Supplier Relationship Management (SRM) – Meaning and Importance

Supplier Relationship Management (SRM) is a concept in the Supply Chain Management, which considered in the aspect of establishing and sustaining the business relationship along the supply chain. Supplier Relationship Management (SRM) concerns the practical processes to integrate the communication and coordination between organizations and their suppliers.

Supplier chain relationship was considered to be one of the important factors in most business, since it can influence the potential of supply chain concept. Now, the modern business seems to be more complex with high competition. Due to the information has more valuable in the supply chain management, firms then need to re-design the ways of managing and sharing information among each others. Organizations cannot independently run the business by themselves. Not only good relationship can help companies to have more competitive advantage to survive in the market, but it can also help companies expands the market too.

Supplier Relationship Management (SRM) is not the new concept used in today supply chain management, but was recently exploited in order to increase benefits across the supply chain. SRM has now become one of the key factors that influence the supply chain. In the future, SRM will not just only an option for firms, but it will be one of business fundamentals, which firms need.

The Growing Importance of Supplier Relationship Management (SRM)

Business has changed many times in the last decade. Only making and selling are not enough for firms to survive in current business. Since we now live in the age of information, information then becomes the important factor in supply chain management. There are some points illustrate that some organizations need supply chain management; in order to reduce costs and improve their benefits, not the information. Information might not be the acquisition of using supply chain concepts, but information is the key driver in supply chain mechanism. Information, on the other hand, can lead to the goal of reduce cost, increase benefits, reduce lead-time, reduce variability, better forecast the demand, improve distribution system, effectively manage the supply chain, and so on. In order to focus more on information, organizations has changed from independently develop supply chain to a multiple coordination with supply chain relationship idea.

Before the importance of supplier relationship has been more considered, firms believed that strong customer relationship was very important, due to the belief of existed customers are more important than the new customers. In addition, firms believed that the future direction of their business will come from the feedback of their existed customers, who have more experiences on firms’ products or services. To acquire the benefits of existed customers, the concept of customer relationship management (CRM) has emerged into the world. The goal of this idea is to increase customer satisfaction and learn customer expectation, so firms then can add more value to their products or services. Later on, companies have realized that satisfying customers is insufficient to gain more competitive in business. Due to the procurement cost is criticized to be one of the largest expenses in most companies, the idea of proactive strategy with the advanced collaboration, called Supplier Relationship Management (SRM), then pop up.

Not only procurement can cause trouble to the buyers in supply chain, it also can make the sellers suffer in real pain too. For instance, Boeing — the aircraft suppliers — has faced with the $2.7 billion financial impact, due to American Airlines has postponed the purchase of 54 out of 56 aircraft’s from Boeing in 2004. This example illustrates the problem of sharing the forecasting information, because these two firms did not consider on establishing the sufficient supply relationship; in order to provide information and set contract truthfully. Firms, who only concern themselves and not consider on their reputation, usually cannot survive in the long-term business. Therefore, Supplier Relationship Management (SRM) plays an important role in helping both suppliers and buyers concern each others, that their strategies will support their future business collaboration.

The growing of changes in modern economical environment is now beyond the basis market mechanism. Due to the changes of technology in communication area such as online baking and online trading, it is clearly that the business behavior across industries is now more complexity and competition. Firms need to rethink their way of creating strategies; doing business solely is possible, but very difficult. Effective coordination with partners is more suitable in order to overcome any changes in modern business. Firms will no longer solely compete in the new business but as supply chains, due to the coming of information technology eliminate the business boundaries. Therefore, Supply Relationship Management (SRM) were developed to solve the challenges of new business relationship and communication along the supply chain.

Supplier Relationship Management (SRM) provides benefits for organizations along the supply chain; by reduce risk and negative impact in the supply chain. Moreover, SRM can helps organizations improve and integrate performance in procurement and sourcing process. There are four benefit areas that Supplier Relationship Management (SRM) can build a collaborative framework along the supply chain.

