Supplier Relationship Management (SRM)
Monday, November 25, 2013
Suppose that you've just taken over managing your department's suppliers.
There are many suppliers that you buy from.
Some have large contracts, with clearly identified service levels, and with carefully defined responsibilities and commitments. Others have simpler agreements.
And some of your supplies come from in-house providers.
Managing these suppliers is only part of your job, and you're not quite sure what you should do with each different one. You also don't have enough time to manage relationships with all of them. So, how can you find out which suppliers to devote more time to, to get best results?
In this article, we'll look at successful supplier relationship management. We'll see how you can categorize suppliers so that you can focus your efforts efficiently. We'll also discuss the different types of suppliers, and how to get the best from your relationship with each of them.
The Four Step Process
The way that you manage each of your suppliers depends on what you need them to deliver. You can use the steps below to understand your suppliers, and determine what you need to do with each of them:
Understand each supplier's importance to the organization.
Understand your role in managing each supplier.
Understand your supplier agreements.
Manage the suppliers effectively.
Let's look at each of these steps in more detail.
Step 1: Understand Each Supplier's Importance to the Organization
All suppliers won't be equally important to your organization. To understand each supplier's importance, categorize them through a process known as supplier segmentation . You‘ll then be able to decide what type of relationship you need with each, depending on how important they are to you.
Use the 2 x 2 grid in figure 1 below to categorize your suppliers.
On this grid, the "Strategic Importance to the Organization" axis shows how dependent your organization is on the supplier. If there are lots of suitable alternative suppliers available, your supplier will have a low score on this axis. If there aren't many alternatives, you'll have a higher score.
The "Value to the Organization" axis measures a combination of how much you spend with that supplier, and how important it is to business operations.
Let's look more closely at each segment in the grid:
Commodity – These suppliers provide "off the shelf" products and services. Each item has a low cost, though you may spend quite a lot of money with the supplier. Several other suppliers offer these products and services, so you probably chose your supplier based on price.
Example: A supplier providing stationery products, or generic, easy-to-source parts for an assembly line.
Performance management – These are still "off the shelf" products and services, but they're more important to operations, and your organization spends more money on them. Your supplier contract is likely to include a set of service level agreements.
Example: An IT service provider supplying day-to-day IT services and support.
Development – These suppliers provide mid- to long-term products and services for the organization. The services cannot be as precisely stated and measured as those in the performance management category, and the cost to change suppliers is likely to be high. However, the costs and benefits of the agreement are not as high as for suppliers in the partner category (below).
Example: An outsourced IT service provider that supplies a significantly different service from the previously-used, in-house provider. The supplier agreement requires continuous management of a set of service levels.
Partner – These are strategic relationships in which both the supplier and customer invest and gain shared benefits. These are likely to be mid- to long-term benefits, and both parties probably share risk. These are not "off the shelf" services, so a set of standardized service level agreements will probably not be a major factor in assessing supplier performance.
Example: An outsourced IT service provider providing an entire IT service to the organisation, involving not just day-to-day IT operations but also developing the organization's IT strategy.
Note:
Several other supplier segmentation models are available, but this is one of the most popular.
Step 2: Understand Your Role in Managing Each Supplier
The agreement and handover conversations you (hopefully) had with your predecessor should give you a clear view of your role in managing the relationship with the supplier.
For some suppliers, you'll manage the relationship at multiple levels. For example, the CEOs of both companies may meet every six months to discuss progress and the future direction of the relationship. A procurement expert may have responsibility for negotiating the agreement and any additions or renewals. An account manager may be responsible for determining what the ideal service should be, and more junior individuals may then manage parts of the agreement, particularly those parts with "off the shelf" elements.
If you need further guidance on your role, your first discussion should be with your procurement team.
These are some example of what your role may include when managing each type of supplier:
Commodity suppliers – Manage any day-to-day issues. Escalate issues to your procurement team if required.
Performance management suppliers – Ensure that the organization gets what it's paying for.
Development suppliers – Provide reports and information to key senior managers responsible for these relationships.
Partner suppliers – Provide reports and information to key senior managers responsible for these relationships.
Step 3: Understand Your Supplier Agreements
For each of the suppliers you've prioritized, a good place to start in managing relationships is reading and understanding your supplier agreements. If possible, speak with the person who managed suppliers before you, and find out what has worked well and what has been difficult.
The agreements can sometimes be hard to understand. They often include legal terms, some of which are not important to day-to-day interactions. But these agreements protect the supplier and customer if things go wrong. These documents are often quite long, so make notes as you read them.
Internal suppliers
If you have internal suppliers, hopefully there's still a written agreement that describes what's expected. However, these documents are likely to be less formal than agreements with external vendors. Also, internal agreements often don't give you, the customer, the opportunity to switch suppliers at the end of the contract term!
