Supplier relationship management (SRM) is a critical function in many organizations because good relationships with vendors can lead to better prices, better planning, better responses to adverse events and less risk in operations and supply chains. Some supplier relationship management best practices are easy and straightforward to execute, while others take more work and imagination.
What Is Supplier Relationship Management (SRM)?
Supplier relationship management (SRM) is the systematic and ongoing practice of evaluating an organization’s vendors — of both goods and services — to determine whether any changes could be made to improve business operations.
- Supplier relationship management (SRM) is an ongoing process that’s valuable for some businesses and vital for others — especially those trying to maintain a competitive edge.
- Good SRM requires analysis of thoughtfully collected quantitative data, as well as more qualitative vendor relationship–building skills.
- SRM can help businesses get better prices, more reliable deliveries and more useful and innovative products to suit their needs.
- While some SRM best practices take a lot of work, others are simple and intuitive, such as being nice to your suppliers, communicating clearly, understanding their needs and paying them on time.
- In other words, SRM involves thinking about what you prefer from your own customers and delivering the same thing to your vendors.
Supplier Relationship Management Explained
There isn’t universal agreement about the exact set of tasks covered by SRM, but, broadly speaking, its goal is to add value to your organization by helping you make better choices about how to engage with suppliers and potential suppliers.
Perhaps most obviously, evaluating suppliers’ strengths and weaknesses is a key SRM task. For example, one supplier might be faster while another is less expensive — this kind of assessment can present supply chain managers with a clear way to decide which types of orders should go to each company. Deciding which goods to buy from each supplier is equally critical, as is knowing when to add new suppliers. There are advantages to be gained by not adding a new supplier to manage and negotiate with, but if another company offers a better product or service in some category that none of your current vendors can match, it could be well worth the extra work and coordination. In SRM, knowing when to negotiate, with whom and for what goal can be an art all by itself, even before the art of negotiation starts. Supplier relationship management also includes knowing when and how to sever ties with a supplier, either because of an incompatibility (e.g., they can’t meet new business requirements, or perhaps they started making too many mistakes) or because a relationship has reached its natural end (e.g., your company stopped selling the product made with that supplier’s inputs).
While most of these relationship management tasks can be performed analytically, there’s also a human factor to consider and manage. Relationships between organizations almost always involve relationships with people at those companies, too. These may take the form of connections between purchasing managers and salespeople, warehouse workers and delivery drivers, attorneys and attorneys (when contracts need to be drawn up) or even CEO and CEO (most common in small companies or significant relationships). It’s easy to fall into the trap of prioritizing just the analytical or relationship component of SRM, but great relationship managers put effort into both.
Supplier Relationship Management Process
There are several ways to break down the SRM process. Every company will cite at least slightly different responsibilities and procedures, but the following steps should be part of any good SRM process.
Segment the Supply Base
Supplier segmentation is the practice of organizing suppliers into useful groups so you can glean insights that will improve supplier relationships, including the kind of effort and attention each group requires. For example, dividing up suppliers by which item they provide may shed light on where the business risks having too few suppliers or where there is confusion — and potential savings left on the table — by having too many.
You can further segment suppliers using a schema like the Kraljic matrix, which separates supplied items according to their risk and how important they are to the company’s bottom line. For example, you may be in a good position to negotiate more aggressively on price, even when an item contributes a lot of profit, if that item is easily available from multiple suppliers. Nor should you need to hesitate much when negotiating with suppliers that provide noncritical items that are easily available and widely abundant — the goal there should be to reduce the administrative and logistical burdens of acquiring the items in order to focus on more important tasks. Beyond these day-to-day negotiations and decisions, the insights derived from this type of segmentation prove even more valuable when you’re forced to do triage after sudden supply chain disruptions, which have become more common in recent years.
There are many ways to segment suppliers, and good supplier relationship managers use as many methods as appropriate to provide value to the business. Don’t be afraid to try out a variety or even create one of your own.
