What the FAQ is Supplier Relationship Management?

Spend Matters welcomes another guest post from Biju Mohan of GEP.

A recent survey of leading organizations has indicated that supplier relationship management (SRM) remains one of the top priorities of CPOs at these organizations. In view of this, we have compiled a helpful FAQ for helping our readers understand this concept better.

Frequently Asked Questions on Supplier Relationship Management

Q: What do you mean by ‘Supplier Relationship Management’?

A: Supplier relationship management, or SRM, is nothing but a holistic program of managing your strategic suppliers – right from the process of selecting them, integrating them into your operations, measuring their performance, and finally, working with them to jointly improve your business and taking it to the next level. In other words, you treat them as your business partners. After all, they do impact a significant portion of your cost base.

Q: What are some of the important things that a company needs to do to put an SRM program in place?

A: SRM is a very important initiative that can easily get diluted in its impact if developed inappropriately. The first and foremost approach is to identify the suppliers that will be part of this program. This requires you to put in place a good supplier selection criterion. Possibilities include strategic suppliers of your business, suppliers who are your business’s power peer.

Q: Power peer? What do you mean by that?

A: In any supply relationship, there is a relative power balance between the buyer and supplier. In cases of a monopoly supply situation, the power is tilted towards the supplier and then they have no incentive to work with you – you, basically, do what they tell you to do. DeBeers, the supplier of rough and uncut diamonds, is an example of this. Similarly, in the case of a monopoly-buyer situation, the buyers are already in a driver’s situation. Walmart and Apple are good examples of this situation. The idea is to identify suppliers where the power balance is fairly well distributed and it is in both parties’ interests to collaborate.

Q: Okay. So once you identify the “right” suppliers, what next?

A: Well, the next step is to develop metrics for measuring this relationship. The metrics will measure suppliers’ performances across multiple parameters including supply costs, service levels, quality of goods and services, etc. Similarly, there will be a feedback mechanism in place – giving suppliers an opportunity to share their grievances and feedback to the buyers.

Q: Why do we need feedback from the suppliers? Will they not be biased?

A: Actually, it is in the supplier’s interests that your business prospers, for their prosperity depends on it too! You will be surprised by the kind of ideas that some of these suppliers come up with. They are in a good position to develop ideas impacting your business. They are an external agency with a lot of industry experience across companies such as yours. They will be able to share the best practices observed in other companies to whom they sell and also suggest ways to make your processes – relative to use of their good / service – more efficient. The best part is that their advice is free and they also have a stake in improving your processes. After all, it translates into higher margins for them too.

Q: Do you know of companies that have a strong supplier relationship management system in place?

A: The Japanese auto majors such as Toyota and Honda are known for their SRM programs. Similarly, companies in the US such as Cisco, Dell, and Walmart have strong SRM programs in place for their suppliers. SRM is increasingly becoming an integral part of procurement strategies at most global companies across the globe.

Q: What are the advantages of an SRM program?

A: Supply reliability, lower costs, value driven innovation, risk management, and of course, reduced dependence on sourcing consultants.

For more interesting thinking on procurement, visit the GEP Knowledge Portal.

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