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Supplier relationship management:
Going beyond the traditional ERP
Al Bukey
Over the years, many organizations have discovered the benefits of enterprise resource planning (ERP) systems for back office support. But even a best-in-class ERP system can’t provide the protection required in this fast-paced business environment.
You may have one of your suppliers suddenly become unable to deliver as originally requested—and you may not know it yet! You have requests for quotes that are late or lost on a supplier’s crowded desk, but you think everything is in process.
You have an action report recommending a couple of hundred purchase order changes, cancellations, delays or fast-tracks.
If any of these problems sound familiar, it might be time to consider a carefully selected supplier relationship management (SRM) solution. These software packages—which are intended to augment ERP systems—allow companies to plan and execute their supply schedules within minutes and receive confirmations almost immediately.
Much of their effectiveness depends on inviting suppliers to share and integrate their information with yours. The tools may effectively reduce the cost of purchasing—which is typically $30 to $170 per order—to a few cents. They also improve compliance with shop floor schedules, resulting in better customer service, and they give purchasers more ability to monitor their vendors' performance.
One auto parts manufacturer I worked with automated its entire purchasing cycle using an SRM solution. As a result, the company managed to virtually eliminate purchasing cancels, delays and expedites. It also saved an average of $50 per purchase order. On-time delivery was also improved, by 65 per cent.
In another case, an SRM system helped reduce panic buying at a consumer products manufacturer. The company also realized savings by optimizing transportation costs; in this case, by allowing trailers to be fully loaded more efficiently. Return on investment was 500 per cent within six months.
I also recall an automotive equipment maker implementing an SRM solution in 2002. Since then, 90 per cent of its key suppliers are on the SRM program. The company no longer calls in, expedites or cancels orders via fax or e-mail. Its suppliers' schedules are simply updated daily via EDI.
Setting it up
So how do organizations approach SRM? The following steps provide a general guide:
1) Decide what level and the type of relationship—such as buy and sell, contractual, strategic alliance—you want to establish with each key supplier. Some might be too large and dominating to support such a relationship, or too insignificant to merit it. Positioning each supplier correctly is the key.
2) Prepare your supply chain. At this stage—which might take several years—purchasers establish a uniform business process to apply to suppliers. Larger vendors might have their own preferred business model for participation in SRM projects, while smaller companies might be hesitant to commit to the terms and conditions of your proposed model. Bringing suppliers on board one by one might make the task easier.
3) Choose the enabling technologies. There are literally thousands of SRM solution providers on the market. The company—sometimes with input from suppliers—must decide which tools, platforms and software they should use. Some SRM packages are web-based or "open," meaning they can connect with just about any system.
Most first tier ERP systems have the SRM solution already integrated—typically referred to as supplier web portals. Smaller ERP vendors offer SRM as a separate option.
4) Determine the level of sharing with each supplier. Some companies, such as auto makers, require automatic visibility into suppliers' systems to determine their capability to meet the demands. For some suppliers, this may cause conflicts with their internal operations, business processes, confidentiality or business culture.
5) Evaluate contractual obligations. At this stage, purchasers must take account of performance rules, penalties, and awards applied to each supplier.
6) Request certification to the SRM program. This strategy gives the project more formality and is useful for bringing suppliers on board quickly.
7) Implementation and continuous improvement. As SRM is deployed, supplier performance and the business process must be constantly monitored, allowing for necessary improvements and adjustments.
Though setting up SRM programs takes time, return on investment can be significant. The strategy has the potential to vastly improve supplier metrics and inventory control.
Al Bukey, president of ABCO Engineering and Operations Management Ltd., has more than 25 years of experience in supply chain, management. He is the past president of the APICS Toronto chapter.
Practitioners and consultants are invited to submit articles to In the Field. Contact the editor at lisa.wichmann@pb2b.rogers.com
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