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Finance glossary

What is supplier relationship management (SRM)?

Bristol James
5 Min

Supplier relationship management, also known as SRM, is the process of evaluating an organization’s vendors to find areas of improvement and promote a positive working relationship. This helps your organization determine which supplier’s contributions are fundamental to the success of your operations and how you can improve their performance.

A successful supplier relationship management system can look different for each organization; however, the overall goal remains the same: to streamline processes between your organization and the supplier. In addition, most organizations retain the same supplier relationship strategy, which is to prioritize the supplier that your company is most dependent on.

For example, if you have poor vendor management with one of your top suppliers, would they be willing to ship you 1,000 pieces of raw material at the last minute or push your request to the bottom of the totem pole? Probably the latter.

A strong supplier relationship also allows your organization to improve efficiency, minimize supply chain risk, enhance supplier partnerships, and improve cost savings. We’ll cover these benefits in more detail below.

The Advantages: Short-Term Benefits

Supplier relationships are beneficial for both your supplier and your company. Here are two of the main short-term benefits:

Improved Efficiency

Efficiency and profitability work hand-in-hand. If your business is constantly paying suppliers late and delaying material orders, odds are your profitability will be lower. When you prioritize vendor management, you can maximize your efficiency and profitability.

How much more profitable will your team be if you never run out of raw materials? How about having the ability to place a last-minute rush order for a large project? The agility and flexibility supplier relationship management brings to the table are indispensable.

Minimized Supply Chain Risk

Another short-term benefit is minimized supply chain risk. It should come as no surprise that supply chains have been experiencing delays over the past few years, from shipments taking twice the amount of time to vendors refusing to take on additional orders. Losing a major supplier can cause a ripple effect throughout your business, delaying projects and causing you to eat through your existing inventory.

Vendors are more likely to cater to customers with whom they have a strong working relationship rather than to customers who take weeks to reply to emails or don’t pay invoices on time. Generating a mutually beneficial relationship allows you to effectively reduce your supply chain risk and avoid costly business disruptions.

The Advantages: Long-Term Benefits

Effective supplier relationship management also has long-term benefits for your company. The top two long-term benefits include enhanced supplier partnerships and improved cost savings. Let’s explore these two benefits in more detail.

Enhanced Supplier Partnerships

Enhanced supplier partnerships can open the door to numerous opportunities. For example, many suppliers limit the amount of credit you can take on. By building a strong relationship through vendor management, you might be able to increase your credit limit, giving you the ability to grow your business.

Not to mention that word-of-mouth vouching can be a powerful tool in the business industry. If your vendor had a great experience working with you, they might pass that information along to another supplier that you are starting to do business with.

Improved Cost Savings

With rising costs over the past few years, finding ways to save money is essential to maximize your profitability. Strong supplier relationships can lead to greater cost savings. For one, suppliers are more willing to offer discounts to customers who have not created any issues in billing, chargebacks, or change orders.

Additionally, supplier relationship management allows you to stay at the top of your supplier’s priority list, especially during last-minute orders. A supplier that you don’t have a strong relationship with might turn down your last-minute request, resulting in you having to pay more money through a different vendor. This isn’t the case when you prioritize supplier relationship management.

How to Implement a Successful Supplier Relationship Management Strategy

Although the implementation process can look different for each company, the steps generally remain the same. Here’s a simplified three-step process:

  1. Categorize Supplier – The first step relies on categorizing your suppliers based on their importance. The most critical suppliers should be ranked at the top and the ones you rarely use or that have numerous alternatives should be on the bottom.
  2. Craft a Supplier Strategy – Now, you will need to create a strategy that you and your team will rely on to build strong supplier relationships. This could be processing invoices from these suppliers first, paying within a certain amount of time, or prioritizing clear communication with your supplier. Utilizing supplier relationship management software can be beneficial.
  3. Execute the Strategy – This is the most important step. Execution puts the policies and procedures you’ve created into effect. Train your staff on how to use your supplier relationship management software and the new policies you are implementing. Everyone needs to be on the same page to build an effective supplier relationship management system.

This three-step process is relatively simple to implement, especially with supplier relationship management software working alongside you.

Managing supplier records

Supplier Relationships Management doesn’t just end with the supplier, it carries forward to an organizations internal processes. Once you’ve started to secure and manage all your suppliers, it’s important to maintain your supplier files to ensure everything remains up-to-date and accurate. For smaller businesses, this may be relatively easy if they are only dealing with a handful of regular suppliers at one time. However, for larger companies with hundreds or thousands of suppliers, it can be crucial to maintain an up-to-date database.

This will help internal accounts payable staff ensure when supplier invoices are coming in, they can easily fact-check the details and the amount on the invoice before sending payment. The Australian Competition & Consumer Commission (ACCC) report millions of dollars are lost annually to cyber scams which are often “disguised as an outstanding invoice to get the business to sign-up for unwanted advertising or office supplies.” For larger companies, it can often be worthwhile to invest in a payment security software, which saves time and money fact-checking invoices through automation.

In Summary

  • Supplier relationship management is the process of categorizing your vendors according to their priority and implementing processes to ensure a mutually beneficial relationship.
  • The short-term benefits of supplier relationship management include improved efficiency and minimized supply chain risks.
  • The long-term benefits of supplier relationship management involve enhancing supplier partnerships and improving your cost savings.
  • Supplier relationship management implementation involves three main steps: categorizing your suppliers, crafting a supplier management strategy, and implementing effective change.

 

 

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