Supplier relationship management the key to future success

What is Supplier Relationship Management (SRM)

Supplier Relationship Management (SRM) is aimed at streamlining the supply chain by improving the communication between an enterprise and its suppliers.

In theory it streamlines the processes between an enterprise and its suppliers in the same way Customer Relationship Management (CRM) makes the processes between an enterprise and its customers more effective.

Essentially SRM practices enable a common frame of reference to improve communication between enterprise and supplier who may be used to different practices and terminology. Ultimately SRM software can lower production costs and result in a higher quality, lower priced end product.

Modern SRM solutions support the whole procurement process in the company, including procurement strategy, qualification of suitable suppliers, tenders and contract design, and monitoring supplier performance.

The importance of implementing a SRM strategy/plan

SRM is becoming increasingly important for enterprises because, in the competitive global environment, purchasing-related savings are equally important as sales.

In the past ten years, significant results have been generated through rationalising supply bases, introducing competition and moving to low cost countries. But recently results from these activities are diminishing, which is where SRM comes in.

Mark Simmons, chief executive of efficio, explains: "SRM is about how to work with key suppliers to reduce costs, introduce innovative products, create cash (inventory reduction and payment term management), mitigate supply and regulatatory risk (like Sarbanes Oxley), and secure supply of scarce materials."

When SRM is effective, he adds, companies improve on profitability, growth, market share and reputation.

Peter Schlemmer, Sales Manager SRM at SAP Deutschland AG, adds: "Supplier Relationship Management is experiencing exceptional interest in the companies at the moment, because the savings created by transparent purchasing are significant and can be achieved rapidly."

SRM is especially important when there is a limited supply base for a product, or when "we may need [those suppliers] more than they need us", says Bob Currey, general manager of sourcing innovation and supply management for Delta.

Delta uses SRM to achieve savings in areas other than purchasing prices, such as working with its suppliers to manage inventory better or in areas of warranty recovery.
Indeed, a recent study by Accenture revealed that SRM leaders are organisations that achieve more than 50 per cent of their procurement benefits from post-contract award activities.

Companies that focus on sourcing and SRM achieve savings of three per cent on their total annual procurement spend. The study also found that 12 per cent of companies will focus more on SRM in the future, while 64 per cent believe the important of post-contract activities will increase or remain the same.

In addition, companies that assign greater resources to suppliers achieve superior results, the Accenture survey adds. SRM leaders dedicate on average nine full-time employees to joint production development, compared to an overall average of three full-time employees.

However, many companies lack supply chain skills, including SRM leaders, of whom many consider the most important activity to be monitoring supplier performance, yet only 15 per cent consider themselves experts in this field. The results suggest that better supply chain skills will yield better results.

The industries that are leading the way in SRM are, according to Accenture, media and entertainment (50 per cent); automotive (38 per cent) and pharmaceutical, medical products and health (32 per cent).

Ultimately, SRM enables companies to realise benefits beyond just savings, including reduced risk, increased speed-to-market and access to new technology and solutions.

Case studies

Many organisations are turning to Lean Six Sigma (LSS) as a means of implementing SRM. Essentially LSS is an intelligent, fact-based process that creates robust benefits through the SRM process.

LSS follows five fundamental steps: define the charter - understand customer expectations and requirements; measure the current state; analyse the process capability; improve - design an optimised solution to support objectives; and control - implement controls to monitor and track improvement.

Efficio, a London-based procurement consultancy, writes that LSS can remove shared costs that would be impossible for supplier or customer to remove in isolation, thereby driving performance improvements across the supply chain.

It reports a number of case studies that highlight the sourcing-related benefits of LSS techniques.

The first example was a global chemical company that was being hamstrung by poor purchase price data integrity. It was losing deals it should have won because errors in raw material prices in the ERP system led to over and under-priced customer product quotations.

The company sought to improve on this area, and selected a team to achieve raw material price accuracy in the ERP system of 95 per cent or more. Using a number of techniques from the LSS toolset such as process mapping, Pareto analysis, brainstorming workshops and user interviews, the team found that more than 70 per cent of purchase orders were verbally placed without confirmation of price. In addition, no supplier procedures were in place for raw material price management and purchase-to-pay processes, as well as a database of supplier email contact details.

LSS analysis identified the need for a buyer training programme in the use of the company's ERP contract management module, and a restricted access, supplier-maintained contract information database. In addition, a major price confirmation activity was conducted with the supply base to confirm system prices against contract prices for the majority of the spend.

Another example shows how LSS techniques can enable SRM initiatives to deliver measurable cost benefits.

Efficio cites a global manufacturing firm that was burdened by costs associated with plant utilisation - the longer the turnaround times between production runs, the lower the utilisation and the higher the operating costs.

Turnaround times were delayed by the outside industrial cleaning company that controlled much of the work. The problem identified was high variability in cleaning times, which interfered with the plant's ability to schedule production, thereby leading to reduced utilisation levels, idle labour and higher overtime and rescheduling costs.
Focusing on industrial cleaning, an LSS project set the objective of reducing the variability in cleaning times to increase plant utilisation, and to reduce cleaning costs through more efficient practices and controls in order to achieve less cleaning equipment hours and man hours.

LSS analysis resulted in the introduction of pre-negotiated 'unit costs' for standard jobs and an approval process with discounted hourly rates for custom jobs. Plant management and the supplier worked together, with the former providing the latter with a monthly production schedule to better manage its cleaning crews, while the supplier provided a list of the supplies needed to ensure a faster turnaround time.

The result was a 50 per cent reduction in cleaning costs, while the rate of job completion within six hours rose from 45 per cent to 85 per cent. Consequently, turnaround time between production runs was slashed by more than 30 per cent.