Supplier Relationship Management: Where’s the ROI for your Business?
Although it’s not making international headlines on a daily basis, Supplier Relationship Management (SRM) is one of the most influential elements of a procurement and sourcing strategy.
SRM is a discipline built for leveraging the relationships between buyer, and supplier, to build value for an organization’s top-line value while cutting bottom line costs. Successful supplier relationship management can have lasting impacts upon an organization’s business-critical KPIs within purchasing, strategic sourcing, and category management activities. SRM is the chameleon of procurement and sourcing organizations: hard to maintain a stable ownership over, but remains adaptable to multiple environments.
Every business ecosystem that has clearly defined production and purchasing of products, goods, or services has the need for an application of supplier relationship management. But, it’s important to keep in mind that managing relationships with suppliers is an effort that is completely relative to each and every organization. And, with this being said, every organization will reap benefits in different magnitudes from the application of SRM.
Great! Now we have an understanding of supplier relationship management, and it’s benefits, on a very Meta level. But, even if you’re remotely interested at this point, you’re most likely still thinking, ‘this is all rather unsexy’.
Let’s dig a bit deeper, and discuss the benefits of supplier relationship management in a bit more captivating manner.
In the words of Jerry Maguire, “SHOW ME THE MONEYYYYY!”.
That’s right, I’m guessing I have your attention now. Money talks. And the real value of a strategy’s return — such as SRM — is directly correlated with the ability to monetize.
How can your business start seeing a Return On Investment (ROI) from focusing on the execution of SRM?
Consolidation of Supplier Base
Cutting ties within relationships is never easy.
But, many businesses have entirely too many suppliers, especially in manufacturing and retail operations. This typically results in over-complication of production, trading, and purchasing. Also, too dispersed of a supplier base can be a cause of internal confusion/unwarranted competition amongst category leaders and buyers.
Trimming the fat and working with a key supplier base, rather than a loosely distributed supplier base, can lead to top-line savings.
Consolidating suppliers will not only show a return on investment in direct purchasing activities, but your company could very well see better supplier performance and higher product quality.
After surveying multiple sources, the main arguments remained rather unified for supplier consolidation and are as followed:
· Reduced Purchasing Costs: By methodically reducing a supplier base, and locating key suppliers, a purchasing organization is shown to receive better pricing, lower shipping/prices prices and added buying power (Moeller 2015).
· Reduced Supplier Risks: A consolidation, and centralization, of suppliers equates in closer relationships, and a greater focus on key risk areas. This, of course, leads to better abilities for risk aversion (Tripp 2017).
· Reduced Supplier Management Costs: Less suppliers, means less relationships to manage, and more time saved. Believe it or not, the maintenance of supplier relationships can be costly. “Observed costs for each supplier relationship was between $700 and $1,400 to source the supplier, set up internal systems, transact purchase and manage the relationship, with the number of FTEs required to manage each $ billion of indirect spend dropping from 141 to 44 between the bottom quartile and top quartile companies” (Moeller 2015).
· More Innovative Supplier Relationships: Developing key supplier relationships can eliminate low-performance suppliers, and ensure the quality of production. Less focus on supplier development will give you more time to focus on product innovation, and allow opportunities for SEI. We will revisit this later.
Better Governance, Better Compliance
One of the key benefits of supplier relationship management comes within compliance.
Working with compliant suppliers will aid your company to avoid supplier-related risks, keeping your organizational values in focus, and securing better product quality. Of course, this kind of supplier governance doesn’t come without rolling up your sleeves and digging in the garden. In order to grow long-lasting relationships with compliant suppliers, you have to be ready to plant the seeds early.
Those who are willing to put in the work will see a significant ROI within time saved, and brand-risk aversion.
It all starts with the selection process and utilizing RFIs (requests for information) to ensure you have a solid background understanding of a supplier before tendering (bidding).
A crucial element of the supplier compatibility analysis, in regards to supplier performance, is to ensure compliance with your organizational CoC (code of conduct). Governing CoC compliance is an ongoing task and will require continuing actions such as self-assessments, audits and supplier evaluations.
