In order to grow your business effectively, developing strong relationships with your suppliers and manufacturers is key – and this goes far beyond financial transactions.
As an eCommerce business, a good line of communications can be mutually beneficial for both parties as you are both dependent on each other to survive in a highly saturated market.
In fact, maintaining your supplier relationships can be seen as a vital brand building tool. If you choose not to invest in your suppliers and develop these relationships, then you may do your retail company more harm than good.
With that in mind, what exactly is supplier relationship management? How can it benefit your business? What factors are likely to affect your stakeholder relationships?
In this guide, we take you through supplier relationship management, factors that affect these relationships and the key benefits an effective SRM process can bring your business so that you can continue to grow:
What is supplier relationship management (SRM)?
Supplier relationship management has one broad goal:
To streamline and improve the processes between a buyer and its suppliers.
In essence, developing relationships with your suppliers consists of any set of activities that is completed by an online business to identify, measure and improve the performance of suppliers and support the continuous improvement of its products or services.
Why should you choose to invest in your supplier relationships?
For starters, strong and stable relationships can prevent stock outs of the products you sell and help to prevent the discontinuation of products that you sell.
Types of suppliers.
- Manufacturers and vendors
- Wholesalers and distributors
- Independent and trade show representatives
Just like customer relationship management (CRM) tactics, an effective SRM process helps you to build mutually beneficial relationships with your suppliers and create strategic growth.
Nurturing good supplier relations helps to establish a powerful brand, promote quality and efficiency and increases the likelihood of innovative and unique product lines.
Strategic management vs. reactive management.
The concept of supplier relationship management was first introduced in the 1980s by a McKinsey consultant, Peter Kraljic. Since then, it has continued to evolve into a strategic form of business growth and conduct.
Broadly speaking, there are two approaches to an SRM process:
Management of relationships only occurs after a negative situation
Management of relationships is planned in advance with contractual agreements
At the beginning of an eCommerce journey, it’s likely that many new and small online businesses will fall into a reactive process by default due to a lack of sufficient resources.
However, as your company progresses and your business model becomes more profitable, it’s common for long-term strategic growth plans to take center stage.
With that in mind, if you can afford the time to nurture and develop supplier relationships early on, then you’re likely to increase the probability of a secure and sustainable business.
Factors that affect supplier relationships.
Trust and loyalty.
Aside from financial transactions, developing mutual stakeholder relationships that are based on trust and loyalty is just as important. The key to successful partnerships with your suppliers to make them feel like they are a part of your business.
Trust can be defined as a positive belief, attitude, or expectation of one party (e.g. the buyer) concerning the likelihood that the actions or outcomes of another party (e.g. a supplier) will be satisfactory.
To achieve this, make sure to inform them about your ongoing processes and strategies, such as new product releases or promotions you have going on.
Listening properly to their needs and pain points can also go some way in developing strong ties with your suppliers. A good line of communication saves time and hassle when things go wrong. The more approachable you are, the more likely you will be to create good bonds.
The benefit of doing this is that you will have a higher likelihood of gaining the trust of your suppliers and foster a sense of open communication from both sides.
Communication and information sharing.
Another factor that affects the development of a good relationship with your suppliers is the sharing of information. This improves the coordination between your supply chain processes and enhances the level of supply chain integration.
You may find that it affects the performance of supply chain partners in terms of cost and service level. Sharing of information and good communication can save on business costs.
In fact, many studies have long since recognized that information sharing is a key requirement of a successful SRM implementation.
What’s more, remember that good communication is key.
Without a sufficient level of communication there is no build-up to develop a strong base for a relationship from. The performance of your supplier relationships largely depends on the effectiveness and appropriateness of the interactions you have with each of them.
Risk and reward sharing.
Within a partnership, suppliers should be assured that both the rewards and benefits and risks and costs are shared. The balance between sharing risks and rewards is one of the key components in establishing and maintaining strong relationship ties.
Risk sharing refers to a type of supply chain risk management. It’s used to deal with unpredicted uncertainty in upstream supply risk, in order to reduce losses in transaction.
In comparison, reward sharing is an incentivised approach aimed at cost-saving and improving product quality. It can also be helpful for achieving better firm performance overall.
Sharing of risks and rewards can also lead to close collaboration between supply chain partners. This helps to build a good level of trust between suppliers and buyers.
Risk and reward sharing can also be a great way to incentivise over-delivery and add incremental value to your relationships; however, if executed poorly, it may harm contract value and dilute the goodwill of the relationship – possibly leading to litigation.
