The term supplier relationship management (or SRM) was coined 1983 when Peter Kraljic, a consultant at McKinsey, highlighted to corporate buyers the importance of being proactive when it comes to supply management matters, and encouraged them to put in place SRM best practices that meet their companies’ requirements.
Little did we know that SRM would become one of the most important aspects of business today. Studies show that organisations that deploy SRM successfully report additional value benefits of 2% of total spend, right through to 40+% from specific key relationships. Effective SRM doesn’t just involve having periodic supplier meetings to ensure good corporate governance, or merely the act of collaborating with key strategic partners. Rather, it is the creation of a dynamic, long-term relationship between the buyer and the supplier to maximise profitability and mitigate risk. The goal of SRM is to streamline the processes between a business and its suppliers, with value creation as a main outcome.
Focus on the relationship
With competition across all industries growing by the day, leaving SRM and supply chain performance to chance is no longer an option. The strength of your relationship with your suppliers will determine whether your business sinks or swims, and the most successful organisations realise that building a strong foundation with suppliers is key to sustainable joint value creation and consistently high revenues. Relationships feed on trust, so it’s important that both parties earn each other’s trust through honest dealings, effective communication and mutual respect. In business, time is equivalent to money, and taking the time to invest in the relationship should result in both parties reaping many rewards.
Encourage fair dealings
Nobody likes to be short-changed or cheated, more so in a business setting. Effective SRM dictates that both the buyer and the supplier come to an agreement that is mutually beneficial and profitable. This is important because if one party is unsatisfied with the terms of the deal or feels that they are being put at a disadvantage, the relationship will surely disintegrate. A supplier that feels unfairly treated may refuse to comply with the agreed terms and conditions of the deal, while a buyer feels that feels cheated may become resentful and bring their business elsewhere. That said, both parties should the reasonable with their requests and consider the position of the other party when structuring the terms and conditions of the deal so that both parties feel enthusiastic about the final agreement.
Keep communication lines clear
A key practice in all areas of the procurement cycle is to manage risk. Every operational activity in the procurement cycle such as sourcing, purchasing, delivery, and payment carries a certain element of risk that must the recognised and mitigated to minimise disruptions to the procurement cycle. In this case, SRM is often said to be the first point of reference for risk management strategies in many supply chains.
To mitigate risks effectively, both the buyer and supplier must be in sync with each other on what to do and how to do it, and this can only be achieved through clear and constant communication, as well as the willingness to hear the other party out. Any concerns or ambiguity must be aired and discussed, and the best course of action mutually agreed upon. Other considerations from the viewpoint of SRM include time, location and frequency of communication.
Take advantage of technology
SRM is as much about raising daily operational performance as it is about innovation and joint value creation. When it comes to selecting suppliers, SRM technology can assist by automating the supplier risk questionnaires and reviews – suppliers are screened through the questionnaires placed on a web portal that allows them to include attachments and examples of past work. This helps the procurement team to carry out proper due diligence when selecting suppliers. Once a supplier has been awarded the contract, SRM technology can also help to onboard new suppliers in a simple and efficient manner. SRM technology provides you with total and maximum visibility into your supplier base, making it easier to analyse all the risk factors. SRM technology also allows you to see what is impacting your supply chain, making it easy to mitigate risks.
Be open with each other
For the procurement cycle to go smoothly, a business’ supply chain must be effectively managed, allowing the organisation to achieve and sustain a competitive advantage. Leveraging supplier relationships to grow competitive advantage is crucial in large global organisations. A good relationship is often said to be cultivated through open and honest communication, and in the case of the buyer-supplier relationship, it is no different. Procurement heads should take it upon themselves to initiate engagement and development programmes to engender a supportive and collaborative relationship with suppliers. A well-designed SRM process facilitates a well-structured, mutually beneficial relationship between the buyer and the supplier through engagement, effort and constant collaboration between both parties.
Keep to the agreed terms and conditions
The buyer-supplier relationship was developed on the premise that both parties work together to fulfil the requirements of a deal they inked. Having agreed to the terms and conditions of the contract – which may cover matters such as pricing, delivery and quantity – both parties should strive to adhere to the terms and maintain a mutually beneficial relationship. A relationship based around a contractual agreement can only flourish if both parties play their part and approach the relationship with openness and respect, making sure to regularly communicate and collaborate. This not only ensures optimum business performance, but makes for a more pleasant working relationship.
Engender mutual respect
Respect – just like communication – is a vital ingredient to facilitate a successful relationship, regardless of the setting. In business, however, the importance of respect is magnified twofold because there is a substantial amount of money involved. Both the buyer and the supplier naturally prefer to work with parties who demonstrate integrity and appreciation for each other’s efforts. Respect also helps to engender trust, which, if built through respect and openness reaps multiple benefits. This, in turn, provides more opportunities to increase business performance through innovation and problem solving. In short, your business is more likely to succeed in a relationship where there is mutual respect and appreciation between both parties.
We hope that this article by team ThunderQuote has helped you understand the underlying principles of effective SRM. Let us know if you require additional assistance by visiting our website!
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