Supplier Relationship Management Insights

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The term "supplier relationship management (SRM)" refers to the practice and process for interacting with suppliers. Most supply professionals view SRM as an organized approach to defining what they need and want from a supplier and establishing and managing the company-to-company (or procurement-to-sales) link to obtain these needs. Even when there is no conscious procurement-to-supplier's sales link, there still are practices and processes in play — informal as they might be. Formal or not, academic and consulting company research shows that organized approaches to supply and suppliers produce positive sourcing results.

This document presents why SRM is useful. It shows key observations and learnings from its use. Common key SRM elements are presented. An SRM application maturity model was developed to show the simple to more complex applications. And, it concludes with where leaders tend to go beyond the more typical SRM model.

SRM Elements

What is the Need? Failure comes from applying a tool without having a context or purpose. So, the first step in SRM is to define the sourcing need for it. Common ones are:

  • Quality (level of and/or consistency)
  • Delivery (consistency, predictability, etc.)
  • Price or cost
  • Transaction efficiency (speed, simplicity, transparency)
  • Value add
  • Innovation
  • Logistics, manufacturing, service needs
  • Scale
  • Assurance of supply

There are more, and observation of seasoned supply professionals shows that the need and thrust of interaction with suppliers can and does change. Many said that once the main SRM goal was attained with a supplier, they moved on to others in layered progression. Some have said that the flux in markets and among suppliers causes shifts in emphases to have to be applied even from one period to the next.

Which Suppliers? SRM is typically applied with suppliers providing high volumes of a product/service or lesser quantities of crucial ones. Too, it is often applied with suppliers that serve many business units of a company or organization, or where intensive engineering, manufacturing and/or logistics interaction is essential.

In Dynamic Times. SRM is often brought into play when a looming sourcing issue or opportunity arises. In current times there is concern of supply price inflation from an economic boom and growing middle classes in China, India, and other developing countries. Too, demands upon a shrunken manufacturing capacity base in the developed world, or weakened financial condition of many companies, causes worry about continuity of supply. SRM is useful in taking initiatives with upcoming needs and the condition of the supply markets that can reap rewards of problem avoidance.

Types of Relationships. Dr. Cavinato's research revealed approximately 145 different forms of formal and informal relationship links between buyers and suppliers. Each one is a relationship supply chain. These roughly group into the following eleven relationships, listed from none to full integration:

  1. Don't know the supplier exists, no reason to use them
  2. Don't know they exist, might use them
  3. Arm's length price relationship
  4. Price relationship, informally cooperate on operating level for efficiencies
  5. Price relationship, formally cooperate for longer term efficiencies
  6. Total cost relationship
  7. Opportunity sourcing
  8. Innovation and top-line, revenue-driven relationship
  9. Joint venture
  10. One invests in the other, gains benefits from having done so
  11. One purchases the other, vertical integration

SRM is mostly found with relationship numbers 3 through 6. The emphasis is on identifying performance attributes wanted from the supplier and managing those aspects of the relationship. Opportunity sourcing (number 7) is the practice of scanning a supply market without a current need to source. This is a pure-discovery initiative to identify what is out there and determine what might be useful in an innovation or new application. It is common in high-tech industries as well as high-margin consumer product industries. Increasingly, supply professionals that have new product revenue as part of their performance metrics visit trade shows and suppliers without an internal requisition waiting back at their desks.

Each type of relationship requires different management and leadership and yields different benefits. As one moves from the arm's length price relationship toward joint venture, the linkages become closer, more defined, and the benefits are broader and deeper (beyond just price).

Internal relationships are just as important as external ones. With SRM these links are common with operations, logistics, accounting and engineering. Internal ones can work against a concerted effort with a supplier or it can create a strong consistency of purpose.

Building Measurements. There are two types of measurements: the targets and the means. Targets are those end goals being sought (price, cost, quality, specific logistics details, order cycle times, time to market, etc.). Means types of measures are those manageable sub-component activities that add up to accomplishing targets. For example, an order cycle time target has within it a transportation transit time as a means measure. A common fault here is to over-require means measurements of suppliers. A simpler approach is to expect the supplier to perform to certain end goal targets.

The point: involve stakeholders, understand the final market and create aligned measurements. Whether target or means measures are used, stakeholders have specific ones that impact their performance and that of their groups.

Roles. In short: what is it you need to accomplish? What type of relationship will work toward that? What do you need to measure to assure that it will happen? These define the roles. Some key issues here are:

  • Single point person or small group with the supplier
  • Internal agreement as to what, how, and how to accomplish the need
  • Limitation of other stakeholders having substantive conversations with suppliers (done through the small group — a difficult dynamic in SRM)
  • Initial initiatives with a ladder of further goals (rather than it being a single-purpose initiative)
  • Feedback with corporate imperatives and market supply/demand dynamics
Supplier Relationship Maturity Model

The table at the end of this paper presents a spectrum of minimal, medium and advanced SRM activity levels with suppliers. To the left are activities common in basic sourcing. As the needs from suppliers increase, so do the needs to measure, control and develop the supplier in overall supply assurance. The increased, more hands-on SRM needs are shown as the relationship moves to the right, with medium and more advanced levels of interaction.

Where to Go With It? SRM is often a part of the rollout of strategic sourcing. Here, it can be the management and leadership end of working with strategic suppliers or ones that are preferred or simply transactional (see footnote). Each SRM initiative is about determining and communicating needs and expectations to a supplier, measuring performance, and invoking actions for compliance. These interactions involve efficiently providing suppliers with expectations of how the communications and flow of products/services are to be provided. In the end, SRM is about categorizing the supply and markets of products and services and following through with how to interact with the selected suppliers to meet measurable performance goals. At the higher end, SRM is about developing suppliers so they perform for the benefit of the buying company/organization.

SRM is about identifying and measuring suppliers via oversight, measurement and management. Much closer collaborative supplier relationships are more two-way, involving suppliers that possess capabilities the buying company does not have yet strategically needs and wants. These are found with above-listed relationship numbers 7, 8 and 9.

Joseph L. Cavinato, Ph.D., C.P.M.
ISM™ Professor of Supply Chain Management
Thunderbird School of Global Management
and Director, A.T. Kearney Center for Strategic Supply Leadership at ISM™

Footnote: The term strategic supplier is generally applied to a very small number of suppliers involved in a myriad of ongoing interactions of stakeholders between the organization and the supplier (engineering, product development, research and development, logistics, quality, manufacturing/services, accounting/finance, and/or more). Many CPOs cite that the cost and time involved in strategic relationships allow no more than about 25 of them.

SRM Maturity Model

Attribute Minimal   Medium   Advanced
Suppliers One or two major ones   A few select ones — important and/or problem ones   Few strategic; More preferred; Many transactional
Who Engages with the Supplier Buyer Procurement and one or two others (i.e., engineering) ad hoc Procurement and one or two others (i.e., engineering) ad hoc Procurement and stakeholder team Procurement and stakeholder team
Oversight Measure   Manage   Develop the supplier
Price/Cost/Value Concepts Price Landed cost Total cost to operations Total cost to the company Total value to customer
Measurements Detailed measures reported to buyer   Mix of means and ends measures   Supplier measures self and corrects in real-time
Expected Performance Comply with requirements   Improve self   Develop self and us
Effective Traditional   Supplier relationship   Category
Management Approaches Sourcing and buying   Management   Management and collaboration

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