Suppliers with no agreements
You may be responsible for some suppliers who don't have agreements. These could be suppliers of goods that you use infrequently – for example, where you order from a catalog or via a website. In this case, they may have generic terms that apply to all customers, so consider reviewing these.
If there's no written agreement, find out about any previous verbal commitments. Then, discuss with your procurement department whether you need to put something more formal in place.
Agreement checklist
Make notes on what each agreement includes. Use the guidelines below as a starting point:
What is the value of the agreement, and what is its term?
What commitments has the supplier made? Are there any agreed service levels that define the service you can expect? For example, a service level could be that the supplier will answer 95 percent of helpdesk calls within two minutes.
What commitments has your organization made?
Does the agreement define any particular roles, responsibilities, or resourcing commitments?
What happens if there's a major dispute?
What is the process for contract termination or contract renewal?
How do you pay the supplier? There are many different ways to charge for goods and services. Here are the most frequently used models:
Fixed price – Goods and services are provided for a stated fixed fee, regardless of the supplier's costs.
Time and materials – The supplier charges at agreed hourly or daily rates, which already include a profit. Materials are charged to the client at cost.
Cost reimbursed – Goods and services are provided at cost, plus an additional amount for the supplier's profit. The profit can be calculated several ways:
Cost plus fixed fee – The supplier is reimbursed for allowed expenses, plus an additional fixed payment to allow for a profit.
Cost plus a percentage of profit – The supplier is reimbursed for allowed expenses, plus an additional percentage added for profit.
Cost plus incentive fee – The supplier is reimbursed for allowed expenses, plus a bonus or incentive fee if they meet certain conditions. For instance, a supplier could earn a bonus if it finishes a project early. Or, a customer might share with the supplier the benefits obtained by reducing process times, giving the supplier an incentive to identify and implement improvements.
Tip 1:
When setting up new relationships, spend plenty of time up front negotiating an agreement that works for both you and the supplier. If you do this properly, then the agreement will make intuitive sense to both parties, and you may never need to consult the written agreement again.
Tip 2:
Whether your agreement is simple or formal depends on your needs. Discuss detailed expectations with the supplier, including what will happen if one party doesn't do as agreed. Make sure you have a clear understanding of each party's roles and responsibilities, rights and obligations, remuneration, penalties, opportunities, and constraints.
Tip 3:
Try to resolve any disputes or issues before you use the agreement, but recognize that things don't always work out that way. Make sure that these are clear, and that appropriate dispute resolution and cancellation clauses are present within the agreement.
Step 4: Manage the Suppliers Effectively
There are three fundamental skill areas used in managing suppliers effectively: communication , market knowledge , and contractual and commercial expertise .
Communication
This includes both formal and informal communication.
Where appropriate, having a formal set of reports and regular meetings helps ensure good communication. These allow you to measure and discuss supplier performance objectively. But, for all but the "commodity" supplier category, this may not be enough. Both you as the customer, and the supplier, must develop sufficient trust and insight into each other's needs so that you can resolve issues early. Issues that you ignore can cause fundamental disputes that could result in agreements not being renewed or contracts being terminated early.
Here are a few communication tips:
When things aren't going well, formal meetings can lead to assigning blame. To avoid this, jointly discuss any risks, and develop strategies to reduce those risks in advance. Understand each other's concerns and perspectives. Be reasonable.
It's sometimes difficult to give feedback to someone who works for you. This can be even more difficult when it involves a supplier, but it's just as important! Gather your facts, and prepare well ( role playing with a colleague can help give you confidence that you've thought of everything in sufficient detail).
Different organizations have different cultures . If your supplier is in a different part of the world, national and regional cultures might influence the way they operate. Take time to understand how your supplier works. It may explain why they do things a certain way.
Tip:
Take our communication skills quiz and follow our communication learning stream to develop your communications skills.
Market knowledge
Stay up-to-date with suppliers in your market and industry group. If you want your supplier to find innovative or more streamlined ways to meet your needs, it helps if you understand what other suppliers are doing.
Contractual and commercial expertise
A procurement team is usually responsible for negotiating the terms of an agreement. But as the customer within the organization, you may need to lead procurement by clarifying your needs. So stay up-to-date with key commercial thinking and ways of writing agreements. This will help when you discuss your requirements with your procurement team, so that you can get the right product or service for your needs.
Key Points
The way that you manage your supplier relationships will depend on the nature of your supplier agreements, how much value each supplier provides, and how strategically important the supplier is to your organization.
If a supplier provides low-cost, "off the shelf" items that you order from a catalog, you don't need to spend a great deal of time managing the relationship. However, when a supplier is strategically important, there's shared risk and shared benefit, so this requires a much greater investment of time and energy in managing the relationship.