  1. Collaborate and execute: Supplier Relationship Management (SRM) provides solutions to form basis network collaboration such as decision-making, procurement process, and so on. In this area, SRM can ensure that the overall supply chain will reach the business objective. In addition, SRM can optimize workflows across supply chain with different partners, cultures, and geographies as well as communicate in internal organization.
  2. Progress monitoring: Since information is precisely important in supply chain management, real-time information should be tracked effectively; in order to overcome any business issues. Supplier Relationship Management (SRM) can notify firms in required details visibly; to increase more level of agility to track and respond any changes.
  3. Measure performances: Suppliers performances must be visible, since it is involved in supply chain mechanical reaction. Clear measure performances make organizations control on logistic operations, sourcing process, and so on easier. Accurate data also helps in establishing commitment and relationship along suppliers and buyers; which results in more effectively arrange firms’ strategies.
  4. Source: Supplier Relationship Management (SRM) can solve some issues of conflict in procurement process. For instance, Win-Win sourcing is the way of sharing a long-term commitment. This idea help organizations and their suppliers avoid irritable negotiation process. Firms can utilize and optimize in the way that everyone will receive their benefits throughout their coordination.

Essential Considerations for Appropriate Relationship with Suppliers

There is an idea suggests that establishing relationship is more strategic, while managing relationship is more operational. Fundamentally, the performance of Supplier Relationship Management (SRM) is depended on the level of trust relationship. In Supplier Relationship Management (SRM), trust is not only the confidence in partnerships, but also involves in considering the impact on partners from our action too. Before getting start, firms need to evaluate the overall performance of their partners; to identify who will be the key partners in the supply chain. The cheapest suppliers are not the key suppliers, but the best suppliers in term of coordination are rather worth.

Strategic Relationship

Strategically, firms should strengthen their internal relationship across functions and people; in order to advance in external relationship. The reason behind this idea is that organizations, which have weak internal relationship, are not dependable. The important thing in long-term Supplier Relationship Management (SRM) is the power of trust must be balance. When one stage in supply chain has more power than the others, it usually causes the trouble of resistance and conflict, which cause the supply chain disaster. Chopra, S., and Meindl, P. (2007) have given an idea of designing strategic relationship in four stages as follow;

  1. Evaluate the value of partnership: The first step in Supplier Relationship Management (SRM) method is to spot the value and benefit that firms might have in establishing relationship. The idea of this stage is that the total profits from relationship can be produced by the partners’ competences. Moreover, equity is the key factor, which helps firms sustain the relationship. In order to obtain those criteria, firms must ensure that their partners can provide or improve the successful factors across in the supply chain.
  2. Design the operational tasks for each stage: In order to balance the power in relationship, every organization along in the supply chain must clearly decide on each player’s role. If one stage has more allocation than the others, the benefits of relationship will not be success. That is because there is no one wants the others to take the upper hand rather than themselves. To achieve this balanced power, the mechanism, such as performance measurement, progress tracking, and information sharing, must be developed to fill the roles in collaboration.
  3. Set the effective contracts: In most practical relationship, there are always issues. The clear coordination mechanisms and contingencies should include in the contracts. The effective contracts can increase the level of trust and benefits in collaboration. In the longer-term, the contracts must be reviewed over time, because it is more effective than the initial fix contracts.
  4. Prepare the conflict solution: Conflicts are usually fall into coordination. Firms should prepare the solution mechanism to deal with the conflicts, which might happen over time to time. It is greatly importance that the conflict resolution and contracts must not conflict each other. Communication and information sharing are the important factors that can help strengthen the relationship. Frequently meeting and reviewing plan are also importance in order to avoid conflicts and sustain relationship too.

