By Supply Chain Brain
Analyst Insight: The true value of supplier relationship management is not what you think. It isn’t just about managing a bi-directional relationship between the buyer and supplier – it’s about managing the extended supply network (customers’ customers and suppliers’ suppliers). In today’s business, the best network of relationships achieves optimal results; thus, managing the supplier relationship is not only critical to success, it’s mandatory if full value is to be extracted for both the buyer and the supplier. – Mickey North Rizza, BravoSolution
Relationship management isn’t always easy. Like all relationships, management and the benefit derived from each participant is at the core of it being a success. When benefit derived is less than what is put into the relationship, the value is eroded. While relationships are not always in balance, the ability to make trade-offs in such areas as cost, quality, agility and risk are paramount to successful relationships.
Magnify this to the next tier of buyer and supplier both up and down stream and the dynamics can be pretty interesting. At the heart of these relationships are demand, orders, inventory, payables, receivables, quality and product or service. When viewed as a network of value, the relationships established must work together to support the required customer outcome.
Value chain relationships require a clear and concise focus on overall outcome. It isn’t about passing along the costs to the upstream or downstream partners. It is about value derived for all parties and the risks and rewards made together to impact a positive outcome. As an example, let’s look at the typical value chain: a brand owner has a multitude of contract manufacturers, a host of suppliers providing packaging, product components and testing as one portion of the value chain. Another portion of the value chain for the brand owner is the logistics of the supplies and product to the distribution points, the distribution points themselves and ultimately the retailers that position the product and sell it to the end consumer. If you think of each segment of the value chain as a valued contributor with a dial that must measure their inputs and outputs in relation to the required demand, a picture starts to form that makes the relationship one of inputs and outputs. While this appears simplistic, it isn’t, because each intersection is measured in terms of value derived: Revenue, Profitability, Operating and Gross Margins, Return on Invested Capital, Return on Assets and Earnings per Share. When the financial lens is tied to the relationship, dynamics start to shift and this can quickly transform or break the relationship.
To be successful at supplier relationship management, procurement must recognize that the broader enterprise and supply chain will engage with the supplier in a multitude of activities.
Successful supplier engagement requires segmenting the suppliers so that the interactions can be managed efficiently and effectively across the value chain and organization. Remembering one size does NOT fit all when managing the supply network is crucial to establishing the right relationships. Elements of successful supplier relationship include application of Kraljic Purchasing Portfolio, Porters Five Forces, integrated horizontal business processes, technology, and supplier interaction hierarchy.
Managing a relationship in any capacity can be trying. Building processes around relationships – using technology to enhance transparency, and engaging people who enhance the value for both parties – is the ultimate SRM. Of course one must also measure value contributed vs. the value derived to understand the real nature of the business. SRM isn’t easy, but can be worthwhile in terms of growth and profitability for the customer, supplier and the entire value chain.