Supplier relationship management: Guide and expert tips
Supplier relationship management: Guide and expert tips
It’s no secret that successful businesses are built on relationships. However, many organizations focus on developing and improving customer relationships, while overlooking the importance of supplier relationships. But, that’s changing. As businesses turn their attention to supply chain resilience, supplier relationship management provides a clear path to stability and value. As such, it’s a key part of strategic sourcing.
Indeed, investing in supplier relationships can improve outcomes both for your business and your vendor partners. In this blog, we’ll explore supplier relationship management. First, we’ll define supplier relationship management, share its history and outline key benefits. Next, we’ll walk through how to get started and expert advice for improving supplier relationships. Finally, we’ll share additional resources for further exploration.
Supplier relationship management, also called vendor relationship management or abbreviated to SRM, is the practice of proactively building collaborative, mutually beneficial partnerships with suppliers.
Sometimes shortened to SRM, the goal of supplier relationship management is to maximize the value of each vendor relationship. Indeed, the focus on value rather than cost is an important distinction of the practice. Gartner defines the ideal outcomes of vendor relationship management saying,
“[Vendor relationship management] enables organizations to optimally develop, manage and control vendor contracts, relationships and performance for the efficient delivery of contracted products and services. This can help clients meet business objectives, minimize potential business disruption, avoid deal and delivery failure, and ensure more-sustainable multisourcing, while driving the most value from their vendors.”
Despite these benefits, supplier relationship management is often viewed as non-essential. Consequently, the time invested in the practices falls short. In fact, recent RFP research suggests that before issuing an RFP, most procurement practitioners spend less than five hours on supplier communication. Additionally, out of five main procurement KPIs, only 26 percent of respondents identified maximizing the value of supplier relationships as a top priority.
Supplier relationship management isn’t a new idea. Indeed, the Harvard Business Review first introduced the idea in 1983. Written by Peter Kraljic, the article, Purchasing must become supply management, warns that companies who ignore changing market complexities, only paying attention to costs open themselves up to risk.
Despite being written nearly 40 years ago, the perspective still resonates. Much of the article sounds familiar, particularly now, amid global supply chain challenges:
“Threats of resource depletion and raw materials scarcity, political turbulence and government intervention in supply markets, intensified competition, and accelerating technological change have ended the days of no surprises.”
The article emphasizes that purchasing must take all factors into account. From sharing business objectives to discussing market conditions, the way we interact with suppliers impacts business outcomes. Furthermore, Kraljic goes on to explore the benefits and importance of supplier management, saying,
“Whenever a manufacturer must procure a volume of critical items competitively under complex conditions, supply management is relevant. The greater the uncertainty of supplier relationships, technological developments, and/or physical availability of those items, the more important supply management becomes.”
While supplier management has evolved in the intervening years, the core message remains the same: Vendor relationships are most valuable when they are partnerships, not transactions.
Benefits of supplier relationship management
Treating vendors as partners means working more closely with them. Consequently, effective supplier relationship management requires regular collaboration, ongoing feedback and enhanced transparency. When strategically managed, these closer relationships yield benefits for both parties:
How to implement a supplier relationship management program
While a traditional procurement mindset is laser focused on reducing costs, the supplier relationship approach recognizes all of the ways a vendor can help improve your business. As you might expect, supplier relationship management is a highly sought after skill for procurement managers. Indeed, it requires a mixture of people skills, problem solving and attention to detail.
For those looking to undertake or improve their supplier relationship management, Gartner breaks down the process into four steps: design, align, launch and govern.
1. Design: Kickoff your supplier relationship program
As with any project, planning is key to the success of supplier relationship management. Inevitably, you’ll need buy-in from stakeholders in your organization. So, in this step, you’ll decide:
What are your overall goals for the program?
First, define your objectives and be as specific as possible. Are you hoping to reduce overall costs? Avoid going through the RFP process each year? Improve vendor performance? Certainly, all of these discussions will lay the groundwork for the next step.
Who in your business should be involved?
Stakeholders in your organization who interact with vendors are a good resource for feedback. Ask your finance, accounting and operations teams what challenges they’re facing. In addition, what are your organization’s plans for the future? How would better vendor relationships make it easier for you to achieve your goals?
How will you implement your plan?
Your vendor relationship management program will require action. How will you announce the plan to internal stakeholders? What will their involvement be? And, how will you roll the plan out to vendors?
Which suppliers should be considered?
Most organizations have hundreds of suppliers and vendors — from pens for the office to mission-critical software. Accordingly, you’ll need to prioritize which vendors should be included in the supplier relationship management program.
