As supplier relationships mature it’s not unusual for the value gained from re-tendering contracts to shrink. This is particularly common in high competition industries such as manufacturing, where repeated cost challenges have driven margins to low levels.
In such cases, procurement’s focus often shifts to supplier relationship management (SRM) as a way of continuing to deliver benefit from contractual relationships while managing supplier risks. Yet without being able to identify, deliver and communicate the benefits of an SRM system, getting buy-in from key stakeholders can prove challenging.
One way to secure stakeholder buy-in is by demonstrating that the SRM process works effectively with a select group of suppliers before rolling it out more widely. But this opens up a new set of challenges in terms of selecting the right suppliers and ensuring the benefit is delivered. These should be resolved before starting the SRM program to maximize its effectiveness from the outset.
Unbiased segmentation and alignment
Choosing the ‘right’ suppliers to work with in order to drive support for SRM is crucial. It may be tempting to eliminate some suppliers on the assumption that they may not be supportive of the initiative, but a key part of SRM is being able to demonstrate commitment to greater collaboration. So, trying to better understand why there might be a poor relationship with some suppliers is important and should in fact be considered in relation to all of your strategic suppliers.
Many suppliers will want to see the benefits of the approach before providing full support, whether that’s by fixing day-to-day issues such as late payments or poorly managed supplier complaints, or ensuring that incentives are worthwhile, such as longer contractual relationships, guaranteed volumes or a gain share from the program.
Workload -v- capacity
When launching an SRM strategy it may be tempting to segment the entire supplier base and try to set up a huge number of improvement or risk-management projects. This is unrealistic and likely to lead to poor engagement on both sides, as under-resourced projects are delayed and results fail to materialize. Set the approach, prioritize the right supplier targets and then focus on critical projects only.
SRM can look easy when done well, but there are a range of skills required to ensure success. A significant part is defining who will be running these activities – a dedicated SRM team, buyers who will manage this alongside a sourcing role or perhaps even business stakeholders. Confirming that the team has these skills – and upskilling them if they don’t – is important if you’re to get the best out of your supplier relationships.
Many of the required skills lie alongside typical strategic sourcing, for example project management, problem-solving and root cause analysis, deep technical understanding of products or services, negotiation, communication and personal relationship skills. In some cases, adopting new skillsets may prove difficult for some procurement staff. They will require formal training or additional staff may need to be recruited to fill any skills gaps.
Governance and support
SRM needs to be ‘owned’ by a senior figure within the procurement function who has the gravitas to ensure that key internal stakeholders across the business are fully bought into the process. This should be an active role with involvement in driving opportunities, the ability to challenge missed key performance indicators and milestones, and with targets built into the individual’s own objectives. A central tool that can track and report on meetings, opportunities, risks and KPIs is crucial.
The SRM team will also have responsibility for sharing best practice across the organization. Stakeholders within the business will form part of this process so having simple instructions, robust training and a strong communications plan can help drive effective SRM.
Setting up SRM can be difficult, so proving its benefits is crucial. A good starting point is to build relationships with a few key suppliers, while testing and improving the processes with them to help build confidence in the solution. These pilot suppliers and the stakeholders who hold contracts with them can become important advocates for success and help promote a wider rollout.
At Efficio, we have developed a set of tools to support segmentation, alignment and SRM management. These define how to set up and launch an SRM process effectively, with a focus on building alignment with suppliers.
With the right approach towards SRM, both stakeholders and suppliers can focus on delivering benefits across the supply chain, while maintaining a strong relationship in the face of ongoing cost pressures.
This article was originally published in the July/August 2018 issue of In-Procurement.