Procurement is more than just beating suppliers down to get the best price. Ensuring we’re getting competitive pricing is an important part of our role, certainly, but fostering best-in-class supplier relationships is also an increasingly important aspect of the job. To do this, we need to establish a best-in-class supplier relationship management practice.

We began this discussion last week by defining what SRM should mean to us in order to expand upon how we should approach such a practice. Here’s a quick refresher:

Supplier relationship management is an active and engaged practice meant to proactively maximize the value of our supplier relationships.

If you missed that post, go back and read it using the link above. We unpacked this definition in that post, and we’ll want to keep it in mind as we move forward.

Now that we’ve defined SRM at a high-level, what can we do to realize the benefits it offers?

Five Keys to SRM
There are plenty of steps required to implement SRM. Although not exhaustive, I want to highlight a few that I consider critically important. To truly promote and benefit from SRM, we will need to start by:
  • Properly segmenting our supplier base.
  • Gauging the state of our relationships – and evaluate which are most important.
  • Consolidating suppliers to a manageable number, given the points above.
  • Reconsidering of what our suppliers mean to us and how we interact with them (and getting it in writing).
  • Improving how we communicate with our suppliers.
Gaining Supplier Relationship Clarity
Any given organization may interact and buy from hundreds or thousands of organizations. Some of these interactions represent key relationships critical to business, and others are simple purchases, perhaps one-offs or very tactical in nature. As we begin building out our SRM strategy, we need to differentiate between the two so we can focus our energy on the relationships that have the biggest impact.

To begin, let’s talk about the first two bullets above. If you’ve previously conducted a spend analysis then you’re already on your way. If you haven’t, now is a great time to do so. Our goal is to tag suppliers in three ways:
  • Categorize each into relevant spend categories.
  • Note the risk they represent to our organization were the worst to happen.
  • Note the overall impact they have on our profitability.
To illustrate, consider any given spend category team that wants to better engage its supplier base. The first step, of course, is identifying which suppliers fall into this team’s category. Perhaps 100 suppliers fall into this category. That’s a lot of supplier coverage! When we dig in deeper, however, we find that the top 20 suppliers make up 80% of spend (ah, the good ol’ Pareto 80/20). Reducing our subset from 100 to 20 is a huge first step – let’s keep going.

Total spend isn’t the only key factor to consider. Take a look at the lifespan of these relationships as well. A million dollar capital expenditure project looks huge on paper – but we’re more interested in the suppliers that we’re working with consistently, month after month. The suppliers that we rely on for more than one-off projects. Perhaps only a handful of our suppliers above were one-time initiatives, lowering our count to 15.

How much of a risk would losing any of these 20 suppliers be? Would it be an easily rectified inconvenience, or a major disruption to operations? In most cases, the more commoditized the product or service, the less risk. Next, how much of our profitability is tied to the products and services offered by these suppliers? Direct spend will of course feature prominently here, but some areas of indirect spend can be major factors.

The two points above, risk and profitability, may look familiar to you. These are the two elements of the Krajlic Matrix – a key tool in evaluating suppliers from an SRM perspective. Suppliers with a big impact on profitability that represent a large risk were we to lose them are where we want to start our SRM journey. Of our 20 suppliers above, this may mean focusing on only 5-10.

Moving Forward
We have a couple different initiatives on our plates now. First and foremost, we’ve identified 5-10 suppliers that we can likely consolidate spend in our hypothetical category to. How critical will that be? Depends on how that Pareto-based 20% of our spend represents.

Supplier consolidation strategies aren’t why we’re here today, though. So, what’s next in terms of SRM? We will cover that topic in the next post.
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