Supplier relationship management (SRM) is the systematic approach of assessing suppliers' contributions and influence on success, determining tactics to maximize suppliers' performance and developing the strategic approach for executing on these determinations. It helps to create positive buyer-supplier relationships and determines which activities to engage in with each supplier. Supplier relationship management is used by supply chain professionals involved in areas such as procurement, project management and operations where these professionals regularly deal with suppliers. SRM includes both business practices and software.
Goals of supplier relationship management
The definition of supplier relationship management can vary from organization to organization. However, the typical goal of SRM is to streamline and improve processes between a buyer and its suppliers -- the organizations that supply the goods and services -- just as customer relationship management (CRM) is intended to streamline and improve the processes between an enterprise and its customers. Underlying SRM is the focus on developing a mutually beneficially relationship with suppliers, especially those deemed as most strategic to the brand, to promote quality, efficiency, innovation and other benefits.
Supplier relationship management has become increasingly important as buyer-supplier networks become more global and interdependent and companies rely more heavily on strategic suppliers. SRM practices create a common frame of reference to enable effective communication between an enterprise and suppliers and to measure supplier performance.
Supplier relationship management process
Just as the actual definition of supplier relationship management can vary, depending on which organization defines it, the processes of strategic sourcing related to SRM can vary as well. However, these broad categories can be used to understand the following important supplier relationship management processes:
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- Segmenting suppliers, which categorizes suppliers based on their importance to the business;
- Developing governance and performance management models to align business processes and assign stakeholders according to business goals; and
- Improving relationships with suppliers, which involves sharing strategic information with key suppliers in order to develop better products and services.
The foundational step of supplier relationship management is determining suppliers' contributions, especially in light of their strategic importance to the success of the business. Different suppliers have different influence on organizational profitability. As a hypothetical example, ABC Smartphone Company's stationary supplier has little influence on the outcome of its profitability, but its main electronics supplier has a huge impact. Any risk to the electronics maker's operations is a major risk to ABC Smartphones. This makes the electronics maker a key strategic partner.
There are many different supplier relationship types and levels. While some in the field of supply chain management believe that supplier relationship management applies only to the key partners, others believe the discipline encompasses all suppliers, although the degree of time, attention and other resources given to a strategic supplier will be far more than one that is a transactional supplier.
After the process of supplier segmentation, stakeholders must determine strategies and core processes. Working with key strategic suppliers where appropriate, this involves the appropriate stakeholders setting up internal governance processes, assigning to specific groups or individuals specific supplier relationships. It also involves setting up and measuring operational measures, with stakeholder reviews to make sure that processes are on track.
One major benefit of supplier relationship management is the possibility of working with strategic partners to increase innovation either through process improvement, product development or both.
Note that although supplier relationship management can be applied to all levels of partners, the goals vary at different levels. Whereas with a transactional vendor, it would not be appropriate to focus significant resources on managing the partnership, and lowering costs will likely be a focus area -- a key supplier requires a partnership approach that reflects its strategic contributions.
One example of the importance of SRM
According to proponents, practicing supplier relationship management can lead to lower production costs and a higher quality, but lower priced, end product. For example, one research study of automakers found clear support for this belief.
The research study, discussed in a May 2014 Supply Chain Management Review, examined the relationship of automakers' approach to SRM and its profits. Looking at six major automakers, the study found a direct relationship between supplier relations and profit, with better supplier relationships contributing to better profitability, and the reverse for bad relationships. As an example, the study determined that the Chrysler Group missed out on $24 billion in unrealized income from 2001 to 2012 due to a period of rock-bottom supplier relations during tumultuous ownership changes at the company.
SRM software options offer specific mixes of features and functionality. One helpful view of SRM software functional categories is outlined by consulting firm Capgemini in its SRM research paper from 2016-2017. It included the following functional categories:
- Procurement intelligence, such as supplier risk management;
- Product lifecycle management, such as portfolio strategy management;
- Sourcing, such as strategy development;
- Supplier data management, such as validating supplier requests;
- Supplier performance management, such as performance review setup;
- Contract management, such as creating supplier contracts;
- Catalogue management, such as user capabilities;
- Operational procurement, such as processing purchase orders; and
- External resources, such as requesting specifications.