SRM

What is  supplier relationship management (SRM)?

According to Gartner Consulting (2001, p. 2), SRM is ‘a set of methodologies and practices needed for interacting with suppliers of products and services of varied criticality to the profitability of the enterprise’.

When and why should a company invest in close supplier relationship

VIPER is a model used to determine the value the organization needs and wants to realize from the supply base (Figure 1). VIPER stands for Value, Innovation, Performance improvements, Effectiveness (of business and operations) and Risk. VIPER defines different requirements and the reasons for initiating some sort of relationship or intervention with a supplier.

There is a natural correlation between the nature of relationship organizations establish with suppliers and the nature of value that is important in each case (Figure 2). This correlation reflects what organizations tend to do, rather than what necessarily should happen.

Figure 1. The VIPER model

Figure 2. Correlation of VIPER to types of supplier relationship

(O’Brien 2014)

What are the steps needed to implement SRM

SRM processes by Deloitte (2015)

Supplier segmentation

Supplier segmentation is the process of categorizing suppliers based on a defined set of criteria in order to identify the key (strategic) suppliers with which to engage in SRM.

Organisations should therefore concentrate their resources on a limited number of relevant strategic suppliers (tier 1).

These relationships are typically prioritized according to both spend and a set of business criticality criteria reflecting the strategic importance of the supplier to the organisation.

SRM governance

Establishing effective governance is key to unlock SRM value. Fundamental steps are the alignment within the organisation, and the setup of internal governance processes together with clearly assigned ownerships of supplier relationships.

The ownership of the relationship can be outside of the Procurement organisation, therefore it is essential to involve the right stakeholders from the business in the process.

These stakeholders are part of a formal supplier governance committee for each tier 1 supplier. A governance committee for example can define and drive the strategic roadmap together with the supplier.
Top‐level strategic objectives with each tier 1 supplier are to be mutually agreed at the top level on both sides (in top‐to‐top meetings).

Performance management

Performance management involves the setup and continuous tracking of operational measures which are mutually agreed with tier 1 suppliers through SRM governance.
It enables a global, shared view of supplier performance along a common set of defined metrics

§  Orgnisational level (local, regional, global levels)

§  Organisation’s values and standards (e.g. financial stability, business continuity, responsible sourcing), as well as with laws and relevant industry regulations.

Supplier development

This would typically involve sharing of plans between the two entities and jointly defining initiatives that create long‐term value for both organisations, such as:
• Innovation agenda, aligning supplier’s creative efforts to business needs and providing the right platform to enable appropriate feedback on innovation proposals.
• New market penetration/product development, leveraging strengths and knowledge of both organisations.
• M&A and/or joint ventures to gain or expand capabilities.
(Deloitte AG 2015)

Supplier Relationship Management Activities (Tran 2015)

1.   Supplier Selection

§  Single vs. Multiple Sourcing

§  Other issues: financial health, technological capability, geographical location or quality system

2.   Supplier Evaluation

There are two phases when supplier evaluation is carried out. One can be seen in the selection task of the buying company. In this phase, evaluation plays a role in placing preference order for potential suppliers in order to select the better one. Another phase where supplier evaluation appears is in the end of supplier development activity with the purpose of controlling and evaluating the buyer-supplier relationship. (Oriso et al., 2014).

3.   Supplier Segmentation

In Kraljic’s model, suppliers can be categorized based on their levels of profit impact and supplier risk.

4.   Relationship Development

Relationship development is defined as ‘a 35 two-way process between buyers and sellers where activities jointly undertaken bring the organizations and the people working within them progressively closer towards a more trusting and mutually beneficial state’(Fogg, 2009, p. 306).

5.   Performance measurement

Fogg (2009, p. 310) states that companies should measure what is important to them, especially taking strategic goods or services into consideration.

6.   Risk Management

Johnson (2001) has categorized the supply chain risks into two different types: risks related to product demand such as seasonality, and product supply such as supply disruptions, etc. Besides, Chopra and Sodhi (2004) classify risks as delays, forecasts, intellectual property, inventories, systems, and capacity.

