What does”Supplier Relationship Management” really mean?

In a report I worked on in 2013, I conducted interviews conducted with 25 chief procurement officers (CPOs) on one of the most important drivers of value creation and resilience that is often overlooked:   harnessing the power of innovation and new ideas that lie hidden in the supply network.

As one executive we interviewed noted,

“Supplier Relationship Manager” automatically assumes that supplier relationships are managed by supply managers. This doesn’t leave room for what could be a more open interpretation of a relationship as a mutually beneficial engagement. One characterization of this is to envision procurement as a supplier “coach,” that seeks to assemble and drive improvement and performance so that the right level of organizational commitment between the parties will become a foundation for continuous improvement and innovation.”

The need for a practical and targeted process to the development of improved supplier relationships is often met with vague references to trust and information sharing.  But there is more to SRM as I learned.  So what exactly is Supplier Relationship Management?

An integrated definition of SRM

Executives I interviewed provided a number of different frameworks through which SRM could be understood:

• SRM as a cultural artifact emphasizing openness and understanding. Experts emphasize how relationships are driven by mutual sharing or risks and rewards, eliminating the need for price negotiations based on cost analysis and open sharing of cost drivers.
• SRM as a technology-driven strategy for collection of information on suppliers, leading to reduction of risk, and improved understanding of supply-based structures and spending patterns. Databases configured to collection of supplier data throughout the sourcing life cycle is envisioned as the primary outcome of this approach.
• SRM as a means of measuring and evaluating supplier performance, leading to regular performance reviews and award of future business and mitigation of supply-side challenges that exist in the current business environment.
• SRM as an element of the extended enterprise and a vehicle for supplier-led innovation, becoming a customer of choice, and having preferred access to first technology insights.
• SRM as a vehicle for measuring risk and defining the level of financial and operational risk in the supply market. Many times, this is driven by regulatory and government requirements.

Given the diversity of perceptions and surrounding the concept of SRM, I sought to undertake a grounded approach to understand the practices, technologies, and organizational requirements for the practice of SRM. My research also derived a maturity model based on years of work in the field that can enable procurement organizations to measure their progress against best-in-class companies that have established successful SRM initiatives with proven results.

The study focused conducting interviews with supply management executives, to explore the following questions:

• How do you define SRM in your enterprise environment?
• What are the enabling processes and tools that constitute the SRM landscape?
• What are the elements of the organizational model within your enterprise required to establish appropriate supplier relationships?
• How does your organization roll out and embed supplier relationship practices across category management roles?
• How do you envision implementing SRM within your organization in the next five years?

There are many interpretations of what SRM is, due to the plethora of software providers claiming to have “the solution,” executive “war stories,” myths generated by Japanese automotive history, and misinterpretations of how procurement operates in an environment that is free from the harsh realities of the global economy.

After conducting 29 interviews with senior procurement executives across five key industries, I derived an integrated definition of SRM that reflects the actual practices discovered through the research:

“Supplier Relationship Management is a strategic mindset that restructures how clients and key suppliers realign their relationship to create a true partnership, one that breaks down the traditional barriers of the customer/vendor relationship. SRM takes the concept of the “win/win” relationship to new levels through strategy, transparency and economic togetherness that delivers true competitive advantages for both organizations. Such partnerships, collaboration and innovation will lead to optimized supply chains flourishing and traditional customer/vendor relationships stagnating”.

 It is important to understand in this definition that SRM is not restricted to a single element, but requires a defined process comprising multiple activities both internal to the organization as well as external with suppliers. The goal of SRM is to derive direct competitive advantage for the business through a defined set of relational archetypes with selected enterprises in the supply market. As such, SRM cannot be neatly boxed into a single definition or technology, but rather is a context for thinking about how customers and suppliers align expectations and derive mutual value for the business, by leveraging the expertise and capability that exists in the supply chain. Many of the executives we met expressed their hopes for what SRM might become in the future, and we have included this future view as well.

Building a relationship with a business partner entails a process that is not unlike the process used during the development of personal relationships between individuals. Individuals are introduced, begin to communicate regularly, establish expectations and ground rules for the relationship, establish trust through their fulfillment of expectations, and over time establish the strength of the relationship as it is tested through good and bad times. To be successful, personal relationships also require a lot of work and commitment, as relationships undergo many tests and challenges that require dialogue, communication, sacrifices, and ultimately, tradeoffs. The rewards of building and nurturing a long-term relationship with a long-term relationship are indeed immeasurable.

“We don’t manage the supplier, we manage the Relationship with the supplier.”  CPO – Consumer Products Company

Although the personal relationship metaphor is not a perfect one, there are certainly elements of this process that are useful for thinking about how relationships with suppliers can be managed. Organizations intent on advancing their extended supply chains need to focus resources on building an effective program for SRM, which establishes a foundation that unfolds over time from the early stages to more advanced and mature types of relationships.  Your competitiveness extends beyond the four walls, and is rapidly evolving towards supply network competitiveness.