Concept of Supplier Relationship Management (SRM)

An important feature of a world class organisation is the way the organisation has been able to develop and link its suppliers with its external processes. Supplier relationship management can be defined as the relationship that exists between the supplier and its buyer based on long term commitments and trust with the ultimate aim to maximize the potential value of the relationship. This will include the management of different forms of supply relationships such as partnership, joint venture and vertical integration.

The critical importance of supplier relationship types to achieve supply chain competitiveness can be viewed under the following headings:

The effective use of strategic partnership

Typical traditional short term relationship is characterize by irregular or ‘one-off’ transactions that give rise to supply uncertainties, difficulties in choosing suppliers, and is price oriented making this type of relationship unreliable and unsupported. Organisations can move from this type of relationship towards a long term relationship known as partnership based on trust, shared goals and risks to achieve mutual benefits. Partnership as an agreement between two firms that seek to accomplish a common objective. The concept of partnership and lean to gain competitive advantage because they realized their partners had the expertise, the technical knowledge and were reliable. Effective partnership with suppliers made them to compete favorably in the market because of good product quality, low cost and reliable delivery. Therefore, firms can use this same method to rationalize their supply base and use the lean concept to produce efficiently which will lead to reduce product lead times, reduce inventory and inventory cost.

The implementation of new management tools and systems

A key element of supply relationship management that gives firms competitive advantage is the implementation of the lean concept of monitoring supplier performance and continuous improvement. Monitoring performance is a post-contractual procedure in which the buyer continuously keeps an eye on the supplier by either managing the supplier’s activities to make sure all commitments are met or using a measurement matrix such as key performance index (KPI) to compare supplier progress and divergence from targeted objective. The overall competitive advantage is an operation that is continuously improved in terms of quality, delivery and service. In 1989, Chrysler benching against the Japanese companies, initiated the Supplier Cost Reduction Effort (SCORE) program aimed to reduce cost, quality and monitor supplier performance.

The integration of knowledge and technology to create an all new technology

Integration with supplier is all about coordination. Here, the buyer and supplier come together to align their processes thus improving communication and supply chain visibility for both parties. When firms integrate their knowledge and technology they are able to meet the needs of end customers by getting the right product at the right price and quality, giving them a competitive edge. This strategy was used by Bose Corporation 1990 that led to the extension and creation of the JIT2 concept, a logical extension of JIT (Just in Time) that eliminates waste in the system, improves communication and reduces demand variability.

Efficient consumer response (ECR) to demand variability caused by the forester effect.

Firms are always seeking solutions for continuous demand variation and consumer requirements. Through effective supplier and buyer collaboration, firms will be able to achieve competitive advantage by efficiently managing their supplier relationship to meet the needs of the end consumer creating a fluid inventory flow from suppliers to the consumers reducing lead times, demand variability and uncertainty. This has led to initiatives such as Radio Frequency Identification Device (RFID), a tracking technology that provides real time information and location of goods. Tesco, UK’s largest grocery retailer has exploited this technology strategy and is piloting pallet-level RFID to manage its logistics.

Increase competition amongst firms to secure and increase domestic and international market share.

Domestic and international market pressures are just other facets that have pushed firms to collaborate and develop strategic partnership with suppliers to gain competitive edge. Using this approach, firms use both local and international suppliers to broaden their sourcing base, reduce product lead time, and stream line cost through cheaper, global and local sourcing alternatives. The benefits are quick response to demand variation and high availability of variety of products at reasonable price and quality. This in turn attracts a greater amount of customers and increase market share. This is a strategy which IKEA, a Swedish international furniture company has successfully used to provide quality products at reasonable price and secure a large market share both domestically and internationally.