed primarily for benefiting suppliers. This is a common misconception in procurement because SRM should be mainly focused on the company’s own business needs.
In reality, the SRM process should cover both peripheral items suppliers (like stationery) and the strategic partners. The only difference is that within a segmentation process you will indicate the product categories that are not critical, and therefore it is not worth spending significant resources for managing the relationships with the suppliers of these product categories.
Vise versa, establishing relationships with strategic suppliers requires significant input. Partners should always be aware of each other’s plans. This may even include providing confidential business information to the partner so that he can design a cooperation plan in line with the purchaser’s long-term strategy.
Preparing for cooperation
Providing open information for suppliers is usually perceived by purchasing companies as a waste of bargaining power because the suppliers may increase the price since they are aware of the purchaser’s plans.
Yet, it should be noted that there is a big difference between a strategic partner and a transactional supplier. The goal of the strategic partner is not to increase the price for supply, but to understand the real business needs of a purchaser. According to Peter Kralich’s assumption, the key task for the purchaser is to maximize profitability and minimize risks. Thus, a supplier relationship management strategy requires both parties to show trust and look for opportunities to create a “bigger pie” instead of arguing over the size of the pieces of the pie.
SRM is a powerful weapon for negotiating with suppliers. However, SRM requires buyers to fundamentally revise their approach to building relationships with suppliers and consider an alternative approach that allows establishing long-term partnerships with them.
The key concept of strategic supplier relationship management is finding opportunities to innovate, either in the procurement process or product development, and waiving the reluctant cost-cutting practices that the purchasing community suffers from.
SRM is a complicated and time-consuming process, and unfortunately, not all companies are able to adopt it. However, the companies that can design their working process according to the main SRM principles can generate substantial value for their business.