There’s no efficient supply chain without efficient suppliers.
Redefining existing supplier relationships is a top goal for many businesses and manufacturers. It helps them ensure a stable stream of raw materials and other essential supplies and survive in the ever-growing retail competition.
This has stemmed the need for supplier relationship management.
Organisations turn towards supplier relationship management as a controlled and systematic process for product sourcing and to maintain a reasonable level of profitability.
What does that mean and what makes supplier relationship management an inevitable activity for you?
This article talks about that and the benefits, goals, and processes of supplier relationship management.
What is Supplier Relationship Management?
Supplier Relationship management (SRM) is the process in which a business takes an effort to build a lasting relationship with its multiple suppliers.
Companies roll out special SRM programs that are aimed at increasing collaboration by identifying the right suppliers. Businesses run such programs to optimise their costs, mitigate risks, and improve the overall operational process.
5 Supplier Relationship Management Benefits
Supplier relationships all aim towards an efficient bottom line. The interactions between a company and its suppliers ensure the best possible outcomes for both entities. Let’s check out some of the top benefits of an effective supplier relationship management.
1. Optimised Procurement Process
For the longest time, manufacturing activities such as procurement and product sourcing are dependent on supplier relationships. And despite the advent of technologies and automation, the processes more or less are still dependent on your rapport with suppliers.
But a lot of times these relationships take a backseat to make room for nurturing customer relationships and reducing costs.
A well-rounded supplier relationship management strategy opens up doors for ideas and feedback. It ultimately improves the supply chain operations and fulfilment processes. SRM helps businesses and suppliers understand the workflows of each other.
This way, they can make iterations to their workflows to meet the requirements of the other. It provides many operational advantages and helps with streamlining purchases and consolidating the supply chain.
Studies show that a positive link between a good buyer-seller relationship leads to an improvement in ROI. There is a better response to market changes and reduced eCommerce order fulfilment lead times.
2. Reduced Wastage and Price Volatility
Waste has always been a pressing issue in manufacturing and procurement. It also adds up the additional costs and hassles of discarding it. But have you ever tried to determine the source of this waste?
It can stem from inefficiencies in processes and the lack of alignment between the buyers and sellers. It can also be due to sudden changes in commodity prices and nothing spooks customers more than huge price fluctuations.
SRM allows for setting up mutually beneficial agreements in terms of what should be delivered at what price. This gravely reduces the price volatility as businesses can take advantage of fixed pricing or scaled increases in return for minimum order levels, lengthier contract terms, etc.
You can also commit reasonable pricing to the customers by setting your own pricing structures and be prepared for any unexpected changes in the prices.
3. Reduced Costs
SRM helps you analyse the supply chain with the intention of reviewing the relationship with suppliers. You can easily find the high-cost areas and take action to minimise them.
For example, you can:
- Minimise the costs of competing, negotiating, and finalising a new contract,
- Partner if dropshipping suppliers if needed,
- Check the supply chain for pricing details,
- Create vendor or product rationalisation, and
- Identify extra logistical cost savings.
The positive relationship establishes a starting point for each purchase. It means businesses spend less time bidding and negotiating before every purchase.
SRM also reduced costs since there's a significant reduction in waste. A good relationship also helps in reducing availability problems, delays, and quality issues. It can ensure enough liquidity in the supply chain.
4. Improved Efficiency
Good relationships with suppliers lead to transparency and higher visibility in the supply chain. Communication improves as suppliers know more about the organisation they’re working with. They inform businesses in advance of any discrepancies in the number of goods or price changes.
This automatically reduces the order issues. And even if issues arise, there is a collaborative effort between suppliers and businesses to resolve them.
Better communication also helps suppliers be in the loop about the business’s evolving needs and circumstances. If you treat them right, they are more likely to be responsive to your requirements and you’ll end up with fewer surprises.
5. Continuous Improvement
A good supplier relationship today sets things in motion for your scaling business in the future. Building on these relationships contributes to the company’s ability to address risks in the future. They can keep functioning despite issues that can halt production. The same foundation can increase flexibility and agility in buyer-supplier relationships.
