Supplier Relationship Management: Six Secrets
Open and honest communication. Transparency. Mutual support. These are the qualities of a healthy relationship…and the signs of an effective supplier relationship management strategy.
In many ways, the steps to ensure a positive supplier relationship are similar to the steps necessary to ensure a strong marriage. Both parties need to make a concentrated effort to maintain trust, transparency and communication. It doesn’t just happen accidentally; it requires deliberate and thoughtful action.
It takes company collaboration to foster corporate success and growth…especially in the unprecedented fluctuation and uncertainties of today’s global supply chain. If anything, COVID-19's supply chain impact has been the perfect case study. The global disruptions (all happening at once) are numerous: supply constraints, logistics backlogs, labor shortages and unprecedented demand just to name a few.
In response to these challenges and uncertainties, OEMs are appraising their strategic suppliers and current relationships. In fact, if there's one lesson learned from the pandemic it has been the importance of developing strategic supplier relationships.
In Jabil's 2020 survey of more than 700 supply chain decision-makers, participants indicated that the shifting supply chain landscape is causing them to take measures such as revising their approved vendor lists and evaluating multivendor sourcing strategies. Supplier relations are also shifting from traditional sourcing and procurement to rely more heavily on initiatives such as supplier relationship management (SRM).
What is Supplier Relationship Management?
To put it simply, supplier relationship management is a systematic approach for developing and managing partnerships.
The goal of SRM is to encourage mutual growth and value creation with targeted suppliers based on a foundation of trust, open communication and a win-win mindset. This differs from non-partnerships, which are predominantly governed by contract administration, contract management and vendor rating. “Purchasing and Supply Chain Management” by Robert Monczka succinctly outlines the purposes and benefits of SRM:
- Become a “customer of choice.” Receive preferential treatment for availability, costs, access to technology, innovation and risk reduction.
- Focus on value. Increase market competitiveness through consideration of all relevant elements that determine stakeholder value.
- Leverage on supplier capabilities. Attain an advantageous position through early involvement in the innovation and product and process development processes.
- Share growth, profits, risks and investments. Develop joint objectives, efforts and resource commitments that result in a healthy culture for continuous growth.
Given the extreme number of fluctuations and uncertainties currently surrounding the supply chain, an SRM strategy is one of the most valuable investments that an organization can make. For example, about 95% of our survey participants indicated that their company has experienced the impact of the ongoing component shortages.
In an attempt to stabilize supply, OEMs are reconsidering their allocation methods. According to our survey, 44% of participants investing in supplier contingency plans, and 39% are looking for additional layers of redundancy and diversity when choosing suppliers. With this heightened focus on allocation, an SRM program is vital to compete in difficult market conditions.
Overall, supplier relationships have evolved significantly over the past few years as OEMs have increasingly begun to outsource non-core competencies, thus making them more reliant on partners for innovation, security of supply, corporate social responsibility and cost savings. This dynamic is changing supplier relationships, making them more vital to bottom-line success and supply chain resilience.
So, how can you make the most of your supplier relationships?
Six Strategies for Strong Supplier Relationships
The primary objective of supplier management is to develop a two-way, mutually beneficial relationship. A solid supplier relationship can take you exponentially farther than you could by yourself, but to do so at peak capacity for a long time requires regular maintenance and care. Here are some tips for cultivating your SRM:
1. Launch During a Buyer’s Market
Maybe you’ve heard the old Chinese proverb: “The best time to plant a tree was 20 years ago…the second-best time is now.”
Ideally, the best time to initiate a thriving SRM strategy is before issues and challenges arise. That will allow companies to create plans so they can be strategic instead of reactive. However, to plant seeds that will blossom into corporate growth and success, the second-best time to act is right now. For an example, let’s consider the component shortage.
As I mentioned, 95% of our survey participants indicated that they have felt the pinch of component shortages. This has kindled significant adverse effects on companies, such as narrower profit margins, fluctuating prices, delays in production delivery or time-to-market and more.
When supply is short of meeting demand, suppliers allocate a percentage of their output to each customer. This means that each customer may get a percentage of the demand they have for a specific product. Ultimately, during these component shortages, suppliers determine who to support; your ability to continue to function depends solely on the quality of the relationship you have with your suppliers. I can't overemphasize the importance of positive supplier relationships.
2. Concentrate on a Targeted Group of Supplier Partners
No company, however large or successful, has the capacity to build a strong strategic relationship with all of its suppliers. The more you supplier partners you utilize, the more difficult it will be to maintain the level of communication and collaboration and build the trust required for successful SRM.
The idea behind SRM is to pinpoint key suppliers and draw a greater focus on developing a business relationship. Typically, companies prioritize suppliers that either provide high volumes of a product or service or offer lesser quantities of crucial ones.
