Differentiate with a Supplier Relationship Management (SRM) article originally published by, and permission to publish here provided by, Michael Massetti, Executive Partner at Gartner.
Democratic institutions around the world promote the core doctrine that all people are created equally. This is clearly not the case in the world of supplier management. All suppliers are not created equally and they should all be managed with this distinction in mind.
This article on how to differentiate with Supplier Relationship Management will look at a model for stratifying and segmenting your supply base within the confines of a structured and formal supplier relationship program (SRP).
The development of supplier relationship management (SRM) accompanied the stratification of the supply base into a number of different hierarchical models. The most tactical suppliers are fundamentally transactional and have the lowest level of relationship management. This highest level is for those that are the most strategic with the largest and most critical spend allocation and the deepest relationships. There are considerably more suppliers at the base than at the top.
For this SRP discussion, we’ll use the following three-tiered model. Supplier management organizations can add levels above “strategic” in this construct for situations where specific partnerships or alliances exist. In some cases, purely transactional suppliers in regional or out-sourced models may be placed below the level of “approved” in this model.
Supplier Relationship Program (SRP)
Supplier relationship management (SRM) is a process for developing and managing collaborative relationships with suppliers at all levels to achieve the required business objectives and overall supply chain strategy. SRP allows the supply team to determine the criteria for establishing the appropriate relationship levels needed to drive supplier engagement.
The process should be managed across the enterprise consistently to ensure alignment with all corporate and supply chain objectives. An annual process of planning, evaluation, and feedback is recommended to adjust for changes in business conditions, supplier performance/capability, new suppliers, and more.
It is critical that this type of program be aligned across the entire corporate enterprise to present a single face to the suppliers. Additionally, including product development, finance, marketing, and other key organizations helps guarantee the success of the program and integration of all activities in the company. Successful supplier programs depend on cross-functional integration and alignment.
In any SRP approach, there are multiple levels of management engaged in the process. All levels of the organization must be involved, from the procurement person responsible for the supplier up through the CEO, depending on the value of the supplier. Further, multiple organizations will touch and interact with various peer organizations at the supplier.
Thomas A. Stewart described a classical single focal point model and contrasted it to a more enlightened multi-point model for relationships between a supplier and a customer in his book “Intellectual Capital.” The classical model is called a “Bow-Tie Model” as the engagements between the sales and procurement representatives always go through them – a single control point structure that resembles a bow-tie. The newer model is called the “Diamond Model” and more accurately reflects the reality of multi-touch and multi-functional interactions with suppliers.
To be successful, the SRP must include all of the key organizations in the planning, selection, review, and decision-making processes. The sourcing or procurement function will own the relationship and manage the overall process. Without the engagement across the enterprise, the supplier may get mixed messages from different organizational agendas.
SRP incorporates multiple levels of communications with the supplier throughout the year. Tactical communications include daily interactions and updates on supply. Weekly and/or monthly communications address demand, purchase orders, inventory levels, deliveries, quality, and more. Of course, issue management is critical and will involve all critical parties until resolution. Many organizations have developed web-based portals or use other cloud-based services to tie the supplier and buyer together.
Structured meetings for review of the relationship, performance, and progress are another integral part of a successful SRP. These meetings will look at all aspects of the engagement with less focus on tactical issues and more attention to the long-term. The procurement team needs to include all of the essential organizations for each review, per the model above. Successful SRM relies on cross-functional engagement and alignment.
Regular, formal business reviews (whether monthly or quarterly) include all aspects of the procurement scorecard to ensure the supplier is performing up to the required and agreed-to levels. Typical metrics will include on-time delivery, cost savings/reductions, quality performance, innovation contributions, and more. Higher-level management from both sides of the relationship should attend.
The more strategic the supplier is, the more important it is for executive management to participate. Of course, the most strategic suppliers may have senior executive involvement and commitment up to the CEO level. Many companies include annual supplier events to roll out strategic plans, recognize top suppliers, and share the direction of the company/supply chain. Some companies run quarterly all key supplier meetings where they present updates about the business, product strategy, and other subjects. This allows one single message to be sent more efficiently than covering the material one supplier at a time.
