A Complete Guide to Supplier Relationship Management (SRM)
- Supplier Management
What is SRM?
Supplier relationship management (SRM) is a systematic approach to evaluating vendors that supply your organization with goods, materials and services.
It’s one of the pieces that fall under the larger umbrella of supply chain management and is a key component to business success.
This is done by determining each supplier’s strategic value and creating a supplier scorecard based on their contribution to your success. You then develop strategies to improve that performance by creating and leveraging strategic relationships with them.
SRM is often confused with supplier risk management, but that is only a small part of what SRM encompasses.
Supplier relationship management (SRM) was originally coined in 1983 when Peter Kraljic, a director at the McKinsey & Company wrote an article called Purchasing Must Become Supply Management, published in the Harvard Business Review.
Kraljic discussed segmenting the supplier base and mapping it against two key dimensions: risk and profitability.
Over time, as technology and strategy has matured, people have built on his original framework to give us the modern view of SRM.
Goals of SRM
Every industry and business has its own definition and categories of what classifies as a strategic supplier, but the main goals of supplier relationship management are largely the same throughout.
Develop Supplier Relationships
This is the bread and butter of any supplier relationship manager.
Figuring out which suppliers are critical to business success and which aren’t, and then managing based on that scorecard is essential.
For instance, an electronic company’s supplier of microprocessors is much more critical—and therefore strategic—than their supplier for paint.
To that end, a manager has to create a mutually beneficial relationship for both sides to create value.
A large part of SRM is supplier risk management.
Supplier risk is one of the largest that any business has to deal with.
Suppliers can’t deliver on time, quality issues, compliance issues, ethical concerns, geographic hurdles, natural disasters and many other variables have to be considered with every supplier.
Having real-time visibility into supplier data and performance, having plans in place to deal with disruptions and being able to lean on a diverse supply base is key in order to maintain value and continuity through hard times.
Optimize the Value Chain
At the end of the day, a supplier relationship manager has to create value.
After the relationships have been developed with strategic suppliers, it falls upon the manager to come up with new and creative ways to leverage that relationship.
Are there innovations you can work on together? Are there different routes or packaging options to explore? What about sourcing alliances?
A good SRM will think outside of the box and always be looking for ways to optimize the entire business value chain, beyond just the immediate supplier impact.
The basic SRM process can be broken into three main steps.
Segment your Suppliers
The first step in the process is to look at your supply base and come up with categories.
This will look different for every company, but you may segment based on item, quantity, location, price etc.
Then you have to go in and figure out which suppliers are most strategic and important to your business success.
This is a basic but important step that often gets overlooked. Without it, there is no easy way to view your suppliers and come up with a strategy that’s tailored to them.
There are so many factors that can go into supplier management and it’s important to segment in a way that makes sense for your business strategy and that will give you the most visibility and control.
Create a Supplier Strategy
Next up is to come up with strategies based on your segments and strategic suppliers.
Not every segment should be managed the same way, and not every supplier within a segment should be managed the same way.
It falls on the SRM to develop a strategy that works for both parties and creates a mutually beneficial relationship to drive value.
Execute (and Monitor) the Strategy
Someone has to be held accountable for each strategic relationship and driving value, so it’s up to the SRM to own the execution of the strategy.
Not only that but you need to find a way to monitor each supplier’s performance and the performance of each strategy you enact so that adjustments can be made in real-time.
Establish what your KPIs and metrics of success look like so you can benchmark and continuously improve performance. A supplier management dashboard is particularly useful here.
SRM Benefits and Use Cases
There are a number of benefits to managing suppliers strategically and pursuing SRM best practice. The ones we hear from customers most often are:
- Utilize full supplier capabilities
- Cost reduction
- Supply chain continuity
- Limit and manage supplier risks
- More supplier responsiveness
- Better visibility and supplier performance
- Increased quality and competition
Like any other business function, SRM comes with its own set of unique challenges.
- Managing risk and continuity during and after COVID-19
- Lack of visibility
- Being used only for cost reduction as opposed to strategic relationships
- Lack of alignment and clear KPIs
- Lack of supplier diversity
A good SRM or supplier management software can help alleviate these challenges and provide more ROI during the SRM process.
When evaluating supplier management software, you should keep the following capabilities in mind:
- Interactive analytics dashboards to improve reporting, goal setting and performance monitoring
- 360° view of your supplier data to give full real-time visibility into your supply base
- Automatic risk management alerts and recommendations built on AI
- Sustainability and diversity scorecard capabilities
- Smart supplier onboarding processes built in to improve collaboration
JAGGAER’s Supplier Management can provide all these capabilities and more while giving you a full end-to-end integration to start getting the most out of your SRM activities. Want to learn more? Contact us today!