What is Supplier Relationship Management And Why Do You Need It

August 29, 2022
Alok Suman
Process Management

With supply chains getting increasingly complicated due to factors such as increased market volatility and changing political scenarios, the concept of supplier relationship management, or SRM, is gaining more traction.

COVID-19 has made supplier relationship management even more challenging. Data suggests that nearly 1/3rd of top business CFOs consider supply chain issues as one of their major concerns.

To navigate these issues better and maintain the business's profitability, an increasing number of organizations are shifting their focus to supplier relationship management as a systematic and controlled approach to sourcing the goods and materials they require.

This blog aims to dive deep into the concept of supplier relationship management, including what it is, how it works, its importance, the process involved, its associated challenges, and more.

What is Supplier Relationship Management (SRM)?

Supplier relationship management is a systematic approach to assessing the contribution of suppliers to your business.

Put simply, SRM is a strategic process that allows you to effectively manage all your supplier relationships, such as workflows (e.g., onboarding), vendor data (e.g., contact information, products), life-cycle management, and more.

SRM helps you identify which suppliers are contributing best to your success and also ensures that they are performing well.

Supply chain management primarily uses the SRM approach in procurement, operations, and project management. Maintaining good supplier relationship management helps you enhance or maximize the business value of your supplier interactions.

The SRM approach primarily works by helping you foster positive relationships with your suppliers and guiding the activities you should engage in with each of them. 

The key goal of SRM is to systematically improve business processes between you and your suppliers by creating a controlled and streamlined approach, leading to improved efficiency for both parties.

Why is Supplier Relationship Management Important?

In a competitive business environment, the importance of supplier relationships is immense in defining the success of any business. This makes SRM and how your suppliers perceive your business one of the most critical areas for businesses to deal with. 

Having a set of trusted and reliable suppliers:

  • Reduces time-to-market significantly
  • Lets you focus on core innovation and strategies by shifting away from non-core activities
  • Ensures the optimal price/value/terms for required products and services

Failing to manage your supplier relationships and information strategically can lead to a range of different issues, such as high procurement costs, wasted resources, poor business insights, negative brand perception, or compliance issues. This can not only threaten the pace of the business but also increase the workload.

For instance, without a robust supplier relationship management solution, it can take a long time to onboard a new supplier to your supply chain. Likewise, if you are not aware of who your suppliers are, it may have a negative effect on your business.

Supplier Relationship Management Process

While the process of supplier relationship management can vary from organization to organization, it typically comprises three main steps:

a. Supplier Segmentation

This is the first step in the SRM process, where you have to create separate groups for your major suppliers, such as tactical, strategic, and tail vendors, thus categorizing them based on how important they are to the overall business.

Once done, each supplier group will require an individual management strategy and set of resources to ensure that the suppliers critical to your success receive the attention they deserve.

b. Developing a Robust Supplier Strategy

At this stage, the organization develops a tactical plan that outlines how it will work with the respective supplier(s) to ensure smooth and successful relationships between the business and suppliers.

The best strategy here is to start with suppliers or the category of suppliers that are most important while also recognizing the role of all suppliers at the same time. This will allow you to take a better approach to the process, keeping both governance and performance management in line with each other.

This will also allow you to skillfully align business processes and assign different stakeholders per your business goals.

c. Executing the Supplier Strategy Seamlessly

At this stage, the teams managing supply relationship management functions in the organization need to take charge and implement the strategy by taking on various day-to-day tasks.

Apart from this, they should also devise different ways to closely monitor as well as measure the success parameters of SRM along with identifying the areas of improvement in the overall SRM strategy and its execution.

Overall, supplier relationship management processes employ a range of strategies to better manage relationships with key suppliers. 

Supplier Relationship Management Benefits and Use Cases

Benefits of Supplier Relationship Management

The main objective of the SRM approach is to leverage supplier relationships efficiently to build both value and profitability for the organization.

If done properly, supplier relationship management can be instrumental in cost reduction, efficiency improvement, and elimination of redundancies in the supply chain.

Some of the other benefits of SRM include:

a. Reduced Expenditures

When it comes to internal costs of a company, expenses related to suppliers often top the list. Supplier relationship management can help reduce these costs, as maintaining smooth and effective relationships with your suppliers can save a great deal of money for your organization.

For instance, good supplier relationship management gives you the advantage of discounts, incentives, or other similar deals and cuts down costs.

Additionally, a healthy supplier relationship also reduces the chances of unexpected costs arising due to delays or mistakes in production.

b. Performance Optimization

Leveraging the SRM approach, supply chain managers can have better control over the performance of suppliers against any kind of set deadlines or obligations to ensure that there is sync between suppliers meeting the business needs and following agreed conditions at the same time.

