Organizations thrive on producing and selling products at the lowest price points. As consumers, we love feeling like we got the best deal in town. That’s just the name of the game—the lowest price catches the eye. But in the Procurement & Sourcing realm, this is one of the biggest misconceptions about cost management. Low cost or price reductions does not necessarily equate to cost savings. Due to the highly competitive marketplace, Procurement organizations have a natural tendency to choose the cheapest suppliers but what is often overlooked is that price reductions only apply to unit costs but have little to no effect on hidden costs such as transportation, reclamation, inventory management, quality, and much more.
Likewise, running sourcing events and awarding suppliers solely on price point will not necessarily guarantee a strategic partnership or set the stage for collaboration. It’s one thing to find a low-cost supplier during crisis management but that should not be the go-forward strategy every time. We need to consider quality, performance, incumbency to name a few. This is where Supplier Relationship Management (SRM) comes into play. These variables along with other Key Performance Indicators (KPIs) are essential to SRM and strategic business planning. While many companies are extremely successful in SRM and recognize its value, it has always confused me as to why many others see this as, let’s just say, the added sprinkles rather than the whole sundae itself. I don’t know about you, but I need my sprinkles.
There are two parts to Supplier Relationship Management: the qualitative and quantitative. SRM is undoubtedly enriched through positive collaboration between Procurement and suppliers. Working with a supplier that understands all the factors that are influencing your supply chain’s effectiveness and efficiency is far more valuable than saving $0.05 on unit cost in my opinion. Building a strong relationship on trust, loyalty, and dependability will go the distance (Dr. Phil was right!). When both Procurement and suppliers take equal ownership in understanding and managing the emotional connection, that’s the sweet spot right there. Allocating resources to allow your suppliers to have a comprehensive understanding of your business needs and strategy can provide considerable ROI and hopefully the ultimate—supplier enabled innovation!
The second part to SRM, my favorite I should add, is analytics! Having clean, accurate data (emphasis on accurate...don’t get me started) to gauge your suppliers’ performance, monitor behavior, facilitate root cause analysis, enforce corrective actions, etc. is crucial to the success of your business plan and budget. How can you continue, change, or improve anything about your business without understanding how you're doing first? When you understand your current state, you are able to make the most educated sourcing decisions to ultimately drive measurable value improvements. These improvements can range anywhere from creating clear responsibilities for Procurement and other functions, developing scorecards, implementing new technology, modifying your category plans, to changing your supplier base. Whatever it may be, know that your savings might not necessarily be hard dollar right out of the gate, and that’s ok. A comprehensive SRM with the right buy in and implementation sets the stage for informed sourcing decisions, optimal business performance and is an imperative culture shift the entire industry must make.