Supplier relationship management: 6 best practices
- Supplier relationship management is part of the procurement management process and involves the relationships between buyers and suppliers.
- Each supplier will fit into a particular segmentation, which helps buyers determine what their supplier relationship should look like.
- SaaS solutions for supplier relationship management are available in the market today and help make a complex process highly manageable.
- Paying suppliers on time, doing annual scorecards, giving annual rewards, and making site visits can add value to the supplier relationship management process.
Let’s wander back in time for a moment. It was 1983 and the first concept of supplier relationship management was born by a consultant named Peter Kraljic. Kraljic said that supply chains needed to shift their sourcing mindset to a more supplier integrative process.
It was the first time (or at least the first we know about) anyone had challenged the procurement status quo where suppliers were concerned. Then, it created a domino effect of transformations in supply chains all over the world.
Today, thanks to this transformative shift, we understand the importance of supplier segmentation and relationship strategy. But in an ever-changing supply chain landscape (think 2020 early pandemic), our involvement in supplier performance can’t stop at simply understanding. Procurement and supply chain professionals – or anyone engaged with suppliers – also need to be involved in the execution of a well-developed supplier relationship management strategy.
Not sure where to start? We’ve got you covered here with a brush-up on supplier relationship management, why it’s essential, and the best practices you can implement to create a transformative shift of your own.
What is supplier relationship management?
Supplier relationship management is a step in the procurement management process. In its most simple state, it is the relationship between a buyer and a supplier. But it’s so much more than catching up with a supplier over lunch.
Today, supplier relationship management is an ongoing process of analyzing your supplier base, segmenting it into categories, and then creating and executing relationship strategies appropriate for each type of supplier. Why? To maximize value.
The stages of supplier relationship management
There are three distinct stages of supplier relationship management. But don’t let the number fool you. Each stage relies on the one before it and is chock full of vital strategies for a successful supply chain.
1. Supplier segmentation
The supplier segmentation stage of supplier relationship management involves analyzing supplier risk and profitability impact on your company. Of course, everything the company orders is important, but not everything has the same impact. As a result, treating all supplier relationships the same is a big mistake. Oh, and don’t think for a second that your suppliers aren’t segmenting their customers. Are you all on the same page with the type of relationship you should strive to maintain?
Break down your supplier base into five categories, as defined by David F. Pyke in “Strategies for Global Sourcing”.
Buy the market
These suppliers and the products they sell are in high supply. The products you’re buying from buy-the-market suppliers are important, but your business won’t shut down without them, and they have no direct impact on profitability. Lead times are typically low and pricing is highly competitive. Depending on the nature of your business, office supplies might fit into this category. This type of relationship does not require frequent communication.
Suppliers in this category have mid-range contract lengths, perhaps longer than the standard one-year agreement but shorter than the more strategic five- to 10-year agreements. Competition is moderately high, and you’re also doing business with some of their competitors. Many technology hardware suppliers will fit into this category.
Suppliers in the partnership segment are those with longer-term contracts. There has been trust established, though the relationship is not exclusive. There is a moderate risk due to limited competition and a moderate risk to profitability.
Suppliers your company has a strategic alliance with are those you typically work with exclusively. There is a high risk due to minimal competition and a high risk to profitability. Therefore, long-term agreements, frequent communication, and high levels of collaboration are needed.
An example of a strategic alliance relationship may be your e-procurement supplier, like Unimarket. They aren’t the only e-procurement supplier out there — there are others like SAP Ariba, Jaggaer, Zycus, and Cobblestone — but you’ve invested a lot of financial and labor resources into implementing their solution, and a switch would not be fast or inexpensive. A shutdown or outage could also be highly detrimental to your company. Therefore, your relationship with this supplier is critical.
Backward vertical integration
This category of suppliers will likely be your smallest — and in many companies won’t exist at all. These are suppliers that your company has fully merged with to the point that they own the supplier. This is common in manufacturing environments where certain components are critical to daily operations. For example, many automotive manufacturers, like Ford, have created Ford subsidiaries dedicated solely to them in providing key components (like rubber or glass).
2. Creation of supplier strategy
Now, it’s time to create the supplier relationship management strategy for each supplier segment. You’ll set goals, objectives, and expectations for each segment and KPIs to measure those. Additionally, you’ll make sure resources are available to meet these needs internally and with the suppliers.
3. Execution of supplier strategy
Finally, it’s time to put your strategy into action. With buy-the-market suppliers, there may be very little to do here. But for your partnerships and strategic alliances, execution of the strategy will involve collaboration and ongoing evaluation and feedback.
Why is supplier relationship management important?
