SRM - Easier When You Know How!

Technical advancements in IT, logistics and communications are constantly changing the commercial environment that all businesses operate within. One of the major consequences of this is that market places are easier for companies to analyse and ultimately enter.

This in turn promotes globalisation as business not traditionally associated with certain market places are now able to adapt their offering and brands to exploit industries where profits may be higher. All of this lowering of the barriers to market entry creates competitive pressure and unless a business is in a monopoly situation (of which fewer and fewer exist) there is and always will be a need for organisations to firstly secure what they have, and then continue to search for ways to improve their business.

This never ending catalyst of change is the driving force behind the need for organisations to become, leaner, more efficient and more profitable businesses. Organisations that embrace this need to constantly stretch themselves are the ones that continue to maintain their competitive advantage and ultimately survive.

When you consider that businesses operate as a collection of departments; these two fundamental business drivers of securing the current status quo, whilst seeking improvements should also be evident in all departments of a business. Sales departments look after their current customers whilst seeking new ones, or HR departments keep current employees happy whilst searching for new employees who can improve the business.

By the same token the procurement function must also strive to achieve these same goals. Procurement activities focused on achieving sustainability and improvement inevitably revolve around relationships with their suppliers and have therefore often been labelled as ‘supplier relationship management’ or SRM. SRM is not a process or a technique, but an activity and if you work in procurement you will have relationships with suppliers. Whether you acknowledge the fact or not you are a practitioner of SRM.

SRM – How do I do it?

Like any activity there are numerous and differing opinions and theories on the best methods of performing SRM and due to the fact that this activity occurs in a unique environment (your business) in conjunction with another unique environment (your suppliers business), the results always vary and will always be unique.

So is there a magic formula for carrying out effective SRM in order to ensure that procurement delivers the maximum value to the business? Well sadly (and despite the plethora of theorists and a CEO that may think otherwise) the answer is no. Just as there is no ‘one-fix fits all’ for personal relationships, supplier relationships need to be managed according to their individual nature and the most appropriate actions need to be taken in order to achieve the desired or required outcome.

Some people will give examples of how a soft, warm relationship with suppliers will always produce the best results, whilst others are adamant that a more ‘arms length’ harder approach is ultimately more effective. The truth is that they both have their merits and will have been used successfully in differing circumstances, but this will be due to the fact that they were the most appropriate approaches for that relationship.

The same is true with techniques - open book versus closed book, framework agreements versus detailed contracts, preferred supplier alliances versus blind auctions etc. Find me a procurement professional that believes in win/win and I will show you another that believes this to be naive and more a win/perceived win, with the theory being that one of the parties can always do better and only perceive that they are winning. The point to embrace is that there is no right methodology or technique, but there are inappropriate or inefficient methodologies and techniques in which to engage certain suppliers and in certain circumstances.

Like individual people, some suppliers and circumstances are more difficult than others to deal with, however unlike some personal relationships the issues that the relationship needs to resolve and deliver are business goals, which are pre-determined and inflexible so the relationship more often than not has to be made to work.
It is the ability to find a way to make difficult supplier relationships work often in a pressured environment that sets the very good procurement professionals apart from the average ones.

From a learning perspective the best procurement professionals not only understand the different approaches, techniques and theories used within SRM, but they also understand when and where to use them in order to gain the best result for the organisations they are working for.

Procurement professionals that have a sound understanding and better still experience in solving SRM issues are well equipped to help deliver value to their current and potential employees and are therefore understandably the candidates most sought after by our clients.

SRM - examples of techniques

Regardless of whether you are an experienced procurement practitioner or relatively new to the industry, the following checklist and advice may give you an insight into some of the SRM techniques other procurement professionals are using.

Remember these activities are not ‘the way’ but ‘a way’, which hopefully you may find useful and if you compare the way you conduct your current supplier relationships with the techniques outlined below hopefully there may be something you can use to help make your SRM activities become more productive.

Know your own business

It is imperative that you understand and confirm with the stakeholders within your business what the organisational needs are and what you are being asked to achieve. You can not effectively manage your suppliers if you do not understand what value they need to deliver i.e. do you need to save $1M this year or do you need fewer deliveries to your warehouse? Does your company want to own more assets or does it need to hold less inventory? Is the business planning on selling more of a certain product and therefore needs to source more of a certain component or service etc? Failure to do this before spending your companies money is often the catalyst for problems further down the track and is rarely good for your long-term job prospects!

Know your products

You must understand exactly how your business uses the products/services your suppliers are providing. It sounds fundamental, but it is amazing how often procurement professionals do not know what suppliers actually do to add value to their business.

If others in your organisation (the users of the products and services) are the keepers of this information how do you know whether you are getting the best possible products and services for the money you are spending? If suppliers feel that you do not understand their products they are far more likely to see the user of the products within your business as their key stakeholder – lack of product knowledge leads to lack of credibility and is often the reason why and how ‘maverick’ buying occurs.