Tags:
Skills, Strategy Tools
There are many suppliers that you buy from.
Some have large contracts, with clearly identified service levels, and with carefully defined responsibilities and commitments. Others have simpler agreements.
And some of your supplies come from in-house providers.
Managing these suppliers is only part of your job, and you're not quite sure what you should do with each different one. You also don't have enough time to manage relationships with all of them. So, how can you find out which suppliers to devote more time to, to get best results?
In this article, we'll look at successful supplier relationship management. We'll see how you can categorize suppliers so that you can focus your efforts efficiently. We'll also discuss the different types of suppliers, and how to get the best from your relationship with each of them.
The Four Step Process
The way that you manage each of your suppliers depends on what you need them to deliver. You can use the steps below to understand your suppliers, and determine what you need to do with each of them:
Understand each supplier's importance to the organization.
Understand your role in managing each supplier.
Understand your supplier agreements.
Manage the suppliers effectively.
Let's look at each of these steps in more detail.
Step 1: Understand Each Supplier's Importance to the Organization
All suppliers won't be equally important to your organization. To understand each supplier's importance, categorize them through a process known as supplier segmentation . You‘ll then be able to decide what type of relationship you need with each, depending on how important they are to you.
Use the 2 x 2 grid in figure 1 below to categorize your suppliers.
On this grid, the "Strategic Importance to the Organization" axis shows how dependent your organization is on the supplier. If there are lots of suitable alternative suppliers available, your supplier will have a low score on this axis. If there aren't many alternatives, you'll have a higher score.
The "Value to the Organization" axis measures a combination of how much you spend with that supplier, and how important it is to business operations.
Let's look more closely at each segment in the grid:
Commodity – These suppliers provide "off the shelf" products and services. Each item has a low cost, though you may spend quite a lot of money with the supplier. Several other suppliers offer these products and services, so you probably chose your supplier based on price.
Example: A supplier providing stationery products, or generic, easy-to-source parts for an assembly line.
Performance management – These are still "off the shelf" products and services, but they're more important to operations, and your organization spends more money on them. Your supplier contract is likely to include a set of service level agreements.
Example: An IT service provider supplying day-to-day IT services and support.
Development – These suppliers provide mid- to long-term products and services for the organization. The services cannot be as precisely stated and measured as those in the performance management category, and the cost to change suppliers is likely to be high. However, the costs and benefits of the agreement are not as high as for suppliers in the partner category (below).
Example: An outsourced IT service provider that supplies a significantly different service from the previously-used, in-house provider. The supplier agreement requires continuous management of a set of service levels.
Partner – These are strategic relationships in which both the supplier and customer invest and gain shared benefits. These are likely to be mid- to long-term benefits, and both parties probably share risk. These are not "off the shelf" services, so a set of standardized service level agreements will probably not be a major factor in assessing supplier performance.
Example: An outsourced IT service provider providing an entire IT service to the organisation, involving not just day-to-day IT operations but also developing the organization's IT strategy.
Note:
Several other supplier segmentation models are available, but this is one of the most popular.
Step 2: Understand Your Role in Managing Each Supplier
The agreement and handover conversations you (hopefully) had with your predecessor should give you a clear view of your role in managing the relationship with the supplier.
For some suppliers, you'll manage the relationship at multiple levels. For example, the CEOs of both companies may meet every six months to discuss progress and the future direction of the relationship. A procurement expert may have responsibility for negotiating the agreement and any additions or renewals. An account manager may be responsible for determining what the ideal service should be, and more junior individuals may then manage parts of the agreement, particularly those parts with "off the shelf" elements.
If you need further guidance on your role, your first discussion should be with your procurement team.
These are some example of what your role may include when managing each type of supplier:
Commodity suppliers – Manage any day-to-day issues. Escalate issues to your procurement team if required.
Performance management suppliers – Ensure that the organization gets what it's paying for.
Development suppliers – Provide reports and information to key senior managers responsible for these relationships.
Partner suppliers – Provide reports and information to key senior managers responsible for these relationships.
Step 3: Understand Your Supplier Agreements
For each of the suppliers you've prioritized, a good place to start in managing relationships is reading and understanding your supplier agreements. If possible, speak with the person who managed suppliers before you, and find out what has worked well and what has been difficult.
The agreements can sometimes be hard to understand. They often include legal terms, some of which are not important to day-to-day interactions. But these agreements protect the supplier and customer if things go wrong. These documents are often quite long, so make notes as you read them.
Internal suppliers
If you have internal suppliers, hopefully there's still a written agreement that describes what's expected. However, these documents are likely to be less formal than agreements with external vendors. Also, internal agreements often don't give you, the customer, the opportunity to switch suppliers at the end of the contract term!
