How to Improve Supplier Relationship Management: Customizing Strategies for Success

Improving supplier performance by ensuring suppliers meet their performance matrix such as quality and delivery, identifying and mitigating all risks associated, enabling better relationship to allow for better pricing and terms negotiation, these are just a few reasons why procurement teams are urgently implementing and effectively managing Supplier Relationship Management (SRM) to achieve better business outcomes.

In this engagement blog from their keynote panel “How do you develop a more tailored approach to build and maintain a lasting SRM practice”, Kai Yang Lee from AkzoNobel and Nelson Chow from Institute for Supply Management Hong Kong gives us their best tips and advices on how you can better manage the SRM in their companies to achieve common goals of a creating, maintaining, and growing mutually beneficial supplier relationships.

A company-wide relationship management approach, how can you do it better?

The first important step is to understand and segment your supply base with a spend and strategic priority. Establish a clear framework, alignment, and governance for each supplier segment and explain why it is important to manage the supply base, surrounding factors such as cost, quality, and business continuity.

There needs to be an agreement on how you want to manage key and critical top X, important, and tail (or transactional) suppliers. An annual review enhanced with value-added, meaningful KPI such as retention rate and satisfaction score, provides insights of the company and supplier’s performance.

All internal engagement held at every level needs to be done comprehensively on the “why” for supplier relationship management. You may realise that within the internal stakeholder base, there are differences between senior management and operational team members and/or between business units/functions.

Ultimate management – Business or procurement?

There’s no fixed answer on whether your stakeholders or procurement team should possess the ultimate management role. It strongly depends on the maturity of the company, but ideally, the procurement team should be the key contact point with the suppliers.

However, the decision you make must be resolute because it’s critical to maintain one voice when it comes to supplier communication. There needs to be a constant two-way communication path between the procurement team and the rest of the business when it comes to requirements for success.

There are still considerations to be made, such as resources and a matrix with clear roles and responsibilities assigned to procurement functions or the business. Any SRM with critical suppliers involved should have a senior relevant business sponsor involved.

How different is the SRM approach for critical suppliers for all critical parts and services?

A key account owner is needed for each specific critical supplier to build a more open and transparent conversation, to regularly discuss upcoming demand and supply requests, and performance monitoring.

There should be a higher emphasis on supplier collaboration and innovation such as the percentage of effort distributor to developing a new product/process/service as a team for the agreed sustainable goal. With a well-thought business continuity plan in place, you’ll be able to achieve a more comprehensive risk profile to ensure business-as-usual operations.

This approach can be relatively standardized for direct (or raw materials) suppliers as it deals with the delivery of goods, which has a fairly standard way of looking at it such as QCDIS. However, for services, we usually have one service provider for each service, and SLAs, KPIs, and discussions, will generally differ significantly.

Indirect SRM – A cherry on top but what’s the most time-effective practices?

SRM on indirect may be seen as a cherry on the cake, but many companies underestimate the size of Indirect spend and its cost savings potential. Generally, outsourcing and automating processes such as e-procurement, and annual reviews, are practices that are time efficient.

Tail spend management is about simplification, consolidation, and self-services. Segmentation of suppliers is crucial, and STM should be done with critical suppliers only.

It’s critical to create a segmentation of suppliers. SRM for critical suppliers is a must-have, and a lack thereof is often a reason why service deliveries fail. You can have the best contacts and scope written with the best commercial agreement, but if the service delivery is not well managed and governed effectively, it will go downhill once the contract is signed.

If it’s done well, SRM will serve as a continuity of the governance regime to ensure that the good, bad, and issues are consistently addressed and not being heavily reliant on the key person.

Key pillars in Supplier Relationship Management

• Supplier segmentation & strategy
• Performance management & improvement
• Risk management
• Supplier collaboration and innovation

How does developing long-term relationships affect anti-competition policy?

A long-term relationship promotes competitiveness, allowing you to reduce costs, improve quality, and increase innovation. Avoid making anti-competition agreements such as price-fixing and exclusivity agreements that breaches anti-competition laws.

Should SRM be set on a global, regional, or local basis?

There is no one-size-fix-all solution as SRM policies need to be specified on a global, regional, and local basis. You make the decision based on benefits vs risks considerations.

Sometimes, it might even be beneficial to drive a local SRM practice for a supplier with a global structure.

