CHAPTER SEVEN

SUPPLIER RELATIONSHIP MANAGEMENT

What is it?

Supplier relationship management (SRM) is first and formost an approach used for engaging
with suppliers on a level that reflects the priorities of the customer organization and how best
these needs can be achieved. It is a differentiation process that recognises that not all suppliers
are the same and therefore not all the customer-supplier relationships should be dealt with
through a single strategy.

Whilst much of the emphasis is placed on the role and situation of the customer and supplier,
the products and services being procured are extremely influential in how the organisations
view and interact with each other. By understanding and responding appropriately to this
triangulation it is possible to yield the greatest value from both the products/services and the
enterprises involved.
The holistic nature of this approach requires the consent and engagement of the whole
organisation. True SRM cannot be achieved through the Procurement function acting alone.
At the partnership level this means the involvement of the executive team; at the very
minimum it means functions acting in a coordinated way so that the organisation does not
appear disorganised or schizophrenic to the outside world.
Given the complexities described above, SRM needs to be considered as part of a much wider
portfolio of procurement resources that collectively deliver the value and contribution that
more and more organisations are demanding of the function. It therefore requires careful
development at speeds often dictated by the activities of the organisations involved.
What is it not?
Given the current situation with regard to SRM products, services and trends, Procurement
finds itself in a position where it is important to state what the approach is not. It is not a
software tool that can be filled in like an electronic filing cabinet, storing all the information
and complex analysis that used to be done on paper. Supplier relationships management
happens in the real world if real benefits are to be derived.
It is not an approach limited to the development of partners alone. Not all organisations
are able to follow the mass manufacturing model of a small number of partner suppliers
who manage areas of the supply network on behalf. Organisations will have different
requirements and different supply networks against which they will often have to develop

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unique solutions.
It is not a quick win solution that can be fully implemented in the short-term. Relationships
of any kind other than adversarial require trust as their foundation and therefore take time
to nurture and build. Not everyone in the customer or supplier organisation will get it right
all of the time and setbacks will be common with hard won benefits becoming easily lost.
It is not something that can be implemented without a fundamental change in Procurement,
the organisation it serves and the suppliers involved in the new approach.
Whilst the new ways of working may be Procurement led, they require the active and
honest engagement of all those involved. Building structured and managed relationships
that balance long-term objectives with shorter-term requirements will require flexibility
on both sides if it is to be successful. It does not mean reducing the power of the organisation.
Rather, it means working as part of a network to ensure that the value of each player is
leveraged toward the needs of the end customer and of each organisation within the supply
chain.

Objective of supplier relationship management

As with many procurement activities, at the most basic level, SRM can be used to reduce
both prices paid and costs to the organisation. By developing appropriate styles of interaction,
even adversarial ones, it is possible to save money. Suppliers have expectations as to how the
customer will act and are often positioned to respond in kind. Key to developing an SRM
approach is a well understood supply base. As the customer organisation develops its own
maturity and inward understanding, it becomes possible to develop more value adding
capabilities to the relationships that are being nurtured. Initially this is often at the product or
service level, but as the customer organisation progresses this often expands to include an
evaluation and sourcing strategy based around the provision (internally) of core competencies
and (externally) of non-core competencies.
Whilst the above focuses heavily upon inward reflection, it quickly becomes just as important
to understand what the supply market and individual suppliers are capable of delivering to the
organisation. A successful relationship strategy will carefully differentiate between internal
and external provision in a way that does not compromise or compete with the other. At this
point the emphasis is on aligning organisations in order to ensure that products and services
flow through the supply chain and network toward the end customer.
The concept of flow (both value and physical) brings into focus the need for stable and
capable processes that perform over time. The propensity of many organisations is to improve

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through programmes, often driven by sub-optimised Lean and Six Sigma approaches that
butcher the enterprise into neat packages in an attempt to demonstrate quick wins and
‘progress’. High performing organisations have high performing supply networks and this
comes from the alignment of objectives and approaches to how things are done across the
entire enterprise. By knowing what is expected, suppliers are able to manage their own
businesses for the long term. Not only is this more cost effective, it is also more robust from
an operationally competitive perspective.
It is not always the case that customers simply want what can be described as the classical
portfolio of products and services. Sometimes engagement with suppliers is influenced by
secondary requirements such as access to technology or other capabilities. In today’s market
sustainable levels of competitive performance are often delivered through the ability to
differentiate the products and services offered to customers. Fundamental to this strategy is
the ability to access new innovation so the organisation can be first to market or offer a
premium above the competition. From this perspective suppler relationship management
is as much about what can be achieved as it is about becoming the customer of choice to
the supply market. However, being customer of choice brings with it significant obligations.
Namely, to maintain the differentiation, and the benefits it brings, through the organisation
managing its suppliers as carefully as it manages itself.

Critical Elements for Supplier Relationship Management

The following critical elements for building effective supply relationships.

Focus on deliverables at the level of the product or service, not the centralized relationship that
occurs at an abstract level and fails to get into the details of the business performance metrics.
Too often, thoughts about SRM start with discussions about global contracts or broad-based
partnering marketing initiatives. Although these can be seductive, they rarely produce
sufficient short-term payoff to sustain the level of effort required to maintain focus on the
initiative. Instead, as one group-level category manager said, “You need to provide short-term
payoff on the basics before leaping into the other neat stuff. Our job is to make it a pull, not a
push.”

 Start with the business outcome at the business unit level. This means defining a
specific measurable performance indicator that means something to the business
stakeholder (e.g., operational cost savings, supply continuity, process improvement
suggestions, access to new technology, or process innovation).

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  Let the business outcome drive the relationship process, course of action, and level of
investment through initiation of projects focused on achieving the outcome.
 The overall relationship (Big R) then becomes an outcome of various relationships with
different products and services that meet different business outcomes (little r’s).
 Program management (Big R) drives incongruity resolution, aggregation of benefits,
and opportunity analysis across lines of business.

Types of supplier relationship management

Buy the market Ongoing Partnership Strategic alliance Backward
relationship integration
Arm’s length Medium-term Longer-term Long-term relationship Ownership of the
Clear parts contracts contracts Full sharing of supplier
specifications Some sharing of Extensive sharing of information and plans Full sharing of
Computerized information information Limited or no business information and
integration Some business with Increased trust with competitors plans
Significant competitors Limited business Extensive trust and One culture
business with Good management with competitors merging of cultures
competitors relationship