The 5 Key Parts of Supplier Relationship Management

The success of your business depends on the effectiveness of your supplier relationships.

Supplier relationship management (SRM) is a key element of business strategy that can give you a competitive advantage, streamline your procurement process, and improve your overall company performance.

Here, we’ll outline the essential elements of supplier relationship management and provide tips and best practices for using these in your third-party risk management processes.

What Is Supplier Relationship Management?

A good supplier relationship management strategy is a cornerstone of a successful business operation. When you build strong partnerships with your third-party providers, you create mutually beneficial relationships that give your business a competitive advantage and ultimately boost your bottom line.

Take Toyota for an example: The Japanese auto manufacturer has maintained decades-long partnerships with its key suppliers in all its global production locations — just like with its cars, the organization’s approach to SRM is to focus on being reliable and loyal to its suppliers.

Not bad for a company that had its highest ever profit in early 2022, as Japan emerged from the fallout of the pandemic.

The Goals of SRM

As any good tabloid advice column will tell you, relationships are supposed to be a two-way street. So, the main goal of SRM is to help you build strong, strategic supplier relationships by nurturing trust, encouraging collaboration, and making it easy to communicate at all stages of your procurement and onboarding processes — and beyond.

A fine-tuned SRM strategy reduces your operational headaches by setting standardized processes for working with suppliers. These help to streamline your supply chain management processes and ensure suppliers are toeing the line and meeting their obligations.

But that’s not all. Besides relationship building, other goals of SRM include:

• Risk management and mitigation: Being able to identify potential supplier risks as they come up will keep you one step ahead of any potential disruptions to your supply management processes.
• Efficiency and cost savings: When you streamline your supplier performance management, you minimize operational costs and avoid unnecessary delays. This means better profit margins and better value for your customers.
• Value creation: Working with providers across your value chain can help your team unearth ways to increase your competitiveness while also boosting your profitability through greater efficiency, as mentioned above.
• Increased supplier loyalty: A more effective relationship with your vendors can help you increase trust between you and your key suppliers. You may find that trust is rewarded with improved loyalty and commitment.
• Better communication and cooperation: Open communication with your key suppliers makes it easier to identify and resolve problems together before they escalate and disrupt the flow of your business operations.

Building strong vendor relationships is a crucial part of your third-party risk management strategy — and effective supplier management systems are essential for helping you look after your supplier base.

5 Critical Components of Your SRM Program

So, how do you come up with an effective SRM strategy to manage all these complex supplier relationships and interactions? It’s easy as 1, 2, 3 (4, 5). Just make sure you include the key components of SRM: supplier segmentation, strategy, implementation, monitoring, and collaboration.

Let’s explore these key elements in more detail:

1. Supplier Segmentation

Grouping together third-party providers based on set criteria, like location, market sector, or industry type, can help your team benchmark your suppliers and spot operational patterns.

Segmentation will make it clearer for you to sniff out the providers that have the most impact on your business operations so you can decide if they’re really the best fit.

2. Strategy

Work with your key stakeholders to take an honest look at weaknesses in your current SRM process and potential areas for improvement. That’ll help you decide on the right approach to your supplier relationships, guidelines for how you’ll source and work with suppliers, and the metrics you’ll use to measure your suppliers’ performance.

3. Implementation

Once you’ve got your SRM strategy in the bag, it's time to put those plans into action. Decide how you'll implement your strategy and who on your team is responsible for carrying out those tasks.

It’s always a good idea to use a dedicated vendor management software platform like Certa to manage your SRM process. A platform like this offers automated workflows that free up your team’s limited time and resources from developing your own internal system from scratch. Plus, a centralized platform helps everyone stay on the same page.

Wherever you decide to start, the right third-party lifecycle management software can easily optimize and automate the supplier-facing aspects of your procurement processes and contract management in real-time.

4. Monitoring

While you implement your new processes, get your team ready to monitor and measure vendor performance across your business units. Regular reporting will help you identify trends and see the areas in your SRM strategy that need further improvement.

Certa can automate parts of this process to help your team spot potential issues before they become problems for your business. It can even generate detailed vendor scorecards that will help you monitor your suppliers’ compliance with your company’s policies and standards.

As these relationships progress, use this supplier data to continue improving and making sure your company is always compliant.

5. Collaboration

Last but not least, make sure you have the right processes and facilities in place to encourage open and ongoing communication across your supply base. Successful business relationships depend on effective communication to make sure expectations are clear on both sides.

A designated supplier relationship management process is essential for successful supply chain management. Without a clear and structured process in place, it's difficult to effectively manage your supplier relationships.

Strategic Challenges to Watch Out For

We won’t pretend there aren’t challenges to developing mutually beneficial relationships with suppliers. Here are a few of them:

• Managing suppliers is time consuming. There’s a lot of talking involved to maintain these relationships, which can be difficult to manage for complex businesses with hundreds of suppliers. And speaking of hordes of suppliers, it can get expensive to manage them all.
• Finding the right balance between supplier relationships and supplier performance. If you focus too heavily on performance metrics, you risk creating an overly competitive and transactional supplier environment. But, on the other hand, if you put too much emphasis on relationships, it can lead to complacency from suppliers and too little competition and innovation.
• Not being proactive. Your organization has to be committed to actively managing supplier relationships to keep your SRM strategy healthy. Having a reactive approach to managing vendor lifecycles will have your team looking like the Spiderman pointing meme, with no clear strategy on how to deal with the many scenarios that may pop up.
• Misaligned priorities. The success of your relationship depends on ensuring that your suppliers support your overall business objectives and goals. If there’s a disconnect somewhere in the relationship, that could lead to trouble. Clearly outlining your objectives and regularly communicating about them can help your team stay on the same page.

Getting all your tech to play nice. Like most companies, you and your suppliers use a bunch of software and tech tools to manage various aspects of your business operations. If these tools can’t talk to each other , it adds another layer of difficulty in managing the different facets of the relationship.