Why is Supplier Relationship Management Crucial to Your Business?

Why is Supplier Relationship Management Crucial to Your Business?

Supplier relationship management (SRM) is a way of working with your critical and strategic suppliers to systematically identify opportunities to reduce cost, improve service and quality. These opportunities are then run as projects with team members from both sides.

Benefits of having a good SRM

1. Eliminate wastes

It eliminates waste and barriers to effective service contracts. It implements what has been agreed between the buyer and seller in terms of what will be delivered and for what price. In practice, waste can be created due to inefficiencies in the system and ways of working of the two sides coming together. An SRM program can identify these sources of waste and eliminate them resulting in lower cost and improved service.

2. Mutual dependency

If both sides value the benefits they get from the relationship created by an SRM program then the relationship will long last. This is hugely beneficial as it means that in times of scarcity your organization is unlikely to be affected by any need for the supplier to ration their output.

3. Encourages investment

If critical and strategic suppliers in your SRM program see that it creates value for them and that the business relationship is likely to be long term, they are more likely to make investments that will increase their capacity and capability to provide what you need.

4. Motivates suppliers

It also motivates suppliers to go the extra mile. In adversarial supply relationships in which every problem seems to belong to the supplier creates disinterest for them and results in a lack of motivation. An SRM program creates shared responsibility and this translates into motivated suppliers who go out of their way to help you. 

Firms have directed significant attention toward working more closely with supply chain partners including not only customers and vendors but also various types of logistics suppliers. This is crucial to achieving coordination and integration among partners. The development of meaningful relationships through the supply chain has become a high priority. 

There are two types of logistics relationships: vertical and horizontal relationships. These are more commonly referred to as integrations in the supply chain. 

Vertical relationship refers to the traditional linkages between firms in the supply chain such as retailers, distributors, manufacturers and parts of materials suppliers. These firms relate to one another in a way that buyers and sellers do in all industries. Moreover, significant attention is directed toward making sure that these relationships help to achieve individual firm and supply chain objectives.

Horizontal relationships may be thought of as a service agreement between two or more independent logistics providers. Firms based on trust, cooperation, shared risk and investments and mutually agreeable goals belong to the same supply chain stage and normally produce or trade the same product.

The intensity of involvement and the range of relationship types extends from that of a vendor to a strategic alliance

In the context of a traditional vertical relationship, a vendor is represented by a seller or provider of a product or service. It is little or no collaboration with the buyer or purchaser as the relationship with the vendor is transactional. This form of the relationship suggests a relatively low or non-existent level of involvement between the parties. Such a relationship is appropriate for certain types of transactions; for example, one time or multiple purchases of standard products or services.

In horizontal relationships suggested by a strategic alliance two or more business organizations cooperate and willingly modify their business objectives and practices to help achieve long term goals. A strategic alliance is highly relational in terms of the firms involved. This form of relationship typically benefits partners by reducing uncertainty, improving communication, increasing loyalty and establishing a common vision. 

However, it has its challenges as it implies heavy resource commitments by the participating organizations and high switching costs. The purpose of such a partnership is a customized business relationship that produces results for all parties that are more acceptable than would be achieved individually. 

Forming a supply chain relationship 

Let us assume a model for a manufacturing firm as it forms a relationship with a supplier of logistics services, say, a transport firm. Following are the steps in a process model to form a logistics relationship.

Step 1: Perform strategic assessment

The first stage involves the process by which the manufacturer becomes fully aware of its logistics and supply chain needs. The strategies are formulated that will guide its operations and logistics audit. Initially, information is required to develop business goals and objectives that need assessment from customers and suppliers. 

Step 2: Decision to form a relationship 

At this stage, a decision is made to form a relationship. For example in a manufacturing firm when the decision relates to using an external provider of logistics services such as an express logistics provider then careful assessment of a company’s core competency is considered.

Step 3: Evaluation of alternatives 

Apparent levels of drivers and facilitators may suggest the most appropriate type of relationship to consider. If neither the drivers nor the facilitators seem to be present then the recommendation relationship is transactional. Alternatively when all parties in a relationship share common drivers and when the facilitating factors are present then the relationship is justified.

Step 4: Select partners 

Selection of a logistics or supply chain partner should be made only following very close consideration of the credentials of the most likely candidates. 

Step 5: Structure of the operating model 

The structure of the relationship (model) refers to the activities, processes and priorities that will be used to build and sustain the components of the operating model. It may include planning, joint operating controls, communication, risk and reward sharing, trust and commitment, contract style and financial investment.

Step 6: Implementation and continuous improvement

The implementation process may be relatively short or it may be extended over a longer period. The future success of the relationship will be a direct function of the ability of the involved organizations to achieve both continuous and breakthrough improvement.

Types of collaboration

Vertical collaboration refers to collaboration typically among buyers and sellers in the supply chain. This refers to the traditional linkages between firms in the supply chain such as retailers, distributors, manufacturers and parts and materials suppliers.

Horizontal collaboration refers to a relationship that is buyer to buyer and/or seller to seller and in some cases even between competitors. Essentially this type of collaboration refers to business arrangement between firms that have parallel or cooperating positions in the logistics or supply chain process.

Full collaboration is the dynamic combination of both vertical and horizontal collaborations. The dramatic efficiency gains begin to occur only with full collaboration. With this type of collaboration, the intended benefits accrue to all members.

It is not the individual organizations that succeed in most markets but the supply chains in which they operate. Businesses and not-for-profit organizations can’t survive in isolation. Organizations need to form strong alliances with partners up and down the supply chain. They need each other to find innovative ways to serve their end customers by being better, faster and cheaper. This is the reason and basis for supplier relationship management.