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Supplier Relationship
Management

Lecture # 3
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Supplier Relationship Management

• A well-known expression in procurement
departments is that, “you get the suppliers you
deserve,” indicating that supplier performance is
determined by the way a supplier is treated and
the expectations of them.

• If this is true, then suppliers and business

relationships with them must be managed
properly.
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Supplier Relationship Management

• SRM is a segmented and strategic approach to
managing a supply base.

• An approach that maximizes value and minimizes risks.

• It is comparable to Customer relationship management

(CRM) where company have Key Account Managers.

• The goal of CRM is to maintain and increase existing

business with the customers.
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Supplier Relationship Management

• Similarly SRM manages relationships with the
suppliers.

• Goal is that the suppliers contribute more

towards company’s business strategy.
– Maximize value
– Minimize risk
What Types of Suppliers Do We Need?
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• The first type of supplier can provide quality parts or

materials at a lower cost than the purchaser could
otherwise manufacture or procure.

• The ability to supply at lower cost may be for a number of

reasons,

• For example; lower labor costs, use of specialized

equipment or economies of scale.

• Consequently it is likely that the supplier will develop an

even higher level of expertise that will allow a competitive,
commercial edge to be maintained.

• Example: Suppliers of packaging/label material

What Types of Suppliers Do We Need?
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• The second type of supplier will have technical

knowledge and unique skills not easily developed
by the purchaser.

• The supplier company may even have patent

rights.

• With such a relationship requiring a greater

degree of communication between purchaser
and supplier, the development of partnerships is
more likely to naturally occur.

• Example: Consultants
What Types of Suppliers Do We Need?
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• The third type of supplier may simply have no

competitors and therefore have a monopoly
on the marketplace.

• Example: Utilities Provider

• The fourth type of supplier may provide

generic products/services and may have many
competitors in the market.
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What Form of Relationship is Appropriate?

• To address this question, it is important to
accept that it is entirely appropriate to have
different types of relationships with different
suppliers.

• The key is to clearly understand the relative

importance of purchased materials, items or
services, and develop relationships
accordingly.
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What Form of Relationship is Appropriate?

• Important factors include:

– Product specifications – uniqueness, complexity,

confidentiality

– Product volumes required - volume of purchases,

patterns of demand

– Relative importance of purchased items

– Service criticality
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What Form of Relationship is Appropriate?

• A number of models exist to assist in the analysis of the
relative importance of purchases.

• Kraljic Matrix is one of those.

• Kraljic matrix is used for conducting portfolio analysis

of your purchases in terms of their value and risk of
supply.

• Four broad categories might be selected as follows:

– Strategic items
– Bottleneck items
– Leverage items
– Non-critical or Routine items
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Kraljic Matrix
• Low personal contact can influence the
relationship as although the communications
are fast, they lack the personal touch which
improves client/supplier interaction.
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Strategic items

• High cost impact and high supply risk.

• These items are the most critical, requiring extremely close

environmental monitoring, and accurate forecasting.

• Risk analysis and contingency planning will be very

important.

• Example: Engine for an automobile company

• Collaborative relationship or alliance with suppliers are

essential
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Bottleneck items
• Low cost impact but high supply risk.

• These items are usually purchased in significant

volumes.

• The purchaser often paying a higher price to

ensure quality and continuity of supply.

• Example: Tires

• Good relations with sellers are important.

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Leverage items
• High cost impact but low supply risk.

• These items will have many suppliers and

readily available substitutes.

• Example: Plastic parts

• The purchaser will exploit his purchasing

power on such items and may have multiple
sources.
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Non-critical or Routine items

• Low cost impact and low supply risk.

• Multiple sources are likely.

• Example: Office stationery

• Transactional relationship
 Relative Importance of Purchases
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• It becomes clear that an organization must develop strong

business relationships, at an appropriate level, with
suppliers.

• This requires:
– A clear understanding of the nature of materials or services
being procured
– The relative importance of those items to the performance of
the purchasing organization
– The relative importance of the buyer to the supplier.

• We can take the above model further by looking at the

supplier’s evaluation diagram on their customers of which
you are one.

