Supplier Relationship Management … does it have a future?

Partnerships, collaboration, mutual success. Increasingly these are the words used by executive management when they describe how their business will work with trading partners. Yet without fundamental change to policies and processes, these words remain little more than sentiments.

Business conditions have changed dramatically in recent years. Globalization has impacted loyalty; it has driven a ‘lowest cost’ mentality; it has resulted in trading relationships that span cultures, jurisdictions and languages. Many of those relationships are now virtual and they operate in an environment where there is constant pressure to cut costs, to innovate and to cope with heightened levels of commercial risk.

In this environment, IACCM research has found that on average, 35% of contracts significantly underperform. This represents a massive impact on bottom-line results – or alternatively, a massive opportunity for improvement. Surely, this must create conditions in which sophisticated vendor or supplier relationship management (SRM) can flourish? Yet in general, it does not, because management is reluctant to make the necessary investments.

Where it has taken root, the evidence suggests that ‘good’ supplier relationship management generates incremental savings of between 5 – 9%. However, sophisticated organizations understand that SRM is about far more than savings; an ‘excellent’ program delivers revenue improvements through innovation, enhanced supplier performance, accelerated deliverables …. These programs focus on quality, continuous improvement and innovation; cost reduction is a consequence. However, this approach often results in conflict with traditional Procurement practices and measurements and in particular, disagreement over the best supplier or the appropriate contract terms.

Another point of contention is the extent to which ‘the contract’ and ‘the relationship’ need to be aligned. Many immature organizations continue to believe that the key to good performance is strong personal relationships. They point to specific examples to illustrate their point. Yet at the same time, they ignore the many examples of failure or sub-optimized performance. In today’s global business environment, success cannot be left to the vagaries of human relationships, it must also be linked to organizational compatibility and alignment.

And this is where SRM has its greatest role and value. It ensures there are processes, systems, skills and methods in place to drive sustainable mutual success. By supporting performance in this way, it enhances supplier selection and also encourages supplier investment in the relationship. In many organizations, SRM or vendor management groups remain an overlay, seeing their role primarily as a point of coordination or oversight. In the best organizations, they are at the forefront of driving internal change and tackling issues that have substantial impact on business results.