The Right Way to Invest in Supplier Relationships

January 2015

Effectively managing supplier performance means managing the entire relationship. Supplier Relationship Management (SRM) is an organized approach to establishing and managing the company-to-company interactions with suppliers and focuses on maximizing the long-term value that can be derived from key supplier relationships. SRM is critical in ensuring a contract’s value is realized after the award. Though managing suppliers to established contracts is essential, the potential value of effective SRM is greater.

Successful SRM programs require patience, investment, risk-taking, and strong executive commitment. It is not an approach for every supplier—only the key suppliers. Companies can create real advantage by selecting the best suppliers and utilizing effective SRM to capitalize on their full potential.

Top-performing companies in SRM experience:

  • Increased innovation – suppliers can partner on new technologies and help mitigate risks
  • Decreased long-term costs – from both the effort required to source and the price paid
  • More efficient P2P – particularly in AP where processes are smoother (invoice matching, etc.) and inventory management where mutually beneficial collaborations exist (e.g., VMI or JIT can reduce inventory for both parties)
  • Improved consistency in quality and better availability of supply – requirements are better understood and both sides are willing to invest in the strategic partnership
  • Enhanced leverage of supply chain staff – these companies can spend their time focusing on strategic priorities instead of adversarial checks and balances

In a 2011 study by The Hackett Group on the value that can be derived from a successful SRM strategy, top performers reported annual SRM benefits of approximately 3% of total spend. Below are a few additional highlights from the study:

  • More than 25% of reported top-performer benefits came in the form of growth (innovation and new business generation/revenue uplift)
  • Top performers dedicated more than 2.7 times more resources to each strategic supplier and had 2.3 times fewer strategic suppliers per $ billion spend than did peer organizations
  • Top performers were more than twice as likely as peers to manage SRM via a single enterprise SRM group

So, what are the most effective approaches to SRM? Below is a selection of SRM best practices.

                                                World-Class SRM Practices

  • Supplier Qualifications – The formal process classifies suppliers into categories based upon strategic importance, past performance, and level of integration
  • Supplier Rationalization – Consolidating spend with a few suppliers will increase the strategic value of the relationship; it also allows you to get the most products from the best company
  • Supplier Communication and Feedback
    • The help desk handles supplier startup and ongoing issue resolution and support (e.g., with AP)
    • Policy and procedure documents are often located on the supplier portal, with the more important items (e.g., how to ship to us) in a more prevalent location
    • Surveys serve the purpose of collecting feedback to demonstrate interest and correct issues, but they should also be designed to solicit ideas for improvement
  • Supplier Performance Measurement (Scorecards)
    • Scorecards are used to rate the performance of key suppliers (not every supplier). Focus more time on the ones that matter most
    • Targets for the performance metrics are set through collaboration with suppliers
    • Plans are prepared and updated to address issues and improve performance
  • Governance Structure and Policies
    • Existing policies define the course of action in those cases when supplier performance is sub-standard
    • Suppliers “on suspension” have had sub-standard performance repeatedly or over a long period of time. Being on suspension often means they cannot bid on new work and must demonstrate actions to improve deficiencies
    • Governance structures that manage issue escalation and performance should apply to both sides—the supplier and the company
  • Business Continuity Planning – Managing risks is not just about decreasing them. It is important to emphasize “agility” to increase the speed in which the supply chain can react to unforeseen events
  • Supplier Diversity and Social and Environmental Responsibility – This is driven across the supply chain organization with specific goals and objectives—the key to achieving supplier diversity and supporting the company’s social and environmental responsibility goals
  • SRM Technologies
    • SRM software can be used for collection of supplier performance data, supply channel smoothing, risk modeling and contingency planning, automating supply chain processes, etc.
    • Compliance can be tracked against regulatory, legal, financial, and other requirements

Which pieces of the SRM strategy are most difficult in your organization? Which pieces are working well? Where do you see the most value today and where do you expect to derive the most value tomorrow? We’d love to hear from you: contact us.

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