• Which quadrant would you fit into?

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Supplier’s Preference Matrix

Supplier’s Evaluation of Customers
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• Now the roles are reversed where suppliers are

evaluating their relationships as well.

• A customer can get a better understanding of

where they sit in the supplier’s supply chain and
which options may be open to them.

• For example if the supplier is in their Critical

quadrant and they are in the supplier’s
Exploitable quadrant, then there are potential
problems with high risk to the customer as they
need this supplier more than the supplier needs
them.
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Possible Relationships
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Possible Relationships
• There can be total 16 types of relationships
between a buyer and a supplier.

• These can be broadly classified into three

categories:
– Transactional
– Collaborative
– Alliance
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Transactional Relationships
• Most common type of relationship

• Neither good nor bad

• Arms’ length relationship

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Characteristics of Transactional
Relationships
• Absence of concern

• One of many

• No Information Sharing

• Focus on price

• Minimum time investment

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The Advantages of Transactional

Relationships
• Relatively less purchasing time and effort are
required to establish price.

• Lower skill levels of procurement personnel

are required
 The Disadvantages of Transactional
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Relationships
• The potential for communication difficulties is much
greater with considerable investment in expediting and the
monitoring of incoming quality transactional relationships
• Transactional relationships are inflexible when flexibility
may be required
• Transactional procurements tend to result in more delivery
problems
• Quality with transactional relations will be only as good as
required
• Transactional suppliers tend to provide the minimum
service required
• Buyers tend to experience less effective performance by
their transactional suppliers
• Lack of motivation on suppliers’ part
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Collaborative Relationships
• Key Difference b/w Transactional and
Collaborative
– Awareness of interdependence
– Necessity of cooperation

• Both parties are aware that money enters

their supply chain (or supply network) only if
the chain’s end products are cost competitive.
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Collaborative Relationships
• ESI results in improvements in cost, quality,
time to market, and leveraging of supplier
technology
• Easier to implement continuous improvement
• Supply disruption risk reduced
• Lower total costs
• Major disadvantage is the time and energy
required to be invested
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Supply Alliances
• The fundamental difference between
collaborative relationships and supply
alliances is the presence of institutional trust
in alliances.

• Alliances reap benefits through physical asset

specialization and human specialization.
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The Primary Benefits of Supply

Alliances
• Lower total costs

• Reduced time to market

• Improved quality

• Improved technology flow from suppliers

• Improved continuity of supply

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Relationship vs. Trust

 30 Which Relationship Is Appropriate?
• 1. Are there many relatively undifferentiated suppliers providing
what amounts to interchangeable commodities? If so, a
collaborative alliance or relationship would not be appropriate: Try
a transactional relationship instead.

• 2. Does the potential supplier possess economic power which it is

willing to employ over its customers? A transactional or very
carefully developed and manage collaborative relationship is usually
appropriate.

• 3. If there is recognition by both parties of the potential benefits of

an alliance, but adequate qualified human resources are not
available at one or both firms, a collaborative relationship is usually
appropriate.

• 4. A collaborative relationship frequently is an appropriate first step

on the road to a strategic alliance.
 31 Which Relationship Is Appropriate?

• 5. Is one supplier head and shoulders above the rest in terms of the value
it provides, including price, innovation, ability to adapt to changing
situations, capacity to work with your team, task joint risks, and so on? If
so, an alliance may be in order, assuming that the supplier is willing to
enter into an interdependent, trusting relationship.

• 6. Are some suppliers “strategic” to your business? In other words, do they

have a major impact on your competitive advantage in the marketplace?
Are you highly reliant on them to provide a unique product, technology, or
service? If so, an alliance may be vital.

• 7. Would your company benefit greatly if the supplier were more

“integrally connected” with your company, perhaps with their engineers
working side by side with yours, or collocating their manufacturing
facilities adjacent or within yours? If yes, consider an alliance.

• 8. Do your customers require high degrees of flexibility and speed of

responsiveness, causing you to demand the same performance from your
suppliers? This is a classic alliance driver.