While contract management ensures specific operational event-based metrics are met, with the focus on meeting contracted requirements, Supplier Relationship Management (SRM) involves assessment, advanced evaluation and subsequent action planning to continuously optimize long-term strategic supplier relationships. There are many models for Supplier Relationship Management. The foundation of these models requires both parties to have the following characteristics:
- Mutual respect
- An understanding of the mutual benefits of the relationship
- Trust in each other
- Fairness and honesty
What are the main responsibilities of suppliers and buyers within their relationships?
SRM requires buyers to get involved with their suppliers, to understand how their suppliers work and to make suggestions for ways suppliers could improve their processes. The purpose is not to manage suppliers’ businesses, but to create value for both parties. Most models contain the following components:
- Regular visits or communication with suppliers
- Regular evaluations with a scorecard or report card of supplier performance; this reflects expectations and a supplier’s current status
- Regular structured meetings to share information and find ways to improve deficits
- Joint improvement activities
The buyer also needs to be a valued customer for the supplier. SRM is a
collaborative relationship. To be a valued customer, buyers must perform the following actions:
- Always pay on time
- Provide adequate lead times
- Personalize the relationship
- Share information
It is important that buyers recognize the strategic value of suppliers. The focus should not be on negatives, but on opportunities to develop ideas that will foster innovation and increase productivity, which will benefit both parties and provide buyers with a competitive advantage.
What supplier relationship management models offer the best results?
There are three groups of interaction types. First is the critical cluster group, which are the supplier relationships that buyers should nurture:
1. Integrate: This relationship thrives on a shared vision and willingness to act as one smoothly running extended enterprise. These relationships are multi-year, differentiated and comprehensive, adding considerable value to buyers’ organizations.
2. Influence: This relationship needs regular communications and good timing to identify opportunities for exclusivity and provide the supplier with opportunities to identify buyer actions and plans that could be mutually beneficial. These are dominant suppliers that offer the potential to innovate jointly to develop new products or services.
3. Invest: This relationship needs continued reassurance to develop trust and overcome takeover fears by investing time, money and resources to develop capabilities to meet the buyer’s needs. These suppliers offer great ideas and innovation, but need to consolidate their basic performance.
If you fall under these categories, you’re doing just fine but still have room for improvement
The ordinary group includes suppliers that are more numerous, with average performance, but have potential for future growth:
1. Harvest: This is a stable, mutually profitable relationship and will continue as long as it is provided everything it needs to continue performing at its current level. This relationship is relatively low cost and hassle free, but complacency could put the relationship at risk. There is a need to ensure the supplier believes it is a valued team member.
2. Sustain: This relationship requires the right balance between investment and returns. These organizations need incremental improvements to increase value and performance to world-class levels. These suppliers recognize the value of the relationship and are willing to compete and improve to gain more business.
3. Improve: This is a relationship where suppliers require clear communication about expectations, how they can be more effective and their future strategic potential. These suppliers could be replaced by other suppliers if investment is costlier than potential returns. However, the preference for the buyer is to provide opportunities for these suppliers to attain Harvest status.
What can I do to improve a struggling supplier relationship?
The problematic suppliers are learning opportunities to identify and fix what is wrong and improve relationships with suppliers if they are willing:
1. Mitigate: When a supplier has ongoing performance issues and is unable to improve, it will require implementation of the exit strategy. However, it is still important to maintain openness and clarity, as there may be opportunity in the future. Ensure there is a good transition plan in place and manage the transition and communications.
This supplier relationship is more difficult if the supplier is involved in multiple lines of business, products or outsourcing agreements. Use this opportunity to understand the supplier’s interdependencies and conduct an in-depth analysis.
2. Develop: This relationship offers the opportunity to develop first class suppliers. They are willing to collaborate and grow their business, working closely with the buyer to increase their performance capacity and abilities. These suppliers are motivated to embrace change.
Buyers should engage in open communications with employees in both organizations and consistent program oversight as suppliers aim for a shared goal.
3. Bailout: This relationship is based on the supplier and the buyer recognizing when an intervention is necessary. This is significant because issues with this supplier can jeopardize the buyer’s business. The buyer should provide specific guidance and expect the supplier to comply with all instructions. Closer monitoring is necessary. The buyer should also set up contingency plans and bring in third party experts as needed. Personnel should be dispatched to the supplier to assess and monitor the situation to resolve problems quickly.
Ideally, this should be a short-term relationship type, with the goal of improving the relationship. If both parties are keen to maintain the relationship, the situation can be used to strengthen ties by developing plans to assist the supplier in bringing about long-term solutions.
There are many other models for supplier relationship management, but regardless of the approach, it takes a commitment from buyers and suppliers to work together to develop a successful relationship.
This level of commitment, investment and relationship with suppliers can result in the following outcomes:
- Reduced costs
- Pricing volatility mitigation
- Supply chain consolidation
- Increased efficiency and communication
- Continual improvement