Perhaps you’ve already got a solid grasp of the importance of supplier relationship management. However, it is just as crucial that your supply chain and procurement teams have the same comprehensive understanding. Do they?
Let’s dive into the “why” of why supplier relationship management is so important if anyone on the team needs a refresher:
- It allows you to assess the capability levels of suppliers to meet organizational needs.
- It gives you the ability to measure supplier performance.
- It encourages you to identify and remedy challenges from a win-win perspective.
- It provides the opportunity for forecasting and frequent discussion to improve costs.
- It can give you a heads-up on new supplier innovations and products.
- It puts you in the position of being preferred customers and getting premium service.
The best practices in supplier relationship management
OK, let’s go back to that fundamental mindset shift Kraljic talked about. If your current supplier relationship management process is a bit lighter-weight than it should be, here are some tried and true best practices to level up.
1. Supplier relationship management (SRM) software
The SaaS market is growing rapidly, at around 18% per year. The average mid-sized company uses more than 100 SaaS applications. A solid SRM application is another one you’ll want to add to your SaaS stack.
Why? A good SRM product helps to streamline the entire supplier relationship management process into one centralized vendor management system — no supplier information spreadsheets, no manual onboarding, no feedback emails needed, and no email reminders to do supplier reviews. A supplier relationship management solution does all of that in real-time in one convenient system.
Expert tip: If you already use an e-procurement or procure-to-pay SaaS solution, ask your supplier about supplier relationship management. Many of those providers also offer supplier relationship management modules.
2. Hire or assign a Supplier Relationship Manager
Every project needs a project manager and supplier relationships are no exception. Who owns your supplier relationship management process?
If no one or a little bit of everyone does, consider hiring or assigning one or more team members to be Supplier Relationship Managers. These managers will not be in charge of managing every supplier relationship but instead manage the process, which also includes managing the SRM solution.
3. Do supplier appraisals and ask for a reverse appraisal
It’s supplier scorecard time! Each year, conduct supplier appraisals – at a minimum on your strategic alliance suppliers – where you review their performance throughout the year. If you’re using an SRM application, you should already have feedback from stakeholders.
While you’re doing your review, ask the supplier to conduct a reverse appraisal of your company’s performance as a customer. Then, schedule time to go over both together. Create an action plan together and involve stakeholders when appropriate.
4. Implement a supplier awards program
Who doesn’t like a nice pat on the back? Most of us do, and suppliers are no exception. I remember my first national supply chain management conference where Colorado State University’s Procurement Services team discussed their annual supplier awards program. They went as far as hosting an annual awards dinner and making a big deal out of it to make their most strategic suppliers feel valued. Brilliant!
Regardless of where they fit in your supplier segmentation and SRM strategy, good suppliers work hard to be good suppliers. Giving them deserved recognition can be an excellent way to take your supplier relationships to the next level. Use your supplier appraisals to help determine who will win awards.
Here are a few supplier award ideas:
- Outstanding performance
- Diversity and inclusion
- Strategic alliance
5. Payment terms must be a win-win
This one might ruffle some feathers. If you’re stretching supplier payments and not paying on time, your supplier relationships are not a win-win. I can say this because I’ve done it. During my procurement stint in the automotive world, stretching payments was a norm when cash flow was an issue. If you’ve never had to talk a supplier into shipping critical parts when you haven’t paid them in months, keep it that way.
Establishing and honoring payment terms is a critical piece of a successful supplier relationship management process. During the procurement negotiation process, negotiate payment term discounts.
For example, let’s say standard payment terms are net 30. Negotiate with your supplier that if you pay by net 10, you’ll get a 2% discount. You may see that listed under payment terms on an invoice as “2/10 net 30.” At maximum, the supplier gets paid in 30 days. At a minimum, they’ll get paid within 10 days and you’ll have another cost savings to report.
6. Pay your key suppliers a visit
If travel budget permits and suppliers are willing, schedule at least one site visit with your strategic alliance suppliers. Even better, your partnership suppliers, too. This shows the supplier that you’re invested and eager to learn about them and how they work.
It’s common for SaaS suppliers to host or be a part of national conferences. If your strategic alliance SaaS providers have an annual conference, try hard to attend. It not only shows them your support and interest but gives you the opportunity to network, learn more about the product, and enhance relationships.
Supplier relationship management: The shift from operational to strategic
Supplier relationship management is a complex part of the procurement process with a lot of layers. In other words, it isn’t easy. And because it isn’t easy, many companies either don’t have a strategic approach for it or have one they don’t maintain.
With a great SRM solution and our best practices, you can use the supplier relationship management process to shift from operational to strategic and create tremendous value and competitive advantage for your company.