Make a list of characteristics that would indicate a valuable vendor relationship. For example, if your organization spends more than $100,000 annually with a vendor, or if the vendor provides a mission-critical service, they’re likely a good candidate.
How will you measure success?
Gathering starting data from vendors is crucial to measuring the impact of your efforts. Indeed, it’s particularly important if you’re implementing a vendor relationship management program for the first time. Furthermore, the data will become even more valuable when you want to optimize or expand the program to include additional vendors.
2. Align: Plan the details
Supplier relationship management is a team effort. If it depends on just one person, it’s bound to fail. So, gather your procurement team as well as other stakeholders and start planning. In this step, you’ll decide who is involved in what ways.
You may find a RACI matrix helpful because it helps assign roles to each person. For example, the matrix would assign duties according to who is responsible, accountable, consulted and informed during each step of the vendor relationship.
Stages of the vendor lifecycle
RFP process and vendor selection
Negotiation and contracting
Managing ongoing deliverables
Renewal or renegotiation
Different people will be involved in each step of the overall vendor lifecycle. As you create your plan, try to view the process from your vendor’s point of view. What changes could make it easier for vendors to engage with your business? Which departments or employees would be involved?
Take the RFP process and vendor selection for example. What challenges do vendors face when answering RFPs? Typically, the concerns we hear are short deadlines, repetitive questions and unclear evaluation criteria. These factors are under your control. If you use RFP management software, you can improve all three, easily.
3. Launch: Take action
Now, this is where things get exciting. It’s time to put your plan to work.
Prioritize your vendor relationships
Make a list of vendors to be a part of your SRM pilot program. Generally, high-value, ongoing, strategic partners should take priority. Additionally, carefully consider the risk associated with each vendor — What is the likelihood that a poor relationship will lead to disruption? And, what is the overall impact of that disruption on your business if the worst were to happen.
Collaborate with vendors
Once you’ve selected your vendors, reach out to share your plan with them. For existing vendors, you’ll want to explain the process and discuss metrics for measuring progress. On the other hand, new partnerships are a clean slate. So, you can share the details of your process during onboarding.
No matter where you start in the vendor lifecycle, ensure all parties understand and agree with the goals so expectations are clear. In some cases, it’s helpful to conduct an initial vendor assessment to measure current performance.
Share what’s next
Supplier relationship management is about consistency and collaboration. So, plan to stay in touch. Let vendors know when you’ll reach out again. Additionally, let them know how to contact you in the meantime if they have any questions or concerns.
4. Govern: Review and optimize
Now, you’ve done the heavy lifting, but the job isn’t over. Maintaining supplier relationships requires ongoing, proactive action. Generally, meeting with key vendors quarterly strikes a balance between too little and too much contact. During your meetings, cover all aspects of your partnership including:
Vendor performance metrics
Updates on business goals and challenges
Feedback on the SRM process
Upcoming needs or projects
New vendor offerings or opportunities
Try to keep the dialogue open and collaborative. As you invite ideas, encourage candid feedback and problem solve together, remember your ultimate goal — ensuring a mutually beneficial relationship.
Investing in supplier relationships can improve outcomes for your business. Here are tips from procurement experts on how to improve your supplier relationships.
1. Improve supplier visibility
“It’s simply foundational thinking: you need good relationships with suppliers to get those preferential allocations when you need them.
“But you need more than that — you need visibility from your supplier, you need alerts on lateness, financial early warnings, status of critical components (like semiconductors of late). You simply will not know when your supplies will be available if you don’t have good SRM in place.” — Nancy Clinton, Spend Matters
2. Consider more than just cost
“The days of selecting vendors on cost alone are over. There are several other considerations. One that is often overlooked is the cultural fit between the organizations.
“Some items to keep in mind when evaluating cultural compatibility include time orientation, organization structure, decision-making processes, rate of change, and the age of the workforce.” — Lou Markstrom, CIO.com
3. View vendors as an extended part of your business
“Procurement organizations need to think of managed service providers and ecosystem partners as their extended enterprise and put stakeholder/customer management at the center of their strategy.
“They can build collaborative muscle by flipping their linear sourcing-centric approach to third-party/partner management and developing a holistic supplier management approach.” — Deloitte CPO research
4. Define the relationship and put supplier KPIs in writing
“Incorporate appropriate service levels and metrics into agreements. A relationship based on a handshake is far more likely to encounter problems than one in which expectations are clearly established and agreed upon.” — Dave Blanchard, Industry Week
5. Involve suppliers in strategic discussions
“If a vendor supplies a key part or service to your operation, invite that vendor to strategic meetings that involve the product they work with.