Robust SRM program – technology requirements

Technology in a successful SRM program acts as an enabler to run more efficiently on a shared platform. A supplier management solution can optimize and standardize the management process, handling a variety of data from various sources such as inventory and eCommerce tools.

Business process management can be included to automate processes, monitor bottlenecks, and transfer activities more efficiently.

Enterprise content management can be used to perform an audit trail, supervising all supplier documentation and documenting all actions taken.

For the implementation of SRM, the technology chosen needs to be related to the retrieval and reporting of data. If you’re generating the information internally, installing analytical and dashboarding tools will aid. Keep in mind that before you decide on your technology, you need to formulate the scope and finalise the contract.

How to get more tools & resources – Showcasing ROI for sponsorship?

With the cost of the SRM tool and resource, state your case by expressing its potential impact on cost, part and service availability, quality, innovation, and sustainability. It will also aid by expressing the revenue and profit target you’re confident in achieving.

If you’re unsure of the ROI, move away from it and use key case studies on how an active SRM can be instrumental in providing value such as addressing risks, managing innovations, reducing costs, and maintaining service levels.

Some might say that storyboarding is a more effective and emotive way to attain sponsorship rather than relying solely on ROI.

How can businesses measure the success and effectiveness of their SRM initiatives?

Some key statistics to note are its cost saving (TCO point-of-view), lead and cycle time, quality, and customer satisfaction. Secondary statistics to measure the effectiveness of a successful SRM include capability assessments and improvements.

Smaller organisations with $100M spend and -20 high spend suppliers, how do you create an effective SRM?

If possible, choose to bundle your volume to create an increase in leverage. If you’re unable to do that, look for an alternative supply, big multinationals who has a smaller pool of competitor and more likely to participate in a win-win collaboration.

It is also important to “sell” to your suppliers on how important your organisation is and its future growth plans. Express how your suppliers can benefit from being a part of this syndicate.

The pitfalls of SRM program – how can you avoid slowing the agility on vendor onboarding or risk exception management?

The implementation of a SRM program needs to be made a priority at board level as it’s a consistently ever-changing topic in most organisations where the key is in consistency.

SRM needs to get the full support, gaining sponsorship from the company and the senior procurement management team to receive the benefits.

Metrics to define the optimal number of Indirect suppliers

There’s a 80/20 rule we generally follow, where 80% of spend is derived from 20% of suppliers.

It’s hard to provide an exact number of suppliers that fall into the ‘strategic’ category, so you’ll need to prioritise based on risk, return, and other factors, depending on the company’s strategic outcomes.

Will the benefit of a stronger SRM outweigh the cost and investment involved?

If your SRM with the right tools is applied to the right supplier/supplier segments, the benefits will outweigh the cost and investment.

A proper SRM is needed for every procurement professional. If it’s not managed properly, it will create a significant impact on its revenue, working capital, and margin of the company.

What’s the criteria to define the supplier’s tier?

Here are a few ways to help your company determine the supplier’s tier.

What’s the supplier reach? Does a 1st tier supplier deliver directly to you, while the 2nd tier supplier delivers directly to your 1st tier supplier, and so on.

How critical is the supplier to your business? Do they supply essential goods or services that the business cannot operate without? Do they supply important goods and services that can’t be done without, but would be difficult or costly to replace? Or are they suppliers who are not essential to the business that can be easily replaced?

There are several 2x2 matrixes you can use such as the Kraljic matrix, where they classify according to strategic items, leverage items, bottleneck items, and non-critical items, aiding in determining how important the supplier is to your business.

Incorporating SRM with the business – embedding effective SRM strategies

With the consistent communication company-wide, the benefits of SRM need to be educated to the company. With this emphasis on the benefits, get buy-in from senior business stakeholders and provide resources for support from the procurement team.

Measure the impact and non-impact of the SRM, and boost employees morales by celebrating wins and promoting key case studies. It is especially important to get a seat at the table as SRM will never be completely outside of procurement.

In today’s evolving landscape, can risk mitigation play a bigger role in SRM?

SRM can help to increase supply chain resilience such as supply disruptions, support social sourcing efforts such as sustainability efforts, and monitor supplier performance to identify early indicators of risk.

                       Kai Yang Lee, Akzonobel               Nelson Chow, Institute for Supply management HK