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Extract from the latest book by Barry Crocker

Extract from ; Supplier Relationship Management

Crocker, B, Moore, D, Emmett, S (2010) Excellence in Services Procurement Cambridge Academic

Introduction

As noted throughout the book, supplier relationship management (SRM) skills will need to be learnt, developed and will grow in importance, as organisations became more reliant on external and increasingly global deals. Additionally in part 4.0 on public sector procurement we commented in detail on the reported failure to comprehensively undertake post award contract and supplier relationship management.

Definition

SRM can be defined as:

Supplier Relationship Management (SRM) is the management of the whole interface between supply and buying organisations through the whole life of the contract. The aim is to achieve maximum long term contribution from the supplier that works towards achieving the buying organisation’s strategic goals.

(Source: Excellence in Supplier Management, Emmett and Crocker 2008)

The key differentiator of SRM from conventional contract management is the focus on the whole interface with the supplier. This may cut across many contracts and SRM therefore, concentrates on the supplier contributing towards the buyer’s long term strategic goals.

Benefits of SRM

Developments such as outsourcing and strategic partnering have increased the size and the importance of the contribution that suppliers can make. Up front or pre contracting activities are still very important but the initial signed contract is only one part of the whole. As a supplier’s operation becomes more and more integral to the organisation, then all of the activities around the management of the contract and the management of the supplier become critical. It is also the positive supplier relationships that will produce any sustainable competitive advantage.

Indeed, the authors suggest that for complex purchases, most of the value obtained from the supplier is actually going to be driven by post contract management, rather than from, the up front negotiated contractual terms.

Additionally, as procurement rationalises the supply base and reduces supplier numbers, then those suppliers who remain, become more powerful. Therefore, if the relationships with these fewer, stronger suppliers are not managed properly, this may present a risk to the business.

As earlier pointed out, being the “customer of choice” is increasingly important, and the better the relations, the more likely they will be that customer of choice. This becomes particularly important if is a seller’s market.

“You have to be attractive otherwise if there’s a bigger partner, the supplier will go with them.”

One of the most persuasive arguments for SRM comes from Henke, (J Henke, Oakland University) who believes that he and his team are on the edge of directly correlating strong supplier relations to a percentage difference in prices, so that if, organisations go about SRM correctly, they can insist on more from their suppliers.

“If they do it the right way you can put more price cut and improvement demands on suppliers. If organisations can guarantee business and suppliers know you will support them when things go wrong, and work with them to improve things until you can’t anymore, then suppliers will stick with you, not just switch allegiances.”

An example of doing this is Phillips:

Case Study; Philips Electronics

The organisation has selected 30 strategic suppliers, a move which has reduced the time to market of some goods by 50 per cent, i.e. twice as fast.

They had two suppliers of a particular product, one of which was running out of capacity so needed a third but they didn’t really want to do because of intellectual property rights issues.

So they sat down with their two suppliers, each from different backgrounds and agreed to work together to improve productivity.

SRM can therefore lead to cheaper prices, gives faster time to market, has more flexibility and brings in innovation.

Procurement to lead SRM

Many commentators see that it is actually up to the procurement department to determine the nature of the supplier relationship. The argument used here takes the view, that suppliers may not always decide what sort of relationship they will have with buyers/customers and that suppliers will only be able to react to the way buyers/procurement behaves towards them. This point of view is also reinforced by our assertion that it is the buyer’s demands that actually result in and create the type of supply chain.

After accepting the need to do this leading, then the “two coming together” are now able to later blend better, learn from each other and synergise; consider the example of L’Oreal below:

Case Study: L’Oreal

L’Oreal procurement has been building long term relationships with suppliers for the past few years to support growth. Their approach is based on mutual respect, transparency and sharing information.

How are the existing relationships?

Once buyers have identified who to work with using SRM principles, then measuring the health of the existing relationship is the next stage. It will be necessary here to identify:

· Where the supplier relations are

· Where you want the supplier relations to be

· The status of your supplier relations, in absolute terms, across different sectors, sizes, countries

· How your perception compares to that of your suppliers

Starting out

The key components that drive SRM are trust, communication, whether you can help the supplier (e.g. to improve cost and quality), whether you hinder the supplier (e.g. by making late and excessive changes) and finally for a supplier, what opportunity they have to make a profit.

Checklist: Critical success factors for starting SRM

· A management mandate to make sure your organisation wants to do SRM

· Build SRM approaches into sourcing methodologies by not only creating SRM manager roles but also by educating and training staff on SRM approaches

· Supplier relationship managers need adequate skills and passion.

· Establish the required behavioural norms

· Manage the stakeholders.

· Look for increased and incremental value over the duration of contracts and relationships

· Build joint working forums focused on identifying and delivering joint improvement programmes

· Incentivise and reward suppliers to deliver demonstrated value

· Focus on total cost of ownership (TCO) and life cycle costs where any increased price can be evidenced and supported as a positive outcome as the TCO costs are reduced.

· Realise quick wins to motivate and work towards creating long term value

· Establish mutual interest and relation targets

· Performance needs to be measured, as only what is measured gets done. So have joint targets for the relationship that will, for example, increase productivity or mitigate risk.

· Don’t wait for the right time to start; this will never happen, so just start.

At least once a year the major stakeholders of the two buying and selling organisations should meet. At these sessions they should seek to understand each other’s intentions, priorities, exploit common ground and deal with any problems. They conclude by agreeing common goals and setting an action plan.

Checklist: Critical success factors to consider when managing SRM

· Remember you buy from individuals, not organisations

· Be open and fast in your communication with suppliers, there’s nothing worse than trying to hide bad news

· Building trust takes time and effort

· Try to maintain a “full reservoir of goodwill” because you never know when you might need to call in a favour

· Procurement managers/directors would be better to see themselves as Relationship managers/ directors

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