Most medium to large size companies work with a huge number of suppliers, which fuels supply chain complexity. The number one mistake in procurement is that companies fail to properly manage their suppliers and the related external spend.
As the supply chain grows bigger and gets more complicated, the need for supplier relationship management solutions increases. SRM software aims to simplify the management process and supplier performance evaluation process to drive effective results. In this article, we’ll discuss the advantages and disadvantages of using SRM software to clarify all the mixed opinions out there.
Pros of SRM Software
Make Fact-Based Decisions
Using SRM software will help your business make fact-based decisions. You will be able to track all your suppliers based on their performance, past history and issues. Being a professional procurement function requires fact-based decision making, which is based on real data (and not feelings). Without data, you can only have opinions.
With the help of SRM software, you’ll be able to track your supplier performance and collect factual data, which will guide you in your decisions about what suppliers to exit, downsize or maybe increase your cooperation. It will also help you identify areas of improvement where the supplier or your side need to change to improve the cooperation between the two parties and take out costs.
There are many reasons why SRM software can save you money; however, the most obvious one is that SRM software will help you manage suppliers, meaning identifying areas that can be improved, which will help you reduce total cost of ownership and increase your company’s competitiveness in the market.
A narrow focus on price saving will likely cost you in the long-run as a focus only on price savings means that other elements in the total cost of ownership, such as the cost of poor supplier quality, cost of poor supplier delivery, etc. are completely ignored. Focusing too much on price savings is a short-term approach, which will likely hurt your relationships with suppliers, which can be critical especially when it comes to strategic suppliers that are critical to your companies competitiveness.
In strategic/non-commodity categories, the long-term approach should be to enhance your relationship with the supplier, which will help you engage with the supplier in a more constructive dialogue where topics like cost-out initiatives and supply chain alignment are discussed to improve overall supply chain performance between the two parties. By managing suppliers using SRM software, you can increase the chances of reducing total costs (and not just price) in the long run.
If you want to improve your suppliers’ performance and refine your supplier performance management process, you need to constantly work on developing your supplier objectives, which can be supported in SRM software. You need to talk with your suppliers in a fact-based manner about the specific targets (not only price targets) you set for them and you need to continuously update the suppliers on how they are performing on these objectives.
SRM software tracks and keeps all the metrics regarding the suppliers’ performance, and the great SRM software enables you to seamlessly share all these data with your suppliers. This enables you and the suppliers to jointly spot specific issues regarding the supplier’s performance, service, and quality that needs further investigation and maybe an improvement. SRM software helps you track supplier performance seamlessly, which is the first step in finding ways to improve the cooperation and your company’s competitiveness in the market.
Instant Feedback To Identify Areas of Improvement
SRM software helps you instantly identify red flags but it also helps you fix the issues not only by tracking performance but also by enabling communications internally and externally with suppliers. Communication between the suppliers, you and your stakeholder is a crucial element of identifying improvement areas. With the help of SRM software, the supplier can get instant feedback from the stakeholder on the stakeholders’ experiences in relation to the supplier, which will enable to clearly identify the areas of potential for each supplier.
In organizations the business is not between procurement and the supplier – instead, it is between the stakeholder and the supplier, which makes the stakeholder feedback crucial to be able to manage cost and suppliers. Good SRM software can enable this communication between stakeholders, suppliers, and procurement, which enable instant and faster solutions to problems.
Get a 360° Picture of Each Supplier
It’s nearly impossible to get a full understanding of supplier performance and manage everything accordingly if all the information regarding suppliers’ services isn’t collected in one place in one solution. Using SRM software will provide you with combined ERP supplier data and soft stakeholder feedback on suppliers all in one place so that you’ll get a full 360° picture of each supplier. In order to perform an objective 360° supplier evaluation, you simply need to have SRM software.
A long-term relationship between the supplier and buyer offers so many advantages, such as free-flow of feedback and ideas, effective supply chain, better customer service, and even lower costs. For example, new ordering processes and inventory control would become a joint venture, which will deliver operational and financial benefits to both sides. So having a long-lasting relationship is a valuable asset for both parties. SRM software shows the benefits for each side which supports the long-lasting relationships.
Improved Coordination, Consistency, and Transparency
Supplier relationship management puts an emphasis on the consistency of approach and behaviours, which would enhance trust over time. An effective SRM requires a new approach to collaboration with suppliers, eliminating all the outdated practices limit the value creation for both parties. This is achieved by better coordination and more consistency. The aim of SRM is to carry out all the interactions with suppliers in a coordinated manner across the overall relationship life cycle, maximize the value of these interactions. This approach brings to a structural collaboration between parties, which goes beyond a buy-sell operation and expands into transparency and trust.
Enhanced Fairness and Motivation
The transparent working procedure brings us to a stronger relationship, and hence, to shared responsibility. The sense of a fair working environment is a direct consequence of transparency, while fairness is proven to increase motivation. The evidence of the interconnection between fairness and motivation has been discussed in numerous research, opposing the standard assumption that material payoffs only drive motivation. The psychology of incentives suggests that the key driver of human motivation is trust and fairness.
Accessible Measurements and Increased Visibility
The main conclusion we can make from all the above points is that SRM software makes more complex supplier management performance accessible to measurements while increasing the visibility and the relevance of KPIs. You will be able to set specific measurements for every supplier, while the relevant KPIs will guide you throughout the supplier performance process. It will be more effective for the suppliers as well, as they would know exactly how their performance is measured and would try to correspond to the KPIs set.
Cons of Using SRM Software
Takes Time and Focus
Obviously, implementing SRM software will take time and focus, just like any new project you undertake.
Requires Changes in Behavior and Culture
Probably the biggest challenge in implementing an SRM solution is that it will probably require a change in the behaviour, roles, and responsibilities of the people in your team using the solution. SRM software offers a new approach to supplier relationship management that is often more data-driven and fact-based, which requires supplier managers or category managers to start interpreting new types of data and engage with suppliers to discuss these data with suppliers. This can be a big change for many people, who might have been used to (just) focusing on price.
One of the most obvious disadvantages of SRM software that you might think of is the investment it takes. However, when evaluating SRM software investments you should evaluate the investment against the value it brings. We have already discussed how SRM solutions can reduce your costs in the long-run, so think about the long-term value you are ‘buying’ with SRM software.