Supplier Relationship Management (SRM)
How to Manage Your Suppliers Effectively
Could your organization thrive – or even survive – without its suppliers?
Maybe you depend on other companies for critical manufacturing components, or you rely on an external IT provider to keep your website up and running. Perhaps you outsource your cleaning and catering services to keep your offices shipshape and your workforce well fed.
Establishing and maintaining good relationships with suppliers can save you money, add value to your business, and help you to achieve your strategic goals. But how do you assess which suppliers matter the most? And what level of connection should you have with them?
In this article, we look at how to categorize your suppliers and focus your efforts where it's needed the most, so that you can get the best results from each relationship.
How to Manage Supplier Relationships
There are four steps that you can take to better manage your supplier relationships:
- Understand each supplier's importance to your organization.
- Understand your role in managing each supplier.
- Understand your supplier agreements.
- Manage your suppliers effectively.
Now, let's examine each step in more detail.
1. Understand Each Supplier's Importance to Your Organization
Not all suppliers are "created equal," and to understand the value of each supplier you can categorize them using a system known as Supplier Segmentation. Doing this will help you to decide what type of relationship you need with each.
Take a look at the Supplier Segmentation Grid in Figure 1, below.
Figure 1. The Supplier Segmentation Grid
The "Strategic Importance to the Organization" axis refers to how dependent your organization is on the supplier. If there are lots of suitable alternatives you can use, your supplier will have a low strategic importance. But, if you have fewer options, it will have a high score.
The "Value to the Organization" axis is measured by considering how much money you spend with your supplier, and how crucial it is to your business operations.
Depending on how your supplier rates against these two axes, it will fall into one of four quadrants. These are:
Commodity – These suppliers provide "off the shelf" products and services. Each item has a low unit cost, though you may spend quite a lot of money with the supplier in total. Several suppliers offer the same products and services, so you probably select your supplier based on price.
Example: A supplier providing stationery products or generic parts for an assembly line.
Performance Management – Your supplier still provides "off the shelf" products and services, but they're more important to operations, and your organization spends more money on them. Your supplier contract is likely to include a set of service level agreements (SLAs).
Example: An IT service provider that supplies day-to-day support.
Development – These suppliers provide mid- to long-term products and services for your organization. These cannot be as precisely measured as the ones provided by suppliers in the performance management category, and the cost of changing suppliers is likely to be high. However, the costs and benefits of the agreement are not as high as they are for suppliers in the Partner category.
Example: An outsourced IT service provider that supplies a significantly different service than your in-house team. Your SLA likely requires continuous management and review.
Partner – A strategic relationship that both you and the supplier invest in and benefit from. These are likely mid- to long-term benefits, and both parties share any risk. Suppliers provide more than "off the shelf" products or services, so a set of standardized SLAs will probably not be a major factor in evaluating supplier performance.
Example: An outsourced IT service provider that provides your entire IT service, including developing your IT strategy and running your day-to-day operations.
To assess the risk and potential profit factors associated with your suppliers, use the Kraljic Portfolio Purchasing Model.
2. Understand Your Role in Managing Each Supplier
Some supplier relationships are managed at multiple levels within a business. For example, the CEOs of both parties may meet regularly to discuss progress and direction.
Your organization might also have a procurement team, which is responsible for negotiating the initial supply agreement, and any additions or renewals. An account manager may determine what the ideal service should be, while more junior individuals manage separate parts of the agreement, particularly those with "off the shelf" elements.
The aspects of the relationship that you'll need to manage may vary according to the type of supplier. For example:
- Commodity suppliers – Managing day-to-day issues, and escalating issues to your procurement team if necessary.
- Performance management suppliers – Ensuring that the organization gets what it's paying for.
- Development/Partner suppliers – Providing reports and information to the key senior managers responsible for these relationships.
If you need guidance on your role in relation to your suppliers, your first discussion should be with your line manager or your procurement team.
