While some businesses are more dependent on their suppliers than others, there’s no doubt that maintaining good relationships with suppliers is a strategic business move.
It can help you secure more favorable pricing terms, earn preference over the supplier’s other customers, and enjoy reliable deliveries that support smooth-running operations.
In this guide, we’ll cover the supplier relationship management meaning, what this process looks like, and critical challenges and best practices teams should be aware of to optimize procurement.
What is supplier relationship management (SRM)?
Supplier relationship management (SRM) refers to the practice of acquiring, evaluating, and nurturing third-party providers using both a qualitative and quantitative approach.
SRM is often taken on by the procurement team or supply chain professionals, though in a smaller business, the owner themself may be directly involved.
Supporting supplier relationships isn’t just something you can take part in every now and then. It requires ongoing effort to foster mutually beneficial relationships.
The goal of this process is to show your suppliers that you have a genuine interest in the business relationship and that you’re willing to collaborate to improve performance for both parties.
Every good relationship with suppliers, you have more leverage to secure better pricing and payment terms, encourage product innovation from the supplier, and enjoy better procurement efficiency.
Key components of an effective SRM process
The supplier relationship management process will look different for each business.
The exact approach you’ll take can vary depending on your industry, your overall procurement strategy, the number of suppliers you work with, the types of goods you’re procuring from them, and a host of other factors.
However, the following are some of the general aspects found in an effective SRM process:
Supplier segmentation
One of the key aspects of supplier relationship management is to segment them into groups based on common characteristics they share.
The most basic way to segment your suppliers is by the types of products they provide for you.
This way, you can have a better understanding of what your supply chain and potential risk exposure look like. In other words, are you too reliant on one supplier for critical input, or using too many suppliers that you’re unable to take advantage of volume discounts?
More advanced methods of segmenting your suppliers may include grouping them by the level of attention they require or how critical their goods are to your operations.
Segment suppliers in a way that makes the most sense for your business and provides you with crucial insights to help you optimize procurement decisions.
Clear communication
The basis for any relationship, including with your suppliers, is clear and honest communication.
From the beginning of your engagement, until you off board a supplier, you need to be transparent about what your expectations are and have the ability to share real-time updates and information that might impact them.
Though the majority of your terms and expectations will be clearly stated in your procurement contract, you also need to establish formal lines of communication between the supplier and your team so you can quickly get in contact as needed.
This keeps both parties in the know and fosters strong trust and loyalty. For instance, if the supplier’s delivery driver is running behind or they had a bad batch of goods that set production behind, proactive communication about these issues can help both parties avoid frustrations.
Performance management
Managing supplier relationships isn’t all qualitative. There are plenty of quantitative aspects to this process, too. This comes into play when evaluating the supplier’s performance.
At the very least, businesses should objectively monitor suppliers to ensure they meet their contractual obligations.
Are they making deliveries on time? Does the quality of goods meet your standards? How many defective products are included in each delivery?
Tracking performance metrics like these can provide concrete data in the case of a dispute or disagreement.
Collaboration
Supplier relationship management should not be one-sided.
It’s not entirely your obligation to cater to all their needs and requirements for fear of rocking the boat and losing an important supplier.
Good supplier relationships are built on collaboration, with both teams working together to improve product quality and procurement efficiency.
You can hold up your end of the deal by making on-time payments to suppliers, and they can return the favor with timely deliveries according to your quality standards.
Collaboration can also lead to innovation. Provide suppliers with constructive feedback and suggestions, and if you’ve established a trusting relationship, they may repay you through product improvements and preferred shipments over their other customers.
Benefits of SRM software
Traditionally, procurement teams would manage all aspects of supplier relationships manually, from submitting a request for proposal to storing contracts and making payments.
In the digital age, businesses of all sizes are switching to supplier relationship management software to streamline processes and ensure better efficiency.
Below, we’ll go over some of the advantages of SRM software in greater detail:
Centralized supplier management
A key advantage of using supplier relationship management software is that it provides a centralized database for storing and organizing important supplier information.
Depending on the platform, SRM software can help teams track supplier contact information, contract details, payment information, scheduled deliveries, purchase orders, and more.
SRM software makes each of these details more readily accessible and easy to find, saving the team time that would normally be spent tracking down a specific folder or physical document.
