The role of the procurement function has changed and continues to evolve in today’s increasingly globalized and competitive market landscape. In the past, Procurement was responsible for the timely availability of products and services and accurately processing transactions. Through the implementation of category management and strategic sourcing initiatives, Procurement began rationalizing the supply base and consolidating volumes, to drive price reductions and savings. However, the next step toward Procurement excellence is to adopt a value-driven orientation with supplier collaboration. Companies are now aware that they must collaborate with suppliers to remain competitive and minimize costs. Supplier management is not a new topic, but it has not been fully integrated and adopted in the procurement function.
Companies have become rather proficient and mature in running strategic sourcing initiatives. After realizing the contracted savings, category teams and buyers continued with these initiatives, while neglecting the implementation and management of contracts. Strategic sourcing is an important factor to drive cost savings, but it is just as critical to develop a supplier relationship management (SRM) process to forge long-term partnerships for continued cost savings and value. SRM should be focused on joint growth and value creation with a number of key suppliers based on open communication and trust. Co-author of Purchasing and Supply Chain Management, Robert M. Monczka describes the SRM objectives and benefits in the following ways:
- Become a ‘customer of choice’: preferential treatment regarding availability, costs, access to technology, innovation and risk reduction
- Focus on value: increased market competitiveness through consideration of all relevant elements that determine stakeholder value
- Leverage on supplier capabilities: advantageous position through early involvement in the innovation and product and process development processes
- Share growth, profits, risks and investments: joint objectives, efforts and resource commitments resulting in a healthy culture for continuous growth
Driving long-term relationships by integrating SRM practices into the procurement function facilitate continued savings and value-adds within the organization. But what are the three most critical objectives of SRM?
Leveraging supplier capabilities is one of the most important objectives of SRM. Not all companies have the ability of keeping all production activities in-house. Those activities that are maintained in-house are typically considered as strong contributors to their company’s competitive advantage – such as product development and core manufacturing processes. However, strategically leveraging suppliers is often less expensive than building certain operations in-house, while employing their unique skillsets can serve to more dramatically enhance your own product and/or service.
The second most critical objective to SRM is reducing cost. Some might perceive this as a conflict with SRM’s strong focus on value creation, but cost reduction is still one of the key imperatives. The difference with the traditional approaches is that benefits are now realized and shared together with suppliers. This helps organizations drive savings, while developing long term relationships.
Lastly, the security of supply can be considered as the third most critical objective to SRM. With globalization of supply chains, fluctuations in supply & demand and material scarcity has made it difficult for companies to ensure product availability to customers. Creating a partnership can allow companies to aim for favored treatment while driving out strong volume and mix fluctuations through integrated forecasting and planning, product sustension and simplification.
Special thanks to Source One for this guest post.