Suppliers with no agreements
You may be responsible for some suppliers who don't have agreements. These could be suppliers of goods that you use infrequently – for example, where you order from a catalog or via a website. In this case, they may have generic terms that apply to all customers, so consider reviewing these.
If there's no written agreement, find out about any previous verbal commitments. Then, discuss with your procurement department whether you need to put something more formal in place.
Agreement checklist
Make notes on what each agreement includes. Use the guidelines below as a starting point:
What is the value of the agreement, and what is its term?
What commitments has the supplier made? Are there any agreed service levels that define the service you can expect? For example, a service level could be that the supplier will answer 95 percent of helpdesk calls within two minutes.
What commitments has your organization made?
Does the agreement define any particular roles, responsibilities, or resourcing commitments?
What happens if there's a major dispute?
What is the process for contract termination or contract renewal?
How do you pay the supplier? There are many different ways to charge for goods and services. Here are the most frequently used models:
Fixed price – Goods and services are provided for a stated fixed fee, regardless of the supplier's costs.
Time and materials – The supplier charges at agreed hourly or daily rates, which already include a profit. Materials are charged to the client at cost.
Cost reimbursed – Goods and services are provided at cost, plus an additional amount for the supplier's profit. The profit can be calculated several ways:
Cost plus fixed fee – The supplier is reimbursed for allowed expenses, plus an additional fixed payment to allow for a profit.
Cost plus a percentage of profit – The supplier is reimbursed for allowed expenses, plus an additional percentage added for profit.
Cost plus incentive fee – The supplier is reimbursed for allowed expenses, plus a bonus or incentive fee if they meet certain conditions. For instance, a supplier could earn a bonus if it finishes a project early. Or, a customer might share with the supplier the benefits obtained by reducing process times, giving the supplier an incentive to identify and implement improvements.
Tip 1:
When setting up new relationships, spend plenty of time up front negotiating an agreement that works for both you and the supplier. If you do this properly, then the agreement will make intuitive sense to both parties, and you may never need to consult the written agreement again.
Tip 2:
Whether your agreement is simple or formal depends on your needs. Discuss detailed expectations with the supplier, including what will happen if one party doesn't do as agreed. Make sure you have a clear understanding of each party's roles and responsibilities, rights and obligations, remuneration, penalties, opportunities, and constraints.
Tip 3:
Try to resolve any disputes or issues before you use the agreement, but recognize that things don't always work out that way. Make sure that these are clear, and that appropriate dispute resolution and cancellation clauses are present within the agreement.
Step 4: Manage the Suppliers Effectively
There are three fundamental skill areas used in managing suppliers effectively: communication , market knowledge , and contractual and commercial expertise .
Communication
This includes both formal and informal communication.
Where appropriate, having a formal set of reports and regular meetings helps ensure good communication. These allow you to measure and discuss supplier performance objectively. But, for all but the "commodity" supplier category, this may not be enough. Both you as the customer, and the supplier, must develop sufficient trust and insight into each other's needs so that you can resolve issues early. Issues that you ignore can cause fundamental disputes that could result in agreements not being renewed or contracts being terminated early.
Here are a few communication tips:
When things aren't going well, formal meetings can lead to assigning blame. To avoid this, jointly discuss any risks, and develop strategies to reduce those risks in advance. Understand each other's concerns and perspectives. Be reasonable.
It's sometimes difficult to give feedback to someone who works for you. This can be even more difficult when it involves a supplier, but it's just as important! Gather your facts, and prepare well ( role playing with a colleague can help give you confidence that you've thought of everything in sufficient detail).
Different organizations have different cultures . If your supplier is in a different part of the world, national and regional cultures might influence the way they operate. Take time to understand how your supplier works. It may explain why they do things a certain way.
Tip:
Take our communication skills quiz and follow our communication learning stream to develop your communications skills.
Market knowledge
Stay up-to-date with suppliers in your market and industry group. If you want your supplier to find innovative or more streamlined ways to meet your needs, it helps if you understand what other suppliers are doing.
Contractual and commercial expertise
A procurement team is usually responsible for negotiating the terms of an agreement. But as the customer within the organization, you may need to lead procurement by clarifying your needs. So stay up-to-date with key commercial thinking and ways of writing agreements. This will help when you discuss your requirements with your procurement team, so that you can get the right product or service for your needs.
Key Points
The way that you manage your supplier relationships will depend on the nature of your supplier agreements, how much value each supplier provides, and how strategically important the supplier is to your organization.
If a supplier provides low-cost, "off the shelf" items that you order from a catalog, you don't need to spend a great deal of time managing the relationship. However, when a supplier is strategically important, there's shared risk and shared benefit, so this requires a much greater investment of time and energy in managing the relationship.
