What is supplier relationship management (SRM)?
Supplier relationship management (SRM) is the ongoing evaluation of vendors that supply your organization with goods, materials, and services.
Not too many years ago, your customers were happy to wait days or even weeks for products to be delivered. You knew who all your competitors were, and market trends were often gradual and steady. Today, none of that is true. Modern consumers shop in real time from a global, and typically digital, catalog. Product (and even industry) trends can take hold in weeks, if not days. Throw into the mix a confounding collection of supply chain disruptions from pandemics to politics and weather events – and that equals quite a dizzying situation. As much as your customers build your business, your suppliers are the foundation upon which it exists. Today’s best software solutions and operational innovations are helping companies develop the supplier relationship management strategies they need to not only compete but thrive in today’s complex and fast-changing world.
Supplier relationship management meaning
The practice of supplier relationship management (SRM) originated in the 1980s as a way to give companies a systematic and consistent strategy for assessing their suppliers. SRM’s roots can be traced back to the work of the renowned procurement and supply chain analyst Peter Kraljic, who introduced an innovative perspective on supplier segmentation. He developed something called the Kraljic Matrix which essentially maps suppliers against two pivotal dimensions: risk and profitability. For example, an electronics company needs both microprocessors and office supplies, but the vendor that supplies them with the former is far more essential to their success than the latter. For this reason, supplier relationship management posits that while good interactions are important with all your vendors, it’s especially crucial to cultivate robust, transparent relationships and ongoing assessment strategies with those suppliers upon whom your business is the most dependent.
Modern supplier relationship management practices and solutions leverage analytical and strategic components that can help businesses revolutionize their approach to managing vendor relationships.
SRM vs. supplier management
The terms “supplier relationship management” and “supplier management” are often used interchangeably, but they are not technically the same thing. Supplier relationship management is just what it sounds like: the practice of managing relationships with suppliers. Supplier management, however, is broader than that. It includes relationship management, but also supplier information, performance, and risk management – as well as activities like forecast collaboration.
As a term, SRM has been around a lot longer and is still used by many businesses, especially small and midsize companies that don’t need the full functionality of an end-to-end supplier management suite. Today, however, supplier management is the more modern term and is often used to describe new and advanced cloud-based tools that meet the complex needs of upper midmarket and large enterprises.
The supplier relationship management process
This is a circular journey, comprising five critical steps:
- Supplier segmentation: This initial phase involves categorizing the supplier base. This helps to deliver insights, highlight potential risks, uncover savings opportunities, and enhance supplier relationships. Segmentation can occur based on various criteria such as item type, quantity, risk (using the Kraljic matrix), location, price, sustainability, and more, depending on what holds the most value for the business.
- Supplier strategy development: Armed with the insights from segmentation, the next step is to craft a tailored strategy. This involves negotiating contracts and prices, enhancing communication processes, and attempting to diversify business across additional suppliers to minimize risk and dependency.
- Relationship building: This stage focuses on deepening your connection with suppliers. It transcends transactions, fostering a relationship that includes end-to-end communication which can include things like early notifications of price changes, promotions, and potential shortages. Essentially, it ensures that your suppliers know you and are attuned to your business needs.
- Strategy execution: Putting into action the tactics and initiatives identified during the strategy development stage to enhance performance, drive value, and achieve the set objectives with each segmented supplier group. It can encompass contract management, order fulfillment, performance management, and proactive collaboration with suppliers to ensure that the strategic goals are translated into tangible outcomes that benefit both the buying organization and its suppliers.
- Monitoring and continuous improvements: Continuous monitoring of supplier performance is essential to effective supplier relationship management. This can include evaluating timeliness and accuracy of deliveries, product quality, cost efficiency, lead time, and responsiveness. Performance data feeds back into the cycle, informing the next round of segmentation and strategy development, creating a loop that gets stronger and more illuminating each time it goes around.
Goals and benefits of supplier relationship management
When you improve your ability to engage with your suppliers, you boost your opportunities for success.
Closer relationships with suppliers: Building closer relationships with suppliers means deepening your interactions beyond the transactional level. It involves forging partnerships and building trust, mutual understanding, and shared objectives. This gives both you and your suppliers a better understanding of each other’s goals, threats, and opportunities.
Lower costs: By understanding suppliers' operations and cost structures, businesses can work with their vendors to identify areas for cost reduction without compromising quality. This can lead to better price negotiations, bulk purchasing advantages, and reduced total cost of ownership.
Reduced supplier risk: A well-implemented supplier relationship management strategy brings greater awareness and real-time visibility - which helps you identify, assess, and mitigate risks with greater speed and assertion. As the saying goes: You don’t know what you don’t know. Leveraging smart procurement solutions and SRM practices ensures that you are more prepared and confident.
Better supplier responsiveness: When your suppliers know you and feel invested in your success, they are more likely to go the extra mile to meet your needs, especially in urgent situations. This responsiveness can make all the difference in time-sensitive or unexpected scenarios. The tighter the relationship between buyers and sellers, the greater the responsiveness.
