Successful supplier relationship management

Many leading companies have realised that it is worthwhile investing to make sure these relationships are managed effectively and efficiently.

In recent years, companies have invested in supply chain management (SCM) software to automate procurement processes, improve delivery times and reduce the cost of doing business. Now, market trends, such as increased global competition, shorter product lifecycles and a move to outsource business processes, require organisations to improve collaboration with their supplier base and to examine methods of further reducing the costs associated with supplier relationships.

What is SRM?
Supplier relationship management, according to Oracle, refers to any supplier-facing business practices which are enabled by collaborative software and which allow companies to work with their supplier base for mutual success. Primarily, SRM tools have been developed to reduce the total cost of ownership (TCO) for procured goods, while creating competitive advantage for an organisation through deeper relationships with its suppliers.

A straightforward example of where supplier relationships are critical to the buying organisation is in the product development process. If materials, parts or services cannot be supplied to meet the design requirements, production deadlines or at an acceptable cost, then the product development team must go back to the drawing board.

Another trend that highlights the need for effective supplier relationship management is the move by enterprises to outsource key functions, from design to product assembly to after-sales service, in order to improve competitiveness and financial performance. Gartner describes this use of contract manufacturing and other unconventional supplier relationships as 'virtualisation'.

The same Gartner report estimates that an enterprise's expenditure on goods and services can often exceed 45 percent of revenue, stating that as spend with suppliers increases, so does the ability of supplier's performance to affect a company's bottom line. These important supplier partnerships must therefore be closely managed and co-ordinated, often across time zones, languages and currencies.

Four steps to SRM success
Oracle believes that there are four critical factors to consider for a successful implementation of an SRM solution.

The first step is integration. An enterprise cannot offer SRM to its suppliers until it has automated and integrated its own internal processes. As SRM draws on information generated throughout the enterprise, including, but not limited to, product life cycle management, supply chain planning, enterprise resource planning and customer relationship management, this information should flow from a single data source.

Pella Corporation, a US manufacturer of windows and doors, wanted to lower its overall costs by adopting a central web-based approach to procurement and improving the management of vendor terms and agreements. By integrating Oracle Financials and Oracle Procurement, Pella streamlined its procure-to-pay processes and achieved significant time and cost savings, while gaining valuable insight and business intelligence.

Oracle Procurement enabled Pella's corporate purchasing division to cut transaction times for purchase orders from thirty minutes to five, a reduction of eighty-six percent. Pella's manufacturing division has cut clerical costs and time per purchase order by fifty percent. Tracey Buck, co-ordinator of facilities management for Pella said: 'Oracle Procurement has helped reduce the number of calls from Pella's corporate purchasing department and from vendors by as much as ninety-five percent.'

Secondly, suppliers need to be connected to the enterprise. They should be able to inquire, view and transact directly with the buyer's system. The method of connecting suppliers to the business must be affordable, scalable and relatively straightforward to implement and use. The range of interface options available to suppliers - XML, EDI, web services, portals or email - means that their investment in linking to the buyer's system can be kept to a minimum.

Thirdly, once a single view of the supply chain has been enabled, analytical tools can be added to help identify the areas of greatest opportunity for both the buying organisation and the supplier base, and to monitor performance. Business intelligence tools assist decision-making and can help increase profitability for both parties.

For example, if over fifty percent of a month's projected inventory of a particular item is sold within the first week of the month, the supplier is automatically notified to deliver additional stock, ensuring that the buying organisation has sufficient supply to meet customer demands, while simultaneously boosting its own revenue.

Business intelligence tools can also be used to track supplier performance against business objectives, other than just price. Monitoring performance is an important step in improving supplier relationships, however according to a study by Aberdeen Group, only about half of enterprises have formal procedures in place to measure performance. Aberdeen analyst, Mark Vigoroso, says that without measurement procedures in place, companies have no way of knowing if money and effort spent on supply chain planning is doing any good.

Finally, a culture of collaboration must be fostered across the supply chain, and suppliers viewed as a source of competitive advantage, rather than cost. Gartner notes that properly managed supplier relationships 'can contribute to enterprise innovation and growth', while a poorly managed supply base 'will drive up costs and slow new product initiatives'.

An integrated, connected supply chain can help lower costs, as manufacturers and suppliers are able set joint production, inventory and fulfilment schedules against real-time market data.

A modular approach can be taken to an SRM project, starting, for example, with a critical supplier-facing function such as procurement or sourcing. UK retailer Littlewoods plc achieved 24 percent savings on its procurement of indirect goods in a successful pilot of Oracle Sourcing.

Oracle Sourcing, a complete and integrated global sourcing application, allows a company to optimise its supplier base, reduce sourcing costs, improve supplier relationships, and source for best value. Littlewoods has now moved its purchasing function online permanently with Oracle Sourcing and expects to massively save on its annual procurement spend.

'Littlewoods Retail spends around £320 million (US $462 million) a year on purchasing goods - a significant amount - that we believe can be reduced through the use of online auctions carried out through Oracle Sourcing,' said David Hallet, chief information officer for Littlewoods Retail Ltd.

In a highly competitive marketplace, companies are searching for further opportunities to reduce costs and improve operational efficiencies. According to Gartner , supplier relationship management (SRM) represents an evolutionary extension of supply chain management, driven by the need for enterprises to better understand their suppliers' long-term financial and operational contribution to the top and bottom lines. It is the next step in managing the supply chain more effectively.

Supplier relationship management then represents an opportunity to improve the accuracy and speed of buyer-supplier transactions, while improving collaborative working practices to the benefit of both parties, driving continuous improvement and lowering total cost of ownership.