“Remember, you brought in the vendor because they could make the product or service better and/or cheaper than you could. They are the experts in that area, and you can tap into that expertise to gain a competitive edge.” — James Bucki, TheBalanceSMB.com
6. Get internal buy in from your suppliers
“Recognize that a supplier usually cannot be successful without internal support. The primary reason I see engagements fail is a lack of backing.
“For instance, abandoning the supplier after the contract is signed, leaving them to implement and manage their services without giving any direction on navigating client needs, or in driving the change necessary for an engagement to be successful.” — Philip Ideson, Art of Procurement
7. Evaluate suppliers’ performance regularly
“At Eaton, we use a supplier dashboard to understand cost, quality, and delivery performance as the key agenda items in our quarterly or annual business reviews with suppliers. These supplier dashboards also serve the basis for supplier negotiation in terms of pricing.” — Muddassir Ahmed, Ph.D., Spend Matters
8. Use technology to enable
“Information technology is often seen as the Holy Grail of supplier-related issues. However, only implementing software, which is already complex by nature, does not add value in complete isolation … IT is an important enabler for value creation as it creates transparency and process efficiencies while improving knowledge management..” — Hubert Verweij and Linda Peck, PwC
9. Treat suppliers with respect
“The purpose of such relationships is to build an effective, long-term relationship. As such, buyers must communicate with the suppliers on the basis of an equal partnership. Threats, aggression, and negotiation stunts will likely undermine the degree of supplier trust into the relationship. Consider, rather, the supplier, as an extension of the internal organization and therefore subject to the professional respect afforded to co-workers.” — Jonathan Webb, Forbes
10. Keep supplier information easily accessible
“Having detailed, accurate and centralized supplier information is a foundational part of managing relationships with suppliers — from product scoping to payment processing. This information can include quotes, contracts, contact details, locations, remittance information, certifications, performance ratings, risk scores, capabilities, and category coverage.
“Tactically, collecting, verifying, cleansing, and managing supplier information can drive significant cost savings. Strategically, supplier information management can drive greater collaboration and innovation with enterprise suppliers.” — Andrew Bartolini, CPO rising
11. Use technology to simplify the SRM process
“The key to effective SRM [supplier relationship management] is having a system in place that makes it easy to view your suppliers and analyze all of the risk factors. Using SRM technology provides you with full and unparalleled visibility into your supplier base, giving you a detailed picture of what is impacting your supply chain and making it easy to mitigate the risk.” — Mickey North Rizza, CIPS.org
Resources for additional vendor relationship management research
In addition to the articles cited above (Gartner, Harvard Business Review, Art of Procurement research), there are countless other helpful resources to improve vendor relationship management.
While this book focuses primarily on supplier relationship management, the knowledge shared has a far-reaching impact. A Spend Matters review of the book says, “This deserves to become THE standard book on this topic.” Not a bad place to start.
Looking for a real-world supplier relationship management example to include in your own business case? Check out this article that explores the positive impact of supplier management on profit and innovation.
Leveraging technology has the potential to make a huge impact on buyer-seller relationships. Indeed, there are many procurement technology solutions designed specifically for improving vendor relationships.
While this blog gives a good overview of supplier relationship management, there’s so much more to learn. If you’re ready to give your procurement skill set a boost, consider an online training or certification program. In addition to the ISM course above, the Chartered Institute of Procurement and Supply (CIPS) and World Commerce & Contracting also offer online supplier relationship certifications.
Detailed and meticulous, this case study explores supplier relationship management in action. With data and charts, you can explore the real-life application and results of SRM principles.
How better RFPs improve your supplier relationships
Ultimately, supplier relationship management is all about time. It comes down to investing time in connecting with suppliers, asking questions and offering transparency. However, time is one thing that’s scarce for many procurement professionals.
While the RFP process represents a small part of the overall vendor lifecycle, it’s one of the first touchpoints in that relationship. Unfortunately, more than 66 percent of RFP issuers use Word and Excel for the process which leads to a lot of challenges. From poor collaboration to endless copying and pasting, it’s inefficient and cumbersome for the buyer. At the same time, it’s repetitive and time consuming for the vendor.
So, centralizing and automating the process with an RFP management system delivers tremendous value to RFP issuers and vendors alike.
“RFP360 helps us automate and focus on core business. Now, we can categorize, search, and profile providers, which helps us understand who would be the most appropriate vendors to invite to a particular RFP,” said Mark Rieder, SVP of HR technologies and benefits administration at NFP. “We’re shortlisting faster, and we’re being a true partner to our vendors. It’s a win-win.”