Create a Supplier Strategy
This step is a combination of two things: (1) deciding on your ideal supplier scenarios — that is, what you want your supplier arrangements to “look like”; and (2) figuring out what moves and changes are needed to make that happen, or at least to bring your actual arrangements closer to the ideal.
Let’s illustrate a supplier strategy in action with this hypothetical case. Suppose your Supplier A is great, but the prices are too high; Supplier B is difficult to deal with; and Supplier C isn’t reliable enough to be your sole vendor for a mission-critical component. Your ideal arrangement would be to obtain lower prices from A, improve interaction processes and establish clearly defined responsibilities with B and give a different supplier some of the business you’re currently giving to C, which will mitigate risk by building a relationship with a redundant provider.
But that’s not a realistic strategy until it translates into a plan of action. For Supplier A, are you going to get a competing offer to try to bargain them down, or will you offer to give them more business in exchange for a volume discount? For Supplier B, are you going to spend more time getting to know their team and processes to reduce friction, or do the issues require a more formalized approach with explicit responsibilities built into the next contract renegotiation? Before finding a backup for Supplier C, do you give C some warning, and do you look among your existing vendors first (which may allow you to build redundancy with minimal disruption to C’s flow of business from your organization), or do you look to take 50% of the business away from C and have the new supplier split responsibilities equally?
Collaborate With Suppliers
Recognizing the nuanced role of collaboration in SRM is not always intuitive to supply chain managers. If you’re buying things from a company, that’s the relationship, right? Once you’ve coordinated orders, payments and deliveries, what further collaboration is required? A lot of advice on managing suppliers and procurement focuses so much on the transactional components that the value of a good collaborative relationship can be lost.
Collaboration with suppliers can come in two forms: informal human-to-human connections and formal collaborations between the two organizations. Informal collaboration happens organically with good relationship management. Beyond orders, deliveries and payments, people get to know each other’s businesses and what’s important to them. Suppliers can give you advance notice of potentially eventful changes like price changes, deals, shortages and new product introductions, while customers can keep suppliers similarly informed about their needs and wish lists. Sometimes these relationships become deeper and more formalized, to the point where the purchasing business has a direct collaborative hand in developing the products it buys.
When you look closely, you can find these collaborations everywhere. For example, Visa and Citigroup are vendors for Costco, providing payment processing services, and the three companies collaborate to produce the co-branded Costco credit card. The transportation sector sees similar collaborations. From battery technology companies working with electric vehicle makers to aircraft makers working with airlines to decide what types of R&D to invest in, supplier-customer collaboration is a driving innovative force behind many of the products we see becoming more advanced year after year. Additionally, the fact that big companies buy from small startups has long been instrumental in helping those startups grow into a role as an ideal supplier of the future, attuned to the needs of their most helpful large customers.
Execute the Strategy
For supplier relationship managers who have acquitted the first three steps well, the next three should be easy. Excellent and adaptable planning goes a long way toward smooth execution. When executing strategy, start by following the plan you laid out when developing that strategy. Things won’t always go exactly as planned but having good collaborative relationships with suppliers will help you adjust on the fly, and good supplier segmentation will help you figure out what’s most important when you’re in a situation that requires triage.
Improve Supplier Quality
There are two main ways to improve supplier quality. The first is to change what companies supply which items, when. By segmenting and determining the strengths and weaknesses of your suppliers, you can maneuver timing of orders so that the quality of your orders improves, and/or the speed and reliability with which those orders are delivered rises, too. You can also work directly with a supplier to improve its quality — either in an objective sense or as it specifically pertains to your business. Sometimes this can be achieved just by asking. What might be a meaningful product improvement to you could be a very simple change for a supplier to make — they just need to know you need it. For example, suppose you’re buying safety signage for a factory. If your sign maker doesn’t know that your walls are almost the same color as its default sign color, it won’t know to offer you a different color to make the signs stand out. And if you don’t ask, you might not realize the sign maker has the capability to easily make signs in another color.
