PURCHASING MANAGEMENT

CHAPTER 8

SUPPLIER RELATIONSHIP
MANAGEMENT
Compile: Đinh Bá Hùng Anh PhD
Tel: 0347.077.055/090.9192.766
Mail: [email protected]
 Supplier Relationship Management
DEFINITION
SRM involves streamlining the processes and communication between the buyer and
supplier and using software applications that enable these processes to be managed more
efficiently and effectively.
Examples of Companies Offering SRM Software • Examine and forecast
purchasing behavior

• Shorten procurement
cycles

• Work with their

partners in real time
SAP SRM enables companies to

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 Supplier Relationship Management
- Supplier relationship management (also known as SRM) is the process by which
companies review, manage, and provide solutions to improve relationships with
suppliers, with the main purpose of creating companion value and ensuring long-term
benefits for both parties.

Here are a few benefits:

- Reasonable purchasing decisions: companies clearly understand factors such as the
supplier's capabilities, operating model, etc.… can make the most appropriate
purchasing decisions to minimize risks during operations.

- Cost optimization: Improved cooperation between companies and suppliers will make
it easier to negotiate factors such as better service with competitive prices, reduced
errors, and supplier risks.
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 Challenges of managing supplier relationships
- Preferred method of communication - For a strong buyer and supplier relationship,
communication is key. However, cooperative relationships between buyers and sellers are
not always easy to create. It is necessary to find the best communication methods between
purchasing buyers and suppliers.

- Lack of transparency - If the relationship between buyer and supplier is not open and
transparent, this can lead to misunderstandings about business needs. If accurate information
is not shared between each party, this could mean that important business opportunities
could be missed.

- Supply chain disruption - External factors beyond your control can lead to problems in the
supply chain. Whether it is late delivery or reduced quality of goods or services; These are
disruptions that procurement departments are unprepared for.
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 Developing supplier relationships
Building Trust
Shared Vision and Objectives
Personal Relationships

KEY
Mutual Benefits and Needs
INGREDIENTS Commitment and Top Management Support
Change Management
Information Sharing and Lines of Communication
Relationship Capabilities
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 Performance Metrics
You can’t improve what you don’t measure”

• Evaluating supplier performance, organizations hope to identify suppliers

with exceptional performance or developing needs, improve supplier
communication, reduce risk, and manage the partnership based on an analysis
of reported data.

• Although price or cost is an important factor when selecting suppliers,

other criteria such as technical expertise, lead times, environmental
awareness, and market knowledge must also be considered.

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Performance Metrics

Pre-transaction
costs

Total cost of
ownership
(TCO)

Post-transaction Transaction
costs costs

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 Total cost of ownership (TCO)
- A definition of TCO is: “a structured method for identifying and understanding the total
costs associated with the procurement and use of a commodity, product, or service
which may include internal and/or external production costs”.

- TCO answers the question, “What is this costing the organization?” because no matter what
is being purchased, there are additional costs above and beyond the price paid to a supplier.

TCO is about getting all those costs identified and quantified and includes several
relevant but often overlooked elements, such as:
- Purchasing or supply chain management
- Inbound/domestic transportation
- Inspection and testing
- Rework, storage, downtime, customer return, lost sales…
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 Total cost of ownership (TCO) components
Total cost components may be segmented into one of three areas:

- Pre-transaction cost - includes identifying a need, investigating sources, qualifying sources,

adding suppliers to the internal system, educating the suppliers on the firm’s needs and
operations, and working to understand supplier needs and operations. This may include
approvals by a supplier selection team, site visits, and sample inspections.

- Transaction - include the net price paid, placing and managing the order, transportation
costs, sample reviews, invoicing, inspections, total landed costs for international purchases,
rejected product handling, and follow-up and improvements for future orders.

- Post-transaction cost - include line fallout or failures, faulty finished goods, rejected
product, system or field failure, repair or replacement costs, loss of customer goodwill,
additional communication, and possibly training.
 Performance Metrics
1. COST

• Competitive price.
• Availability of cost breakdowns.
• Productivity improvement/cost reduction programs.
• Willingness to negotiate price.
• Inventory cost.
• Information cost.
• Transportation cost.

