3 Reasons Why a Sourcing Software is Needed for Effective Supplier Relationship ManagementSupplier Management | June 09, 2022 | By
The recent global issues shook the foundations of many businesses and have led or forced companies to make their business processes more dynamic to meet the ever-changing complex and competitive requirements. And this chaotic state of affairs had a crippling effect on the product manufacturing companies whose business heavily depends on their suppliers. The pandemic, port shutdowns, inflation, international relations, political turbulence, technological disruptions, war, climate change, labor relations, and raw material hoardings are still straining the global supply chains leaving them with many missing links. And as we have already learned, demand and supply patterns can be upset virtually overnight. All of these issues lead us to focus on one of the core components of an organization’s success – managing supplier relationships, which in light of current events, is extremely important.
The Need for Effectively Managing Supplier Relationships
Product manufacturing organizations should place managing supplier relationships at the core of their strategy. Earlier, supplier management was only focused only on cost reduction. The buyer-supplier relationship did not extend beyond that. But, today they are seen and valued as partners who continuously work together to bring innovations, improve operational efficiency, and align with the business objectives by developing a mutually trusting and meaningful relationship. Suppliers play a key role in the success of a product and thereby in the overall success of the organization.
We have already talked about how complex the direct material procurement lifecycle is in our earlier blog. Successful product manufacturing requires a strong supply base since almost 65-80% of the cost of a product is on account of the direct materials sourced from various suppliers. It requires extensive collaboration among internal and external stakeholders across the procurement lifecycle, driving cost efficiency and deriving maximum value with minimal supply risk. To ensure that maximum value is derived from the suppliers, given that a lot is invested in them, it is important to:
- Measure supplier performance.
- Identify areas of improvement such as mitigating the growing risks and complexity in the Supply Chain.
So, What is Supplier Relationship Management & What are it’s Benefits?
In 1983, Peter Kraljic, the then director at the Mckinsey and Company, wrote the article Purchasing Must Become Supply Management, published in the Harvard Business Review. In this article, Kraljic discussed and suggested segmenting the supply base and argued that the items or parts to be mapped against the two key dimensions: Risk and profitability– famously known as the Kraljic Matrix. Peter Kraljic’s basic idea was to urge the buyers to manage their suppliers intelligently. Even though he proposed this in 1983, it is still relevant today.
Managing Supplier Relationships or Supplier Relationship Management (SRM) is a systematic approach to selecting, onboarding, managing, and evaluating suppliers or vendors who supply the product manufacturing organization with the goods and materials. SRM is a part of the larger umbrella of Supply Chain Management and, as mentioned above, is a key component to the success of a business. The focus of SRM is to develop a two-way mutually beneficial relationship between the buyer and supplier organizations to deliver higher levels of innovation and competitive advantage, aligning with the strategic objectives of the product manufacturing organization. SRM is often confused with supplier risk management; however, Supplier Risk Management is only a small part of the SRM process.
Benefits of Effectively Managing Supplier Relationships
- Establish and leverage long-term supplier relationships that enable organizations to create synergies for continuous maximum performance with increased efficiency and to ensure that business performance does not drop even during testing times.
- Effectively managing the supplier data, is a first step toward building a resilient supply chain resulting in an,
- Efficient onboarding process
- Strategic partnership with only the relevant and diverse suppliers
- Effective category management with proper segmentation
- Reliable and effective supplier performance monitoring
- The ready availability of supplier performance information for analytics and reporting and Timely risk assessment & mitigation
- Achieve optimal product cost and control of quality, which would result in a strong supplier management practice that will enable organizations to identify, cost and quality savings/opportunities throughout the direct material procurement lifecycle. And this will directly impact the bottom line and business success.
How a Sourcing Software can be Effective in Managing Supplier Relationships
Managing supplier relationships is not just about managing a large supplier base. Apart from evaluating supplier performance and managing supplier relationships, SRM is also about onboarding and evaluating the suppliers. And all of these need proper communication between the stakeholders.