Continually Monitor and Adjust
This step marks the difference between having a supplier relationship and managing a supplier relationship. It’s what turns SRM into a critical business function. It’s not enough to do these things once. Your business needs will change; your suppliers will change; technology will change; customer expectations will change; and economic conditions will change. Everything needs to be monitored continually, and all related decisions need to be revisited and reevaluated periodically so course corrections can be made. When you’re setting things up, you can do yourself a favor by putting in place good data collection infrastructure (in terms of both technology and human processes for collecting data and making sure it’s accurate). Keep in mind that monitoring doesn’t just mean monitoring your suppliers, but also their competitors and the marketplace in general. The information you collect here will feed back into segmentation and strategizing, and these steps will start anew.
Reactive vs. Strategic Supplier Relationship Management
Strategic SRM is about thinking long-term. It’s being deliberate and making moves to continuously improve your supplier relationships and the value you get from those companies. It’s something you can, and should, plan for months, quarters and even years into the future. But things don’t always go as planned. When that happens, and you need to react fast, good SRM practices can turn a potential disaster into a manageable challenge.
Sometimes, suppliers will make huge mistakes, or adverse events will befall them or arise somewhere else along the supply chain in which they operate. In these cases, you may need to be reactive — place an emergency order, pick up a new supplier in a hurry without your normal vetting process, fire an existing supplier or ask a supplier for something unusual. If you’re good at monitoring the market and your suppliers’ competitors, you may already have a short list for new suppliers you could reach out to in a pinch. If you’ve built good collaborative relationships with your existing suppliers, they may be more willing and/or able to accommodate an emergency request. And if you’ve set up clear expectations and responsibilities, a supplier could already be working on a solution to your liking before you even find out there’s a problem.
Keep in mind that not all events that require reactive management are bad. Sometimes new technology will hit the market, new products will be innovated or new customers with unique needs will come your way. Just as with the adverse events mentioned above, good SRM will set you up to handle these well. For better or worse, surprises will happen, and your plans will need to adjust. Supply chain best practices, including SRM, will enable you to adapt your plan quickly and realistically and then swiftly get back to being more strategic and less reactive.
Differences Between Reactive & Strategic Supplier Relationship Management
|Main Objectives||Fixing problems, jumping on opportunities||Planning, optimizing, making good investments and building relationships|
|Time Horizon||Short term||Long term|
|Responses to a Problem||Mitigating immediate effects, quick recovery, “rescue mode”||Understanding why the problem occurred, taking steps to reduce the probability and/or negative impact of similar problems that arise in the future|
|Relationship Focus||“Let’s work on this together”||“Let’s build something together”|
|How the Styles Interact||Make sure your short-term moves don’t cause long-term disruption or damage (be wary of knock-on effects)||Set things up so you can be more flexible and reactive; you can’t plan for everything, but you can build systems and organizations capable of handling almost anything|
Goals of Supplier Relationship Management
The ultimate goal of SRM is to improve your operations’ reliability, decrease costs and foster growth through having good relationships with the right suppliers. But what does that look like in practice? Here are three common goals of effective SRM that can add value to almost any large organization.
Develop and Enhance Relationships With Suppliers
This sounds obvious, but a key goal of supplier relationship management is to develop and improve relationships with suppliers. This means a lot more than setting up contracts, placing orders and being nice to them (though that all matters). By proactively choosing the kind of relationship you wish to develop with each supplier, you can ensure that the most critical inputs for your business are among the most reliably and efficiently procured. Better yet, you can develop personal relationships to the point where the company’s most important suppliers are willing to work with you through any unexpected adverse events. Relationships of this quality could even evolve into collaborative partnerships, should an opportunity arise to work together to make suppliers’ next generation of offerings be even better suited to your organization’s needs.