Many organizations have multiple locations and manufacturing sites associated with their business. In addition to the meetings that take place at procurement’s location, supplier engagement at higher levels is important for the rest of the corporate footprint. Structured meetings with engineering, manufacturing, marketing, and other groups that are spread out around the world are important to the overall communications hierarchy.
Executive commitment to the process is critical to its success. Managing the relationship at higher levels requires an appropriate investment in time from senior executives. The more strategic the supplier, the more imperative it is that executives from the buying side invest time and effort into the relationship. Suppliers need to understand how important they are to the business all the time, not just when a crisis occurs. Senior management’s full commitment to the process demonstrates that.
One cornerstone of any SRP is transparency from both sides of the relationship. If your suppliers are not intimately aware of their status in your hierarchy, the program needs work. You do not want a supplier to believe they are more important to you than how they are classified in your SRP hierarchy.
SRP requires investments by both the supplier and customer to be effective. There are many ways to describe the attributes of a success engagement. Suppliers will achieve different levels of investment depending on where they sit in the hierarchy – strategic or preferred or approved.
The first attribute is access to technology, knowledge, and capability. The supplier ensures executive engagement in critical functions, active participation in business reviews, and early access to product development roadmaps. In return, the receiving organization provides access to key decision makers across the enterprise and feedback to the supplier for wins and losses of competitive bids.
Second is the commitment to world-class quality and execution. The supplier must consistently achieve quality levels agreed to with procurement. Appropriate quality standards must be realized and adhered to as they evolve. Immediate attention to any excursions by the supplier is vital. If the supplier performs to expectations, or better, they will improve or maintain their SRP rating.
The third area of importance is the speed and agility of the supplier. They must deliver or realize that the competition may very well beat them out. Delivery performance relies upon typical supply chain tools – buffer stock, supplier-managed inventory (SMI or VMI), just-in-time (JIT) delivery, lead-time improvement projects, improved forecasts, etc. Additionally, new product introduction (NPI) must be prioritized by the supplier to enable the customer to meet its market requirements. In return, the customer provides early engagement in the design process. Finally, the procurement team will participate closely with the supplier in collaborative planning and forecasting to support agility.
Cost is next on the list. In the world of never-ending cost reduction expectations, the supplier-customer relationship must deal with this directly. There needs to be an intimate understanding of the cost needs and drivers on both sides. The supplier must demonstrate commitment to on-going cost reduction and engage closely with the procurement and engineering teams to identify ways to lower costs, not just reduce prices. Procurement must clarify long-term cost requirements clearly. Active engagement by both parties in cost reduction workshops and planning sessions helps to manifest the mutual investment. Procurement will allocate more spend to a supplier who, all else equal, helps drive cost down.
Finally, the more important the supplier is, the more resources must be visible to the procurement and other teams at the customer. Suppliers must share their technology and operational roadmaps to gain alignment. The customer design teams require access to technical expertise from the supplier to achieve their goals. The supplier who does this best will gain access to early product design requirements and closer engagement with the design team itself. Innovation is required to drive long-term success of both parties. The supplier has to strive to be a market leader to remain atop the SRM hierarchy.
Pulling It All Together
Supplier relationship management (SRM) is a core process for a successful procurement or supply chain organization. We’ve touched on a number of essential elements of SRM and SRP in this article. The table below highlights a more comprehensive view of supplier relationship programs across many of the dimensions discussed above. It also highlights the differentiation across the three levels of SRP hierarchy in our model – Strategic, Preferred, and Approved.
Differentiate with Supplier Relationship Management (SRM)
Differentiate with supplier relationship management (SRM), an important element of a successful procurement program. The concepts highlighted here can be expanded or reduced to fit any company’s supply management objectives. Once you decide on the scope and complexity of the program appropriate to manage your supply base, then you must drive integration of the process across your organization and with the suppliers.
Suppliers should know where they stand in the SRP hierarchy, why, and how to improve. Similarly, the supplier needs to communicate to procurement where they stand in the supplier’s customer relationship hierarchy. Clarity in how the process works, the roles of each party, defining success, and commitment to make the process work are the key components of the SRP foundation. Without these, SRP will not deliver the expected results.
How can you differentiate with supplier relationship management (SRM)?