Communication and mutual understanding are the cornerstones of a good supplier relationship. Improper communication means incorrect material supplies, missed order targets, product schedules not adhered to, and below-par operational efficiency leading to low financial profitability. Having enterprise-wide visibility into supplier data and performance and alternate plans to deal with disruptions and mitigate supply risks contribute to the success of an organization. But, to have visibility, we need more structured data, and for structured data, we need the right sourcing software that covers the entire direct material procurement lifecycle.
When suppliers are managed manually, there is the absence of a central repository of data related to supplier information. All the information such as on-time delivery metrics, quality, cost performance, and other KPIs of suppliers is a daunting task to manage manually since the data needs to be gathered from multiple channels and systems. Also, when the suppliers are selected for any new project, it is important to refer to their past performance data, without which incompetent or unsuitable suppliers may be utilized. With sourcing software, all of the above details and much more can be captured and is readily available when needed.
Here are 3 reasons why a sourcing software can contribute to effective supplier relationship management:
Best Fit Supplier Selection:
One of the areas of supplier relationship management that require attention is supplier selection. Selecting and onboarding new suppliers is a critical task for product manufacturing organizations. When done manually, onboarding a supplier involves several supplier documents that are reviewed and approved by multiple departmental stakeholders, such as sourcing, engineering, supply chain, and financial teams. The process can protract to several days if not weeks.
With sourcing software such as Zumen, suppliers are registered and are onboarded using a common portal. Also, if there is an active ERP integration, existing supplier details are automatically fetched. If ERP is not available, existing supplier data can be imported in one go. So, the next time a buyer is looking for a supplier from the list of registered suppliers for a particular part, Zumen recommends the best-fit suppliers based on the past purchase history and also provides supplier ratings based on on-time delivery, cost, quality, and other KPIs.
Supply chain visibility is now a must-have rather than a good-to-have. During the pandemic, one of the biggest challenges for product manufacturing organizations was having complete visibility of the detailed status of the supply chain. In a 2019 Deloitte survey, 60% of the CPOs cited poor quality of master data, standardization, and governance as the biggest challenges to procurement and sourcing. A sourcing solution like Zumen allows buyers and other stakeholders to view the value of purchasing for all suppliers in real-time, as well as check supplier performance based on cost, quality, and on-time delivery. The metrics can also be filtered based on the part, individual suppliers, commodity, maturity, and geographic location. With all of these data available in real-time, organizations can make strategic decisions. And also, when the need arises to find alternate suppliers, Zumen’s supplier data management provides a ‘single source of truth’ for all supplier-related information and leads to improved supplier management.
Supplier Performance Evaluation:
Supplier performance review is a significant part of the supplier relationship management process. When the supplier performance scorecard is done manually, all the relevant information is collected from various documents and collated, and a report is prepared when asked for a review. This sort of review is done every month. Also, updating the scorecard frequently consumes a significant amount of time, time that buyers could utilize to perform core functional activities.
Using Zumen, organizations can prepare custom templates for evaluating the suppliers. And the supplier performance can be reviewed in real-time, anytime. The software pulls all the relevant data and automatically prepares the performance report based on the templates created. For example, a supplier’s performance can be viewed against cost, quality, and timely delivery of POs, parts, etc. in just a click. Thus, buyers can spend more time with suppliers for their improvement rather than spending time preparing reports and validating them.
In a nutshell, to ensure the long-term availability of critical materials and components, and also to maintain a long-term strategic relationship with the suppliers, it is important to have data at the forefront to achieve the desired outcomes. With a best-of-breed sourcing software like Zumen, organizations have access to accurate and complete supplier information. All the required data is available when and where it is needed, allowing buyers to focus on the strategic aspects of procurement and sourcing. To know more, visit www.zumen.com or feel free to reach out to [email protected] or [email protected] if you need any help.