Mitigate Supplier Risk
A lot of SRM is focused on improving operations for when things go as planned. But among the biggest values any company gets from SRM are improved operations on days when things go wrong, not to mention the reduced chance of something going wrong on any given day.
Supplier risk comes in many forms: miscommunication; mistakes; adversarial moves, like sudden price hikes or demands you weren’t prepared to meet; and even outright dissolution of the relationship (e.g., due to one party’s choice or the supplier going out of business). Good SRM mitigates these risks in a number of ways: You’re less likely to be surprised if you’re on top of events and communicating well with your suppliers; you’re more likely to get advance notice about potential issues from people with whom you have a good relationship; good customers have more bargaining power than bad customers; and good SRM means having more backup options and a diversified supply chain for the times when risks become real.
Optimize the Value Chain
Supplier relationship managers are primarily focused on the suppliers themselves, but it also pays to take a step back and view suppliers in the context of the business’s larger value chain. Taking that broader view can help you optimize value for the business and its customers through product innovations, lower prices and reduced risk. For example, if you as an American manager think that having only one provider of steel frames and components is too risky, you might decide to get a second. But maybe the company that appears to be the best choice for an additional vendor gets its steel from the same Chinese steel mills as your first. Choosing that supplier would mitigate some risk (such as if your first supplier has operational problems or goes out of business), but it doesn’t mitigate as much risk as choosing a provider that buys steel from an American mill, since that would also lessen the risk associated with trade policy (e.g., tariffs) and port bottlenecks.
Optimizing the value chain can also mean looking at what you have and finding ways to get more value from it. Sometimes this is straightforward, like looking for places to squeeze extra savings and better prices out of the flow of goods; and sometimes it means thinking outside of the box, like looking for opportunities to collaborate with suppliers on innovation and R&D.
Supplier Relationship Management Benefits
Supplier relationship managers who do everything right consistently gain the following five key benefits:
This is the first goal of most SRM operations — saving money with each transaction. The first part of supplier relationship management is picking the suppliers with whom to have relationships, and for many types of supplies and services, cost is going to be a key differentiator (subject to minimum standards in other areas, such as quality).
As discussed above, risk management is a huge and often undervalued goal of SRM. By being proactive about supplier relationship management, you can reduce the probability of a bad event occurring (by doing things like building in redundancies), as well as minimizing the cost of an adverse event when one does occur (by being ready with mitigation strategies and alternatives).
Enhanced supplier responsiveness.
Good relationships grow from good two-way communication. Keeping suppliers informed of your business’s evolving needs and circumstances makes them more likely to keep you abreast of theirs. It also encourages them to be more responsive to your requests, both the expected ones and the surprises. And at a practical day-to-day level, people who like you are going to be better about responding to your requests than people who don’t, so being nice to your suppliers, both in terms of human interaction and logistical considerations like paying them promptly, pays benefits in the end.
Good SRM improves the visibility of your value chain and operations, while also improving your vision into the goings-on within and surrounding your business. Good supplier relationship management will yield detailed knowledge about your inbound goods and the progress of services. From putting GPS trackers on trucks to getting notifications when certain steps in the production and shipping process are completed to just getting a casual “heads-up” from a supplier when something unusual is happening, SRM means better vision and, consequently, fewer surprises.
Use of suppliers’ full capabilities.
As your supplier relationships deepen, it often pays to get to know what else they can do for you. Maybe they can provide other things you need beyond what you approached them for; maybe they have expertise in logistics or dealing with some government’s red tape that could help you as well; maybe there are opportunities to collaborate; and more. The first mission of SRM is getting what you need today, but there’s a lot of value to be gained in exploring what you might need or want tomorrow. Not taking advantage of value that your suppliers can offer is just leaving money on the table.
