Supplier Relationship Management in Small Business

Posted on December 23, 2020

Can Supplier Relationship Management be the game-changer for your Business? Read on to find out how…

No business requires convincing that in today’s scale-driven and tech-intensive global economy, great supplier relationship is the supply chain’s lifeblood. Businesses, particularly the well-established ones, are buying services and components from suppliers more than ever before.

Companies are increasingly relying on suppliers to improve quality, cut costs and develop new products and processes faster than their competition. As a matter of fact, experts agree that businesses looking to succeed in today and tomorrow’s marketplace must consider turning their arms-length relationships with their suppliers into close, well managed partnerships featuring close-knit networks that enable them to continuously learn, improve and prosper.

So, how can you achieve this? Truth be told, it’s tougher to build seamless relationships with suppliers than most businesses imagine. Yes, but not anymore.

As it is, majority of manufacturers work with a myriad of suppliers, rendering the supply chain complex. With stiff competition necessitating a need to reduce prices for the end-user, most small and medium enterprises are compelled to squeeze margins to their detriment.  

In order to maintain profitability, forward-looking start-up's must adapt a systematic approach to their supply/sourcing strategy. This is when efficient supplier relationship management comes in handy.

Supplier relationship management (SRM) refers to a systematic, enterprise-wide assessment of suppliers’ assets and capabilities with regards to overall business strategy. An effective SRM strategy will not only help you build strong partnerships of mutual collaboration but also help reduce risks of errors.

Hence adopting a strategic approach to supplier management is a crucial step towards boosting the profitability of your business.

Why supplier relationship management is important

A small business without a reliable supplier relationship will eventually feel like veering off the road in your family car—wobble and risky. To ensure a steady flow of new and better products to your inventory, strategic supplier management is the magic you need.

3 key factors driving supplier relationship management

Reduce cost: Most business transactions and expenses relate to supplies. Hence, when you build a mutually-enriching relationship with your suppliers, you can enjoy discounts, incentives, special deals and more. Additionally, having a good relationship with suppliers reduces the extra cost that may be due to errors and delays in procurement.

Encourage supplier-led innovation: Establishing a great relationship with your suppliers ensures efficient communication. This encourages suppliers to share ideas about product improvement, service innovation, supply chain process efficiency and more.

Supplier evaluation: It’s vital to assess your suppliers and make sure they meet all qualifications needed by your company. With an effective supplier management system, you can detect areas that need improvement as you do business with the suppliers.

How to manage supplier relationships better

Effective supplier management is a no-walk-in-the-park, however, it isn’t impossible. Below are some ideas you can consider when thinking of rolling out a supplier relationship management.

1. Segmenting suppliers for SRM

Start by segmenting purchased items or raw material into two main categories—Profit Impact and Supply Risk. Here’s why.

Note that your profit impact is basically the impact that the supplied items have on your bottom line. Profit impact is usually higher for raw materials or items that make the biggest portion of the final product like Colorbond steel for the construction of a roof or processed fabric for a dress manufacturer.

Supply risk happens when the supply chain is disrupted due to unavailability of a given item. Supply risk is considered high for those raw materials that are scarce, rare or whose supply is impacted by government policies, delivery logistics or when suppliers are fewer. For example, the unique material or fabrics like silk which are required by a saree manufacturer.

Once all the commodities have been classified, with products and components according to their profit impact and supply risk, the products can then be segmented into the product-purchasing categorisation matrix as follows:

  • High-Profit Impact and High-Supply Risk: Strategic suppliers
  • High- profit and Low-Supply risk: Leverage supplier
  • Low-Profit Impact, High-Supply Risk: Bottleneck suppliers 
  • Low-Profit Impact, Low-Supply Risk: Non-critical supplies

Segmenting your suppliers enables you to Plan for Purchase. Using supplier segmentation, you are able to ascertain reliable suppliers and group them in one category based on their price, quality and product importance, enabling you to make better and more efficient decisions concerning purchases. Furthermore, you can employ cloud technology like Xero Projects to enable you keep track of your payments and purchases with real-time data, allowing you to manage your supplier relationship more effectively.

2. Shift from competitive to collaborative relationships

After segmenting your suppliers, take time to approach each supplier and discuss the relevance of their product on your business. For leverage and non-critical suppliers, look for alternative suppliers in the market so as to establish a competitive relationship with them and optimise your profit margins and product abundance.

Be sure to build collaborative relationships with both your bottleneck and strategic suppliers whom you can’t substitute and are crucial to your supply chain. This demands that you establish a strong partnership and or alliance-based relationship approaches.

SRM is undergoing great transition, with strategies varying from one company to another.

Gone are the days when just managing expenditure and securing the best business deals from your suppliers was enough. You have to continuously keep an eye on the yield delivered by your supplier.

With an effective SRM strategy coupled with the right application, you can establish long-term and trustworthy relationships with your major suppliers. In addition, you can also come up with an exit strategy well in advance for your troublesome suppliers.

A Technology-Driven Approach to Supplier Relationship Management:

Looking at the above supplier segmentation matrix, there’s no doubt that all the suppliers that fall in the Strategic supplier segment are your most esteemed suppliers.

This explains why today most organisations rely on technology to better manage these relationships in a bit to reward their businesses with a superior edge over competition.

Small and medium-sized enterprises are yet to define what a strategic supplier really is for their business before determining how technology can come in handy in helping them build those relationships.

While understanding the art of segmenting your suppliers is the first step towards ensuring better supplier relationships, knowing the most suitable technology to enhance that relationship is quite important. 

A survey on Procurement 2025 carried out by Efficio in conjunction with Strategic Suppliers cooperation Cranfield University revealed that technology is simply making more data-driven decisions in procurement.

As a small or medium-sized business owner, you may have to consider investing in the latest technology to improve or transform your SRM efforts. If you plan to integrate technology into your business so as to maximise and fast-track value from supplier relationships, an ERP is the platform for you.

Enterprise Resource Planning (ERP) enables you to access all your tally data on whenever, wherever. If you use an ERP to manage your inventory, then having full insight of the data will enable you to ascertain and categorise your Strategic Suppliers and improve your relationship with them.

As it is, SRM is all about integrating the right resources, practices and technologies required to align your small or medium-sized business with your suppliers in order to build stronger and lasting relationships.

Armed with the right tools to foster supplier relationship management, you will then focus on what is more important to your business.

When you take time to identify and classify top suppliers and create better relationships, this leads to efficient operations.

ERP's are designed to provide complete visibility of your stock details including stock items and stock groups which include relevant information about sales, purchases, closing stock, top sellers, top customers, stock value for the group, go-down wise breakage as well as the items in the group.

This information can be used to segment your suppliers in 4 different categories as mentioned above and better manage your relationships with them.