This leads to optimal performance of suppliers and selection of suppliers based on unique requirements such as professionalism, shipping capabilities, and more.

c. Better Decision-Making

Automation of different tasks associated with supplier relationship management will offer important data points and allow you to gain deeper insights into the process that, in turn, will help in decision-making.

Higher visibility into supplier performance provides more information on supplier behavior, associated risks, and supplier services to help you foresee potential issues before they actually arise.

d. Enhanced Efficiency

When you automate tasks related to supplier management, it allows you to eliminate both manual errors and the stress associated with the administrative work required to manage suppliers.

A survey by global analyst firm IDC suggests that manual error costs firms in the US and the UK an average of $18 billion per country or $435 per employee every year.

Automation reduces this risk of errors and associated costs, enhances control, and ensures that all your tasks are performed smoothly and consistently, thus offering you more visibility into the supplier network. 

e. Easy Regulatory Compliance

Another advantage of maintaining good supplier relationship management practices is that it helps in meeting all your regulatory compliance needs.

For instance, an organization might need to prove that it is buying some percentage of goods and materials from small, minority-owned businesses to be able to keep a government contract.   

f. Stable Pricing

One of the key parts of supplier relationship management is using a supplier scorecard, as it quickly highlights the different pricing strategies used by each supplier.

SRM helps organizations spot the suppliers who offer the best pricing, thus eliminating concerns over cost fluctuations.

Additionally, analyzing supplier relationships and shifting focus on mutually beneficial ones can also give organizations the chance to negotiate lower costs in exchange for higher minimum orders or longer contract terms.

SRM Use Cases

An increasing number of organizations are reporting several use cases for implementing SRM, highlighting how the discipline helps them:

  • Ensure continuity of the supply chain
  • Limit risks associated with the supply chain 
  • Take higher advantage of supplier capabilities
  • Enhance responsiveness of suppliers
  • Reduce costs
  • Gain visibility into future pricing

Supplier Relationship Management Challenges

While the importance of developing good relationships with suppliers is huge, doing it well can be quite challenging.

In this section, we discuss some of the top supplier relationship management challenges and the ways to address them:

a. Reducing Risk

A range of risks can disrupt the supply chain in an organization. These include everything from business risks such as shortage of raw materials and price fluctuations to operational risks such as lack of supply chain visibility to environmental and common public health concerns such as natural disasters or pandemics.

Navigating these challenges to successfully manage and mitigate the associated risks due to these factors is one of the most important concerns of modern supplier relationship management teams.

b. Priority Alignment

Another challenge in executing SRM is priority alignment, as the strategic goals to improve supplier relationships may conflict with traditional goals, such as focusing on cost efficiency.

There are several such scenarios where decision-makers solely focus on getting the best price rather than improving quality or strengthening relationships with suppliers.  

Likewise, sometimes an organization's stated goals differ from its tacit goals. In such a case, companies should closely examine the stated goals and the tacit ones to decide which ones to support.

c. Promoting Corporate Social Responsibility

In today's evolving business landscape, businesses must integrate environmental and social factors into their operations. Plus, they also need to consider all these aspects while interacting with internal stakeholders, which forms the basis of corporate social responsibility. 

To reduce environmental externalities and also to encourage volunteerism among employees, companies today need to deal with the ongoing challenge of corporate social responsibility while they manage their relationships with suppliers.

d. Communication Between Buyers and Sellers

Considering the complex nature of the supply chain, one of the most important requirements is maintaining clear communication between buyers and suppliers. This is a huge challenge in SRM, where both parties struggle to build trust among themselves.

The best way to tackle this is through technology, which can help build a strong relationship between buyers and suppliers.

With the help of technological tools, buyers can easily share their data and insights with suppliers. It will not only help suppliers send their supplies at reasonable prices but also help them find the right direction to strengthen their relationship with buyers further.

How SRM Can Be Automated

One of the best ways to automate SRM and effectively implement your supplier management strategy is to use powerful SRM software. This type of dedicated SRM software offers a centralized avenue for all kinds of communication, collaboration, and documentation.

In supply chain management, leveraging the correct SRM software will not only offer higher transparency but also facilitate data sharing between the organization and the supplier.

Apart from this, it can help you automate several day-to-day tasks associated with efficiently managing supplier relationships, such as supplier performance monitoring and procurement, thus giving you more time to focus on other important parts of your business.

While picking an SRM software, remember that it should have all the functions per your specific requirements while also needing minimal training.

Additionally, the software should have features like supplier-facing functionality and communication to create better involvement, along with powerful reporting capabilities to help in improved procurement and other similar decisions.

The Bottom Line

Practicing supplier relationship management efficiently is a must for businesses today as it helps save a great deal of time, money, and resources.

Having a well-defined and properly executed SRM process and following all the best practices will help you better manage your supplier relationships.

In addition to this, SRM also offers your staff and teams clear and transparent purchasing procedures along with offering deeper insights to enhance the overall suppliers' value for your organization.

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