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Supplier Relationship Management - An Analytic Approach to Optimizing Procurement

  • April 20 2000, 1:00am EDT

In too many companies today, procurement is a highly complex business activity that involves numerous employees in many divisions and departments of a company purchasing goods and services from a wide range of suppliers. Seldom are procurement tasks in one part of a company coordinated with tasks in another. For instance, many purchasers are left to their own devices in finding, evaluating, engaging and retaining suppliers. This reality usually stems from the fact that the company does not provide its purchasers with information about suppliers – drawn from across the enterprise, as well as from external sources – that can enlighten decisions about which suppliers to use for which business situations.

THE HURWITZ TAKE: For a company to make effective decisions about how to best use suppliers, it needs an information system that quantifies and manages its relationships with its suppliers. Supplier relationships are defined by several attributes that depend on internal information, external information and standards for classifying suppliers.

  • Internal information. Some supplier attributes can be quantified using information available within a company such as how much money a company spends annually with a given supplier, the quantities of parts purchased, how often these were delivered on time and how many of these were returned due to defect.
  • External information. Other attributes of a relationship with a supplier rely on information acquired from outside a company. For instance, learning a supplier's annual revenues enables you to calculate the percentage of its business your expenditures with them represent. External sources can also tell you a supplier's current levels of debt and growth, which help you determine how much risk you take by doing business with that supplier.
  • Standards for classifying suppliers. You can place your relationships in context by comparing similar suppliers to see which is best for price, dependability, or quality. To facilitate such comparisons, de jure and de facto standards exist today (such as Dun & Bradstreet's D-U-N-S Numbers and the United Nations' Supplier Product and Services Classification codes) for categorizing each supplier according to the type of product or service provided and the industries served. Without these standards, you may be comparing apples to oranges.

Once procurement information is collected and organized in an information system and accessible through an analytic application infused with procurement domain expertise, procurement professionals can apply the information – within the context of supplier relationships – to develop procurement strategies. These strategies could involve consolidating suppliers (if there are too many in a particular area), diversifying suppliers (if there are too few for mission-critical goods and services) and promoting suppliers that fit your corporate societal commitments (e.g., giving preference to minority-owned or environmentally conscious suppliers). Even more dramatically, however, much of the information can be applied in negotiations. For instance, if your annual "spend" with a key supplier is a large percentage of that supplier's annual revenue, you can use this fact as leverage for a lower price or better delivery conditions.
In summary, supplier relationship management (SRM) involves consolidating and classifying procurement data to provide an understanding of supplier relationships. The benefits of SRM stem from analyzing supplier relationships to develop procurement strategies that reduce costs, make procurement predictable and repeatable, enlighten supplier partnership decisions and provide leverage over suppliers in negotiations. The greatest benefit of SRM, however, is that procurement strategies developed through it directly impact a company's bottom line.

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