Supplier relationship management (SRM) is a systematic approach to evaluating, managing, and partnering with suppliers that provide goods, materials, and services to an organization. Falling under the larger supply chain management function, SRM focuses on fostering strong supplier relationships to enhance business outcomes and improve supplier performance. By effectively managing these relationships, businesses can ensure that their suppliers contribute positively to their overall success.

What is Supplier Relationship Management?

Put simply, supplier relationship management (SRM) is a systematic approach to evaluating the suppliers your business works with that provide your organization with goods, materials and services. Performing SRM requires assessing each supplier’s value and contribution to your success, often through the use of a scorecard. 

Peter Kraljic, a director at McKinsey & Company, coined the term “supplier relationship management” in 1983 in an article that proposed segmenting a business’ supplier base and mapping it against risk and profitability. Since then, technology and changes in the landscape of business relations have evolved SRM, but the primary goal is still the same: determine if strategic suppliers help meet your business goals in a satisfactory manner, and streamline the supply process as needed. Though each industry may abide by a different means of scoring, that goal can be broken down further into three general objectives:

• Develop and strengthen relationships: This requires looking at which supplier relations are critical to the business and which aren’t. The more valuable a supplier relationship is, the more the business needs to work to ensure the relationship is mutually beneficial.
• Minimize risks: A key part of supplier relationship management is risk management. Performance, quality, compliance, ethics, geographic challenges, and more must be considered in regard to each supplier relation to assess their value versus risk potential.
• Maximize value: Businesses depend on reliable, high-performance vendors. To ensure a mutually valuable and lasting supplier relationship, an SRM manager must continuously create ways to leverage the relationship and strengthen the business value chain as a whole.

The Supplier Relationship Management Process

There are three steps to supplier relationship management. Let’s break down that process.

1. Segment the Supply Base

The first step in the supplier relationship management process is to take a look at your suppliers and determine the appropriate categories to score them on based on your goals. These can be unique to your business or industry, but factors like quantity, quality, location, and price are commonly used. Being able to score each supplier based on the factors that affect your success gives you visibility into the overall value of each supplier relationship. You have to figure out which supplier relationships are most important to business success.

2. Create and Maintain a Strategy

The person in charge of supplier relationship management must determine a strategy for each supplier so that the relationship remains efficient. Not every segment or every supplier relation should be managed the same way. What you invest in one may be different than what you invest in another. Those in charge of supplier relationship management must establish a strategy that generates a beneficial relationship for both parties.

3. Run and Maintain the Strategy

Both the performance of the supplier relationship and the strategy around maintaining that supplier relationship must be continuously evaluated so any changes can be made in real time. This requires establishing KPIs and specific metrics of success to assess performance against.

The Benefits of Supplier Relationship Management

There are many benefits to supplier relationship management, all of which contribute to a healthier business. 

• Reduced costs: Creating and maintaining an effective strategy for each supplier relationship that is valuable for both parties inevitably leads to cost savings, as well as a reduction in delays, quality issues, availability challenges, etc.
• Less price volatility: When you have a good, healthy relationship with a supplier, you can work together to minimize commodity prices, exchanging fixed prices for a longer contract term, for example. Reducing price fluctuations establishes better trust with consumers. 
• Increased efficiency: As with any kind of relationship, having a good relationship with suppliers leads to better communication, understanding and ability to work together to achieve the best outcome for both. 
• Outsourcing: When you trust a supplier, you can transfer to them time-consuming activities like managing inventory levels or certain aspects of customer service. 
• Supplier consolidation: When you and a supplier work well together, you better understand what the other needs to operate efficiently and can work to accommodate. This streamlines supply chain processes and can sometimes lead to reducing the number of suppliers you need to work with – resulting in increased buying power. 
• Ongoing improvements: Teamwork between both parties of a supplier relationship allows for feedback to continuously optimize factors that make both of you happier and more profitable.

Challenges Associated With Supplier Relationship Management

The need for effective supplier relationship management is arguably greater than ever due to supply strains of geopolitical issues, chip shortages, port congestion and other supply chain disruptions. However, there are some ways those in charge of supplier relationship management falter, causing SRM to become difficult or not as beneficial. Common supplier relationship management issues include:

• Approaching it as more of a means of cost reduction than developing mutually beneficial relationships with suppliers
• Having a supplier relationship strategy that lacks clear success metrics
•  Building relationships with a lack of supplier diversity
• Carrying too much inventory to address potential supply disruptions
• Changing sources of supply and burdensome supplier rationalization
• Having inconsistent supplier sourcing and onboarding processes
• Establishing excessive premium freight charges to meet customer delivery expectations
• Inhibiting ability to accurately track and trace purchase orders, shipments, receipts and invoices
• Mismanaging documents and accruing processing errors, leading to slow cycle times
• Having inefficient procurement workflow and processing, causing unproductive supplier relationships
• Creating a supplier relationship dynamic in which buyers spend too much time fighting fires and addressing unexpected supply disruptions

A tool that significantly optimizes supplier relationship management for a variety of industries is an ERP software solution. ERP software collects and organizes supplier data in one central location so you have better visibility into KPIs and can make more strategic supplier decisions. QAD’s ERP solutions are designed to improve all aspects of supply chain management, including supplier relationship management.

To see how beneficial enlisting the efficiency of an ERP solution would be to your SRM efforts, we offer a diagnostic test consisting of 12 questions to see how well your business is currently able to manage supplier relationships. Take the SRM diagnostic assessment here, or get in touch with QAD to learn how ERP software can improve your SRM for a healthier bottom line.