Start by segmenting your supplier partners. The Kraljic model can be useful in determining what suppliers should receive higher levels of attention. Although hailing back to 1983, this model is still highly relevant and effective for modern supply chain managers as a method to map multiple suppliers against risk and profitability. Additionally, create a set of criteria. Use these to categorize your key strategic suppliers (tier 1) and concentrate on building those relationships.
3. Develop a Clear Vision
Every strategy needs to start with a clear understanding of the end goal as well as measurable targets. Looping partners in on the supply chain planning process will ensure that you are both aiming for the same results. In other words, to achieve SRM success, collaborate with your partner to develop a shared, clear and inspiring vision and imagine the potential consequences if the goals are not met.
4. Make it a Framework for Procurement and Sourcing
Just over three-quarters of survey participants said that although everything “under the hood” is completely different, their supply chain framework has not changed significantly.
In order for both parties to derive the greatest possible benefits from their partnership, you cannot think of it as simply a tool; it should be the framework that every sourcing strategy relies on, from negotiations to long-term planning.
Too often, supply chain managers mistake SRM for an elevated form of negotiation or a more ethical way to bamboozle suppliers into lowering costs. This piecemeal approach to SRM turns it into an opportunistic activity, thus making it impossible to foster a long-lasting partnership.
5. Act Strategically vs. Reactively
Challenges and issues will arise. But with SRM, you can create pre-established contingency plans to fall back on when situations inevitably go awry. This allows businesses to act strategically and rationally instead of being forced to invent a solution on the spot.
6. Ensure Everyone Benefits Equally
I’ve said it before, and I will say it again: SRM strives to benefit both parties. This cannot be overstated; it is the backbone of every supplier partner relationship strategy. Companies are entering a long-term relationship with definite measurable goals and a mutually understood and pursued vision.
Three Challenges in Supplier Relationship Management
Although ripe with benefits, like any endeavor, supplier relationship management has its challenges. A study by PwC identifies three of the most prominent challenges when it comes to SRM. Let’s explore these:
1. Overemphasis on Cost Reduction
Always remember: the objective of an SRM is to create a situation that benefits both parties. SRM is a marathon, not a sprint. Keep your eyes on the long-term goals instead of short-term gains.
2. Lack of Specific SRM Competencies
Historically, the foundation of the procurement process has been functional competencies: negotiation, market analyses and risk and cost management, to name a few. However, fostering a flourishing SRM requires more tactical skills, such as influencing, leadership and change management. Ensuring that buyers are trained in these skills can assuage the severity of this obstacle.
3. Insufficient Alignment Between the Business, Procurement and Supplier
Again, it is crucial to remember that SRM seeks to benefit all parties involved. The lack of alignment can be detrimental if the buying organization wants to develop a partnership and the supplier is working to take advantage of the customer. Additionally, some businesses simply approach supply chain with different mindsets and methodologies.
This challenge can be alleviated with all departments involved sitting together to discuss and set a clear vision with measurable goals, as I mentioned earlier.
The Future of SRM Technology
Supply chains, by necessity, have undergone constant change since before the industrial revolution, and the tempo of innovation has only accelerated within the last few decades. The digital era, however, is necessitating something more than operational tweaks to today’s supply chains.
Given the substantial challenges supply chain managers face, it is no wonder that the most common response to supply chain disruption is to adopt new technology. In fact, 95% of respondents agree that better technology decisions today will help their supply chain strategies long-term.
As technology evolves and becomes more incorporated into supply chain processes, there are several technological maturities that will assist better SRM.
Artificial Intelligence (AI) and machine learning will help facilitate supplier selection and risk management. Data sets generated from SRM actions, such as supplier assessments, audits and credit scoring provide an important basis for further decisions regarding a supplier. With these burgeoning technologies, data gathering could be active rather than passive. Therefore, supplier selection will be more predictive and intelligible, setting the foundation for supplier relationship success.
Additionally, more than 90% of our survey respondents agree that it is important to maintain visibility through to the original component or supplier is important. Technology like cloud computing will also enable an agile and real-time transfer of data, thereby aiding in more effective, and open communication.
As market forces develop and technology evolves, the landscape of procurement and strategic sourcing is changing as well. And as more companies outsource vital functions, such as innovation, security of supply and corporate social responsibility, maintaining a positive and long-lasting supplier relationship will be more vital—in fact it could be a competitive advantage. SRM can connect the broken tangle of global suppliers with the strategic interests of an organization to identify and drive previously untapped business potential. In the process, SRM creates a win-win situation for everyone.
Special Report: Supply Chain Resilience in a Post-Pandemic World
Insights from over 700 supply chain decision-makers at OEMs with more than $500 million in revenue on how they are managing their supply chains in light of COVID-19 and other market dynamics.