What is Supplier Relationship ManagementFebruary 21, 2015
In today’s competitive marketplace, companies focus scarce resources on the strategies most likely to yield success to their organization. Supplier relationships have become increasingly important in ensuring this success. At a time when many organizations are turning to outsourcing to save money, the quality of your relationships with these suppliers can have a critical impact on the success of your company. Supplier Relationship Management (SRM), a subset of supply chain management, is concerned with understanding of who your most important suppliers are and how you can focus your time and energy on creating and maintaining more effective strategic relationships with them.
What is Supplier Relationship Management
Supplier Relationship Management has lots of different definitions and some of them are as follows:
“Supplier Relationship Management as the systematic management of supplier relationships to optimize value through cost reduction, innovation, risk mitigation and growth throughout the relationship life cycle.”
“SRM is a methodical approach to integrating two parties to bring greater value for money for the customer and enhanced margin for the key supplier(s), and assist in achieving strategic objectives of both.”
“Supplier Relationship Management is the discipline of working collaboratively with suppliers in order to maximize the value derived from those supplier relationships.”
“Treating your suppliers as an extension of your organization (win-win) and not the enemy!”
Chartered Institute Purchase & Supply chain defines SRM as “the process for managing these two aspects in the interaction between two entities – one entity is the supplier of goods or services and the other entity is the customer/end-user organization”. It believes that the term supplier relationship management should be reserved for the more complex relationship development associated with period contracts, rather than the more straightforward performance management of individual orders. SRM is a mutually beneficial two-way process in that it should improve the performance of both the buying and the supplying organizations.”
Benefits of Supplier Relationship Management
An effective SRM solution is an information system that provides ‘Supplier Intelligence’ through an enterprise-wide, integrated view of a company’s relationships with its suppliers and the commodities or services they provide. It enables you to collect, analyze and leverage all aspects of your supplier data and purchasing history, giving you vital insight into your supply base and purchasing history. An effective SRM solution contains essential components such as ranking, rating and optimization that allow you to reduce your supply base and reduce your overall costs. Ultimately, an effective SRM solution gives your organization a competitive edge by allowing you to:
- Reduce direct and indirect costs and improve bottom-line profitability.
- Understand what you are buying and from whom.
- Minimize the risk of supply chain disruptions.
- Select the best suppliers to gain advantage over competitors.
- Streamline the supply-chain management process by collaborating with business units across the enterprise.
- Assure that your organization’s resources are prioritized on the most critical suppliers.
Why Do You Need an Effective SRM Solution?
If your company conducts business on a global scale, you probably have experienced difficulty in getting true picture of your total purchasing spend. How many suppliers do you currently have? Could you narrow your supply base and deal more efficiently with a smaller number of suppliers? Are you dealing with affiliated suppliers? Is your supplier base increasingly diversified? Are you making sound objective decisions based on information rather than on hunches? How are you monitoring your supplier contract usage to support negotiated contracts? If you cannot answer these questions, you need Supplier Relationship Management.
McKinsey & Company has stated that an SRM solution can save a company approximately five to fifteen percent or greater of total spend over a three-year period. For procurement managers and other senior executives, the overall objective is to reduce total cost and minimize risk, while also ensuring that procurement goals are achieved. SRM is a tool to monitor key performance indicators through a scorecard approach, creating snapshots of how well an organization is meeting its goals and objectives. With SRM, you can align overall procurement goals with your organization’s objectives, thus improving your organization’s success in reducing cost and in minimizing risk within your supply chain.