Supplier Relationship Management (or SRM) programs are designed to build a closer working partnership with your critical and strategic suppliers. This should result in better value for both organizations. However, there are differing views on whether the benefits outweigh the potential risks.
Arguments for SRM
– Eliminates waste and impediments to effective service. Contracts specify what has been agreed between the buyer and seller, what will be delivered and at what price. In practice, waste can result from inefficiencies in bringing together the processes, systems and ways of working on both sides. An SRM program can identify and eliminate these sources of waste, resulting in lower costs and improved service.
– Builds interdependence. When both sides appreciate the benefits they are getting from the relationship created by your SRM program, they develop an expectation that the relationship will last. This means that in times of shortage, your business is unlikely to be affected by the supplier having to ration their production.
– Encourages investments. When critical and strategic suppliers see your SRM program as adding value for them and that the relationship is likely to be long-term, then they are more likely to make investments that increase their capacity and ability to deliver what you need.
– Motivates suppliers to go the extra mile. Arm-length and controversial supplier relationships, in which every problem is blamed on the supplier, create disillusionment and disinterest in them and lead to a lack of motivation. SRM programs create a shared responsibility and that fairness leads to motivated suppliers who go out of their way to help you.
Arguments against SRM
– Creates exit barriers. Long-term relationships with key suppliers that create dependency (e.g. through investments in shared IT systems) can be a barrier to switching suppliers. The risk is that new entrants will be deterred and they may miss out on innovations from other vendors.
– Makes it difficult to test the market. It makes good business sense to compare your current prices and sourcing solutions with alternatives from time to time. If your SRM program has indeed created a bespoke solution, you may not be able to find a comparable alternative to test if you are still getting value for money.
– Can lead to complacency. A long-term relationship with key suppliers can lead to both sides getting too used to each other. The consequence of this can be an acceptance of the status quo of working methods with dwindling new ideas.
– You must choose the right supplier the first time. Of course, when entering into a long-term relationship with a supplier and implementing SRM, it is vital that you make this selection based on the right criteria, as it becomes increasingly difficult to swap out suppliers when a better one later emerges. When choosing SRM suppliers, treat them as if you were marrying them. Easy to do, but with dire consequences later if the choice was wrong!