The benefits of Supplier Relationship Management (SRM) cannot be overstated. They bring maximized value to supplier relationships. These benefits include lower sourcing costs and pricing, more consistent quality, improved ability to compete globally and collaborative relationships with suppliers. Both the buyers and suppliers enjoy advantages only SRM can bring. However, since SRM relies on establishing trustworthy working relationships with suppliers, there are also some competitive risks and exposures inherent in collaboration. Managing those risks and exposures is as important as managing the strategic supplier relationships.
The importance of developing collaborative relationships with key suppliers has never been more important. A globalized business environment coupled with a volatile economy presents unusual competitive challenges that companies can use to their advantage. By developing strong supplier relationships, businesses can harness lower costs, better service and innovation that give them a competitive edge. The potential drawback is the fact that collaborative relationships requires trust and sharing of company products and services, processes and goals and objectives which increases the risk of:
Developing suppliers to the point where they evolve into competitors
Sharing trade secrets that harm marketplace competitiveness
Becoming too dependent on the supplier leading to loss of control
Becoming too complacent in the relationship and not enforcing standards that preserve competitive pricing
Forming undifferentiated collaborations with suppliers that are not organizationally prepared to commit resources or to fully benefit from the partnership.
One of the first steps in managing the risks associated with SRM collaborations is to choose suppliers that have an organizational culture that values information sharing and open communications. The suppliers chosen must have demonstrated their commitment to earning mutual benefits. This commitment is often proven by the supplier’s ability to present innovative problem solving solutions to the company. Another indication of commitment is strong top management support for the collaborative arrangement and the goals of the partnership.
Monitoring is Critical
It’s also important to put into place management practices that regularly evaluate and monitor supplier adherence to agreed upon performance standards and contractual requirements. The collaboration is only beneficial to the buyer and the supplier as long as both are meeting their goals. Monitoring and evaluation practices include verifying internal controls, identifying problem solving techniques, monitoring performance, and conducting regular supplier evaluations to ensure capabilities are upheld after the partnership is formed.
One of the temptations of operating on a SRM platform is to reduce the number of suppliers in order to reduce the costs of managing and evaluating the ongoing relationships. This can lead to overdependence on a smaller group of suppliers and that increases risks in two ways. First, the business is subjecting itself to potential product or service delivery problems while having few options for supplier replacement. Second, less competition between suppliers can lead to less competitive pricing.
In addition, the business that becomes too dependent on a few suppliers takes the risk of failing to develop supplier diversity. Supplier diversity promotes innovation, which can improve efficiency. Maintaining a larger rather than a smaller supplier group lowers the risk of exposure to quality or delivery problems, while encouraging innovation through supplier diversity. In addition, maintaining the right competitive balance between suppliers promotes ongoing supplier efforts to bring value to the buyer in order to retain supplier status.
SRM requires the buyer to have a deep understanding of the supplier’s operation. It’s important to understand the supplier’s business model, capabilities, and areas of expertise. Though the collaborative relationship requires trust, you should only share what needs to be shared in order for the supplier to provide the highest quality service. SRM does not mean opening up all of the company’s financial records to the supplier or sharing trade secrets or even letting a supplier manage all of a single function. Dividing the procurement contracts between multiple suppliers will lower risks of a supplier becoming a competitor, while also creating an expanded supplier base that provides more opportunities for MWBEs.
Team Approach
Balancing the numbers of suppliers is coupled with prioritizing the suppliers to insure the evaluation and management strategies in place match the supplier’s impact on the business. For example, some suppliers provide critical products or services that directly support the mission of the business. These suppliers should be rigorously and continuously assessed for performance. Assessments can utilize technologies that provide effective oversight and quality communication capabilities while enabling the buyer to:
Evaluate supplier risk before contracts are awarded
Develop a supplier risk profile that is based on a variety of components that include ability to manage data and information security and privacy, financial information, and community relationships
Identify and track unique supplier capabilities
This type of information forms the SRM foundation, but successful and sustainable relationships depend on management frameworks that rely on cross functional participation by all organizational members impacted by supplier performance. A successful strategy results in the development of a team composed of members from impacted organizational functions to select suppliers and assess post contract performance. By using a team rather than just procurement professionals, the risk of choosing suppliers unable to offer full benefits to the business is minimized. For example, you can create a selection or assessment team composed of staff from purchasing, transportation, production, engineering and finance.
Another approach is to bring suppliers into the business as a team member, or to even give the supplier access to certain business activities. One of the main advantages of this collaborative approach is that smaller suppliers, including MWBEs, can directly learn from knowledgeable key personnel. As the buyer’s business grows, the supplier can grow as well by utilizing training for the buyer’s benefit while using knowledge provided by the buyer.
Balancing Act
The Supplier Relationship Management program must balance risk with the desire for innovation. Bringing maximum innovation and value involves partnering with suppliers that bring these benefits to a collaborative arrangement. In the supplier selection process, during which risk assessment is made, the supplier should also be assessed for its potential to bring new ideas and approaches. It’s the ideal time during this selection process to consider minority and women businesses that are anxious to be partners of choice, knowing these partnerships will bring new opportunities.
Dr. John Henke is an authority on buyer-supplier relations who surveys and analyzes buyer supplier activities and approaches. He is president and CEO of Planning Perspectives, the world’s leading authority on buyer-supplier relations. Planning Perspectives (PPI) is a leading business-to-business advisory and consulting firm whose knowledge, experience, and unique skills help manufacturers work more effectively with their suppliers, and suppliers with their manufacturing customers.
Henke makes two points about collaborative partnerships. First, the more trusting the relationship is between the supplier and the buyer, the greater the price concessions given to the buyer. Second, the better the relationship is, the greater the likelihood that the supplier will be willing to share innovation with the buyer.
There is no magical formula for ensuring all risks are eliminated in collaborative relationships. The real key is identifying the potential risks, determining the likelihood of each risk occurring and identifying prevention strategies. Throughout the partnership, there must be continual assessment and monitoring.
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