Why You Need a Supplier Relationship Management Program

Despite the many benefits, it’s rare for middle market businesses to have contracts with suppliers or even a supplier relationship management program in place. Many businesses of this size don’t consider it to be a priority and supply chain managers don’t want to put the time and effort into creating such a program. And when the economy is stable and business is good, that’s an understandable stance to take. But economic growth or decline, tariffs, and issues like those presented in the transportation crisis of 2018 or the COVID-19 pandemic can threaten your entire supply chain.

Whether it’s a supplier that can no longer meet your demand or an increase in spot pricing to the point that it threatens your profit margins, a change in your supplier relationship can cause your entire supply chain to collapse and your bottom line takes a hit.

In order to protect profit margins, avoid risks, and ensure the quality of your products remains high, you need a supplier relationship management program.

What is a supplier relationship management program?

A supplier relationship management (SRM) program is a two-way partnership between your business and any third-party suppliers of goods or services. Its purpose is to stabilize costs, ensure the quality and quantity of goods, and reduce risk to your business.

It’s reliant on continuous dialog between companies and a mutually agreed upon scorecard that allows you to regularly evaluate your suppliers and vice versa.

Think of an SRM program like marriage counseling after having been married for a long time. It needs to be a two-way street in which you assess your supplier’s performance and they have the opportunity to assess yours.

The risks of operating without an SRM program

Not only do middle market business lack an SRM program, but many don’t have a contract with their supplier that sets pricing and guarantees the delivery of a product or service. Business are counting on their suppliers to continue delivering goods and services without any assurance that it will happen. Because supplier risk has not been assessed, these businesses also haven’t identified secondary and tertiary suppliers for their key products.

This becomes problematic if any one of these three scenarios occur.

  • The economy booms: When the economy is doing well, customers are more inclined to purchase goods. While that might seem like a good thing, it means an increased demand on your suppliers. Depending on their facilities, staff, and capabilities, they may not be able to keep up with demand, leaving you without the goods to manufacture your product.
  • Your relationship becomes fractured: It’s important to remember that you and your supplier both have control over your relationship. If a supplier doesn’t feel they’re being treated well, they can end your relationship and immediately cut off the supply of goods to your business, halting your production.
  • Supplier costs increase significantly: Purchasing goods using spot pricing could mean that you reach a point where your vendor’s goods and the associated transportation costs dig into your profit margins so deeply that you can no longer make the relationship work. At that point, you’re stuck until you can find a new supplier.

What are the benefits or an SRM?

The benefits of an SRM program are huge and greatly outweigh the hassle of putting it together. The most obvious benefit is that you have a solid relationship with suppliers built on regular communication and the desire to support one another. It will also likely result in a contract that guarantees the delivery of their product at a locked price, which is more cost-effective for you.

An SRM program and contract with your suppliers lowers the risk of suppliers not being able to give you what you need to conduct business. By exploring that relationship and setting expectations, you can rest assured your supplier won’t fail you. Or you can at least know what to expect so you can find secondary or tertiary suppliers to backfill what your primary supplier can’t fulfill.

Steps for setting up an SRM program

To get started, it’s vital to do a risk assessment of existing suppliers to make sure they can meet your needs in the future. Once you’ve identified primary suppliers, reach out to write contracts and create a balance scorecard. This scorecard should contain agreed upon criteria that needs to be met by both you and your supplier.

From there, you should meet with your designated suppliers quarterly—or at least twice a year—to review the scorecards and create a plan for correcting any issues that come up.

If you need help setting up or running your SRM program, contact the experts at FortéOne to eliminate supplier-related risks and protect your bottom line.