Executive Briefings

SRM Is Vital to Business Profitability

Analyst Insight: Supplier relationships and the management of them are critical to business. The strength of the relationship is two vs. one, transparency, collaboration and innovation. Real value is extracted when buyers and suppliers work together. Not surprisingly, businesses focused on supplier relationship management (SRM) lead their peers five to one in terms of value derived from their supply base. - Mickey North Rizza, VP of Strategic Services, BravoSolution

SRM Is Vital to Business Profitability

Cultivating meaningful supplier relationships takes time but when done right is worth more than simple cost savings. A recent study by John Henke of Planning Perspectives found automakers could have earned $2bn more in operating profit last year had their supplier relations improved.

Strategic procurement teams know managing supplier relationships is vital to business profitability. Conventional procurement organizations are not adept at managing supplier relationships; they exert power over the supplier and manipulate the outcome for the buyer’s advantage only.

Here are five supplier relationship attributes that will help you move beyond conventional procurement and bring more profitability to your business.

1. Fairness: Many companies say they work closely and fairly with their suppliers and that they value them, but do they really? Businesses must honor contracts and protect and value the supplier’s intellectual property.The supplier’s contracts and information must be treated just as if it was your own company’s; in a sense, it is - because the effects can dramatically impact your business.

2. Trust: Earning your suppliers’ trust with honest communication, supporting fair and equitable financial practices with your suppliers, listening to their concerns and involving them in your processes ultimately brings two-way trust, making the supplier and buyer a vested partner in each other’s business.Trust allows you to stop fighting over the money and who gets what portion and start working together to figure out how to grow it.

3. Collaboration: Adversarial relationships grow nothing but angst and distrust. Collaboration brings out a mutually beneficial relationship. The top procurement teams who successfully align with their key suppliers have improved supplier capabilities of innovation, quality, reliability and cost/price reductions and agility to reduce risk factors. Greater value can be achieved for both businesses, something that would be difficult to achieve if operating independently.

4. Relationship Experts: If you want the best out of your supply base, select the best relationship-oriented employees to manage them. Procurement teams who put a greater emphasis on qualitative and quantitative supplier data analysis are able to quickly and succinctly identify weak spots, risks and opportunities in the global supply chain - improving the strategies and plans needed to manage the suppliers, and ultimately both businesses, for continued success.

5. Technology: You can’t manage what you can’t see. The key to effective supplier relationship management (SRM) is a technology system that makes it easy to view your suppliers and analyze all of the risk factors. Using SRM technology provides you with full and unparalleled visibility into your supplier base, giving you a detailed picture of what is impacting your supply chain and making it easy to mitigate the risk. Visibility is crucial to fostering the best relationships.

The Outlook

By 2020, businesses that utilize SRM technology, integrate quantitative and qualitative facts, and apply the right talent and relationship principles to their suppliers, will be able to tie the economic value of their non-price supplier benefits and the supplier concessions to the supplier’s total economic contribution. The supplier’s total economic contribution to the buying organization’s operating profit will be the new value by which procurement teams will be measured.

Cultivating meaningful supplier relationships takes time but when done right is worth more than simple cost savings. A recent study by John Henke of Planning Perspectives found automakers could have earned $2bn more in operating profit last year had their supplier relations improved.

Strategic procurement teams know managing supplier relationships is vital to business profitability. Conventional procurement organizations are not adept at managing supplier relationships; they exert power over the supplier and manipulate the outcome for the buyer’s advantage only.

Here are five supplier relationship attributes that will help you move beyond conventional procurement and bring more profitability to your business.

1. Fairness: Many companies say they work closely and fairly with their suppliers and that they value them, but do they really? Businesses must honor contracts and protect and value the supplier’s intellectual property.The supplier’s contracts and information must be treated just as if it was your own company’s; in a sense, it is - because the effects can dramatically impact your business.

2. Trust: Earning your suppliers’ trust with honest communication, supporting fair and equitable financial practices with your suppliers, listening to their concerns and involving them in your processes ultimately brings two-way trust, making the supplier and buyer a vested partner in each other’s business.Trust allows you to stop fighting over the money and who gets what portion and start working together to figure out how to grow it.

3. Collaboration: Adversarial relationships grow nothing but angst and distrust. Collaboration brings out a mutually beneficial relationship. The top procurement teams who successfully align with their key suppliers have improved supplier capabilities of innovation, quality, reliability and cost/price reductions and agility to reduce risk factors. Greater value can be achieved for both businesses, something that would be difficult to achieve if operating independently.

4. Relationship Experts: If you want the best out of your supply base, select the best relationship-oriented employees to manage them. Procurement teams who put a greater emphasis on qualitative and quantitative supplier data analysis are able to quickly and succinctly identify weak spots, risks and opportunities in the global supply chain - improving the strategies and plans needed to manage the suppliers, and ultimately both businesses, for continued success.

5. Technology: You can’t manage what you can’t see. The key to effective supplier relationship management (SRM) is a technology system that makes it easy to view your suppliers and analyze all of the risk factors. Using SRM technology provides you with full and unparalleled visibility into your supplier base, giving you a detailed picture of what is impacting your supply chain and making it easy to mitigate the risk. Visibility is crucial to fostering the best relationships.

The Outlook

By 2020, businesses that utilize SRM technology, integrate quantitative and qualitative facts, and apply the right talent and relationship principles to their suppliers, will be able to tie the economic value of their non-price supplier benefits and the supplier concessions to the supplier’s total economic contribution. The supplier’s total economic contribution to the buying organization’s operating profit will be the new value by which procurement teams will be measured.

SRM Is Vital to Business Profitability