7.   Supplier Development

Fogg (2009, p. 297) and Wagner (2006) point out various reasons leading to supplier development phase, including:

• realization that products and services account for a larger amount of total cost since sourcing is common
• suppliers are not capable of delivering required products
• suppliers are not performing as expected
• need to further develop the supply base to bring better goods and services, and improve the interactions between buyer-supplier

8.   Supplier Relationship Performance Measurement

Measuring the performance of the relationship aims at understanding how both buyers and suppliers feel in a purchasing and supply relationship, rather than only through data metrics (Fogg, 2009, p. 315)

9.   Supplier Relationship Management Process

• Assign individuals to manage relationships, including executive managers assigned to manage the most critical relationships

• Provide timely and complete supplier performance feedback
• Practice cooperative cost management approaches
• Implement supplier relationship management information systems
• Meet with suppliers to understand supplier relationship expectations
• Invite suppliers to participate in joint improvement workshops
• Develop longer-term contract agreements that create mutual value

Examples of successful implementations of SRM

Case 1: Deloitte’s SRM enhancements at a Global Consumer Business Company

Deloitte was asked to support the client’s SRM enhancement initiative which they started internally. Based on an initial gap assessment, Deloitte followed a combined approach of both mobilizing internal stakeholders and conducting an external Voice of the Supplier (VoS) survey.

Together with a core team from the client, Deloitte developed a framework for the client’s SRM approach including the following:

·       Agreement on SRM strategy.

·       Definition of supplier segmentation process and tools.

·       Establishment of a governance model and definition of roles and responsibilities, for both internally and externally.

·       Improvements and guidance to the performance management process and measures.

·       Supplier development processes and responsibilities including measures for underperforming suppliers, business development initiatives and management of innovation opportunities.

·       Deployment of SRM within the organisation and implementation planning.

In addition, Deloitte developed a VoS survey questionnaire and supported the client in the selection of survey participants. Deloitte ran the survey on behalf of the client and provided analytics and a survey report, supporting the web‐based survey results with phone‐interviews with selected suppliers.

Case 2: How to build superior supplier relationships like Japanese automakers 

“Honda is a demanding customer, but it is loyal to us. (American) automakers have us work on drawings, ask their suppliers to to bid on them, and give the job to the lowest bidder. Honda never does that” said CEO, industrial fasteners supplier to Ford, GM, Chrysler, and Honda

According to a study by Planning Perspectives Inc., 400 North American suppliers have indicated that Honda and Toyota to be the gold standard for building highly collaborative supplier relationships, based on five metrics:

§  relations with suppliers, communications,

§  efforts to help suppliers cut costs,

§  willingness to share savings

§  avoidance of hindrances such as late engineering changes

Over a period of six years and through collaborative relationships, Honda of America's consumer price index rose 11% and a big competitor was feeling good, as they limited their materials cost increases to only 7% during this period. Through collaborative relationships, Honda was able to reduce costs by 19%. The overall competitive gain was 26%.

According to Jean-Christophe Deville, general manager, purchasing, at Toyota Motor Europe At Toyota, in terms of the depth of activities, especially in the area of research and development, they have a line for strategic co-development partners and the other suppliers.

§  Of 250 European suppliers, about half are non-Japanese companies, and of those about 15% are classed as strategic potential or actual co-developers. For those, they do not only have more frequent senior-level review meetings, but also invest time in things like technical R&D shows, where they discuss the latest thinking and ideas together, and participate in conferences for their own (and our second-tier) suppliers. (State of Flux 2017)

In order to develop relationships and working closer with suppliers, Toyota and Honda applied what they called a Supplier Partnering Hierarchy, a six step instruction to reach the maximum potential in a buyer supplier relationship (Liker & Choi, 2004):


  

References:

Chopra, S., & Sodhi, M. S. 2004. Managing risk to avoid supply chain breakdown. MIT Sloan Management Review.

Deloitte. 2015. Supplier Relationship Management (SRM) Identifying and maximising the value of strategic supplier partnering. The Creative Studio at Deloitte. London. UK.

Fogg, M. 2009. Managing Purchasing and Supply Relationships. The Chartered Institute of Purchasing and Supply. London. UK.

Gutzmann, M. 2017. How to build superior supplier relationships like Honda. LinkedIn. URL: https://www.linkedin.com/pulse/how-build-superior-supplier-relationships-like-honda-gutzmann. View: 11.10.2018.

O’Brien, J. 2014. Supplier Relationship Management. Kogan Page Limited. London. UK.

Oriso, L., Lima-Junior, F. R., & Carpinetti, L. C. R. 2014. A fuzzy logic approach to supplier evaluation for development. International Journal of Production Economics.

State of Flux. 2017. Case studies: Toyota. State of Flux. URL: https://www.stateofflux.co.uk/ideas-insights/case-studies/toyota. View: 11.10.2018.

Tran, H. 2015. A Case Study of Integrative Creation of Supplier Relationship Management Process. Aalto University School of Business. URL: http://epub.lib.aalto.fi/fi/ethesis/pdf/13988/hse_ethesis_13988.pdf. View: 11.10.2018.

Wagner, S. M. 2006. Supplier development practices: an exploratory study. European Journal of Marketing.