With a greater portion of products and services resting in the hands of third-party suppliers, the race is on to solidify consistent, long-term supplier partnerships. But just because the fundamental nature of the buyer-supplier relationship is changing doesn’t mean suppliers have the upper hand.
The power of reciprocity is more important than ever, in fact, as the harmonization of the buyer and supplier relationship becomes more and more vital to ensure intelligent, scalable, and sustainable growth.
In this day and age, the success of any buyer-supplier partnership is not only contingent upon a mutual understanding that there’s more than one business opportunity out there. It also rests on the establishment of a mutually beneficial, performance-oriented agreement.
This increasing need to curate and sustain value to remain competitive today has redefined the significant and overall concept of supplier relationship management from the ground-up.
“Old-School” Supplier Relationship Management
The traditional objective of supplier relationship management (SRM) has been to ensure contract compliance and mitigate risk through the proper management of third-party suppliers. But conventional SRM is short-sided in that it’s essentially focused on the exchange of monetary value for a product or service.
Instead of investing in a transparent and ongoing relationship that generates value for both parties, traditional SRM is heavily geared towards managing the final step in the traditional procurement process and ensuring previously agreed upon terms are met.
80% of survey respondents in a recent American Productivity & Quality Center (APQC)study claimed that SRM implementation has improved supplier reliability and reduced risk. But considering how critical suppliers are in delivering products and services today, viewing third-party suppliers as a potential liability and source of risk can be a huge business mistake today.
This rigid approach to SRM can potentially hinder the level of innovation and value that can come out of a more constructive, valuable, and sustainable buyer-supplier partnership. Instead, determining the most valuable suppliers and establishing a reciprocal supplier relationship based on transparency, innovation, and continuous two-way prosperity is critical to retaining a competitive advantage.
“New-School” Supplier Relationship Management
There are a ton of potential suppliers out there and even more procurement departments competing for supplier attention, best pricing, and priority insight into future product launches and how to stay ahead of the pack.
Considering suppliers play such a huge role in the production and delivery of products and services, securing the right suppliers and moving towards a more strategic supplier relationship that is sustainable and mutually beneficial for both the party’s bottom line is more important than ever. So how can you achieve a value-oriented supplier relationship?
We’ve outlined three action plans designed to foster a more constructive and sustainable supplier relationship. We like to call this the “new-school” concept of SRM.
- Identify the most valuable suppliers.
- Establish reciprocal performance-based contracts.
- Use technology for real-time insight, collaboration, and transparency.
Determining the most valuable suppliers
There are two predominant concepts that can be used to identify your most valuable suppliers, the second being the most relevant given the changing nature of supplier relationship management:
- Comparative advantage
- Supplier performance management
Comparative advantage is an economic strategy used by global supply chains and companies that may ideate locally but produce and manufacture products abroad. In essence, the principle of comparative advantage is based on the mindset that countries should manufacture the products that best minimize total operational costs and import everything else. But the comparative advantage concept has noteworthy pitfalls.
Quality standards, compliance standards, and consumer expectations, for example, differ from country to country, market to market. Products that are able to meet all of these criteria are often more expensive. And with thecurrent trade and tariff environment, establishing tariff-proof supplier relationships along with competitive (and consistent) import prices brings with it another web of challenges.
Supplier performance management (SPM), on the other hand, is an effective up-and-coming, end-to-end solution to determine your most valuable suppliers. The best practices in SPM can also be used by bothlocalized supply chains and global operations.
Supplier performance management focuses on evaluating suppliers based on delivery fulfillment, product and/or service quality, lifecycle costs, trustworthiness, integrity, and various other applicable criteria. Because supplier performance is extremely volatile at times, SPM is a comprehensive and continual process that’s often integrated into real-time SRM software, which we’ll discuss in a minute.
2. Establishing performance-based contracts
Predetermining mutually beneficial goals and contractual terms for every point in the supply chain is key to any sustainable supplier relationship.
TheInstitute for Supply Management has pinpointed 145 different types of relationships between buyers and third-party suppliers. Out of these established buyer-supper relationship links, the following are known to breed the most collaborative and reciprocal arrangements:
- Opportunity sourcing: continuously surveying the supply market for new opportunities without any specific requirement or sourcing needs.
- Innovation and top-line, revenue-driven relationships: identifying what’s on the market and evaluating the marketing and identifying innovation opportunities and/or new applications
- Joint ventures: Establishing and nurturing a deeply-rooted, integrated, and highly defined buyer-supplier partnership yielding strong joint benefits stretching far beyond just monetary value.
3. Using technology to build transparency
Constructive buyer-supplier relationships depend on trust, transparency, and reciprocity. Having the right technology in place can streamline the process of meeting these needs by:
- automating and streamlining tasks
- providing real-time insight, collaboration, and methods of open communication
- Facilitating natural rapport and supplier engagement
- reducing lifecycle costs and time allocated to individual tasks
- enhancing accuracy and reducing human error
- allowing more time to solve complex problems, meet mutually defined KPIs, and explore new supplier relationship management initiatives
Integrated and real-time supply chain management and supplier relationship management software are on the rise to solve problems stemming from a lack of resources and clearly outlined procedures allocated to SRM.
Modern SRM software continues to rise to such challenges by embedding supplier segmentation, SRM, SPM, and supplier development into the design of comprehensive SRM software features such as demand forecasting and planning, sales and operations planning, procurement fulfillment, logistics, and supply chain visibility.
Navigating the Emerging Performance-Based Supplier relationship
Given the integral role that suppliers play in product and service fulfillment and delivery today, supplier relationship management is rapidly evolving. Establishing value- and performance-based contracts defined by mutually beneficial goals and KPIs is indispensable for cultivating and nurturing consistent, long-term buyer-seller partnerships.
What’s your game plan to navigate the emerging value-based supplier relationship to not just stay afloat, but thrive in the long haul?