Solutions

Ask your internal users which products they have issues with and what improvements they would like to see.
Compile a list of the issues and give it to your suppliers as a job list.

Know your supplier businesses

Regularly audit all of your suppliers in order to understand exactly what they do? Understand what their core business is - it may not be the service they provide to you, so which suppliers do specialise in that service and are they better/worse?

Who owns the business and what are their plans for it - organic growth, public/private sale, ascquisition, streamlining?
How healthy is the business - are they expanding, moving, going bust? How does this affect your business? Try to understand the culture within which they operate; are they easy to deal with and will they continue to be easy to deal with?

If the supplier has no interest in knowing more about your business, you should be asking yourself why, perhaps you are not part of their future plans. If it helps, categorise suppliers: excellent, adequate, need to improve, lost cause. This gives you a natural priority of focus and identifies vulnerability and risk to your business.
Know the personnel you need to form a relationship with and ask them questions you want to know the answers to such as:

Who are your competitors (my other potential suppliers?)
Are their products better than yours (and if so why?)
What do you think of our company (are there things you can learn from them, are they right?)
How much does you company earn from our business (how important are you to their business, what impact will you have?)
Rather than guess ask them what their company and they personally need from you and your organisation (do they have a specific sales/profit target?)
Make a relationship plan along with your supplier’s stakeholder/s. Decide together on how the relationship will work operationally, what expectations do both parties have?
How will you help each other achieve commercial and operational goals? Include the internal issues list you collected and the supplier’s goals and targets.
Define deliverables and timescales
Use regular and specific meetings to review it together! If it needs changing change it.
Communicate internally
Develop regular communication channels with your internal stakeholders, if there are supplier problems/delays tell the business what the problem is and how it will be fixed, never let the business tell you or tell the suppliers themselves! (Failure to communicate bad news internally can make you and your department appear distant, out of touch and over time may undermine your credibility.)
Show your business that you are managing the suppliers. Tell people about your successes and the improvements you are making and what you have achieved, if you don’t nobody else will!
A regular monthly internal update is a great idea. Remember tailor it to your internal stakeholders ask them what they would like to see – product and service issues update for the technicians, spend by category, cost centre etc for the CFO: "the department that makes the most noise often gets given the most toys”
Communicate externally – (Your external credibility) If a supplier’s products/service is appalling tell them why, what effect it is having internally, what you expect them to do about it and by when
Likewise if the supplier is doing a great job tell them. Annual supplier awards can be a great way of showing good suppliers they are appreciated and not so good suppliers what the best suppliers are doing.
Communicate to suppliers what your business is doing. If you have news that will affect their business good or bad tell them.

Using SRM to promote you

The main thing to bear in mind with regards to SRM is that supplier relationships are just like personal relationships. Honesty, transparency and consistency are good principles, if applied, go a long way to making them easier to manage. It is vital to keep the goals and purpose of your relationship to the fore and to remember that corporate and personnel relationships change and therefore you may need to change your outlook and activities accordingly.

From a recruitment perspective employers throughout Australia are looking for procurement professionals that can make the process of procurement as efficient and as profitable as possible.
Good procurement practitioners understand the inner workings of their business and what products and services it needs to help sustain and gain competitive advantage. The real skill is understanding the business needs, matching them to the most appropriate suppliers and then incentivising them through SRM activities to produce the desired products and services your business requires on time, every time and at the lowest possible cost to your organisation.

Using the best methodology and SRM techniques

The best procurement personnel and the ones most valued by employers are those who have a selection of SRM techniques, methodologies and tools they can use and more importantly know which ones are the most appropriate to use for each supplier relationship.
Like all business processes SRM is not a definitive science, but a collection of activities that have been bundled together. Understanding what it is gives procurement professionals a framework within which to ring fence these activities and allocate goals to them.

With the creation of goals, actions and deliverables can be determined and time and resources can be applied to them. Measurables and reporting monitor the progress of these actions and deliverables towards achieving the goals and communication is the glue that holds it all together.

If all SRM activities are thought of in this way by working out which of these elements (goals, deliverables, measurements and communication) is missing or weak it should be possible to identify if and why relationships have become problematic and hopefully how to fix them. Maybe the goals of the relationship weren’t established to start with so there is a conflict of interests; it could be that ther were any identified deliverables, so although there may be considerable activity, but it is undirected, or perhaps activities are not being communicated efficiently so problems are only perceived ones.

SRM is arguably the core activity for procurement professionals so if you are looking to improve you profile with your current employer or feel that you need a challenge within a new organisation, think of the current everyday SRM activities of that business and formulate ways in which they can be improved with the specific goal of increasing the profitability of the process and the business these relationships exist in order to serve.