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 Performance Metrics
2. QUALITY

• Percent defect-free.
• Use of statistical process control.
• Use of continuous process improvement.
• Use of corrective action program
• Use of documented quality programs such as ISO
9000, ISO 14000.
• Warranty characteristics.

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 Performance Metrics
3. DELIVERY

• Delivery time.
• Delivery reliability.
• Percentage of defect-free deliveries.
• Actual delivery compared to the
promised delivery window (i.e., two
days early to zero days late).
• Extent of cooperation leading to
improved delivery.

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 Performance Metrics
4. RESPONSIVENESS AND FLEXIBILITY
• Responsiveness to customers.
• Ability to work effectively with teams.
• Responsiveness to changing situations.
• Participation/success of supplier
certification program.
• Short-cycle changes in demand/flexible
capacity.
• Changes in delivery schedules.
• Participation in new product development.
• (…)
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 Performance Metrics
5. ENVIRONMENT

• Environmentally responsible
• Use of environmental management system
such as ISO 14000
• Extent of cooperation leading to improved
environmental issues

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 Performance Metrics
6. TECHNOLOGY

• Proactive improvement using proven

manufacturing/service technology
• Superior product/service design
• Extent of cooperation leading to improved
technology

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 Performance Metrics
7. BUSINESS METRICS
• Reputation of supplier/leadership in the field
• Long-term relationship
• Quality of information sharing
• Financial strength such as Dun & Bradstreet’s
credit rating
• Strong customer support group
• Total cash flow
• Rate of return on investment
• Extent of cooperation leading to improved
business processes and performance
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 Performance Metrics
8. TOTAL COST OF OWNERSHIP

• Purchased products shipped cost-

effectively
• Cost of special handling
• Additional supplier costs as the result of
the buyer’s scheduling and shipment
needs
• Cost of defects, rework, and problem
solving associated with purchases
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 Performance Metrics
Example of using these metrics to evaluate a company

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 Supplier Development
Seven-step approach to supplier development

Identify critical goods and services

Identify critical suppliers not meeting performance requirements

Form a cross-functional supplier development team

Meet with the top management of suppliers

Rank supplier development projects

Define the details of the buyer–supplier agreement

Monitor project status and modify strategies

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 Supplier Development
Step 1: Identify critical goods and services
Assess the relative importance of the goods and services from a strategic perspective.
Goods and services that are purchased in high volume, do not have good substitutes,
or have limited sources of supply are considered strategic supplies.

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 Supplier Development
Step 2: Identify critical suppliers not meeting performance requirements
Suppliers of strategic supplies not currently meeting minimum performance in
quality, on-time delivery, cost, technology, or cycle time are targets for supplier
development initiatives

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 Supplier Development
Step 3: Form a cross-functional supplier development team
Next, the buyer must develop an internal cross-functional team and arrive at a clear
agreement for the supplier development initiatives.

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 Supplier Development
Step 4: Meet with the top management of suppliers
The buyer’s cross-functional team meets with the suppliers’ top management to
discuss details of strategic alignment, supplier performance expectations and
measurement, a time frame for improvement, and ongoing professionalism.

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 Supplier Development
Step 5: Rank supplier development projects
After the supplier development opportunities have been identified, they are evaluated
in terms of possibility, resource and time requirements, supply base alternatives, and
expected return on investment. The most promising development projects are
selected.

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 Supplier Development
Step 6: Define the details of the buyer–supplier agreement
After consensus has been reached on the development project rankings, the buyer and
supplier representatives jointly decide on the performance metrics to be monitored
such as percent improvement in quality, delivery, and cycle time

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 Supplier Development
Step 7: Monitor project status and modify strategies.
To ensure continued success, management must actively monitor progress, promote
exchange of information, and revise the development strategies as conditions warrant

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 Supplier Development
Example: Intel’s Supplier Continuous Quality Improvement (SCQI) program

Intel’s achievement from the program

Objective: improving • Establishes aligned goals, indicators, and metrics.
supplier quality and
• Enables benchmarking of supplier performance.
minimizing time needed to
inspect incoming products. • Identifies potential quality issues before they impact Intel.
• Drives supplier agility and ability to provide leading-edge
products and services.

