SRM is probably one of the most frequently used terms in modern Procurement. It has been used for the past 30 years with the aim of creating closer, more collaborative relationships with key suppliers. By implementing an SRM strategy, companies believe they will develop strong partnerships that realise new value and reduce the risk of failure.
But are they right?
In order to answer that question we must first look at what the official meaning of SRM is from the Chartered Institute of Procurement & Supply:
“SRM enables procurement to operate at a strategic level and by adopting a more collaborative approach and developing a closer relationship; this generates more value from the relationship in terms of innovation and efficiency.”
Even though it is very clear that collaboration should be at the heart of the relationship, the reality is the opposite.
SRM has become a vehicle for a one sided-relationship based on cost cutting and delayed payment terms. It involves the supplier being managed BY the buyer, not an equal collaborative approach as suggested by the Chartered Institute of Procurement & Supply.
But this is entirely understandable if you look at a brief history of procurement strategy.
Procurement was born in the 1970s with a strategic focus on compliance and risk management because this is what the C-Suite was asking for. Cost gradually became a focus for companies in the decades that followed but it was the financial crisis of 2007 which made cost the primary KPI of every enterprise procurement team. Again, because that’s what was being asked of procurement.
Despite SRM being introduced in 1983 by McKinsey consultant Peter Krajlic in an HBR article titled “Purchasing Must Become Supply Management”, it was never properly embraced due to the cost cutting mindset mentioned above.
But it is obvious to everyone that cost cutting is reaching its limits:
- 50,000 UK SMEs fail each year due to supplier consolidation and bad terms
- 20% of expected savings lost from out-of-contract purchases (33% of total)
- New powers to punish late payments are being introduced
So what if we replace SRM with Supplier Collaboration?
This leads to a transformed relationship where BOTH SIDES see value through greater innovation, competitive advantage and growth. Both sides of the relationship are incentivised to support one another in shared goals and objectives as well as to deliver more value.
But does Supplier Collaboration really live up to the hype? In short, yes.
McKinsey stated that leaders in supplier collaboration have achieved 2x growth over their competitors. They also report a 5 year increase of 196% for companies that drive regular innovation from their supplier ecosystems. The 2019 CPO survey from Deloitte shows more evidence that the potential of supplier collaboration is becoming well recognised. CPOs rated supplier collaboration as one of their top three priorities for 2020. Business partnering and relationship management is also ranked the top soft skill training area for CPOs over the same time period. For suppliers this recognition is mutual. PwC found that 90% of companies have a supply base willing to collaborate, a clear demonstration that suppliers also recognise the value-add potential of supplier collaboration.
The intentions of SRM were good, but it has been too often associated with brutal cost savings initiatives and inconsiderate one-way relationships. Rather than improve their SRM strategy, companies should seek to implement a strategy focussed on supplier collaboration. This is far more than just managing suppliers, it is a way of working, innovating and doing business!