We report on how supplier relationship management can save firms
millions of pounds.
The use of supplier relationship management (SRM) technologies is
one of the last remaining differentiators between rival large
companies and is still a relatively untapped weapon in the battle
to gain competitive edge.
At its most basic, SRM enables users to create a global view of
what they buy from individual suppliers in their supply chains to
more easily spot bad purchasing habits and pursue savings. However,
it can also offer a lot more benefits.
Users are increasingly turning to SRM products to rank and rate
their supplier bases, match business objectives with individual
suppliers' performances, identify their best suppliers, understand
and reduce procurement spend, predict optimal procurement
strategies across traditional and e-channels and build strategic
and profitable supplier relationships.
These moves sound the death knell for maverick corporate spending
and suppliers which provide poor value for money.
These activities can lead to significant savings and return on
investment. For example, consolidating all purchases with a select
number of suppliers provides power in future negotiations.
Depending on the size of the firm, savings that stem from knowing
more about suppliers before signing or renewing a contract are
usually in the range of 5% to 15% of an organisation's total
purchases. This can easily translate into millions of pounds.
Successful SRM strategies deliver savings in both costs of goods
and services, transactional costs and the ability to be more
responsive to changes in customers' demands and supply markets.
They enable any merger or acquisition activity to be undertaken
with more confidence as potential savings can be more accurately
evaluated.
Those within the supply chain also benefit. They gain a greater
understanding of the needs of the companies that they supply to and
improve co-operation between supplier and buyer.
The term SRM was coined by US analyst Gartner Group last year when
it became clear that large firms lack even the basics in managing
their supply chains effectively. One of the first software
suppliers to launch an SRM solution to address this problem was SAS
Institute and it recently released an update of its SAS Solution
for Supplier Relationship Management, version 2.0, offering
enhanced analytic, score-carding and information-delivery
capabilities.
Global companies such as Schneider Electric, which has hundreds of
suppliers and spends millions of dollars on procurement each year,
are using SAS's SRM technologies to consolidate and analyse
purchasing data.
Many other IT suppliers have now developed SRM solutions. Toronto
Hydro, the second largest municipal distribution utility in the US,
has implemented i2's Tradematrix Strategic Sourcing and Tradematrix
MRO Manager SRM solutions in its electric system division with help
from management and IT consulting firm, Cap Gemini Ernst &
Young.
"After the merger of six municipal utility companies into one, we
were looking for solutions that would control our costs and
maximise the efficiency of the power distribution systems," says
Jeff Clark, the utility's vice-president of supplies and services.
"i2 was able to unify the competing engineering standards and
resolve material and supplier inequities, resulting in cost
reduction."
Other users are just discovering the technology. "One company
recently applied SRM technology and discovered it had 180 different
styles of AT&T recorded in its computer systems," says Jorg
Salomo, SRM program manager at SAS International.
"You can only negotiate volume discounts if you know what your
volume purchases are. You can only do this if you know what you buy
and from whom, and SRM technologies enable you to discover
that.
In the present economic climate, cost is the major concern for
companies investing in supply chain development. Oracle has
addressed this with its Supplychain.Oracle.com collaborative supply
chain solution, offered online. Oracle says it can reduce
inventory, improve forecast accuracy, match demand and supply more
closely and improve delivery performance.
Denis Kenny, European head of strategic sourcing and e-procurement
at Cap Gemini Ernst & Young, says, "SRM is about obtaining
better value from your suppliers than competitors get from theirs
and turning supplier performance into real competitive
advantage.
As organisations focus on their core competencies and outsource
functions that used to be performed in-house, the ability to
extract optimal value from suppliers becomes ever more critical.
Companies that are uncompetitive in terms of cost, quality and
service will lose out.
An SRM strategy in practice
- If you have not yet adopted a strategic approach to purchasing
then put together a dedicated management team to move purchasing
from tactical - managing top tier suppliers only - to strategic -
looking for improvement opportunities across the entire supply
base. This is what SRM is
- Develop an information strategy for your purchasing function.
Make sure there is detailed spend information across your entire
supply base
- Group your suppliers based on market and supply risk for the
goods and services that they provide. Different types of suppliers
require different types of relationships
- Review and improve the purchasing processes for each group of
suppliers
- Implement operation systems such as e-procurement, to support
the procurement and purchasing processes. Information is vital here
to assist in the identification of which suppliers, commodities and
buyers will need to use these systems. Implementing an SRM solution
for information provision prior to any operational system will help
you understand what data needs to be collected by the systems
- Use your SRM information systems to monitor and measure the
effectiveness of new purchasing strategies, and to enable
continuous improvement.
What is supplier relationship management?
SRM is
similar to customer relationship management in that it involves the
review and improvement of three different aspects of
purchasing:
- Purchasing processes - strategic sourcing, contract negotiation
management and measurement and the "req to cheque" (order to
payment) process. IT can assist in the implementation and
management of these business processes, but they must be reviewed
and improved before implementing operational systems to support
them
- Operational systems - e-commerce (e-procurement, B2B
marketplaces and e-negotiation tools) are a key component of SRM.
They enable organisations to tie their purchasing processes more
tightly into their supply base. E-commerce can enable more
efficient transactional processes, better compliance, and improved
collaboration with suppliers
- Information systems are key to the effective understanding,
improvement and measurement of the other two aspects of SRM.
Without comprehensive and detailed information about an
organisations current spend it is difficult to identify and
implement improved purchasing strategies.
Source: Jennifer Major, SAS UK's programme manager for SRM