Traditional supplier relationship management (SRM) approaches fail to take advantage of opportunities to design collaborative business models, jointly create value, and drive innovation with strategic suppliers.

Traditional SRM — often focused on control and the lowest cost — is incomplete, misaligned and unbalanced. In contrast, next-generation SRM encompasses the entire procurement process to drive long-term, mutually beneficial partnerships.

SRM has been around for 20 years, but APQC’s 2018 research finds that a significant number of companies (23 percent) are just now exploring implementation. For those organizations, APQC cautions that although the world has evolved, traditional SRM suffers from three major pitfalls they would be wise to avoid: it is incomplete, misaligned, and unbalanced.

Historical SRM approaches are often missing vital elements that are a part of an interconnected business model. Supplier relationships exist on a continuum, with purely transactional relationships at one end and investment-worthy equity partnerships at the other. Understanding the purpose of the business relationship along that continuum helps establish the essential design principles of next-generation SRM: determine the appropriate scope of work, performance management approach, pricing approach, and governance structure. As systems thinking shows, with missing pieces, the system — or sourcing business model — breaks. In addition, next-generation SRM goes beyond simply being buyer-specific to also incorporate design principles that bring out the best in the supplier.

In addition to missing elements critical to a successful relationship, traditional SRM approaches can have misaligned and conflicting elements. When elements of the relationship are misaligned, over-engineered, or under-engineered, the value to the supplier is reduced or eliminated. Most commonly, APQC has found that traditional supplier agreements focused on counterproductive goals. APQC's research found that organizations leverage SRM primarily to manage risk and ensure contract compliance. Rather than leverage suppliers as sources of innovation, buyers see them as a potential risk to mitigate or control, thereby damaging the health of the relationship and creating unbalanced power dynamics.

These unbalanced power dynamics manifest in the buyer’s legal, finance, and risk managers shifting as much risk as possible onto the supplier via unlimited and non-negotiable liability clauses. Suppliers are forced to factor in risk and estimate a higher price rather than estimate for the services most likely needed. For the buyer and supplier to share the rewards, they also need to share the risk and collaborate to mitigate it.

In traditional SRM, the buyer’s procurement staff and the supplier’s sales staff design approaches and systems to manage each other without involving the other. The end game for both is the same: finalize the deal. However, the two parties often come at it from different angles with opposing goals. Too often, no one is happy in the end. Instead, buyers and sellers should set collaborative goals and align their governance mechanisms so both can achieve longer-term benefits.

The Outlook

It’s time to reinvent SRM. APQC found that 80 percent of organizations rely on SRM to reduce risk, and 72 percent rely on it to monitor contract compliance and service levels. This is not where SRM has the most impact on the bottom line. Micromanaging terms and shifting risk onto suppliers is counterproductive. As organizations reinvent their SRM, APQC wants to see more organizations using SRM to drive innovation and sharpen their competitive edge.

Marisa Brown is senior principal research lead, Supply Chain Management, at APQC.