The true value of supplier relationship management

Milan Panchmatia
23 February 2015

Supplier relationship management (SRM) has long been a popular topic of conversation amongst buyers and for good reason. With procurement under increasing pressure to deliver savings and added value, the process often represents one of the few sustainable ways to bring about a step-change.

There remain a number of challenges for those looking to implement an SRM programme. Chief among these is the need to demonstrate the tangible benefits which such an approach would produce. The latter can be wide-ranging and can include supplier-led innovation, better risk management, sustainable savings and better quality products. Despite this, the long-term nature of SRM means it can be difficult to get support from senior stakeholders.

Getting buy-in can be one of the most challenging elements of installing an SRM initiative. In 4C Associates’ experience, the easiest way to do so is by starting with a small, focused project. This will enable buyers to experiment and find the best ways to deliver value, without being under huge pressure. It will also help ingrain the process within the organisation – a key requirement for any successful SRM programme.

When it comes to proving the value of SRM, there are a number of case studies and surveys which shed an insight into the benefits a well-run operation can deliver. The OEM Profitability and Supplier Relations study, found that for automobile manufacturers, better supplier relationships lead to higher profit margins. According to the research, the value of non-price benefits, such as suppliers sharing technology and providing the best team available, was on average four to five times higher than that delivered via price concessions. Chrysler is singled out as a company whose 10 years of turbulent ownership led to poor supplier relationships and an estimated $24 billion in unrealised income.

Speaking on the importance of SRM, former Sainsbury's chief Justin King explained the retailer’s ‘What is British will stay British’ strategy focuses on selling seasonal British food and growing goods which would traditionally be sourced abroad, locally. The tactic will not only give the retailer better visibility over its supply chain, but also improve consumer perception and trust, in relation to the brand.

In a challenging economic climate, one of the main benefits SRM can deliver is better risk management. The horse meat scandal, for example, demonstrates what can go wrong when buyers and suppliers work at arm’s length. In this case, it is widely accepted supermarkets put meat suppliers under unsustainable cost pressure. As a result, some suppliers resorted to illegal practices.

A solid SRM process can also prove invaluable should a key supplier become unable to provide a good or service. Effectively engaging with backup suppliers ensures that they will be ready and willing to step in when needed.

Another recent example was the announcement that Phones 4u was going out of business. A very telling message appeared on the retailer’s website after the announcement: “Following the unexpected decision of EE and Vodafone to withdraw supply from Phones 4u, we regret that we are offline.”

Whereas traditional procurement is built around getting the best prices from suppliers, potentially to the detriment of the relationship, SRM delivers benefits to both sides. A well-managed process will deliver sustainable benefits and long-term savings, whilst ensuring a level of flexibility that would be otherwise difficult to achieve.

This is not to say there is no room for hard negotiations and e-procurement tactics. Short-term savings delivery continues to play a vital role in many procurement departments. But as margins become increasingly tight and supply chains more and more stretched, SRM represents an invaluable tool to unlocking value, which goes beyond simple savings.

Milan Panchmatia is a director at 4C Associates
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