3. Understand Your Supplier Agreements
Now that you've prioritized your suppliers, and understand what your role will be in managing each of them, your next step should be to go over each supplier's SLA in detail.
These agreements often include legal terms, some of which will not be relevant to your day-to-day interactions. However, agreements are designed to protect the supplier and the customer if things go wrong, so it pays to be familiar with them.
When going over these agreements, ask yourself the following questions:
- What is the value of the agreement and what is its term?
- What commitments has the supplier made? Are there any agreed service levels that define what I can expect? (For example, one service level could be that the supplier will answer 95 percent of helpdesk calls within two minutes.)
- What commitments has your organization made to the supplier?
- Does the agreement define any particular roles, responsibilities or resourcing commitments?
- What happens if there's a major dispute?
- What is the process for contract termination or contract renewal?
- How do you pay the supplier? Are the goods or services provided for a fixed fee, or charged at hourly or daily rates? Are costs and expenses included? And, are there any bonuses, penalties, profit-sharing, or incentive schemes in place?
Your organization may not have written agreements with every supplier. For instance, you'll unlikely have formal agreements with suppliers that you use infrequently, such as office furniture providers. In this case, contracts may follow generic terms that apply to all customers, so consider reviewing these, too.
If no agreement has been made with suppliers that you use regularly, find out about any previous verbal commitments. Then, discuss whether you need to introduce a more formal contract with your procurement department.
If your organization uses internal suppliers, there may still be a written agreement between your department and the department supplying the goods and services. However, these documents will likely be less formal than agreements with external companies and they may not give you the option to switch or outsource suppliers when the contract term ends!
When you're choosing a new supplier, use the Outsourcing Decision Matrix to help you to decide whether to outsource an activity or keep it in-house. If you opt for the former, the 10 Cs of Supplier Evaluation checklist is a useful way to assess a potential supplier's suitability.
4. Manage Your Suppliers Effectively
Managing suppliers effectively requires three fundamental skills: communication, market knowledge, and contractual and commercial expertise.
Reports and regular meetings allow you to measure and discuss supplier performance objectively. You can also use SRM software to track your spending and order fulfillment.
But, for all except the Commodity category, this may not be enough. You and your supplier should aim to build up trust and understand each other's needs, so that you can resolve any issues early and avoid disputes. This will reduce risk, ensure quality and reliability, and allow you to identify new opportunities.
To achieve this, work together to develop strategies that benefit both of you, offer constructive and regular feedback, and take the time to understand each other's concerns and perspectives. If a dispute does arise, avoid reacting emotionally, by dealing with it professionally and objectively.
Finally, pay attention to cultural differences. If your supplier is in a different part of the world, national or regional cultures and laws might influence the way that it operates.
If you want your Development or Partner supplier to stay innovative or find more streamlined ways to meet your needs, it helps to know what other suppliers in your marketplace are up to. So, keep a tab on other suppliers' activities in your industry.
Contractual and Commercial Expertise
Your procurement team is usually responsible for negotiating the terms of supplier agreements. But, as the customer within the organization, you may need to work with procurement to make sure your needs get met.
Stay up to date with the latest commercial thinking and market rates, as this information will come in useful when you discuss your requirements with your procurement team. And it will ensure that you can get the right product or service for your needs.
Establishing good supplier relationships can save you money, add value to your business, and help you to achieve your strategic goals. So, it's essential that you take the time to manage these relationships properly.
The relationship that you have with each of your suppliers will depend on the level of service that they provide. For instance, If a supplier provides low-cost, "off the shelf" items, you may not need to spend a great deal of time managing the relationship.
However, when a supplier is strategically important to your business you'll need to devote much more time and energy into building up your relationship.
There are four steps that you can take to manage your suppliers more effectively:
- Evaluate each supplier's strategic importance to your organization.
- Understand your role in managing each supplier.
- Read your supplier agreements carefully.
- Develop your communication skills, market knowledge, and commercial expertise.