Supplier Relationship Management (SRM): What Is It & Why Does It Matter?

Supplier Relationship Management (SRM) is a key part of any high-performing operation. Getting it right can mean massive benefits for you and your team – from lower prices to improved customer support. But, without effective processes in place for SRM, you can end up in some tricky situations – from price hikes to poor customer service when you need it the most.

What is Supplier Relationship Management? 

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Supplier Relationship Management (SRM) is an organization-wide assessment of your suppliers’ assets and capabilities with the objective of:

• Determining which suppliers to work with for key business functions and needs.
• Creating an operating procedure for all supplier interactions across the relationship’s lifecycle.
• Developing mutually beneficial strategic relationships to realize competitive advantages (e.g., better pricing, etc.) 

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There are three key components to effective SRM:

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(1) Supplier Segmentation

Supplier segmentation is ultimately about helping you determine the best use of your time. You’ll want to segment your suppliers based on strategic factors (e.g., total spend, critical manufacturers, etc.) to help you focus your efforts on the areas where you have the most to gain. 

Two common forms of segmentation that might be helpful depending on your focus:

ABC Segmentation 

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Group and classify items into three spend groups:

• Class A –typically 10-20% by number of items and 50-70% by projected dollar volume.
• Class B – typically 20% of items and 20% of dollar volume.
• Class C – typically 60-70% of items and 10-30% of dollar volume.

Pareto Segmentation (80/20 Rule)

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The Pareto Principle is a universal observation that 80% of outputs come from 20% of inputs (80/20 rule). Following the 80/20 Rule will allow you to focus your efforts on 20% of the vendors or items that matter most (by spend, time spent, etc.). 

For example, you can segment the top 20% of suppliers by spend volume to better focus time spent on collaboration with suppliers (see Supplier Collaboration below). 

These frameworks are designed to make sure you’re not spending too much time on suppliers who make up <1% of your spend, for example. They help you strictly prioritize and use your time as effectively as possible.

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(2) Supplier Performance Management

Supplier performance monitoring is all about codifying the must-haves, nice-to-haves, and performance benefits of working with each of your suppliers. Once you’ve set your criteria for each of these categories, you’ll want to send out a questionnaire for all of your suppliers to complete. 

Examples:

• Must-haves: lead time requirements, safety requirements, etc. 
• Nice-to-haves: eco-friendly supply chain, storage capacity, etc.
• Performance: on-time delivery rates, cost savings, etc.

These will all ultimately depend on your organization and its needs.

Once your suppliers have filled out the questionnaire, you can focus your efforts on finding suppliers with better performance in key areas that are lacking, building up fail-safes if you’re too dependent on a single supplier, and more.

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(3) Supplier Collaboration 

Once you’ve segmented and scored your suppliers, you’ll want to start developing deeper relationships with your most strategic partners. Building these relationships will take time, but ultimately yield massive benefits. First and foremost, simply empathizing with your suppliers is helpful for you to pinpoint potential risks (e.g., supply chain issues plaguing their industry, management issues, etc.). It also helps you align your incentives so that you can build a mutually beneficial relationship – from providing them with product feedback to building favorable financing terms. It’s key that both you and your top suppliers are clear and open about your objectives. 

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Conclusion

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This just touches the surface of everything that goes into supplier relationship management. From segmentation to performance monitoring to collaboration, these tasks are all about helping you focus your time and resources to get your organization even closer to its goals.