Operational Relationship

  1. Initiating stage: To achieve the operational relationship, firms should select the style of relationship that fit to the procurement and market characteristics. The four factors that should include in selecting style of relationship are flexibility, quality, delivery, and cost. The important consideration on these four factors is sometimes these four factors cannot go along together in constructing the relationship. Therefore, firms should measure the best benefits, while evaluating these factors.  Clear strategic goals and objective must be done in this stage too. Firms might start by initiate and implement the internal approach and mechanisms within themselves. So firms can ready to support with the external supply relationship; in order to take the mutual benefits of SRM.
  2. Replenish relationship: The relationship will not be successful, if companies choose their partners poorly. The reason is companies and their alliances cannot get along with too much different in culture, strategies, and vision. In order to implement relationship, firms should start in a small scale, and then adjust the relationship over time; to motivate the relationship to be evolved. When the value of relationship is generated, organizations should appreciate this value to all internal and external partners; in order to encourage people to have more confidence in forming and developing this relationship. Technology can support and enable the relationship in the supply chain. The supportive technology can give more advantages and competitiveness to the supply chain; especially the information technology is very useful in geographic relationship. There is a relationship implementation model called 5-s framework, which helps organizations focus on their core dimension of relationship management.
    1. Structure: Organizations should construct their relationship in two levels: first is the internal structure and the second is the macro structure along the upstream through down stream in the supply chain.
    2. Staff: Any activity requires respond. People are absolutely the core resource in business. In addition, people are the crucial dimension of relationship. Organizations must clearly identify the representatives for SRM, or the relationship might not happen or maintain.
    3. Style: As mentioned before, the right style of relationship is the key factor in SRM. Companies, who select their relationship style poorly, will not success in managing their relationship.
    4. Systems: Effective mechanisms, such as procurement process, relationship performance, service function, and supply chain process, are required in order to fulfill the relationship. The unclear operational processes usually conflict the relationship, and cause the collapse of relationship.
    5. Schemes: Support relationship programs are very importance in order to implement relationship. SRM is not the logical function, but involve with the emotion too. Relationship will not be replenished, if firms do not have more interact or communication with their partners.
  3. Sustaining relationship: Frequently review and improve are necessary in maintain the relationship. Firms should review the key contracts that influence the relationship. If it is better to update or change the detail of contracts, firms should do rather than keeping the initial contracts. Furthermore, organizations should frequently define the new potentials or benefits in this supply relationship, and then improve them into the coordination. It is importance that firms should identify and solve any problem together with their alliances; in order to avoid conflicts and increase their level of relationship. The more interaction means the more close-relationship. In addition, close-relationship can affect to the way of their collaboration too. Sustaining relationship depends on three key factors: strategic and operational goals, performance measurement, and feedback mechanisms.
    1. Strategic and operational goals: Even goals must be identifies in the initial stage of construct relationship, it is better to review, and update over the longer-term. Goals can be changed, because there are always changes in running business. Moreover, the initial goals might not suitable for managing the partnership, since companies might have not much knowledge on constructing relationship at the beginning stage.
    2. Performance measurement: Basically, we cannot manage things, which we cannot measure. Not only performance measurement can influence in managing relationship, it also helps avoid the conflicts too. However, it is necessary that the measurement must not be one-way measurement. Any firms include in the same supply relationship program must have opportunity to track each others. Moreover, the measurement process must be clear and clean; in order to increase and maintain the level of trust.
    3. Feedback mechanisms: Feed back mechanisms should be visible, or organizations might not have the benefits on feedback. It is not importance that the feedback must be in formal report. An informal feedback also available too. While the formal feedback might set in an annual report for top management, the informal ones, such as weekly or monthly, are more proper for support team or staff. That is because the relationship issues can happen in any way and any time. Firms should be more agile; in order to deal with any uncertainty.

To conclude, Supplier Relationship Management (SRM) becomes an important factor in running a business. Supplier Relationship Management (SRM) can help organizations reduce the negative impacts and increase benefits along the supply chain.

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