Supplier Relationship Management

"Good fences make good neighbors" is an old proverb that can be applied to the buyer-supplier relationship as "good partnerships lead to good business outcomes." To make the most of these partnerships, procurement teams need a comprehensive view of sourcing and should not just focus on one aspect.

As companies continue to consolidate, classifying their supplier base and understanding strategic supplier relationships can play a vital role to sustain growth and cost management target. In this business world, a healthy supplier relationship is an important indicator of success. When you start forming connections with your suppliers, you will unlock many hidden values in your supplier base. These connections must be cultivated on a regular basis, and they should extend far beyond the finalization of a deal.

Maintaining a healthy relationship between the buyer and seller, with a clear two-way communication can create a platform for resolving conflicts. Working towards continual improvement will lead to an additional value in your supplier relationships.

Also, taking an extra care when sourcing suppliers is a vital aspect to consider. Selecting strategic suppliers is the foundation of the successful supply chain management. Choose business that meet your needs and are willing to work with you to build a healthy organic relationship.

In the world of constant changes with challenges and opportunities, sourcing has become open, accessible to anyone and for any business. A collaborative or furthermore dynamic supplier relationship is highly required to attain our business goals. As always unstated that the performance of our procurement/sourcing team is highly linked and connected with our suppliers’ performance, which means that the magnitude of supplier relationship management is more important. Like any relationship, it helps to gain trust and develops the communication.

Unilateral/Biased approach won’t help to have strong relationship with the suppliers which you intend to work, focusing only on your own benefits. The sourcing process can have real impact on the post–contract relationship that buyer company has with their suppliers.

Only procurement function professionals work hard to build and maintain a strong and vibrant relationships with their preferred/prequalified suppliers.

When procurement function can see evidently that their suppliers are their trustable partners, rest is assured, and company will have robust results.

Even with those suppliers with whom you have an excellent relationship, you must have regular evaluation of cooperation, and should point out things that failed on both sides. When you will evaluate the mistakes of your company, the supplier will appreciate your self-reflection.

It is necessary for any procurement professional to be prepared and play well according to each negotiation with the supplier. If you feel that you are going into a game with low cards, don't just try to bluff, it won't benefit in the long cooperation. You must learn from the game and take more trumps for the next one.

If you have the right cards in your hand, you will not be surprised by the sudden ace of the opponent. Find out in advance how the supplier stands with other departments of your company. Make sure that you are not attacked by arguments or else you will quickly lose your negotiating position.

Obstacles for effective SRM

Today’s business has a lot of critical missions to fulfill such as there are huge pressure on category managers for ensuring quality, sourcing managers for sustainability and CPOs for enhancing top-line value. To meet all those demands, procurement teams requires dynamic work tools.

These tools will develop better insight into their suppliers’ activities and increase intelligence for further analysis to make decisions regarding supplier bases. One way or the other, an SRM solution should be able to provide you with a framework for developing stronger and more collaborative relationships with your suppliers.

The relationship must be trustable and transparent. This includes:

• no alignment with internal stakeholders,

• improperly managed supplier data base,

• unclear supplier classification,

• existence of too many suppliers,

• lack of skilled resources,

• less tools and technology and

• no clear KPI to measure SRM and process in place.

Resilient governance structure

To cope up with emerging procurement landscape, a variety of governance structures are required to improve supplier collaboration. These ecosystems can deliver tremendous value if they are structured and mandated with clear expectations. This kind of governance structures are working well in different size of companies.

In order to effectively collaborate with suppliers, procurement organizations can adopt the framework of strategic supplier relationship management (SRM). Resilient procurement is characterized by four pillars and supported by distinct governance structure and key enablers, that is people, process, and technology.

• Strategic partnership is generally made with highly critical and valued category suppliers who are core assets to the company. This 1% of supply base (refer “Segmentation of supplier for the SRM activity”) varies based on the nature of business, complexity of category portfolio and procurement maturity.

• The involvement of cross-functional governance team is needed to establish partnership management, including C-level for the strong SRM program.

• Unique scorecard for each strategic supplier should be developed and systematically updated with capturing all inputs on supplier performance measurement and then management as SRM can differ with different suppliers.

• The relationship framework (refer the following schematic) involving sponsors, steering committee and a cross functional SRM team drives the relationship between the organization and a preferred supplier.

• The level of involvement from top-level executives may vary depending upon the nature and size of the consulting project undertaken. For example: strategy and M&A consulting projects involve key executives more than any operational consulting projects.

Segmentation of supplier for the SRM activity

This is one example from Hackett Group, I am sure you are already aware of different ways of classifying the suppliers with the application of classic 80:20 rule to support SRM program.

It is important to interact and develop a close contact around the topics in which procurement team or nominated key account manager from the buyer company can interact with their suppliers. To discuss the ongoing challenges, more focus on common project objectives and priorities is needed. Also, understanding the importance of co-design development and innovation possibilities will help to work on mutual benefits.

Regular interactions and frequent communications will help to build trust. Proactive engagement of supplier lays a great foundation to achieve common goals together.

In a challenging business environment, we can experience success simply by joining hands together with our suppliers and not by being alone. We need to develop mutual trust and maintain supplier relationship which leads to a long-lasting journey.

Based on the criticality of product and service, the procurement complexity has been defined. From the following graph, you will get an idea about the idle size of suppliers placed in different classification levels.

Regardless of any size of the companies around 5% of the suppliers classified as Strategic and Preferred suppliers those who needed upmost care, their contribution to your business brings direct impact to your business continuity plans.

Outcome of supplier relationship management

In order to have innovative supplier relationship management program, bringing a significant funnel increase on innovation and brand reputation through constant idea generation. Also, the more proactive and insightful role played by suppliers will support the execution process properly. Looking at innovation from a holistic view, procurement makes it clear that suppliers who support multiple lines of business will see more success than those in standalone relationships.

• Strategic supplier relationships should deliver performance that is “better than market.”

• Cost trends should be challenging level to the market indices. Strategic supplier relationship brings competitiveness in front of end customer.

• It ensures that relationship is mutually beneficial. Also, assures to engage talents and skills of buyer and suppliers to share the knowledge pool.

• It brings maximum value addition to the company and lays a strong base for long-term business relationship.

Concerning quality and performance, a supplier relationship management strategy should enhance the quality and performance of both buyer and seller entities and deliver on business’s critical KPIs.

Upholding the standards of supplier quality and performance, gauged by the members of your internal procurement team, creates a basis for shared responsibility between both entities. Shared obligation aids the production of top-quality products, increasing the brand value, and gives your customers the finest quality they expect and deserve.

Therefore, leveraging supplier relationships to better competitive advantage is crucial for driving collaborative innovation and transcending value from all parties involved.

Summary:

Collaboration across the business shows limited impact or no economies of scale and therefore leverages with suppliers or ability to collaborate and share sourcing/supplier issues internally. Shared objectives and goals lead to effective cross-functional communication, efficient use of procurement resources, economies of scale, leverage with suppliers, lessons learnt contribute to continual improvement. Best-in-class companies consider high-potential suppliers for supplier relationship management programs and invest in them with the expectation that they will come up with innovations that will add value to the organization in the long run.