Does SRM represent the last source of savings?

Milan Panchmatia
4 May 2015

Supplier relationship management (SRM) has long been a contentious topic.

In fact merely defining what the term means often proves difficult and can elicit a wide range of responses. There are those who believe SRM is part and parcel of contract management, whereas others see it as a wholly separate discipline.

For the purpose of this article, when I refer to SRM, what I mean is the aspect of a business relationship which goes beyond written contracts and numbers. SRM is focussed on building trust through mutually beneficial relationships between companies and individuals.

In this context, SRM is clearly emerging as one of cornerstones of modern procurement. The financial crisis means many businesses are no longer able to keep providing savings using traditional methods. Many suppliers are under tremendous price pressure and are simply no longer able to keep delivering cost reductions on a yearly basis.

The benefits of SRM extend far beyond maintaining sustainable relationships with key suppliers. Developing strong bonds between businesses can lead to better quality products, greater supplier visibility and risk management and higher levels of staff satisfaction.

There are of course situations where e-auctions, tenders and negotiations can result in significant savings, but in mature industries these are increasingly few and far between. In fact, continuing to operate using only these tactics will not only damage relationships with suppliers, but in some cases give rise to serious legal issues. The horse meat scandal, for example, is widely believed to be a consequence of unsustainable price pressure from supermarkets.

A recent example of successful SRM is a recent AB InBev project which entailed providing growers with high quality barley, so that they in turn could provide them with better products. The project will allow AB InBev to produce better quality drinks, whilst allowing suppliers to grow their guaranteed income. This example highlights how implementing SRM can provide mutual gains.

The opposite is also true. Take the recent demise of Phones 4u. The latter is a classic example of a business losing contracts with key suppliers. When EE and Vodafone withdrew their support from the company there was little it could do. Roy Williams, managing director at Vendigital, speculated that suppliers pulled away after Phones 4u put them under too much cost pressure.

Successful SRM delivers far more than a sustainable relationship with a supplier. If properly implemented the process can provide a definite competitive advantage and numerous valuable innovations. In a difficult economic climate, where many companies are struggling to implement traditional savings, SRM represents one of the foundations on which businesses can continue to grow.

At the end of the day, it is all about balance. In most cases there are still areas where costs can be driven down by negotiating and other more traditional methods. But in most mature industries it is likely the tactic of demanding annual reductions is coming to an end and SRM will continue to play an increasingly important role in buying strategies.

Milan Panchmatia is a director at 4C Associates

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