Supplier Relationship Management: Benefits and Challenges
Written By: Al Bukey
Published On: January 19 2007
More and more companies are requesting their suppliers to integrate their business systems and share information online and in real time. Integrated business systems enable sourcing companies to plan and execute their supply schedules within minutes and receive confirmation almost immediately. Integrated systems effectively reduce the cost of purchasing, which may range from $30 to $170 (USD) per order, down to a few cents. In addition, they almost completely eliminate the need for expeditors and they improve compliance with shop floor schedules, resulting in better customer service. An added benefit of integrated systems is their performance tracking capability and its associated improvement in supplier relationships.
Supplier Relationship Strategies
Developments in information technology (IT) have required and enabled manufacturing companies to rethink and restructure their supply chain strategies. For example, customer focus strategies have led to the development of customer relationship management (CRM) tools, and back-office support strategies have helped develop enterprise resource planning (ERP). Other examples of integrated applications include electronic data interchange (EDI); manufacturing execution system (MES); computer aided design/computer aided manufacturing (CAD/CAM); Just-in-Time (JIT); vendor managed inventory (VMI); and warehouse management system (WMS). Finally, integrating suppliers' information systems beyond the EDI type connection has been necessary to shape this evolution into a more refined integration and relationship. Supply chain management (SCM) requires an outward view of company operations that extends to suppliers, customers, distributors, and beyond, as well as an understanding of the value of the contribution made by each element in the supply chain. A simple supply chain system includes three main elements: suppliers, a company, and customers, which are shown in figure 1.
Figure 1. Simple supply chain structure and relationship.
Complex supply chain models evolved from this simple model, with developments in management and technology adding components across the supply chain.
Many companies have come to realize that although the ultimate goal of making profit remains the same, relationships with suppliers are completely different from relationships with customers.
Supplier relationship management (SRM) includes information integration with respect to numerous areas: delivery schedules; inventory; capacity; commitment to schedules; delivery information; delivery; quality and financial performance of suppliers; quotation management or request for quotation (RFQ); credits; adjustment; and other related information in addition to its real-time tracking and monitoring.
Unlike CRM, an SRM relationship generally evolves with each supplier over time based on the significance of the sourcing. An illustration of this relationship is shown in figures 2 and 3. SRM may place key suppliers at higher levels of integration, and perhaps even at strategic alliance levels, while keeping some suppliers at the procurement relationship level.
Figure 2. Strategic relationships in SRM.
At its basic level, a purchasing transaction involves buying a product or service from a seller one time only and without any expectation of a repeat transaction. Buying items from a department store or gas at a gas station are examples of this type of transaction. The next level is where an expectation of repeat transactions and a resultant business relationship starts. The vendor is recorded in the buyer's database, the buyer is checked for credit worthiness, and a purchase order (PO) or invoice may be issued for the transaction. Thereafter, the relationship becomes more complex, with the vendor and the buyer entering into binding, long-term contracts and agreements and joint deployments of business processes.
Strategic drivers for SRM may include, but are not limited to, all of the following:
- Consolidation of suppliers where better supplier capabilities are favored
- Expansion into global markets
- Pressure on price and profit from customers and competition
- Pressure on value generation in supply chain
- Performance requirements of shareholders
Changes in globalization and economic developments and significant improvements in quality, price, and delivery have directed many companies to shift their focus on suppliers that are located in other parts of the country and the world. In many cases, this has helped sourcing companies to develop new markets while sourcing from the same area. At the same time, however, increased global competition has placed enormous pressure on price and profit for products and services, as evidenced by global trade. Most companies are now faced with the challenge of sourcing and delivering the same products and services more quickly and at a lower cost. Coupled with the developments in IT and information management, some of these challenges are met by integrating the suppliers' information systems with customers' information systems, with improved visibility and timely decision support, while at the same time applying lean principles in order to improve their competitiveness.