A long-term relationship can pave the way for better product development. It can start new order processes and joint ventures that provide financial and operational benefits to both parties. As companies tailor their supply chain, they can consolidate the processes, reduce costs, and improve the end product delivery and logistics pick-up.
Process of Supplier Relationship Management
For supplier relationship management to be successful, you must pay heed to different activities for operational and financial efficiencies. What is this process?
You’re about to find out.
1. Segmenting Supplier Base
Segmenting your supplier base comprises creating separate groups of your major suppliers. You can divide them based on the type of vendors they are such as strategic, tactical, and tail vendors.
No single strategy works for all. Manufacturing and b2b is a clustered and unorganised market. Suppliers all act differently and have different policies. Segmenting them into a group will help you draft a distinct manufacturing strategy for all and identify the set of resources for each.
It is also advisable to segment your suppliers based on who adds the most value to your business versus how much you spend on them. Those with the most value and spending, are usually the vendors you might want to build long-term relationships with. While there may be other small groups of suppliers who can help you with innovation.
This method is known as the matrix approach. Here, the suppliers are segmented into:
The other type of supplier segmentation is called the pyramid approach. It segments suppliers into strategic, important, and transactional categories. In this case, the value of suppliers at the top of the pyramid (strategic) is high. Whereas transactional suppliers are at the bottom of the pyramid and have a lower value.
You can also segment them based on the risks of supplied items and how crucial they are to your product mix. If a product is widely available in the market, you’re always in a good position to negotiate for a better price. This way, you can reduce the logistics and administration costs of procurement.
Ultimately, you’ll be the best judge on how to segment your suppliers. It depends on what products you sell, their market value, availability, risks associated, and supplier value and innovation.
2. Setting Objectives
As you do for every process, setting up goals and KPIs is critical for the measurement of the progress of your supplier relationship management activities. Set up distribution management goals that align with your greater business objectives.
It can range from cost-efficient logistics operations to super fast customer deliveries. It helps you prioritise the type of suppliers you want to work with.
Based on your objectives define your supplier management KPIs such as:
- Lead time: what is the time between a supplier receiving an order and shipping the same to the business?
- Compliance Rate: How does the supplier adhere to the contract terms? It helps you figure out how reliable your suppliers are in terms of delivering what was promised.
- Defect Rate: What is the damaged and faulty rate delivered by the supplier?
- Supplier Availability: Can the supplier provide the order as and when required? Supplier availability helps you determine the order cycle time consistency of the suppliers in terms of availability during the contract duration.
- On-time delivery rate: This helps you check if your supplier is able to deliver on time.
3. Measure Supplier Performance
There’s no point in having KPIs if you’re not going to measure the performance and evaluate the results to see if the suppliers fulfil your KPIs. To measure supplier performance, you need to keep track of your strategist and tactical vendors. It’s okay if you don’t do the same for tail (those that can be easily replaceable) suppliers.
Since the focus is on consistency, you’d have to do more than just on-time-in-full monitoring. Suppliers are also evaluated based on:
- Timely deliveries
- Innovation in products
- How well they collaborate with clients on a regular basis
Businesses also measure supplier performance metrics like quality performance, service performance, CSR activities, etc.
4. Create a Supplier Strategy
The supplier relationship management strategy includes aligning the action plan with four components:
- Supplier performance management
- Relationship management
Let’s say that the goal of your supplier relationship management is to decrease costs and get optimised prices from your suppliers.
You have three suppliers where the first supplier provides excellent products and services but the prices are a tad too high.
The second one is not an easy supplier to deal with but provides good pricing.
Your third supplier isn’t that important to your overall business since there are other supplier options for his products.
In this situation, you would ideally seek to negotiate a better price from the first supplier. You strive to improve the communication with the second. You know what to do, but this step is figuring out the how. You can offer more business to the first supplier to get a volume discount or you can negotiate with them showing other competitive offers.
