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• Firms today are facing supply chains that are increasing in complexity. A manufacturing entity may work with hundreds of suppliers on different continents.
• Customers are demanding competitive pricing, hence making margins even slimmer. There is, therefore, the need to create value through strong relationships with suppliers.
• Supplier relationship management today involves leveraging technology to achieve more visibility into procurement spending, manage transactions and communicate efficiently, and find mutually beneficial value opportunities.
Beyond technology, there needs to be goodwill on either side to build a long-lasting relationship. Through the relationship, areas for improvement in product quality and efficiency may be identified. Parties should be willing to make such improvements and even investments for the sake of the business relationship. When well-executed, a supplier relationship management strategy can be a major source of competitive advantage. Here are the benefits of supplier relationship management.
Procurement Costs Reductions
Companies normally spend more money on paying suppliers than they do on internal operations. Yet there is often more focus on making internal operations more efficient. A similar focus on relationships with suppliers can yield significant cost savings in the long term.
Building strong relationships with suppliers enables a company to take advantage of discounts and deals from the supplier. They are also likely to advance friendly credit terms which can lead to a better working capital position for the firm. When you cultivate a strong relationship, suppliers are also likely to be keen on quality and on-time deliveries. This eliminates costs associated with late deliveries and poor-quality items.
Focusing on your supplier relationship will lead to you realizing areas where your business can make savings. As indicated, supplier relationships can be vastly improved by using technology to aid the procure-to-pay process. Orders can be automatically generated from approved requisitions and sent to the suppliers. Suppliers can get a portal from where they can access important documents and communication. They can also send in invoices and have them automatically verified.
Using technology makes processes faster and eliminates reliance on human effort for repetitive tasks. People who did menial repetitive work can dedicate more time to finding innovative ways to create value for both the company and its suppliers.
Better Supplier Relationship Management
When you spend more time analyzing the working relationship with suppliers, you will be able to identify and mitigate supplier risks. For instance, part of supplier relationship management is selecting suppliers to work with through an objective approach. You could analyze their capacity to deliver the quality and volumes required. Once onboard, you will monitor their performance through metrics such as on-time deliveries and quality. Over time, you will drop poor-performing suppliers and only remain with the most reliable and capable ones. This approach will significantly reduce your supply chain risk.
A good relationship with suppliers should include an open communication culture between both parties. Therefore, when the supplier is facing constraints such as liquidity, halted production, or logistical interruptions, they are likely to send in a notification early. This allows your company to take contingent measures to minimize the impact of the disruption.
A major supply chain risk is the volatility of prices which can eat into your margins or force you to pass the costs down to your customers. When your competitors are handling price volatility better than you are, you may be forced out of the market due to inconsistency in the final price of your products. One way to curtail this is to enter into fixed-price arrangements with strategic suppliers. You could give them bigger and longer contracts as an incentive to agree to such an arrangement. In fact, your longer contract could enable them to secure funding to make their own production processes cheaper, perhaps by upgrading their equipment.
Supply Chain Consolidation
As relationships with suppliers deepen, a business may find it beneficial to work with fewer suppliers because of the value that may be realized as a result. For instance, it could reduce shipping costs by shipping in bulk from one supplier. Working with fewer suppliers may deliver better efficiency in purchasing and payment processing. Over time, the business may decide to even outsource some functions, such as inventory control, fully to a particular supplier.
Challenges in Supplier Relationship Management
The biggest challenge for most companies in supplier relationship management is the crafting of a strategy. Businesses need to have an overall strategic plan, upon which an SRM plan will be developed. Working without a strategy will lead to knee-jerk decisions, inconsistencies, and resource wastage. With a proper strategy, the business will objectively identify the most important suppliers and start building a strong partnership with clear goals.
Another challenge lies in the alignment of priorities. When deciding on suppliers to work with, a business must find the right balance between good prices, quality, and suitable terms and conditions. Management must make justification on why they chose to work with certain suppliers over the rest. This thinking has to be applied consistently across the various departments to avoid a lack of clarity in the SRM strategy.
Finding the Right Vendor
As seen, developing a strategic relationship with suppliers can lead to major efficiencies and savings for a business. Businesses can realize fewer disruptions, better workflows, and value creation opportunities through closer relationships with suppliers. Having the right software to support the interaction between a business and its suppliers is crucial. ProcurePort is the world’s leading provider of e-procurement technology. We can advise on how you can use e-procurement software to build a robust supplier relationship management strategy. Contact us today for a free consultation session.