Criteria focus area: • Matures critical Intel–supplier relationships

quality, cost, availability, • Encourages collaborative agreements, team problem
technology, service, labor & resolution, and two-way continuous learning.
ethics systems,
• Encourages continuous improvement throughout the year.
sustainability.
• Provides data to support supplier recognition.
 Supplier Relationship Management Types
TRANSACTIONAL SRM ANALYTIC SRM

• Enables: tracking supplier interactions (order • Enables: analyze the complete supplier base.
planning, order payment, returns,…).
→ Focus on short-term report. → Focus on long-term procurement strategies.
→ Answer: Answer:
o What did we buy yesterday? o Which suppliers should the company develop
o What supplier did we use? long-term relationships with?
o What was the cost of the purchase? o Which suppliers would make the company
more profitable?
 Supply risk control
KRALJIC matrix:

High
Leverage Strategic
items items

Revenue impact
Exploitation Diversify,
of purchasing balance, or
power exploit

Non-critical Bottleneck
items items
Efficient Volume
Processing Assurance
Low

Low Supply High

Risk CH8-24
KRALJIC matrix
- The Kraljic Portfolio Purchasing Model was created by Peter Kraljic and it first appeared in
the Harvard Business Review in 1983. Despite its age, it's a popular and useful model used
in companies worldwide.

- Its purpose is to help purchasers maximize supply security and reduce costs, by making the
most of their purchasing power. In doing so, procurement moves from being a transactional
activity to a strategic activity.

Each of these boxes represents a different buyer-supplier relationship type and suggests a
set of distinct sourcing strategies:
a) Non-critical items
b) Leverage items
c) Bottleneck items
d) Strategic items
 KRALJIC matrix
a) Non-critical items
- These items are low risk and have a low impact on
organizational profitability. The most used example
in this segment is office stationery. Although important
for employees to perform their duties, pens and paper
do not have a significant impact on the business, nor
does their absence represent a serious threat.

- For buyers, stationery is an irritation. It clogs up time

with outlying concerns. As such, the sourcing strategies
deployed here focus on efficiency and reducing
managerial burden. Techniques such as e-auctioning
and catalogs are excellent means to redirect
responsibilities either directly to suppliers or to internal
customers who are requesting the goods.
 KRALJIC matrix
b) Leverage items
- Where items have a high profitability, but a low
risk factor, buyers possess the balance of power in
the relationship and leverage this strength to obtain
greater returns. Traditionally, procurement
professionals have exploited this status to lower
prices, but increasingly more advanced companies
are looking to unlock the innovative potential of
their suppliers.

- The market dynamics of this relationship rest upon

an abundance of highly commodified parts.
Suppliers can be easily substituted as their offerings
are much the same. The only limitation for buyers is
perhaps overplaying their hand and forcing a low-
profit margin vendor into insolvency.
 KRALJIC matrix
c) Bottleneck items

- The opposite of leverage items: risk is high, but

profitability is low. Here, the strength is in the
hands of the supplier. The market consists of a few
suppliers that can behave as oligopolistic allies to
force prices upward.

- Procurement leaders found that these suppliers

absorb more of buyers’ time compared to any
other segment. The supplier relationship is
demanding, even though they have a limited
impact on company profitability. The market
structure forces buyers to accept an unfavorable
deal.
 KRALJIC matrix
d) Strategic items
- Lastly, high-supplier risk and high-profit impact
items cover strategic suppliers. These are critical
to the business. These items only represent a
handful of suppliers, but ensuring an effective and
predictable supplier relationship is key to the future
of the buying company.

- Managing such suppliers requires a diverse array of

skills and can subsume a significant proportion of
executive time in sponsoring and directing the
relationship. Strategic partners should look to
innovative both product and process innovation and
in return they can expect long-term commitment
from the buyer as well as proactive development.