Supplier Relationship Management Challenges
SRM does many wonderful things for an organization, but it’s not without its challenges. SRM requires frequent and dedicated attention to quantitative and qualitative factors, as well as being careful not to fall into some common pitfalls. Here are four main categories of SRM challenges:
Lack of alignment.
Considering SRM’s focus on the positive potential of supplier collaborations, innovation and deep, meaningful relationships, it can be easy to overlook the fact that your interests won’t always be perfectly aligned with those of your suppliers. The greatest, omnipresent lack of alignment has to do with price: Businesses and their suppliers negotiate over those numbers in a roughly zero-sum game where each side wants a price more to their liking. But that’s not the only place where interests may diverge. Some suppliers may be looking to get into your business and become a competitor, while your own R&D group may be trying to make a supplier obsolete. Less dramatically, sometimes two organizations just have a hard time getting on the same page. Absent strong incentives to work well together, it takes extra work on from the SRM team to achieve strong alignment.
Mismanaging supplier diversity.
Supplier diversity is the goal for two very different challenges, despite their common label: lowering supply chain risk and increasing the volume of purchasing your organization does with minority-owned businesses. The former requires finding a balance between two competing priorities: More diversification leads to more redundancy and less risk, but less diversification can lead to deeper relationships and better prices. Giving one company all of your business could make you a favorite customer that enjoys volume discounts; but if something happens with that company’s reliability, you’re in a lot of trouble and won’t have much leverage. Meanwhile, placing tiny orders with hundreds of suppliers will give you excellent redundancy such that losing several per year wouldn’t be an issue, but it’s a lot to manage and the sheer volume makes it hard to build good relationships. The right balance will depend on the particulars of your business and whatever the good or service in question happens to be.
The second part of this supplier diversity challenge is about sourcing more inputs from companies that are majority owned (51%) and operated by people who have been historically underrepresented or underserved in the economy. This includes suppliers owned by minorities and women, as well as those owned by veterans, people with disabilities and LGBTQ+ people. Beyond “doing good” by increasing economic opportunity for these diverse communities, some research shows that businesses with supplier-diversity programs “do well” for themselves, too, by boosting their brands, building a more competitive supplier base, increasing their agility and resiliency and bolstering their connections to diverse buyers. A key challenge for this type of supplier-diversity program is that, because minority-owned businesses have been underserved by the economy, many don’t have the financial wherewithal to handle a large contract from a major customer. Often, some form of supply chain finance will be necessary to bring a deal to fruition.
Not mitigating risk and continuity.
The increasing frequency of supply chain disruptions in recent years and unusually high turnover in businesses (namely, closures and acquisitions that have become more common) have made business continuity more challenging. The continuity risk associated with these disruptions presents an evolving problem to supplier relationship managers. A few techniques that have proved helpful to some include looking further up the value chain to get more warning when detrimental issues might occur (i.e., look at the suppliers of your suppliers, and their suppliers, and so on), diversifying supply chains — which could turn outages into shortages or even no disruption at all — and proactively communicating with suppliers about your upcoming needs and giving more advance notice than ever before.
Lack of visibility.
We talked about how visibility is a good thing, but it doesn’t happen organically. It’s something that needs to be developed through good relationship management. And even with excellent visibility, you’ll almost never have as much insight into a supplier organization as you do into your own. Combatting lack of visibility requires both hard and soft approaches — for example, mandating supply chain visibility aids (like access to real-time truck GPS data) while also keeping in close touch with your contacts at the supplier organization.
Supplier Relationship Management Use Cases
The use cases for SRM are many and varied. Good management of supplier relationships helps companies avoid too-rigid supply chains that break down at the slightest disruption because it fosters intimate knowledge of multiple potential suppliers for each business need. That same SRM process affords companies the opportunity to optimize supplier operations at lower cost, increase the value they derive from their supplier networks, improve supply chain continuity (thereby reducing supplier risk), obtain better supply chain visibility and take better, fuller advantage of the entire range of their suppliers’ capabilities. SRM could be a crucial tool for companies that deem it a goal for increasing the sustainability of their supply chains.
