Why Supplier Relationship Management is important

Supplier Relationship Management (SRM) is a term that has moved out of the realms of procurement and has taken its place firmly within the supply chain lexicon. The concept of SRM evolved in the eighties as a term referring to a more proactive relationship between organisational buyers and suppliers where buyers understand and document the risks and impact of each supplier in terms of profit and business continuity.

Real examples

An example being, a tea and coffee supplier does not significantly impact an organisation's profitability, nor does the absence of their product pose a risk to business continuity beyond some inconvenience. Contrast such a supplier with one that supplies a raw material vital to the production of an organisations product. For example, a sugar supplier to a sweet manufacturer – a shutdown in the supply of a raw material is potentially devastating, and indeed the fates of supplier and buyer in such an example are so closely intertwined they can be considered to have more of a strategic alliance than a simple buyer/seller relationship.

How would you define it?

The process of SRM requires that a buying organisation determines supplier categories based on risk to profitability and business continuity. Through the creation of such a framework, the organisation can identify those suppliers that are critical to the organisation to foster strategic working relationships that are likely to require substantial effort and management.

"Intrinsic to a robust supply chain is the coordination of suppliers along the entire value chain to ultimately deliver customer satisfaction."

Through an SRM process suppliers of strategic importance are identified, and a fundamental shift is required to move from vendor relationship to a partnership. This shift requires that the organisations begin to share highly confidential information to be able to coordinate strategy and plan activities together. Such coordination enables both organisations to satisfy their ambitions, to seek opportunities to innovate within their mutual space and move away from a cost-cutting/profit-maximising relationship to one of real mutual benefit.

At Barloworld Logistics, supplier relationship management is integral to the success of our organisation, and indeed the management of suppliers vital to our customer's supply chains is our utmost importance to the way in which we add value to our customer's businesses.

Good practice examples

It is well documented that developing deeper relationships with strategic suppliers represent the future of a successful supply chain, but this is not easy, nor is it a process guaranteed of success. One way to attempt to avoid the obstacles of mistrust or lack of integration is to follow these steps:

1. Understanding and segmenting suppliers according to the unique needs of the organisation. Organisations do not have the same requirements in terms of profitability and risk, and therefore a one size fits all segmentation will not work. Many use The Kraljic Matrix to map suppliers into four quadrants based on profit impact and supply risk. Such segmentation allows for the flow of effort to those suppliers that are identified as strategic, as well as allowing for the implementation of processes to maintain transactional suppliers at a satisfactory level with minimal effort
2. Create a supplier governance and key performance indicator framework. The creation of a governance framework is simply to document the rules of engagement for each supplier segment in terms of, amongst others, relationship, contractual obligation and performance review. This further requires the refinement of performance metrics appropriate to each segment. This can mean moving beyond the rather blunt technique of measuring year-on-year savings and beginning to monitor items such as strategic alignment, relationship strength and longevity, to name a few.
3. Implementation of individual and segment strategies. Once identified, the less critical segments warrant strategies that govern all suppliers within a segment, however, for those suppliers considered to be strategic, individual engagement strategies are required. Levers to be considered include negotiation tactics, innovation requirements and market advancement and as such, each alliance strategy requires considerable effort to bear fruit. 

Within a supply chain, the relationships and interactions of suppliers along the entire chain not only create the free flow of products from source to consumption but unlock value when carefully orchestrated. More and more, there is a realisation that supplier relationships are key to the overall performance of an organisation, and that such process should fall within the realm of experts. It is perhaps useful to not only review one’s suppliers base but also to engage supply chain experts that understand the importance of suppliers as levers within the supply chain in order to unlock optimal benefit.