Recently, our practice has witnessed an increase on industry interest around Supplier Relationship Management (SRM), while not a new concept, SRM has trended because it has proven value. As companies had come to the realization of the strategic significance behind the strategic sourcing & procurement departments to their operations, they have also started to boost their SRM efforts and adopt new programs that allow them orchestrate their supplier relations to their overarching mission and strategy. What they seek is that optimization initiatives are not only supported by internal business units, but by every entity within their operation, this of course, comprises the supply chain and supplier base.

While not every company will have a matured SRM in place, those who do, will likely have embedded practices specifically tailored to their own culture and strategic objectives. The focus of SRM is to develop meaningful relationships with strategic suppliers to drive a competitive advantage for both sides; typically, SRM will prioritize suppliers based on their criticality to their operation and establish controls and procedures to foster collaboration and support innovation. SRM is a systematic and all-inclusive effort conducted at all levels of the organization that should not to be confused with Preferred Supplier Programs (PSP or PSL); which may or may not be part of a broader SRM. Yet, it would complement it nicely.

In order to understand PSL, we must take into account that, typically, “regular” suppliers do not enjoy treats beyond an established relationship with the buyer; these relationships aren’t necessarily oriented to identify synergies or manage collaboration beyond easing the interaction and maintaining service at adequate levels. Suppliers in “Preferred” status (Preferred Supplier Lists) enjoy a privileged standing in a company’s supplier base. Preferred suppliers are typically selected for a specific commodity or service category to assist those business units; they also are the first suppliers to be approached when business needs arise, and, for the most part, don’t have to compete for the business (i.e. do not need to place quotes for their services). Preferred suppliers are normally heavily scrutinized for selection (through RFx, interviews, reference checks, etc.) and conditioned to maintain certain levels of performance to retain status.

That said, we must keep in mind that PSL programs have limitations; for starters, as mentioned, suppliers joining the program are only used for certain commodity areas, not for the whole organization, and as the requirements of these areas evolve, suppliers may lose relevance. In addition, because PSL are narrowed to specific areas, preferred suppliers may not be receiving visibility from other departments that could potentially synergize the relationship further. Also, PSL programs are limited in that not all categories or commodity areas in an organization will necessarily require a PSL, especially if there are no discernible benefits to either supplier or buyer, or because as a result of category strategy, there is no real need to have that supplier on a PSL. For instance, circumstances in which commodity areas represent single source markets, such as the credit card industry, where there only are only two providers of the core card platform (TSYS and FDR), only one of those would typically be selected, so there is no benefit to the supplier or buyer for the additional labor required to put them in PSL status.

Another challenge is program maintenance; suppliers in PSL should be reviewed on a regular basis, and the performance criteria reassessed constantly to ensure that business requirements and supplier capabilities evolve at unison; in other words, while the supplier may be performing accordingly, it may no longer make sense to keep them on PSL given changing business conditions. The value of the program as a whole must be tracked as well, in order to determine the cost saves and value adds resulted from the program, and its relevance to the company’s overarching strategy.

Because of this narrowed alignment to the company’s strategy, the limited visibility across business units, and the volatility of the business conditions; even when they are properly managed, PSLs do not offer a permanent solution, unless they are supported by SRM. Be that as it may, we can certainly assert that PSL programs are still beneficial to both the supplier and the buyer, as they do deliver and monitor value to whichever category they service.

On a higher level we have SRM, which offers more essential optimization support as it gets embedded in the culture of the organization and evolves with it, as such, well-managed SRM will not disappear, but develop instead. SRM takes aim at a company’s full supplier base to ensure that a systematic supplier assessment is consistent to the business strategy, including regular suppliers and those in PSLs. SRM is organization-wide and strategy oriented, and so, it takes a universal approach that tracks performance beyond ROI metrics, by improving suppliers’ relations, enhancing collaboration, fostering innovation and supporting a competitive advantage.

This may sound a bit like the “chicken or the egg” case, but the reality is that both PSL and SRM are built and designed around adequate supplier management and strategic support, and you don't necessarily need one to have the other, but they complement each other quite well and when adequately planned they are symbiotic. That being said, if I had to choose what should come first, I would probably recommend a focus on implementing a strong SRM program first, in order to establish clearer rules to the PSL later, and so that all suppliers (regardless of their PSL status) can still be adequately managed through the SRM program.
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Diego De la Garza

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