But perhaps the ultimate use case to emerge from top-notch management of supplier relationships is the potential for greater customer value that can be distilled from such a well-run value chain.
Reduce Costs and Limit Risk With NetSuite’s Supplier Relationship Management Software
Several of the best practices discussed here are literally impossible for humans to achieve at scale without supporting software. Collecting, managing and analyzing all the data, live-tracking shipments, making projections and more require software specially designed for supplier relationship management. NetSuite’s Procurement module includes vendor management capabilities that offer companies a platform to collect and track this data that can scale with your business and purchasing operations. NetSuite vendor management makes it easier to monitor vendor performance and execute SRM strategies because it maintains all information for each supplier in a central data repository for SRM managers. It provides an online portal for vendors to collaborate and stay connected with the company, and vendor scorecards simplify the job of tracking supplier performance.
NetSuite Supply Chain Management is broader still, enabling managers to view their organization’s entire value chains, from customers all the way back to each individual supplier. Companies can start with demand planning and perform the kind of inventory management and predictive analytics that enable them to optimize all aspects of their supply chains — including supplier relationships.
Supplier relationship management is an essential function for businesses, which need material goods and services to reliably arrive on time, meet proper standards and be sold for a good price. But great supplier relationship managers go beyond that to find opportunities that deepen relationships, mitigate risk and even enable partnerships with suppliers to build the next generation of innovative goods and services.
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Supplier Relationship Management FAQs
How do you manage good relationships with suppliers?
Maintaining a good relationship with a supplier can be as easy as giving them the things you want from your own customers: honesty, clear communication, reliability and, of course, on-time payments. Getting to know their needs and capabilities while sharing your own can also deepen relationships and reveal opportunities for productive collaboration later on.
What is the role of a supplier relationship manager?
Supplier relationship managers are charged with creating, managing and improving relationships with an organization’s various suppliers. This involves frequent analysis and evaluation, planning, negotiating, research and logistical execution.
What is the importance of supplier relationship management?
Supplier relationship management is aimed at improving the value of a company’s supply chain and the consistency with which that value can be delivered. It can result in lower prices, faster speeds, improved reliability, advance warning about unusual events (both good and bad), and might even lead to fruitful collaborations.
What is supplier relationship management (with example)?
Supplier relationship management is the practice of evaluating suppliers and potential suppliers, considering their current and potential value to your organization and making (and executing) decisions that improve business value. For example, if you have two suppliers of an easily acquired commodity, you might decide to give all your business to the vendor offering a better price. On the other hand, you might decide that having only one supplier of an essential but hard-to-find item for your business is too risky, so you decide to add another supplier to the mix to create some redundancy.
What are the functions of supplier relationship management?
Supplier relationship management functions can differ from organization to organization, but the process typically includes supplier segmentation (classifying your suppliers along different dimensions and organizing them into useful frameworks), strategic planning, collaboration with suppliers as would be useful, executing on the plans made, collecting data and learning from experience to improve the performance and quality of the relevant supply chains, and iterating to constantly learn and improve.
What are the types of supplier relationship management?
There are many ways to segment different types of SRM, but two main approaches that every good supplier relationship manager must address are reactive and strategic management. Strategic management is when you get to plan and make deliberate, calculated (often literally) moves in the direction of setting up your supply chain as advantageously as possible. Reactive supplier management happens in response to surprises, which could be adverse events (like a supplier going out of business or failing to meet an obligation) but could also be a positive change (such as a new innovation coming out that you hadn’t expected but that will meaningfully improve your business and/or the lives of your customers).
What are the three basic components of supplier relationship management?
Supplier segmentation, strategic planning and execution are the three most basic steps in a supplier management process. But for long-term success, it’s important to make sure you’re working with suppliers collaboratively and iteratively to constantly learn and improve.