Putting the Pieces Together

Supplier relationship management, or SRM, is a puzzle that needs to be put together the right way for it to be a win-win for all parties involved.

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According to the Chartered Institute of Procurement and Supply, “Supplier relationship management (SRM) is a comprehensive approach to procurement managing and capturing the post-contract value from key business relationships. SRM enables procurement to operate at a strategic level by adopting a more collaborative approach and developing key relationships,” which in turn “generates more value from the relationship in terms of innovation and efficiency.”

SRM by definition alone is complicated, which is why, for many procurement operations, SRM can be like a vexing jigsaw puzzle: There are many unique pieces, and all must fit together seamlessly to achieve a cohesive overall sourcing design. Unfortunately, all too often, the pieces do not fit well together or are missing entirely in today’s procurement picture.

“I’m making a very broad-based statement here, but there are quite a few immature organizations that are just not ready for SRM because they haven’t even architected an appropriate supply base yet. These organizations need to first focus on sourcing to architect the optimal supply base, deliver savings and gain credibility within their companies before they start down the SRM path,” says Chris Sawchuk, principal and global procurement advisory practice leader for The Hackett Group, a leader in supply chain process improvement.

Eric Wilson, software and technology executive with Basware, a purchase-to-pay and e-invoicing provider, says companies often lack clarity around SRM and thus fail to take the necessary steps to implement it. He maintains that many procurement operations aren’t evolved enough to embrace the practice. Some procurement operations are locked in a past mentality, which Wilson states is essentially, “How do you beat up your suppliers to negotiate better contracts and squeeze every penny out of them?”

But he adds, “Successful procurement departments think more about the mutual success of the suppliers and buyer, and that’s really where SRM comes into play. While controlling your supply base is helpful in some ways, it’s not nearly as beneficial as collaborating with your suppliers, particularly strategic suppliers, to achieve mutual success.”
SRM not only helps streamline the procurement process, but it also reduces costs, spurs innovation and improves efficiency. Moreover, it can help companies meet contractual obligations and conduct business in an ethical manner. “Ultimately, you want your suppliers to be successful along with you, not in spite of you,” Wilson says.

Clear the Hurdles

Mickey North Rizza, a vice president at IDC Research, an analyst firm, wrote, “Engage your suppliers on a continuous basis to maximize the value of interactions that lead to the delivery of goods and services to your business.” She adds this may sound easy, “but when you add in thousands of suppliers to cover your indirect and supply chain spend, supplier management can become unwieldy.”
Procurement must clear many hurdles in the race to SRM, according to Wilson. First and foremost, it must overcome a legacy mentality. He explains that procurement must understand SRM is more about mutual benefits than controlling suppliers.

The second hurdle, he adds, is explaining the business value of SRM to corporate decision-makers. “Procurement has to explain to business leaders how a progressive organization can put into place a holistic SRM initiative, then optimize it for long-term benefits,” he says.

Finally, the benefits of SRM must be quantified. “Procurement needs to model the hard-dollar costs of supplier turnover, supply chain breakdowns, supply delays and general inefficiencies in the supplier/buyer relationship, then get the appropriate resources and personnel allocated to SRM to make it effective and get the desired results,” Wilson says.

In some procurement operations, SRM is in name only, in which case, Wilson says the results are limited. The entire business from top-down has to be behind it, and resources and funding must be allocated to it.
“Quite frequently, procurement organizations think too narrowly about SRM and put in place a system they call SRM, but it only addresses a couple pieces of the puzzle, like supplier information management or supplier scorecarding,” he says. “For SRM to work, procurement needs to take a broad, holistic approach.”

Align Goals

“Trust, transparency and education are all factors that contribute to SRM’s success,” notes Joe Sandor, Hoagland-Metzler professor of purchasing and supply management for The Eli Broad School of Business and Graduate School of Management at Michigan State University. “You need to engage all significant internal stakeholders beyond lip service.”

On paper, getting buy-in from the executive team seems easy enough. Procurement simply aligns itself with corporate objectives, then demonstrates how SRM can help achieve those goals. But before anything can happen in that regard, Wilson says procurement professionals need to educate the team on what progressive SRM is. “If procurement is thinking too narrowly from a technology or objective standpoint, or in how to operate with suppliers, it is not going to be able to convince business leaders to move forward with a progressive SRM initiative,” Wilson says.

