Many procurement leaders have asked us how to plan and implement an effective SRM program. In this article we will present five key steps to ensure an effective SRM program is implemented.
But before we start describing the steps, let’s define what we mean by SRM:
What is SRM?
Supplier Relationship Management (SRM) is a systematic, enterprise-wide assessment of suppliers’ capabilities toward the organization. A determination of what activities to engage in with different suppliers, and planning and execution of all interactions with suppliers in a coordinated fashion. The objective of SRM is to maximize the value realized through those interactions.
The focus of SRM is to develop two-way, beneficial relationships with supply partners to deliver greater levels of collaboration, innovation and competitive advantage than could be achieved through a traditional, transactional purchasing arrangement.
The objective of SRM is to plan, track, structure, streamline and make more effective the processes between an enterprise and its suppliers on both operational, tactical and strategic levels.
This means that an SRM implementation involves change, which needs to be taken into account when planning the SRM process.
The 5 key steps in implementing a SRM program are:
1. Segment your supplier base
Firstly, you must segment your suppliers base into different supplier segments (could be named strategic, tactical and tail suppliers) that you will manage differently using different approaches and resources. Segmentation of suppliers is one way to help you ensure the proper alignment of resources within an organization.
Start by identifying those suppliers with whom you can work with to achieve greater levels of value creation for your company, let’s call them your strategic suppliers. These are typically large spend suppliers but could also be smaller critical suppliers that may be able to deliver innovation that could have great value for your company.
Next identify your tactical suppliers that could be suppliers you frequently buy from but who has limited spend and where there are alternative suppliers in the market available. The tail suppliers are the rest of the suppliers. Do not focus resources on these.
2. Set objectives for your SRM program
It is important to have objectives. If you don’t, your team will just move in different directions without achieving anything. The objectives must be aligned to your overall business objectives.
If you are a high-tech/ innovation company, you are probably not focused on cost savings but instead innovation capabilities so your objectives in relation to your SRM program might reflect improvements in the supplier portfolio’s innovation capabilities.
If you are a production company producing commodities, you probably have greater focus on objectives like cost savings and on-time delivery performance to be cost-effective and competitive in the market. Each company should have their own objectives for their SRM program.
3. Measure supplier performance against objectives
What gets measured gets managed. You should define your most relevant supplier performance metrics in alignment with your objectives for your SRM program, and then track these metrics across your suppliers – start by measuring your strategic and tactical suppliers and leave the tail suppliers.
Supplier performance is much more than compliance and On-Time-In-Full (OTIF) measurement. Value from supplier relationships comes through various processes from simple delivery to product innovative and collaborative activities that focus on solving your customers’ problems.
Supplier performance objectives and measurements must focus on, and be tied to, the overall objectives of your company.
Typical supplier performance metrics to measure are:
– Delivery performance (data from ERP)
– Quality performance (data from quality systems)
– Service performance (data from surveys)
– CSR performance (data from supplier self-assessments)
– Risk status (data from supplier self-assessments or external data sources)
– Innovation capabilities (data from supplier self-assessments or surveys)
4. Engage suppliers, be transparent and get aligned
Segmenting suppliers and focusing time and resources on those strategic suppliers will help to drive the necessary relationship development and performance that can improve your company’s overall competitive advantage.
Collaboration is something that we hear a lot about, but we may not always be able to clearly define it or even recognize it properly in the context of day to day business dealings.
We believe that allowing suppliers transparency into your business goals, activities and supplier performance data is a great way to start a more constructive collaboration with selected suppliers. By being transparent you start building a foundation of trust and you get aligned with the supplier, which is essential to creating value together.
When being transparent you should simply ask the supplier how they believe they can support your business even better given the new information about your goals, plan, activities etc. Often you get surprised about all the great ideas that can arise from such a discussion.
Supplier transparency and collaboration can lead to improvements in both supply availability, supply quality, reduction in wasted resources in the supply chain and even new innovations that helps your company beat the competition in the market.
5. Collaboration and continuous improvement
Within a focused, consistent and collaborative supplier relationship environment there is significant opportunity to bring about improvements in supplier quality, delivery, performance and service. In part this is an outgrowth of investment in regular meetings with the supplier that focus on all aspects of business performance.
Further it can be enabled through the sharing of data related to supplier performance measured on different metrics as described above. This data can on a consistent basis effectively flag when actions are needed to fine tune the cooperation and this way continuously improve the cooperation and the overall value creation for both parties.
That’s it. I hope this could inspire. Good luck with implementing your own unique SRM program.
If you want to learn more about how LeanLinking SRM can help you in the process, please click here.