What is Supplier Relationship Management, and why is it important to implement it in the organization?

All organizations have a procurement or supply management function for the acquisition of goods and services, but the efficiency and agility with which they execute this function often determines a significant part of the profitability or growth of the business.

This ability to not only obtain the best price, but also the service associated with that purchase, a level of performance or quality inputs, or simply to find a partner in the supplier that leverages new business and future growth, is something that is achieved through an organized process, with specific goals, strategies, and activities in the relationship that a company aims to establish with its suppliers.

The English term Supplier Relationship Management refers to the management of a long-term “win-win” relationship with suppliers.

It closely resembles the concept of a "partner" and seeks an interrelationship that goes beyond a simple transaction. It implies a contractual relationship and a commitment to development and strategy where both companies seek growth, resulting from this contractual supply relationship.

Buyers guide this process, carrying out a set of activities and, in many cases, leading an interdisciplinary group (Quality, Process, Logistics, etc.) that interacts with suppliers to achieve a better understanding and design of the services dictated by the future or current contract.

Achieving this level of relationship with key suppliers increases the ability to purchase inputs and services in a timely manner, the desired after-sales service, the possibility of maintaining lower stock and associated costs (Total Cost of Ownership TCO).

The Total Cost of Ownership, or the total cost of purchasing a particular good or service, is what should determine the purchasing decision and is an objective indicator that measures SRM management.

For example, when purchasing a computer, the cost of the purchase itself, the warranty it includes, delivery times, repairs estimated to be required during its useful life, maintenance, updates, services and support, etc., must be included. Therefore, the analysis of the purchase is not limited only to the moment of the transaction, but also to the associated expenses or potential costs arising from the impact of that service or consumption of material.

Some activities to lay the foundation for an SRM

• The visibility and integration of basic processes, together with accessibility to information, are the necessary and essential conditions to be able to manage the relationship with your supplier community: payment tracking, invoices, relevant documentation, indicators, sales forecasts and information that provides predictability and control to operations with suppliers.

• Service Level Agreements (SLAs) are often annexes to commercial contracts and contain a description of the provider's operation and expected behavior, establishing the relevant performance indicators that will be measured frequently when the operation is in operation.

• Propose meetings or continuous improvement circles where an agenda of innovations or simply proposed solutions to operational or quality problems is presented.

It is important that all these activities and the nature of this type of relationship be known and communicated to the supplier prior to signing the commercial contract, as it is a measure of transparency to anticipate this set of activities, for which the supplier will need greater resources to provide the required services. For example, if the SLA establishes that the on-time delivery indicator (generally known as OTIF, In Time In Full) is 100% of deliveries OK in terms of quality, time, and quantity, the supplier must strive to build a much larger safety stock and incur higher storage costs.

In the long run, the natural execution of SRM has hidden benefits that are evident in practice, and I can attest from my professional experience in various industry sectors:

• It allows anticipating a supply crisis that a key supplier may have, and given the existing fluid communication channels enabled by the SRM, being able to adopt containment actions together to minimize impacts on supply.

• It enables the supplier to develop by increasing its services or goods, allocating larger volumes of supplies, and obtaining a better acquisition cost ratio.

• New business opportunities are more quickly leveraged by combining capabilities and flexibility to build supply operations, as we work in an environment of trust and transparency, not only commercially but also operationally.

• In the event of a potential lack of capacity in a process, there is a greater possibility of outsourcing operations to a supplier and being able to sustain committed production volumes.

  
  

This is a topic that deserves to be explored in depth and contextualized in each industrial or production environment, but for any Purchasing and Contracting department, SRM opens up a field of action that allows you to lead a strategic process toward long-term, efficient sources of supply that leverage business growth, ultimately constituting a competitive advantage. While we are all aware of the intense competition that exists in all markets, having a collaborative attitude with suppliers can lead to new opportunities and practices, resulting in innovation and continuous improvement processes.

Lucas R. García (Editor SC Tank)

(Sources: Arroyo, PE, Holmes, L. and De Boer, L. (2012). “How do supplier development programs affect suppliers?” Business Process Management Journal)