Then the SRM initiative must be tied to corporate objectives, which every organization releases annually. Procurement operations can connect directly to the C-suite through the CFO.
Sawchuk states that procurement groups need to answer one fundamental question as they make senior-level connections and embark on a supply risk management initiative: What are we trying to protect?

“[As an organization], what are we most worried about and what are we are trying to protect?” he asks. “Are we trying to protect our revenue? Are we trying to protect our margins? Are we trying to protect people’s safety? Are we trying to protect our brand or our intellectual property?”

Sawchuk points out that none of these objectives are procurement decisions; “they are business decisions.” And once procurement understands the priorities, it can then align its supply risk identification, mitigation and management strategies to them.

“By mapping the expected results of the SRM program to the defined objectives from the CFO, procurement can make the SRM initiative more strategic in the eyes of the business and get backing,” Wilson says.
Sawchuk highlights how this might work by looking at child labor. Let’s say you have an organization that is highly dependent on families, especially children, for its success. That organization does not want to be caught off guard and learn that a supplier in its network, even a fourth tier supplier, is using child labor. “This could significantly impact and even destroy the company’s reputation, and quite possibly its business,” he says.

The challenge with supply risk management investments, unless externally mandated, is long-term sustainability. When everything is going well, organizations tend to question their investments in supply risk management. They don’t tend to reward for a lack of risk events, but they certainly penalize when an event does happen.

Phase the Execution

Sawchuk recommends taking a phased approach to SRM: “To begin, we need to segment our supply base and decide whom we are going to engage with from an SRM perspective.’”
He suggests augmenting more traditional tiered and matrixed supplier segmentation models with a multidimensional approach. “Let’s say you have 10,000 suppliers in your supply base. Are you going to manage and measure the ongoing performance of all 10,000 suppliers? The answer is no. First, you don’t have the resources to do that, and second, it just isn’t necessary,” he says. “Somehow, you have to decide which suppliers will be performance-managed and what criteria you will use to make that decision.” This may include past supplier performance, business criticality of what the supplier is providing and the breadth by which the supplier is used across the business.

Other dimensions beyond performance include risk, as well as augmented capabilities like supplier-enabled innovation. “Procurement needs to decide which suppliers to focus on from a performance standpoint, which ones to focus on from a risk standpoint, and which ones to focus on from an augmented capability and innovation standpoint,” he says. “They need to broaden their more traditional tiered segmentation models to include these dimensions more overtly as well.”

There are several key success factors in initiating SRM. “First, have an objective for building this capability, and ensure others align to it. Second, SRM is not just a procurement capability, it is an enterprise capability, and you cannot be successful on your own. Third, everyone is doing some aspects of SRM today. What everyone isn’t doing is developing an overall and consistent framework, and establishing a single and consistent face to the supply base. Fourth, don’t try to build Rome in a day. Procurement must be strategic in how it initiates and grows the program,” Sawchuk says. “One thing I’ve never seen work well is going broad right from the start. The most successful implementations start smaller, gain traction and broaden over time.”

Talk it Up

Once a SRM program is up and running, how does procurement communicate its value? Wilson states that all SRM efforts start with a baseline measure. “You need to establish a baseline, then take measurements quarterly to show the quantifiable benefits of the SRM program,” he says. The original baselines might show things like turnover in the supply base, inefficiency in the purchase-to-pay cycle, the costs to process an invoice or a purchase order, the quality of products from suppliers, on-time delivery and so on.

“You need to measure all of these things up front, then use analytics to measure these things quarter over quarter to publish a scorecard that clearly shows the benefits coming from SRM,” he says. “Executives need to see the quantifiable value of these efforts. The data needs to be compelling and defensible, showing the hard-dollar returns on investment promised when you developed the SRM business case.”
When sharing this scorecard, Wilson advises that procurement operations also show how these hard-dollar savings are tied to the business’ overall goals. “That’s how you get continued backing for these initiatives,” he says.

He recommends communicating benefits to suppliers as well. There should be scorecards that show how SRM is benefiting them. These might include information on the speed of transactions, invoicing and payments, dispute resolutions and overall efficiency. “If it’s one-sided, you’re not really implementing SRM,” Wilson explains. “You’re just implementing a supplier-squeezing initiative.”

He concludes by saying, “Don’t think about SRM as a separate system. It is part of your overall relationship between you and your supplier, and it needs to be built into your entire procurement process. And when you think of SRM, you need to think about it as being mutually beneficial. A win-win for both parties.”