In these days of rapid change, deciding the level of relationship to develop with each supplier has become increasingly important. Depending on the structure of the supply chain, strategic drivers, strategic priorities, and operational objectives, a relationship with each supplier must be established. The level and the type of relationship (buy and sell, contractual, strategic alliance, etc.) must also be decided. For example, some current strategic supply chain alliances may include third- or fourth-party logistics, service and warranty management, exclusive distribution networks, etc. All of these can be controlled and managed by SRM.
Establishing Supplier Relationship Management
Setting up SRM starts with deciding which level of relationship your company will have with each of its suppliers. Then the rest of the steps will follow the sequence below.
- strategic approach and partnership level: Buying companies must identify which level of relationship they need to establish with each of their suppliers. Some suppliers will be of greater importance than others, and the development of strategic relationships with them may already be underway. Some suppliers may either be too large or too dominating, making it difficult to enter into a desirable relationship. Still others may not be significant at all. So, strategically speaking, positioning each supplier is key to the start of SRM. Negotiating a win-win proposition with each supplier is the next item to accomplish at this strategic level.
- supply chain preparation: It is essential to evaluate and establish a relationship with each significant supplier. At this stage, it is preferable to have a uniform business process already established. A company and its suppliers may be part of a larger chain, major suppliers may have their own business process, and smaller companies may not be willing to commit to the terms and conditions that are required. Evaluating and preparing the supply chain is a long process that may take a few years to accomplish. Once the objectives and strategic goals are established, appropriate business processes must be developed. Bringing each supplier on board one at a time may make the task easier. One must understand that this is a journey that requires time to learn and adapt to the changes in the business relationship.
- enabling technologies, IT, communication, and integration: There are literally thousands of technology solution providers out in the market. Companies (sometimes together with their suppliers) must decide which tools, platforms, software, etc. that they need to use. Some tools may only work in limited environments. Solution providers today are web-based, open systems and can connect with almost any other system. Considerations must also be made in relation to such integrations as level of automation, contractual obligations, real time versus frequent updates, and communication standards. The sourcing company must decide on the enabling IT to fit the needs of its supply chain strategy. The information tools must provide a necessary advantage for a successful SRM implementation.
- information visibility and level of sharing: After technology selection, the level, security, timing, frequency, and amount of information-sharing must be decided on and implemented. Some companies (especially those in the automotive industry) require automatic visibility into suppliers' systems and their capability to supply the requirements. For some suppliers, this may cause conflicts within their internal operations, business processes, confidentiality policies, or business culture. Issues like these must be addressed individually with each supplier.
- monitoring performance of operations and certification requirements: SRM software packages offer numerous tool sets to monitor the performance of suppliers. Supplier performance can be used to verify the agreed upon certification requirements.
- contractual obligations (such as rules, penalties, rewards, etc.): Because each supplier is different, rules and contract terms may vary from supplier to supplier. Although the goal is to bring everyone on board with the same business process, this may not always be possible. Therefore, penalties and rewards are useful in bringing suppliers in line during the process of SRM development.
- certification: Certification is a set of rules, business conditions, and performance requirements that is established as a general policy and defined specifically for each supplier. Certification may also be chosen to bring suppliers on board quickly. It requires extensive evaluation of a supplier's capability and ongoing performance. Based on the agreement with each supplier, contractual obligations and their related execution with rules, penalties, and rewards must be put in place. The conditions for certification must be satisfied by ongoing performance. As a resultant benefit, for example, incoming products (or services) become exempt from inspection, are delivered to point-of-use, and are paid upon use.
- implementation and continuous improvements: As SRM implementation begins, business processes and supplier performance must be constantly monitored, with improvements or adjustments made as required. Once business processes have been correctly established and are working properly, they become standard, as they will facilitate improvements to the SRM process.
Most companies, unless they are start-up operations, already have established supplier bases, ongoing business relationships, and sourcing-related databases. Once a company decides to establish an SRM environment within its supply chain, the process described above should begin. Figure 3 shows development of strategic alliance relationships over time.
Figure 3. Relationships develop over time.