It is the responsibility of supplier relationship managers — whether it be a specified role or delegated to category managers, strategic purchasing, or sourcing — to methodically implement actions govern suppliers.
Some of these responsibilities might include(but are not limited to):
· Maintain an ever-developing understanding for the market; suppliers, supply base, and global risks.
· Continuously review performance and ensure fulfillment of agreements.
· Benchmark, and maintain the gauging of KPIs, in relation to strategic supplier relationships.
· Communicate goals, and build trust/rapport amongst suppliers (ebrary.net).
· Spot areas for potential supplier development, and allocate internal resources to opportunities for enhanced quality/production.
Better relationships and better rapport lead to productivity, and that is applicable to any organization; whether it is your internal organization or in collaboration with a supplier’s organization.
Collaboration for Innovation
Supplier relationship management allows your procurement org to communicate goals and requirements to suppliers.
It’s important to set realistic goals and requirements on suppliers. Also, it’s important to ensure suppliers that your knowledge can be their shoulder to lean on, should they require a supplier development program or improvement project.
Communication is the key to collaboration, and collaboration breathes innovation.
Allowing suppliers to see common goals and work freely within the framework of your procurement org’s requirements, with complete trust and transparency, can ultimately result in supplier-enabled innovation (SEI).
If you’re production costs are too high, and you make a supplier aware of this issue, you could potentially leverage their expertise to better your bottom line. The supplier consequently benefits from finding an innovative production method. This method can be reapplied within other collaborations, increasing the supplier’s top-line margins and savings on materials. The supplier developed the innovation, and all your organization had to do was have a candid conversation; communicating a pain point where you saw the potential for a savings opportunity and shared value.
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Magnus Carlsson, author of Strategic Sourcing and Category Management: Lessons Learned at IKEA offers an interesting take on establishing structured performance goals in a supplier relationship, which are steps 1–4 and serve as a basis for later evaluation of the collaboration.
The workflow is pictured below.
Source: Strategic Sourcing and Category Management: Lessons Learned at IKEA p. 46
1. Goals and Requirements : In the first step, it’s important to understand requirements, align values, but also point to opportunities for improvement for the supplier’s performance.
2. Must-haves: Defining the necessary minimums for the supplier relationship to be successful (ie. Quality, delivery performance, sustainability, compliance). This element might conjure up conflicting areas in later evaluation, but that’s when your procurement organization can weigh the benefits of developing a supplier, or dropping the collaboration.
3. Sourcing Goals: Sourcing values that your organization views as elements that are important to maximize (ie. Cost, spend, CSR goals etc.)
4. Good-to-have: This is a step in the workflow that provides a home to that little extra that might be present in a supplier relationship. “ Things that are useful but for which the company is not prepared to pay extra. They can be used as part of the negotiation and to distinguish between suppliers with comparable offers. The second type is the personal opinions that are sometimes created in internal discussions but are not important to the project’s purpose” (Carlsson 2015, p. 48).
SRM in a Digital World
As you’re well aware of, digitalization has impacted multiple elements of your business’ value chain. Procurement and sourcing are no different, and that means that supplier relationship management, too, has reached the digital frontier.
Adopting digital solutions is just one element of developing an overall SRM strategy, but an important one nonetheless. Digitalization of SRM activities offers an value adder where ROI can be equated in time saved by category managers, sustainability/CSR managemers, and purchasing analysts.
If you could cut those man-hours in half, or even a quarter, by adopting solutions that can automate and streamline daily tasks it would surmount to substantial yearly cost reductions.
Where do we go from here?
Well… now you’re all hopped up on knowledge, and you want to know where to turn next.
Start by evaluating your organization. As stated in the introduction, SRM is a strategy that is completely unique from organization-to-organization. There is no one-size-fits-all snuggie you can cozy up inside, and call it a day.
Put in the legwork: evaluate your business-critical KPIs, work internally to develop a strategy, rally your organization behind the strategy, adopt the relevant digital solutions, and start interacting with your suppliers.
In a year or two from now, you’ll see the ROI and I’ll be sitting be awaiting your call…
“SHOW ME THE MONEYYYY”!
Until next week.