What is Supplier Relationship Management (SRM)?
Recently, an honest procurement leader asked us the question: ‘What is SRM?’
I think this is a very relevant question, as there seems to be no consensus on what SRM really is. In my experience, you can ask ten CPOs this question and you would probably get ten different answers.
SRM as a practice is very immature. Compared to CRM (Customer Relationship Management) widely used in Sales, we must admit that we are maybe 10-20 years behind sales practices, and we could learn a lot from sales in the professional way sales manage customer relationships.
In an attempt to answer this relevant question, I decided to write this blog about SRM to give our perspective on SRM as a practice.
What is SRM?
Supplier Relationship Management (SRM) is a systematic, enterprise-wide assessment of the capabilities of suppliers toward an organization, a determination of which activities to engage in with different suppliers, and the planning and execution of all interactions with suppliers, in a coordinated fashion across the relationship life cycle, to maximize the value realized through this interaction. The focus of SRM is to develop two-way, mutually beneficial relationships with strategic supply partners to deliver greater levels of collaboration, innovation, and competitive advantage than could be achieved through a traditional, transactional purchasing arrangement.
In other words, SRM is a comprehensive approach to the tasks of tracking and managing an enterprise's interaction with the organizations that supply the goods and services it uses. The goal of supplier relationship management is to plan, track, structure, streamline and make more effective processes between an enterprise and its suppliers on both operational, tactical, and strategic levels.
Over the course of time, companies engage in multiple interaction activities with their suppliers; looking at Spend/POs, negotiating contracts, joint product/solutions development, receiving/using products/services, having review meetings, and so on. The many interaction activities with suppliers should be viewed as a relationship, one which can and should be tracked and managed in a structured and coordinated fashion across functional and business units.
What is the added value of SRM?
SRM increases efficiency and reduces the cost of processes associated with suppliers on both operational, tactical, and strategic levels, e.g. when receiving/using products and services, developing new solutions/products, continuous improvements in the value chain, and managing joint projects.
SRM also gives procurement leverage in the (re)negotiation with suppliers. With a complete picture and understanding of the relationship with a supplier across all business units and functions, procurement has the insight and facts needed to negotiate even better terms or identify areas where a supplier needs to improve to create more value (or reduce costs) for the company.
Finally, SRM enables procurement to make a greater impact within the business. With an understanding of the relationship with each supplier across the entire business, procurement can better understand the experiences and needs of the business in relation to its suppliers, and hereby meet these needs in a better way, creating greater value beyond cost savings.
What framework should we provide the category teams with?
SRM is a process that (in order to be very effective) needs to be supported by a type of solution that enables logging of interaction with suppliers, e.g. performance data, satisfaction, documentation etc.
What should the future role of a Procurement department be?
The role of the procurement manager (or category manager) will be to manage suppliers. Our motto is: “Don’t manage costs. Manage suppliers”. The reasons for this statement are many, but our key argument against a narrow focus on cost saving is that it will actually cost you in the long run. Not many CFOs want to acknowledge this, but it is a fact. Focusing only on pushing prices on suppliers will likely damage the relationship, and you will not get the value from the supplier you could have had.
Instead, value-focused procurement managers need to have at their fingertips every piece of data about their suppliers (and not only price data) in order to put forth the most effective messaging and tactics to actively manage their suppliers, so the suppliers take needed action that will increase value creation for the company. Procurement managers also need all the interaction data they can get on a supplier to gain leverage and improve a negotiation result. This way a more holistic approach to procurement and supplier management can actually end up reducing costs and creating even more value.
SRM will be the next big thing in procurement following the era of category management practice, because the potential in SRM is enormous and can become an important part of every company’s competitive strength. We believe that the use of SRM solutions will skyrocket in the coming years, as it will become a must-have for most professional organizations to enable greater value creation in procurement.