When you think of important business relationships, your customers are probably the first group that comes to mind. Maintaining good relationships with customers is paramount to any company. However, there is another group that enables you to satisfy your customers, namely, your suppliers
Maintaining a good relationship with your suppliers is also vital; it enables you to keep your customers satisfied because you obtain the goods and services necessary to sell your products and services. For your relationship with your suppliers to flourish, you need to implement supplier relationship management.
This article explores what supplier relationship management is, why it is critical, how it is greater than just supply chain management, and how EDI tools can help you improve your supplier relationship management.
What Is Supplier Relationship Management?
The term “supplier relationship management” was introduced in 1983 by Peter Kraljic, a consultant for McKinsey. The consultant urged buyers to adopt a comprehensive strategy to manage relationships with their suppliers because their fates are intertwined, and the supplier and the buyer need to handle those relationships in a way that minimizes risk.
There are three steps to supplier relationship management: supplier segmentation, supplier strategy development, and supplier strategy execution. The first step involves mapping your suppliers with an eye toward the amount of risk to which you are exposed. Supplier strategy development requires creating a plan to meet business needs, while the third step is carrying out that plan.
Why Does Supplier Relationship Management Matter?
Take a moment and think about the most crucial supplies you need to produce your product or services. What would happen if your supplier was not able to fill your order? Would you be able to fill your customers’ orders? How would such a delay affect your business?
Conversely, what if you were a supplier? If you rely on one or a few major customers, you could run into trouble if those buyers have financial problems or decide not to do business with you.
Apple and GT offer a sobering example of what happens when supplier relationships are not properly managed. In March 2013, GT, Apple’s supplier of a critical component of its screens, announced that it had developed an innovation that would allow Apple to produce more screens, lowering the device manufacturer’s costs. Apple’s leadership offered to lend GT hundreds of millions of dollars in order to build a new factory.
This was excellent news for GT. Its revenue in 2013 was down 66 percent from two years earlier. GT’s stock price soared when Apple declared it would invest in a new factory.
Unfortunately, the good news ended there. Within days of starting to manufacture the screen component, known as the sapphire, it became obvious that there were problems. The first sapphire to come out of the oven was badly cracked. When the next batch was not any better, GT’s management realized there were problems with the production process.
Apple did not hold onsite meetings or work with GT to get to the root of the problem. Instead, the device manufacturer took a hands-off approach. GT was terrified Apple, its biggest customer, would abandon it. The supplier tried to resolve the issue on its own, with no success.
GT failed to meet production deadlines and, in response, Apple held back a payment of over $100 million. In October 2014, GT declared bankruptcy and publicly blamed Apple for its downfall. GT is not the only supplier to be burned by Apple. The screen maker Wintek gambled on Apple’s demand for glass touch screens, only to lose millions of dollars and shutter factories when Apple decided to move to a different type of screen.
These examples well illustrate the need for strong supplier relationship management.
What Is the Relation between Supply Chain Management and Supplier Relationship Management?
You might be asking, “Well, if I’m managing my supply chain, aren’t I already managing the relationships with my suppliers by default?”
Supplier relationship management is a significant component of supply chain management that, unfortunately, many companies overlook to their own peril.
“Supply chain management” refers to the oversight of materials, information, and finances as they travel from supplier to manufacturer to wholesaler to retailer to consumer. As you can see, supply chain management encompasses quite a few moving parts.
However, it is important to note that nowhere in that definition is there anything about maintaining a strong relationship with your supplier that ensures that you get the materials you need while minimizing risk to your company.
Many business leaders do not undertake supplier relationship initiatives because they do not understand the value it can bring to their firms. In fact, supplier relationship management increases the value of supply chain management.
Here is how it does that. Supplier relationship management reduces the costs of your materials as well as the risk you assume by doing business with a specific supplier; it increases the transparency of the supply chain; it improves supplier performance; and it can even lead to the discovery of new market opportunities.
EDI Tools: Helping You Implement Supplier Relationship Management
There is a technology on the market today that can help customers manage their relationships with suppliers so that they minimize their risk while remaining profitable and agile. It is possible you might already be using this system in the form of EDI tools.
EDI tools enable customers to communicate quickly and easily with their suppliers, which reduces cost and risk while increasing the transparency of the supply chain. Suppose that you have contracted a supplier to create a specific part for you. You could send those specifications via email and hope that someone looks at the email within a couple of hours and that the supplier can work with the file format. Or, you could transmit the specs via EDI tools, so they would arrive immediately and there would be no issue with file formats because the EDI tools would translate the document so the supplier could see it.
Customers can also reduce their risk through EDI tools. As mentioned earlier, EDI tools give them greater visibility into the supply chain. They know when an order has shipped and when it is expected. Suppliers can also use EDI tools to notify their customers when an order is delayed or when they will not be able to meet the customer’s needs. Then, customers can find another supplier so the flow of business will not be interrupted.
Moreover, EDI tools improve supplier performance because they make processes more efficient. EDI tools automate the sharing of information, so employees do not have to spend time entering order information or filling out invoices. They can devote their time to other, more important tasks, such as producing the materials that keep their customers happy.
Because EDI tools provide an advantage to both the supplier and the customer, the supplier can pass along those cost savings to clients. As a result, customers pay less for their materials, and suppliers can move more inventory faster, so they have less in their warehouses.
Here is another benefit of EDI tools. They allow for faster deliveries. When suppliers spend less time manually processing orders, they can get shipments out the door faster. Some industry experts estimate that there is a 30 percent improvement in delivery speed when suppliers use EDI tools.
Suppliers who use EDI tools are at a greater advantage because they have more market opportunities. Major retailers such as Walmart and Target prefer to do business with trading partners that utilize EDI tools; they work with so many other companies that they need a single method to manage orders and information. Amazon and eBay are also partial to trading partners that utilize EDI tools for the same reason.
Want more than just anecdotal evidence? In the early 1990s, Dixons Carphone handled 90,000 invoices a year for merchandise. By 2004, the company was handling 700,000 invoices, without having increased the headcount in its accounts payable division. Business leaders attribute that success to the implementation of EDI tools.
There are new market opportunities for suppliers’ customers when they use EDI tools, too. They can bring fresh products to their clients because they are communicating faster with their suppliers. In turn, their suppliers can ship materials, and the customer can bring those products to market faster.
Supplier relationship management is crucial for suppliers and customers. It benefits both parties by making trade consistent and efficient. One of the best ways to manage the relationship between suppliers and customers is to implement EDI tools; this technology simplifies processes while reducing risk. To learn more about how EDI tools can help you, contact us.