Your plan of action will depend on what type of personnel you have and how they can get the best out of every supplier deal. A lot of supplier relationships rely on good communication and negotiation skills. Have an employee that can make it effortless to convince the suppliers and seamlessly pull out the plan of action.
Collaborate with Suppliers
We know what you’re thinking. Isn’t communication the same as collaboration? Yes and no. At the core of relationships is building a rapport with the suppliers that go beyond the business transactions.
You need to connect with suppliers on a more personal level for the long-term benefit of your business. Treat them how you would treat your customers as here too, you want to make repeat purchases, get the best rates, and receive top services.
In this process, you can collaborate with suppliers through:
- Informal human-to-human connections, or
- Formal organisation-to-organisation connections
Ensure that your collaboration happens organically through simple relationship management. On the outside, a routine informal phone call or being friendly may not seem much. But it can help you get closer, and learn about each other’s business and what’s important to them.
Suppliers also eventually keep you in the loop of eventful changes — changes like price fluctuations, product innovation, shortages, and changing supplier expectations. You can in fact do the same.
6. Continually Monitor and Adjust
Execution of strategies is only successful when you measure and monitor. Since logistics and manufacturing are volatile industries, you have to practice supplier relationship management on a regular basis.
There are new technological advances, price fluctuations, product innovations and many other factors that will come into play and you’d have to revisit your strategies and adjust according to the new market trends.
Monitoring and adjusting will help you better adapt to new changes. This is also where you monitor the market conditions, competitors, and products in general. It will give you an insight into how you can tweak your supplier relationship management. You can collect the data to accurately segment your suppliers and start supplier relationship management anew.
3 Major Goals of Supplier Relationship Management
1. Mitigate Risks
Risks are expensive. You strive to always focus on ensuring that things go as planned. But activities can deviate a little and put you in an unexpected position. With improved operations, you considerably reduce the risks of something going wrong.
Most of the risks associated with suppliers originate because of miscommunication, sudden price rises, or unexpected dissolution of supplier relationships.
But with SRM practices like developing a concrete collaboration, you can get advanced notice and be prepared for bad phases. Having good supplier relationship management also allows you to have backup and diversify your supply chain.
2. Enhance Relationships with Suppliers
We’ve said it time and again. Regardless of technological advances, relationship-oriented businesses have been the ideal business way. And sure, placing orders and setting up contracts are equally important. But so is having a sincere partnership that lays the foundation of benefiting both parties instead of a single one.
Suppliers control the entire procurement process of your supply chain. So you need to be proactive in building personalised relationships with each supplier. This ensures that the heart of your business — your product, is in reliable and efficient hands.
Enhancing relationships with suppliers also ensures that they will stand by you during adverse times. In the future, such collaborations can also lead to partnerships. That way you can mould your supplier relationships according to your organisation's needs.
3. Optimise the Value Chain
Since procurement is the first step in the overall logistics process, it’s essential to optimise the value chain right then itself. Having SRM eventually benefits the entire chain. Mainly through cost savings, getting the best deals, reduced risks, and leveraging product innovation.
Since you’re on a constant lookout for getting the most out of the least from the suppliers, you can witness a range of advantages that spirals into the rest of the value chain. You’re motivated to look for new opportunities that benefit your:
- Order management,
- Inventory management,
- Warehouse management,
- Last-mile deliveries, and
- Customer satisfaction.
5 Common Challenges and Measures of Improvement for Supplier Relationship Management
1. Lack of Visibility and Communication Challenges
While you always strive for seamless communication with your suppliers, it’s easier said than done. Most of the problems that arise in supplier relationship management are because of the lack of communication altogether.
Many buyers become sceptical while sharing information with suppliers. That creates a lot of mistrust amongst suppliers. And it becomes a bottleneck in developing authentic relationships with them. Besides, how do you expect them to fulfil your supplier needs if they’re not in the loop about your goals?
