The Truth Behind Supplier Relationship Management (SRM) in 2022

Hey, Procurement Legends. I want to talk about Supplier Relationship Management. I truly believe SRM is going to be a big part of Procurement moving forwards. It's been around forever but a lot of companies struggle to implement it.

I'm going to cover so broad parts of SRM here to hopefully help you with your own SRM journey.

The buyer-supplier relationship is constantly evolving.

Suppliers are becoming even more strategic to businesses, which means that procurement teams need to be able to react quickly, innovate efficiently and evolve their relationship with suppliers.

The Covid Pandemic taught businesses that Procurement was essential and that it was more than about cost. However, as we now enter a world of economic downturn, with recessions across the globe, impacts of global warming destroying communities, shortages of key components and materials, and global supply chain disruption…are we going to continue with the advances within procurement or regress and be the cost cutters again?

I hope it’s the former and this means one thing in particular for me.

This means that Supplier Relationship Management (SRM) is an increasingly important aspect of procurement in 2022.

The key challenge for most organisations is how to find the right suppliers in the first place; however many businesses struggle with identifying which suppliers will add value at the right price point and how best to manage them over time through collaborative partnerships rather than adversarial relationships where both sides benefit mutually from working together long term.

Will this idea be in CPOs minds as their business needs to save a penny where ever possible?

The buyer-supplier relationship is constantly evolving.

The supplier's role has changed from being a mere supplier of products and services to becoming an active participant in the business. This new way of thinking can be attributed to three main factors:

• Suppliers are not just selling products and services anymore, but also the capabilities of their organization, including intellectual property, core technologies and expertise in manufacturing or related processes. There is more emphasis on providing solutions rather than just products or services alone.

• Customers are becoming more demanding, especially where cost savings through lean operations have become a key performance indicator (KPI). Customers want suppliers to be able to deliver value beyond what they pay for through improved productivity and lower costs while improving quality at the same time.

• Increasing globalization has increased interdependence between customers and suppliers; there is no longer competition based on price alone – it’s about customer satisfaction which includes both quality as well as cost savings achieved through lean manufacturing methods such as the Kaizen approach which is an approach towards continuous improvement initiatives within an organization’s supply chain network.

Suppliers are becoming even more strategic to businesses.

But, the question we must ask throughout this thought process:

• Are we strategic to our suppliers' businesses?

• Are we their Customer of Choice?

• Are we a safe bet for our Suppliers?

If no is the answer to any one of these then you may have a problem. As supply continues to be difficult, and prices rise beyond inflation figures, when you next look to squeeze your supplier, you might find them saying no. But worse, you might find them saying “this isn’t a worthwhile relationship for us any longer. We will not be working with you moving forwards”.

Some of you may be wondering, what exactly is SRM?

The term was first coined by Harvard Business School professor Michael Porter in 1995. It refers to a broad range of activities and initiatives that organizations take with their suppliers. The goal of SRM is to improve relationships with suppliers and ultimately enhance competitiveness through cost reduction, risk management, and innovation.

Sounds fantastic, right? Who wouldn’t want to have this in their supply chain?

Suppliers are becoming even more strategic to businesses than ever before due to the increased complexity of supply chains. In fact, according to research conducted by Accenture, an international management consulting firm headquartered in New York City:

• 70 per cent of companies surveyed said they expect their procurement costs related to suppliers' performance will increase over the next two years;

• 57 per cent said they plan on shifting spend from low-performing suppliers;

• 54 per cent said they plan on reducing or eliminating business with poor-performing suppliers;

• 41 per cent said they will take corrective actions against non-compliant or problematic suppliers.

This shift in focus on the Post-Signature Contract Management activities is exciting to hear about. Supplier Relationship certainly isn’t a one-way street where Procurement teams market themselves to become a customer of choice.

Its foundations are there to build partnerships with suppliers that get it, who want to deliver exceptional performance levels, and to have partners that can grow with you.

Supplier Relationship Management is a key aspect of procurement.

Supplier Relationship Management (SRM) is a key aspect of procurement. It is a strategic tool that can help you manage risk, manage your supplier relationships and even help manage the procurement process.