Automated workflows
Financial automation is becoming more widely used across all business processes, including procurement.
More specifically, SRM software allows businesses to automate certain aspects of the supplier relationship management process, like managing contracts and documents with eSignature features, timing and initiating supplier payments, and more.
As a result, procurement teams can work more efficiently, reducing the time spent on routine and repetitive tasks.
Performance analytics
Supplier relationship management software also makes it easier for businesses to track, compile, and analyze key performance indicators (KPIs) like order lead times, costs, and defect rates.
Calculating and tracking these metrics by hand can be extremely tedious and prone to human error.
Instead, leveraging SRM software allows businesses to take advantage of advanced data analytics and other visualization tools to gain better insights into supplier performance.
Common challenges in supplier relationship management
Just like with any other type of relationship, those between a business and its suppliers have their highs and lows.
The following are some of the common challenges that can arise when managing vendor relationships:
Supplier risk
Even if you’re partnering with a supplier that is easy to work with and provides high-quality goods, don’t overlook the supplier risks you’re exposed to.
Supplier risk can occur for many reasons, like if the supplier falls into hard times and goes out of business, their suppliers go out of business, or a natural disaster prevents them from producing goods and making deliveries.
No matter the cause, be aware that you can suffer financial losses or operational disruptions because of your supply chain.
Make sure your relationship management practice includes thorough risk assessments, allowing you to make strategic partnerships that reduce your exposure.
Disagreements and disputes
Even with your most long-standing and trusted suppliers, you are bound to disagree with them at some point during your engagement.
Whether it’s for something seemingly minor or a more serious issue, any type of disagreement can put the relationship at risk, even though they’re largely unavoidable.
Either party can be in the wrong, so it’s important to maintain clear and transparent communication and work with the supplier directly to resolve the dispute.
Best practices for optimizing supplier relationships
Despite the potential challenges that can arise during a supplier relationship, there are ways to effectively mitigate these roadblocks to support mutually beneficial and long-term engagements.
Here are some best practices and expert suggestions on how to effectively manage vendor relationships:
Negotiate fair contracts
Procurement contracts are the foundation for any supplier relationship. They spell out the terms of the engagement, acting as a guide telling both parties what’s expected of them.
Negotiating fair contracts provides several benefits. It helps prevent disagreements and disputes, and it also shows your supplier that you’re looking out for their best interest.
If you want to establish trusting relationships with your suppliers, don’t try to low-ball them or try to devalue their products during negotiations.
Set your relationship off on the right foot by negotiating fair contracts that are a win-win for both parties.
Establish dispute resolution methods
No matter how large or minuscule a problem might seem, it’s important to have a dispute resolution method outlined in writing so you can quickly resolve it and avoid business disruptions.
When you have this in place, you don’t have to shy away from conflict with your suppliers and worry that any misgivings will ruin your relationship.
Establishing fair dispute resolution methods in your contract means you know what protocols to use in the case of a disagreement and have confidence that both sides will be treated fairly.
Make periodic reviews
When you’re just starting your business, managing relationships with one or two suppliers can be straightforward.
But, as you scale operations and start to expand your supplier base, you can’t devote the same amount of time and resources to supporting suppliers as you previously did.
In these instances, it’s easy for certain suppliers to slip under the radar and skate by on subpar performance.
Even if you can’t monitor suppliers as closely, it’s still important to review and check in with them regularly.
This allows you to share any troubling performance data, let them share any feedback, renegotiate contracts when it’s time to renew, and ultimately part ways when either party decides to end the relationship.
Ready to optimize supplier relationships?
Managing supplier relationships can be an involved process, though it’s an important practice that helps to strengthen your supply chain and result in more effective procurement.
As you grow your business, supplier relationship management can become more taxing to your team.
While certain aspects of this process need the human touch, other components, like managing supplier payments, can be automated for better accuracy and efficiency.
Using an automated accounts payable system like BILL helps you pay suppliers on time, every time.
Rather than poring over invoices and verifying them against purchase orders and receipts, you can put supplier payments on autopilot and give your procurement team more time to meet and evaluate suppliers.
Automate your AP process to improve supplier relationships by signing up today or requesting a demo with BILL.
