When was the last time you thought about your business’ relationship with its suppliers? Was it the last time you placed an order? The last time you signed a contract? The last time they raised prices? Never? The fact is, most business owners think of procurement as nothing more than a transactional relationship. So much attention is paid to negotiating the price of the goods and coordinating the delivery that very little thought goes into the quality of the relationship and how improving it might help you both.
We’re going to take a little time today to explore the benefits of maintaining a positive relationship with your suppliers. Whether your business is a small ecommerce startup or a big box retailer, the benefits of supplier relationship management are the same.
Supplier Relationship Management
Supplier relationship management, SRM for short, is defined by Gartner as a business initiative that many companies undertake to build mutually beneficial relationships with suppliers. The process involves collecting quantitative and qualitative data concerning vendor-provided goods and services, and analyzing this data for opportunities to improve (or reasons to end) the relationship.
Of course, it wouldn’t be a business strategy if there weren’t a couple more acronyms to learn. To engage in SRM, you’ll need SIM and SPM: an SIM (supplier information management) tool centralizes basic contact and purchasing data for all of your suppliers; an SPM (supplier performance management) tool measures how well each supplier is performing against the terms of the contract. You may already be tracking this information on a spreadsheet, without the use of fancy acronyms. If so, good on you! Adding an SRM layer simply forces you to analyze this data once in a while, and use the information to improve your business. SRM is more than a one-and-done analysis. It’s an ongoing process that can be particularly important for businesses trying to maintain a competitive edge. And the benefits can be significant.
The Value of a Collaborative Relationship
Why, you might ask, would I care about building a relationship with a supplier? I’m the customer and the customer is always right, right? If I don’t like the price or the quality, I just go elsewhere!
It’s true. As the customer, you do hold a great deal of the power in the relationship. But if the COVID pandemic taught us anything, it’s that a smoothly run supply chain is vitally important to your business. Shipping delays, labor shortages, and manufacturing shutdowns can wreak havoc on your business, as can deteriorating product quality. There’s more to supplier relationship management than getting a good price. SRM not only leads to better prices and more reliable service, it can also lead to greater efficiencies and more innovative products that keep you ahead of the competition.
A collaborative relationship can improve your standing with the supplier, setting you up as the “customer of choice” and reducing your exposure to the risk of supply chain disruption or product quality issues.
Taking a collaborative approach with suppliers can help your business innovate, find better products and solutions, reduce inventory costs, and work around future problems.
If building more sustainable processes and products is important to your business, you can’t do this without the cooperation of your suppliers.
Focusing on shared growth rather than price leads to more efficient processes and a more agile response to changing conditions, giving your business a competitive edge.
Developing a collaborative relationship as opposed to an adversarial one results in greater trust and a more positive work environment.
Tips for Evaluating Supplier Relationships
The biggest obstacle to a positive relationship with your suppliers is the constant focus on negotiating a deal. A successful SRM initiative takes a systematic look at every aspect of the relationship, including your part in making it a positive one. You may or may not get a better deal in the end, but the goal is to build a better, more beneficial working relationship. Here are a few tips to getting what you want from SRM.
Establish KPIs to track the quality of a vendor’s products and service, in addition to quantitative metrics such as timely deliveries, cost savings, and order accuracy. For example, evaluate processes including invoicing, payment, tech integrations, communications, timely approvals, and customer service responses.
Put a dollar value on intangibles like sustainability, likeability, and innovation, and factor those into the equation. Can the supplier grow with you and take you where you want to go? If so, it might be worth paying a little more for their goods.
Compare the negotiated price and promised savings to the actual price you paid for goods. A PricewaterhouseCoopers study showed that after negotiating a contract, an average of 25% of the savings were lost during the implementation process. The savings that were promised were not reflected in the P&L at the end of the year.
Look in the mirror. While you’re evaluating your suppliers, you should also be evaluating your company’s performance as a buyer. Are you paying on time, communicating needs clearly, and cooperating with vendors that are making an effort to improve services?
Lastly, you don’t need to create strategic partnerships with every vendor you work with. Focus on the suppliers that you consider vital to the success of your business. Other vendor relationships can be managed more simply, based on performance and deliverables. End relationships with uncooperative vendors whose goods can easily be purchased elsewhere.
Steps to Implementing SRM
If you deal with a lot of vendors, investing in SRM software will help you more easily manage the data and make it available to stakeholders for analysis. Smaller businesses may be able to make improvements simply by putting someone in charge of tracking performance and managing the data. Here are some of the concrete steps you can take towards supplier relationship management.
1. Formalize the process. Establish goals and objectives, tactics, and a budget.
2. Get the support of upper management and any stakeholders who could derail the process.
3. Segment your suppliers according to the items they supply. This simple step can reveal shortages or redundancies that may be costing you money or causing confusion.
4. Establish KPIs that hold both your suppliers and your procurement team accountable.
5. Monetize the value of a positive relationship and the cost of a negative one. This will give you a more objective way to decide whether it’s worth working with a particular vendor to improve the relationship.
6. Set up a system for tracking the market price of goods you’re purchasing, and research other suppliers you might consider. Be sure to compare their customer satisfaction ratings, reputation, capabilities, and financials to your current vendors’ numbers to make sure you’re comparing apples to apples.
7. Examine the reasons for a failed relationship and take steps to repair it before ending the relationship. Would better tech integrations help? Regular meetings or reports? It’s a lot easier to mend an existing relationship than to establish negotiations and integrations with a new partner.
8. Do your homework when it comes to choosing new vendors. Ask for references, read reviews, and compare their prices and financial performance to their competitors’.
9. Make sure your procurement team has the soft skills to manage contract negotiation and implementation, whether through on-site training or changing the requirements for new hires.
Lasting Relationships
The best working relationships benefit both parties — that’s why they last so long. For example, we love working with our ecommerce clients and, based on their feedback, they love working with us. That’s because they know we’ll do almost anything to make their customers happy! They can’t scale their business without us, and we wouldn’t be able to grow and invest in more efficient processes if it weren’t for them. It’s a mutually beneficial relationship, and that’s exactly what you’re looking for in your vendor relationships.
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