There are many different aspects to SRM but there are also some key things that should be considered when it comes to SRM. Below we will take a look at these issues in more detail:

The first thing that needs to be defined when talking about supplier relationship management is exactly what it means and who's involved. This could be different depending on where someone works but they're all part of SRM one way or another so let's look at them:

• Procurement

• Legal

• Compliance

• Finance

• Project Management

• Product

• Engineering

There needs to be a collaborative approach to supplier management.

SRM is a collaborative process involving multiple people and departments. When building out your SRM strategy, you'll want to make sure that it includes all stakeholders across the organization.

The goal is for everyone to be on the same page when it comes to goals, timelines, expectations and resources from each group involved in SRM projects. I’m sure you will appreciate that this is more challenging than it seems. Some businesses will use a charter with their suppliers to set this out. This is non-contractual (and yes, the contract should set out everything you need). It’s more like an oath. An ethical bond that you adhere to and do not dare to break. It has a symbolic meaning in your partnership.

At its core, SRM is an ongoing process that involves looking at suppliers as more than just providers of goods and services.; they're also partners who work with you every day of the week (or month).

To keep them accountable while ensuring you get what you want out of them on time and within budget, there needs to be a system in place where everyone can communicate openly about what's happening with their assigned supplier relationships.

Suppliers should be segmented in terms of their value and risk.

This step is critical to your success.

I’ve worked in companies that place their high-risk and high-value suppliers in a category called “Strategic Suppliers” or “Tier 1” suppliers. I’ve also worked with Clients that were a million miles away from the maturity levels needed to segment their supply base. It made everything a free-for-all and there was no understanding of urgency or risk within their supply chain.

You should segment your suppliers into three categories: High, medium and low value. The best way to determine this is by identifying your top 10 suppliers who provide the most value.

Then identify the next 30-40 who are providing less value but are still important to the business.

Finally, consider all other suppliers that may be of less importance but still need access to your projects or products for them to fulfil their own roles within their organization (or yours).

Once you've identified these categories of different suppliers and determined their approximate share of revenue (by industry standard), it's now time for some number crunching.

You need to analyse your supply base to understand which suppliers make up the most spend in both categories and overall. Compare and contrast this. Perhaps a high-spend supplier such as a laptop provider such as Apple really doesn’t deserve to be a high-risk “Tier 1” supplier. It’s just expensive because you’ve got 10,000 staff that need new laptops every 2-4 years.

Let's move on to step two: defining risk levels associated with each individual supplier so they can be matched appropriately into a category based on their potential impact on overall project costs and timelines.

Any supplier that can derail your business operations is likely to be considered an extreme or high risk to your business.

This is a good moment to evaluate all of your active risks with your suppliers and assess your mitigation strategy.

If you haven’t captured any risk data yet for your suppliers then this is the moment to do so. Speak with your supplier, internal users of the suppliers' service and your team. Find as many risks as possible.

Next, assign them a probability rating. This could be 1 for never going to happen and 5 for this is almost a certainty. Next rate them on impact. 1 would mean it gives us a light scratch through to 5 which cripples us.

You can get started with this using a basic Excel risk register.

Supplier Relationship Management Policies

Businesses need clear SRM policies and processes in place that are consistently adhered to.

Your SRM policies and processes should be communicated to all stakeholders, including suppliers and internal stakeholders.

You should have a mechanism for handling any issues that arise from your SRM programme whether that is feedback through any SRM software you use or an email you receive that highlights an issue.

We mentioned the SRM Charter early on in this article. That should be one of your assets.

As a minimum you need:

• An SRM Policy - sets out what you are looking to achieve e.g A more resilient supply base, where we are the customer of choice with our Strategic Suppliers. Our Strategic Suppliers provide us with their best pricing, we innovate together, we share each others’ successes and we’re both brought into the wider business strategy for one another.

• A Charter - Sets out the rules for each engagement (or contract) that we sweat to uphold.

• An SRM Process - how is SRM built into the wider sourcing and contract management phases?

Capture this as a minimum and you’ll be okay. However, I would suggest that you need to get C-Suite to sign off on each document. Someone, outside of Procurement, needs to champion SRM in your company at the C-Suite.