This is where technology steps in. Thanks to the many tools available in the market like e-procurement tools that help in extracting crucial information. It encourages a lot of transparency between buyers and suppliers and allows them to be on the same page.
E-procurement involves ordering and purchasing goods and services online. It eliminates paperwork and streamlines the procurement process right up until the final payment.
2. Managing Inventory
Overstocking and understocking have been prominent problems in inventory management. In supplier relationship management, these issues are very common and at times inevitable. Having just the right amount of stock at the right time is challenging but essential since it reduces costs associated with storage space and waste.
To address this challenge, connect your supplier relationship management system with inventory control and demand forecasting systems. This way, your suppliers are in the loop about the data you collect and you can constantly monitor and review that data.
Technological and automation tools that you use in the logistics management process all come with integration. Integration helps you develop a technological ecosystem by connecting all your major tools like procurement software, shipping operations and so on. This helps establish greater transparency with your suppliers and allows them to proactively inform you about stockout risks.
3. Contract conflicts
Contract conflicts are very common between suppliers and buyers. A lack of alignment between buyers and sellers ultimately leads to the unnecessary exploitation of one party over the other. It also proves to be expensive.
For example, say a supplier has a monopoly in the market for niche products. These suppliers can easily look for a profit-making opportunity. They can keep the prices extra high that eventually is passed on to the consumers by the company.
To avoid such issues, keep the vision clear and communicate the same with suppliers. In our example, you can encourage the suppliers to become partners or buy in volume to keep the prices low. In the end, the contract needs to benefit both parties equally and have room for negotiations and adjustments.
4. Lack of Alignment
Strategic goals can sometimes collide with traditional goals. Decision makers can just focus on low prices and not on improving suppliers' ties or improving quality. This lack of alignment can create serious problems in the procurement process.
While you’re looking to strike a deal that benefits your goals, the suppliers are looking to fulfil theirs and there’s often misalignment in what both parties want.
To address this, you can pay heed to hire the right talent and decision-makers that understand what’s best for the organisation in the long run. The manager also needs to communicate and support goals in concrete ways to dispel any confusion.
5. Over-reliance on One Supplier
Having a single supplier is always risky as a supplier works with multiple businesses too. There can be delays in deliveries, shortages of goods, and confusion in procurement. All these issues can cripple supplier relationship management.
While it is critical to have suppliers that play a strategic role in procurement, you never entirely rely on a single one. For supplier relationship management to move smoothly, you need to diversify your suppliers to have a backup.
To truly build a business that outshines others in the industry, you need to go the extra mile in building relationships. Sure, the revenue, sales, and numbers will speak for themselves. But relationships are something that acts as an invisible force that ensures success with ease.
While you hear about customer relationship building all the time, supplier relationship management is equally important and paves the way for an efficient logistics process starting from procurement. Happy suppliers mean a happy supply chain. The earlier you realise this, the better you can work towards building a logistics process that provides a crucial competitive advantage.
Meanwhile, if you need help with your logistics, feel free to reach out to us at PACK & SEND and we’d be happy to guide you through.
Frequently Asked Questions (FAQs)
What is supplier relationship management?
In the most basic sense, supplier relationship management is an initiative to build mutually beneficial relationships with suppliers. Companies roll out special SRM programs that are aimed towards increasing collaboration by identifying the right suppliers and with whom to partner.
What is the importance of supplier relationship management?
Supplier relationship management is the need of the hour for many players in the manufacturing and eCommerce industry. The top reasons for embracing supplier relationships are so that businesses can optimise their costs, mitigate risks, and improve the overall operational process.
What are the goals of supplier relationship management?
Procurement is expensive and risky. Supplier relationship management aims towards building positive supplier relationships to mitigate the risks associated with overstocking and understocking, timely deliveries, and excessive demand, and reduce costs associated with negative customer experiences, wastage, and extra storage space.
What is the role of the Supplier Relationship Manager?
Supplier relationship managers overlook the SRM processes with the multiple suppliers. They evaluate, analyse, plan, and negotiate for successful supplier outcomes and logistical execution.