Risk sharing can also help to develop long-term relationships between a buyer and its suppliers and there are many benefits to forming such arrangements.
- It focuses each partner upon the link between investment and profit
- Brings suppliers together to meet an overall objective
- Engages all partners in achieving strategic goals
Contract style and scope of partnership.
Another element that can have implications on the development of relationships with your suppliers is whether or not you choose to have legal contracts or formal agreements with them.
The benefit of having a contract in place is that it improves the commitment between both the buyer and supplier and can increase the overall satisfaction with the relationship.
With that in mind, it should be acknowledged that many buyers and suppliers only have informal agreements in place. Formal arrangements are often made by companies that are expanding quickly in size and have the relevant resources available.
That said, we strongly recommend that you ensure both your business and your suppliers have agreed to terms on a clearly written contract, where all terms are defined and all responsibilities are made obvious, in order to save hassle further down the line.
What’s more, understanding the scope of a partnership with your suppliers is key to analyse the formation, operation and effectiveness of each vendor.
It goes without saying that committed partners are more willing to sustain the relationship between suppliers and buyers; neither should have to be worried about being replaced.
When commitment is encouraged within a business, the business develops a strong and collaborative work ethic and works together with other organisations to implement supply chain partnerships.
In other words, having partners that are committed to one another helps with the successful integration of an SRM process for a business.
Transparency in each other’s operations also helps to build trust and understanding in the relationship. Keeping channels of communication open ensures that you and your suppliers are on the same page.
Benefits of investing into your SRM strategy.
Mutually beneficial partnerships
According to the Chartered Institute of Procurement and Supply (CIPS), when you are aligned with your suppliers and treat them as partners, “both businesses will experience higher success rates, decreased risks and enhanced collaboration and innovation.”
As a mutually beneficial relationship, both parties should experience enhanced efficiency. And, as the relationship develops, the communication improves. Both involved parties learn more about each other and therefore rates of efficiency increase.
The benefit of this is that problems are likely to be reduced, and if order issues do occur, the strong reciprocal ties in the partnership should make it much simpler to resolve any problems before they escalate.
And that’s not all.
Through crafting a healthy long-term relationship between both buyers and suppliers, there is room for feedback and ideas to be passed between the two parties involved.
As the CIPS states, this will allow for a variety of benefits, including:
- Improvement of operations
- Streamlined supply chains
- Reduced costs
- Improved customer service
Another benefit of investing into your SRM strategy is that you are less likely to be ditched by your suppliers. With strong reciprocal ties in your relationship, you’re also less likely to find that your vendor has run out of a product you sell.
Take a look at our recommended techniques for effective inventory management.
If you choose not to invest time into these relationships, you may run the risk of a product you sell being discontinued without warning.
This can be problematic as if you oversell and can’t make up the orders in another way, you risk harming your business and your relationships with customers.
Instead, it’s a much safer bet to invest in your supplier relationships while you have the time. This way you can be prepared should a worst-case scenario happen.
Supplier relationship management is highly important as over time, you will find that your relationship develops to the point where you’re exchanging a free flow of ideas and other feedback you can use to direct your wider business strategies.
Over a long-term duration, this will facilitate a more streamlined and effective supply chain that has a greater likelihood of having a positive impact on costs and customer service.
Reduce business costs.
Generally speaking, when you are negotiating new deals with new suppliers, there are a number of initial costs involved. A supplier relationship management process can eliminate many business costs further down the line.
There are many long-term cost savings that can be achieved in the long run with an SRM strategy in place. By establishing strong relationships, you are likely to find that you will have less issues with product availability, quality of products and less delays in supply.
Successful supplier relationship management brings a number of opportunities to light.
Strong relationships with your suppliers may lead to co-creation in a new product development or improve the quality of your current inventory.
Joint investment also results in a more efficient use of resources and can accelerate the effect of supply chain partner innovativeness on a company’s product innovation strategy.
Within a partnership, suppliers are (to some extent) able to alter the opposite party’s operations to improve the relationship and better suit one another. Joint control helps all parties eliminate waste and improve their customer service.
What’s more, with a strong SRM process in place, it’s likely that you’ll experience a faster time to market, transactional efficiency and large financial gains; enabling you to continuously deliver a quality product, placing you ahead of your market and competition.
Sustain supplier relationships to boost your bottom line.
If there’s one thing that’s for certain, it’s that investing in your supplier relationship management process is key to developing a successful business model.
Through strong relationships with your vendors, you can achieve both security and sustainability for your eCommerce business. An effective SRM process ensures that your product lines will always be available and your deliveries timely.