Summary: Traditional supplier management squarely focuses on getting the lowest price for a part. Value-focused supplier relationship management, or SRM, promotes collaboration between manufacturers and suppliers as a best practice because it delivers long-term benefits. Pay a little more now, reap the rewards forever.
As companies grow and scale in size, outsourcing is inevitable.
So much so that, 70% of today’s industrial and consumer products are made from content that’s procured-in.
70% of industrial and consumer products are made from procured-in content.
With the majority of production outsourced and product complexity increasing all the time, scaling hardware companies rely heavily on suppliers and contract manufacturers to ensure that their quality and inventory needs are met.
This means that your approach to supplier relationship management is critical to your success.
Today, we’re going to look at why supplier management is broken, and how you can make it better with value-focused supplier management.
Traditional Supplier Management
Traditional supplier management focuses on getting the best component for the lowest price.
It’s a zero-sum game: if you win, your supplier loses.
The value assigned to the relationship is effectively zero.
This is fine when you’re sourcing simple commodity components.
But once you start looking for sub-assemblies and more complex components, and when you start looking for a supplier who can innovate with you, and who can help with new product introduction…
That relationship is looking a lot more valuable.
Fortunately, this medieval thinking is on its way out.
But it doesn’t have to be this way.
What is Supplier Relationship Management (SRM)?
Supplier Relationship Management, or SRM, is a long-term strategy to promote collaboration between manufacturers and their suppliers.
Its goal is to build positive manufacture / supplier relationships, where manufacturers are work in partnership with their suppliers.
SRM is a shift from viewing suppliers as opponents in a negotiation to partners in delivering products to market.
SRM may sound like an idealistic, but there are real benefits to be gained with this approach.
The Benefits of SRM
SRM is about the long-term advantages of having reliable suppliers who share the objectives of the manufacturer.
When suppliers feel they are valued, they are willing to give manufacturers more than they would in a supplier management situation.
Companies are now aware that they must integrate and collaborate with suppliers to remain competitive
Specifically, scaling businesses who practice supplier relationship management methodologies can expect:
- Impeccable customer service. Manufacturers who build long-term partnerships become a customer of choice. Suppliers are happy to give you the best service they can. This preferential treatment is helpful when you have a tight deadline or a massive order to fill because you know your supplier will go the extra mile for you.
- Supply reliability. The partnership you’ve created with your supplier creates a sense of trust and accountability in both parties. And therefore, a greater commitment from suppliers when fulfilling your orders — even when the going gets tough.
- Industry expertise. Get the inside scoop on best practices in the industry. This includes knowledge of what materials to use, the latest innovations, and the best production techniques as well as suggestions and improvements that make your product better.
- A bigger talent pool. By building a partnership, manufacturers benefit from the production experience of their suppliers. Working together, suppliers and manufacturers can crowdsource knowledge and innovate together.
How SRM fuels your bottom line
SRM isn’t just a warm fuzzy feeling in your stomach.
It translates into measurable benefits for your bottom line by reducing purchasing costs, risk, and admin/management overhead.
Let’s dig into those a little more.
Reduce purchasing costs
By investing more in each supplier, you can cut the number of suppliers you deal with as well as secure volume discounts (especially important when you’re scaling your business). Combined, these reduce supplier spend by up to 9%.
Reduce supplier spend by 9%.
Reduce supplier risk
The more suppliers you have, the more stuff that can go wrong.
With fewer suppliers, you can develop stronger and more meaningful relationships with each one.
It also means you can dedicate more resources to drafting and enforcing SLAs, compliance, and other legal policies.
Finally, if you’re a small client for dozens of suppliers, you’re a small fish in lots of different ponds.
However, if you double down on a few key suppliers, you’re a much more important client — one whom your suppliers are much less likely to risk losing.
Reduce admin costs / overhead
Each supplier costs between $700 and $1,400 to set up, not to mention the time it takes for your staff or your own.
Fewer suppliers with more meaningful relationships and you can cut these admins and overhead costs significantly.
How do I achieve SRM?
SRM is a whole approach to supplier management.
There are lots of things you can do to achieve SRM.
Consolidating suppliers, spending more time with each one, and operating with a value-add approach all help.
But the single best thing you can do is share your product data across the value chain.
The best thing you can do is share your product data across the value chain.
Sharing product data opens communication & builds trust
When manufacturers share information about product design and objectives with their suppliers, it creates an open channel of communication for both organizations.
By providing suppliers access to product data, information becomes a shared resource that flows between you and your and suppliers.
Problems are spotted and solved early, and everyone stays on the same page to drive innovation faster.
What’s more, a transparent approach to product data fuels trust among your suppliers, fast-tracking trust between you and your suppliers.
Sharing product data opens communication aligns manufacturers and suppliers
Providing suppliers with access to product data guarantees that the whole supply chain understands your goal for the product.
With SRM, everyone’s on the same page and you can work together towards a common objective.
Sharing product data opens communication leverages supplier expertise
Since suppliers know your goals, they can be a knowledge center to help you achieve them.
Suppliers produce many kinds of products at high volumes, so they know the production process inside and out.
Using the past successes and failures of suppliers ensures you’re producing your product in the most efficient manner.
It also saves you delays and costs that follow mistakes during production.
Traditionally, the manufacturer-supplier relationship has been all about cost reduction in the short term.
Supplier relationship management, however, has thankfully replaced this practice and looks to garner long-term value from manufacturer-supplier relationships.
By working with suppliers, you can create partnerships within your supply chain that yield business benefits far beyond any initial cost savings.
Image credit: Enrapture Media via Unsplash