What is supplier relationship management?
Supplier relationship management is the set of processes that organizations use to build, manage, and maintain relationships with their suppliers, or vendors. A supplier relationship management strategy is essential to ensure that relationships are built productively, with a view to increasing the overall effectiveness and resilience of the supply chain.
Supplier performance plays a large role in the success of businesses of all sizes. But the more supplier relationships a business has—and the more complex those relationships—the more important it is that they are fostered.
Supplier relationship management, forming part of the overall practice of vendor management, helps businesses to better establish and grow their relationships with their suppliers. It is essential in building processes that are mutually beneficial for both buyer and supplier, ensuring that the supply chain continues to function effectively, and understanding which relationships provide the most value.
The supplier relationship management process
Relationships with suppliers are typically seen as long-term investments. That means that supplier relationship management is a process, rather than a singular activity. From supplier selection to ongoing risk assessment, this is the outline that the supplier relationship management process typically follows:
- Supplier selection. The first step in a relationship with a supplier is to select them. This is initially spurred on by a procurement need—the buyer identifies that they require a new good or service that their current supplier base can’t provide. From there, potential vendors will be researched, shortlisted, and approached for quotation. There are many factors that are considered as part of the supplier selection process, including price, reputation, capacity, and delivery terms.
- With a suitable supplier selected, the relationship moves on to the consideration of finer details. Contractual negotiations begin to clearly define expectations and responsibilities and ensure that the terms of the buyer-supplier agreement meet both parties’ needs.
- If all goes well during the negotiation process and the contract is agreed upon and signed, the next stage of the relationship is for the supplier to be onboarded. This involves gathering all necessary documentation, establishing communication channels, setting KPIs, and setting up payment processes.
- Monitoring and management. Finally, with the relationship firmly established, it can begin serving its purpose. As the supplier meets their obligations by fulfilling the buyer’s orders, the relationship will develop and mature. Throughout the course of the relationship, the buyer should be continually monitoring the supplier’s performance and assessing risks, both new and ongoing.
Challenges in supplier relationship management
Developing strong relationships with suppliers can result in huge benefits, but the process isn’t without its pitfalls. The following are some of the most common challenges companies face when building and managing supplier relationships:
Selecting the right suppliers
Without the proper precautions, buyers can fall at the first hurdle of a supplier relationship by selecting the wrong supplier for their needs. This challenge can be effectively avoided by paying great attention to detail in the supplier selection process.
After a procurement need has been identified, potential suppliers should be researched in detail to ensure that they meet all established criteria and pose no substantial risks. The request for quotation process should be equivalently well-considered. Rushing into a relationship without carrying out due diligence can cause significant long-term harm.
Ensuring effective onboarding
On the surface of things, supplier onboarding seems like a relatively simple task. However, since no two companies share the same values or processes, forming an effective partnership is difficult. The onboarding period is the perfect opportunity to lay a solid foundation that will ensure a strong long-term relationship.
Being entirely clear about how communication and disputes will be handled is of the utmost importance during the onboarding process. Smooth communication and fair conflict resolution are at the heart of positive supplier relationships, and it’s important that both parties understand what the proper channels are to achieve these goals at the outset of the relationship.
Monitoring ongoing supplier risk
Potential supplier risk comes in a variety of forms, from financial risks like a fragile balance sheet to reputational risks like unethical business practices. These risks pose different threats to buyers but are all potentially harmful to both the resilience and stability of their supply chain and the health of their bottom line.
The supplier selection process should be formulated so that it identifies risks before relationships are formed, but not all risks are visible from the outset, and others can develop during a relationship. That makes ongoing risk monitoring an essential part of supplier relationship management.
Fostering positive relationships
Good communication is the cornerstone of any healthy relationship, and things are no different with suppliers. Without the ability to communicate needs clearly, constructively address issues, and effectively manage disputes, fractures can form in supplier relationships that may lead to breakdowns in their effectiveness.
Ensuring that there is a strong and open line of communication, established practices for dispute resolution, and an ongoing atmosphere of goodwill are all positive ways to foster a supplier relationship.
Benefits of a supplier relationship management system
An effective approach to managing supplier relationships, especially for companies that deal with lots of individual suppliers, often relies on the use of a dedicated supplier relationship management solution. These systems can help to make the process of selecting suppliers, building relationships, and fostering their growth over time easier to handle. Making proper use of such a system can facilitate better adherence with supplier relationship management best practices, bringing about benefits including:
- Improved communication. Supplier relationship management systems will typically feature in-built communication channels on both a top-level and in relation to specific documents, such as purchase orders or invoices. Having the ability to communicate in a closed system that’s tied directly to the documents that are being referred to can make communication between buyers and suppliers much smoother.
- Easier onboarding. Onboarding can be a complicated and chaotic business when dealing with suppliers of different types and sizes. A supplier relationship management system can help to create and enforce standardized processes for onboarding which makes it simpler to hit the ground running in new relationships.
- More effective risk and performance management. Finally, the features of a supplier relationship management system will often be of assistance in monitoring and managing ongoing supplier performance risks. With the functionality to store information about the supplier centrally, from their KPI performance to their order fulfillment track record, it can be invaluable in assessing how well the relationship is serving the buyer’s business goals.
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