Faster supplier collaboration: By providing your suppliers with digital and real-time methods of collaboration and information sharing, you can react faster to disruption and improve business agility. Often, this is done on a multienterprise supply chain business network – a many-to-many B2B collaboration platform where buyers and sellers can connect, transact, and partner on shared processes and information.
Greater visibility and transparency: Good supplier relationship management is transparent. It clearly communicates performance metrics, their importance to all, and the fact that everyone is subject to scrutiny. This no-nonsense, honest approach gives a good impression and encourages suppliers to maintain high standards as part of their partnership with you, rather than simply out of fear of surveillance.
Optimized value chain: By aligning supplier operations with your business objectives, supplier relationship management strategies help to support an increasingly streamlined supply and value chain. This ensures that from end to end, each link in the chain is visible, functioning efficiently, and contributing to overall business success.
Insight into suppliers’ capabilities: With access to data and intel, you can better understand the strengths, capabilities, and potential within your suppliers’ businesses. If you’re introducing new products or business models, for example, you can assess whether your current supply base can meet those needs – or if you need to find new suppliers. By grasping the capacity and limitations within your supplier landscape, you can speculate and pivot with greater assurance and foresight.
Protecting against supply chain disruption
It took the catastrophe of COVID-19 for people to fully appreciate how dependent we all are on supply chains. Aware of how close they’d come to the brink, the best businesses began to aggressively optimize their supply chains and the systems and processes that run them. Part of this has led to the urgent adoption of better supplier relationship management practices to help navigate uncertainties with resilience and confidence. By cultivating strong supplier relationships and maintaining continuous oversight, you can anticipate disruption and respond with agility.
Challenges of supplier relationship management
Even with strong supplier relationship management processes in place, there are still risks and challenges to which you should always remain alert.
Lack of supplier diversity: Building great relationships with a small number of suppliers is terrific for a lot of reasons. But there is always vulnerability and risk associated with having too many eggs in one vendor’s basket. Fortunately, SRM software solutions can help to manage a lot of the time-consuming, administrative elements of relationship management, leaving you free to build new 1:1 relationships and bring on more vendors than you otherwise would have had time for.
Misalignment: Sometimes suppliers can become competitors. Or their agendas and business models can change to where you’re no longer aligned on terms and prices the way you once were. This can be awkward when you’ve built close and friendly relations, so it’s essential to anticipate these scenarios and build diplomatic communication and negotiation plans in case this happens.
Obstacles to risk and continuity: From global politics to pandemics and weather crises, we’re learning to “never say never” when it comes to the next potential supply chain event. Ensuring excellent relationships with your suppliers is an essential buffer against uncertainty – but unfortunately, it’s not a panacea. These days, it’s also crucial to double down with AI- powered solutions and technologies to help you better grapple with data, see around corners, and put contingency plans in place.
Visibility challenges: While supplier relationship management enhances visibility into supplier operations, it is impossible to achieve complete transparency. Balancing trust with technological aids like IoT sensors, blockchain, and GPS tracking can help in maintaining a clear line of sight without encroaching on the supplier’s autonomy.
Supplier relationship management examples
Supplier relationship management strategies and solutions are helping these important sectors manage their unique needs and issues.
- Healthcare: From medicine to surgical equipment, product quality is literally a matter of life and death in this sector. Supplier relationship management in healthcare often involves rigorous vetting processes for suppliers, regular quality audits, and strict compliance checks to adhere to healthcare standards and regulations. For example, a hospital could receive real-time alerts if a supplier’s product has been subject to recalls or quality issues, enabling swift action to find alternative sources and prevent potential harm.
- Retail: With the pace of social media, fashion trends come and go – sometimes literally overnight. Supplier relationship management in retail facilitates collaborative forecasting and planning with suppliers to ensure that the right products are available when they’re hot and not sitting around gathering dust once they’re not. For instance, a retailer of a high-priced, limited edition item can work closely with suppliers to tailor their orders by region, ensuring supply without surplus.
- Energy: Utility companies are often dealing with assets that are decades old and require rare and unusual parts and equipment to keep them running. Furthermore, they are facing mounting pressure to reduce emissions and develop more robust sustainability measures. The old-school parts suppliers and the modern high-tech vendors of smart power equipment have very different practices and methods. Supplier relationship management can help utility companies centralize and unify the way they manage these disparate types of suppliers – making sure they meet the crucial energy needs of customers and remain compliant with sustainability standards.
- Transportation: These companies depend on reliable equipment and timely delivery of supplies. Effective SRM in this sector could, for example, involve closely managing relationships with parts suppliers for vehicle maintenance, ensuring everything is available when needed without carrying excessive inventory. A logistics company might use supplier relationship management tools to evaluate the reliability of a diverse network of suppliers, giving them the confidence to expand and diversify their business.
- Construction: Businesses in this sector are under constant deadline pressures and must maintain relationships with a dizzying variety of material suppliers. A construction firm could use supplier relationship management software to track supplier performance across multiple projects, identifying those who consistently deliver on time and meet quality specifications. This helps them stay on track with both costs and timing.
Take the next step
Explore solutions to start the digital transformation of your supplier relationship management processes.
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