SRM tools are generally used in complement to such systems as ERP. While SRM tool sets enable the sourcing company to manage its suppliers, these tool sets have many uses, and some examples are given below:
- Collaborative forecasting, planning, and scheduling
- Web-based connection, private trade exchange (PTX), EDI, extensible markup language (XML)
- Request for quotation
- Logistics interface with carriers such as global positioning system (GPS) tracking
- Corrective action and improvement tracking
- Communication repository such as e-mail
Supplier Relationship Management Cases
An auto parts manufacturing company automated its entire purchasing cycle using an SRM system. Purchasing was expedited, and cancellations and delays were almost eliminated. Time saved is now used to focus on strategic management. Generating 5,000 POs each year, the company saved an average of $50.00 (USD) per PO. It has improved its on-time delivery by 65 percent because it is ensured of reliable deliveries from its suppliers.
The application of an SRM solution for a manufacturer of consumer products helped to significantly reduce "panic-buying" when changes to the daily schedule would call for a change in requirements. Optimizing transportation costs further increased savings by allowing trailers to be fully loaded with needed material, requiring minimal communication. The company realized a 500 percent return on investment (ROI) within six months.
An automotive original equipment manufacturer (OEM) implemented an SRM solution. In the following three years, 90 percent of its 200 key suppliers were added to the SRM application. The OEM manufacturer no longer calls, expedites, or cancels orders via fax or e-mail. It is just a simple EDI-based communication that updates all suppliers' schedules daily.
A major hotel chain in the Mediterranean region implemented SRM as a stand-alone system for its extensive number of suppliers. Daily purchases (as well as capital purchases) can now be placed online with various certified suppliers by the users of the hotel chain. This has saved the company substantial amounts in time and material.
Today's SRM tools are marketed as stand-alone or add-on options for ERP systems. Most first tier ERP systems are already integrated with an SRM solution. Some examples of these systems are mySAP's SRM, Oracle's iSupply, and Infor's Supplyweb. These systems are typically referred to as supplier web portals. Smaller ERP systems offer them as separately purchased solutions in cooperation with stand-alone solution providers such as vSRM, Supplyworks, Supplysys, and Intelex. Based on the selection of choices and the ERP system used, prices may vary from $500 to $250,000 (USD) in license fees plus the cost of maintenance. Low-cost solution providers are available in the market that can be integrated with full functionality into any system for a license fee of $500.00 (USD) and up with a nominal user-based fee (less than $75.00 [USD] a month) for each supplier.
Even with a best-in-class ERP system, your beautiful morning can quickly turn into chaos due to unexpected problems that can arise. One of your suppliers may not be able to deliver as originally requested, and you may not know it yet. RFQs may be late or lost on a supplier's crowded desk, but you think everything is progressing as it should. You may have completed a material resource planning (MRP) run the night before and the action report recommends that a couple hundred POs be changed, canceled, delayed, or otherwise expedited. A typical procuring company has a handful of suppliers that communicate electronically through integrated systems, with the remaining suppliers communicating through a variety of manual methods such as faxes, e-mails, snail mail, voice mail, and phone calls—very costly solutions these days. SRM tools can resolve most of these problems automatically.
The SRM solution tools available today can provide many added benefits to companies. These benefits may include
- a cross view of a supplier's inventory;
- bar code on the go;
- real time supplier performance view or dashboard;
- corrective action form and continuous improvement;
- connect anyone anywhere with any format;
- multiple languages for each user;
- transportation tracking;
- EDI; and many more.
Finally, an SRM solution must be able to enhance the relationship between procuring companies and suppliers so that procuring companies can focus on best practice efforts. A correctly selected and implemented SRM solution will help companies to overcome most, if not all, of the above challenges.
About the Author
Al Bukey, P. Eng., CFPIM, CIRM, CSCP, has over twenty-five years' experience in supply chain, ERP, and JIT systems, as well as in industrial engineering, manufacturing applications, management consulting, and training. President of Canadian-based ABCO Engineering and Operations Management Ltd., Bukey has been a consultant for manufacturing companies in establishing supply chain systems, implementing ERP systems, JIT sequenced delivery applications, production planning, industrial engineering, and training. He is the past president of APICS Toronto chapter, a subject matter expert of APICS CSCP program, and a frequent guest speaker at organizations. He can be reached at email@example.com.