Supplier Relationship Management: What It is, Benefits & Process

Supplier Relationship Management

What is Supplier Relationship Management?

Supplier relationship management (SRM), is a systematic approach for evaluating suppliers that supply your company with goods, materials, and services.

It is one of the many pieces that make up supply chain management, and it is crucial to your business’ success.

This involves identifying each supplier’s strategic worth and creating a supplier scorecard that reflects their contribution to your success. Then, you create and leverage strategic relationships to improve their performance.

SRM is often misunderstood with supplier risk management. However, that is just a small portion of what SRM covers.

The term supplier relationship management (SRM), was first coined by Peter Kraljic in 1983, when he, a McKinsey & Company director, wrote an article entitled Purchasing Must Become Supply Management, published by the Harvard Business Review.

Kraljic spoke about segmenting suppliers and mapping them against two key dimensions: profitability and risk.

As technology and strategy have improved, people have expanded on his original framework to create the modern view of SRM.

Goals of Supplier Relationship Management

Each industry and every business has its own definitions and categories of strategic suppliers, but the basic goals of supplier relationship management remain the same.

Develop Supplier Relationships

This is the heart of every supplier relationship manager.

It is crucial to identify which suppliers are essential for business success, and then manage based on that scorecard.

An electronic company’s supplier for microprocessors, for example, is more important and therefore more strategic than their supplier for paint.

Managers must create a mutually beneficial relationship between the managers and employees in order to create value.

Risk Management

A large part of SRM is supplier risk management.

Supplier risk is one of the most important issues that any company must deal with.

Suppliers cannot deliver on time, to top quality, compliance issues, or ethical concerns. Every supplier must be aware of geographical hurdles, natural catastrophes, and other variables.

It is crucial to have real-time visibility of supplier performance and data, to be able to plan for disruptions and to be able to rely on a variety of supply sources in order to preserve value and continuity in difficult times.

Optimize the Value Chain

A supplier relationship manager must create value at the end of each day.

Once strategic suppliers have established relationships, the manager must come up with creative ways to leverage those relationships.

Do you have any ideas that you could collaborate on? Do you have different packaging options or routes to explore? What about sourcing alliances

Good SRM is able to think outside the box and find ways to maximize the business’ entire value chain. This goes beyond the immediate impact on suppliers.

Supplier Relationship Management (SRM) Process

Three main steps can be broken down into the basic SRM process.

Segment your Suppliers

The first step in the process is to look at your supply base and come up with categories.

Each company will have a different approach, but you can segment by item, quantity, price, etc.

Next, you need to identify which suppliers are strategic and crucial to your business’ success.

This is important, but a simple step that’s often overlooked. It is essential to understand your suppliers so that you can create a customized strategy.

There are many factors that go into supplier management. It’s important that you segment your business in a way that makes sense to your business strategy. This will allow you the greatest visibility and control.

Make a supplier relationship management strategy

Next, you need to develop supplier relationship management strategies that are based on your strategic suppliers and segments.

Each segment is different and each supplier should be managed differently.

It is up to the SRM, to create a supplier relationship management strategy that works both for them and fosters mutually beneficial relationships to drive value.

Execute the Strategy (and monitor it)

Each strategic relationship must be accountable and each driving value must be tracked. The SRM is responsible for the execution of the strategy.

You must also find a way of monitoring each supplier’s performance as well as the performance of every strategy you have in place so that you can make adjustments immediately.

You can establish your KPIs and success metrics so that you can benchmark and improve performance. This is where a supplier management dashboard can be particularly helpful.

Benefits of Supplier Relationship Management (SRM), and Use Cases

It is possible to manage suppliers strategically and implement SRM best practices. These are the most frequent comments we get from customers:

  • Use all supplier capabilities
  • Cost reduction
  • Continuity in the supply chain
  • Limiting supplier risks
  • Increase supplier responsiveness
  • Better supplier visibility and performance
  • Quality and competition increase

Supplier Relationship Management Challenges

SRM, like any other business function, has its unique challenges.

  • Managing continuity and risk during and after COVID-19
  • Visibility issues
  • Not being used to build strategic relationships but only for cost reduction
  • Inadequacy of alignment and unclear KPIs
  • Insufficient diversity of suppliers

Software for Supplier Relationship Management System(SRM).

These challenges can be alleviated by good SRM software or supplier management software. This will also help to increase the ROI of the SRM process.

These capabilities should be considered when evaluating supplier management software.

  • Interactive analytics dashboards for reporting, goal setting, and performance monitoring
  • 360° view of supplier data for full visibility into your supply chain
  • AI-based risk management alerts and recommendations
  • Capabilities of the Sustainability and Diversity Scorecard
  • To improve collaboration, smart supplier onboarding processes are implemented

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