Few companies can honestly claim to manage their suppliers efficiently. Without even noticing, many are overcharged for orders or take delivery of shipments late. They pay whole teams of employees to perform the administrative tasks generated by purchasing activities: checking deliveries against orders, for example, and processing paper-based invoices.
In the midst of this chaos, they make new purchasing decisions based only on imprecise notions of which suppliers offer the lowest prices, the fastest delivery times or the best quality materials.
A few, however, have broken this mould – and companies that have cracked the supplier relationship management (SRM) challenge process transactions more efficiently.
Supplier Relationship Management defined
SRM Definition
Supplier relationship management (SRM) aligns a company and its supplier by enabling them to analyse, control and optimise the information, material and financial flows between them.
Objective
The objective of SRM is to reduce the total acquisition costs of materials and services while improving final product quality, value to the customer and profitability to an enterprise.
Why SRM is important
When executed correctly, SRM can better control process inefficiencies and time barriers among users, buyers and suppliers by increasing interaction and aligning the interests of all relevant parties within a cross-functional, collaborative communication environment. In addition, it creates a platform for planning, analysing and engaging suppliers to effect other improvements (such as product design or time-to-market)
Source: The Meta Group
Take one shining example. Cutting the cost of buying supplies has been a major goal for Japanese automotive giant Nissan in recent years. In response to mounting debt throughout much of the 1990s, the company launched a ‘Nissan Revival Plan’, which ran between 2000 and 2002. As part of the initiative, the company implemented SAP’s SRM software and achieved a 20% reduction in overall purchasing costs.
Such has been the project’s success that Tsukasa Ihara, a manager in the company’s global information systems division, says the company now plans to roll-out the SRM system to its entire worldwide operations: “We will eventually reach a common business process among the Nissan Motor Company worldwide and make [supplier] code structures and items universal. Furthermore, we expect to integrate purchasing records and cost reduction records into a single worldwide database.”
Given this kind of enthusiasm from early adopters, it is hardly surprising that a wide range of software suppliers is adopting the SRM acronym. Among them are the enterprise resource planning (ERP) companies, PeopleSoft, SAP and Oracle, which all offer their own SRM suites. The term is also used by supply chain management specialist Manugistics, e-procurement specialist Ariba and business intelligence company SAS Institute, among others.
All have something of a claim to the term, despite their different backgrounds. The processes that make up SRM depend on a hybrid of technologies and require a significant implementation, migration and integration effort at most organisations.
But there are two key goals that must run side-by-side in an effective SRM project, say analysts. First, there is the automation of the processes by which a company buys supplies. This can range in sophistication from automated generation of requests for proposals (RFPs) to more holistic order management systems. Second, there is the analysis that enables buyers to assess historical supplier data and base subsequent purchasing decisions on the results.
Taking supplier relationship management online
Making those activities happen in ‘real-time’ is the ultimate challenge. To achieve that, organisations are automating procurement tasks and taking them online in a bid to collaborate more closely with suppliers and to reduce the amount of internal effort involved in distributing requests for information (RFI) and receiving bids for contracts.
PeopleSoft, for example, includes a Strategic Sourcing application in its SRM suite that enables suppliers to log in to a customer’s systems over the web in order to view RFI details. Suppliers can then prepare and submit their responses online. Because the application enforces established purchasing policies and creates standard templates for RFIs and contracts, the Strategic Sourcing application can ensure that buyers receive the same scope of information for all competing suppliers – and are able to judge them more quickly on a fairer, more consistent basis.
The need to automate procurement is driving new investments in software by the ERP companies’ long-term customers. The US-based chain of convenience stores, 7-Eleven, for example, has been using Oracle’s financial applications for five years. In January 2003, it announced a deal to upgrade its applications to the latest Oracle 11i suite and, at the same time, implement Oracle’s iProcurement and Sourcing applications. 7-Eleven’s stated goal is to dramatically reduce the amount of manual labour and data management its employees are required to perform when requisitioning supplies.
“Oracle iProcurement provides 7-Eleven with a self-service requisitioning capability, to help its employees process requisitions, purchase orders, quotations, and receipts quickly and efficiently, lowering associated transaction and containment costs,” claims Thomas Madigan, vice president of retail solutions at Oracle.
Similarly, Boston-based Beth Israel Deaconess Medical Center – a PeopleSoft human resources customer since 1991 – announced in June 2003 a decision to purchase PeopleSoft’s SRM suite in order to streamline procurement. “PeopleSoft SRM supports the entire procure-to-pay process with healthcare-specific functionality, which will enable us to reduce procurement and reporting costs without sacrificing service,” explains Larry Bastianelli, fiscal systems manager at the Beth Israel Deaconess Medical Center.
A fair assessment?
Despite the support for real-time SRM that such automation offers, a faster, less costly procurement process is only beneficial if accompanied by improved contract negotiations and better sourcing decisions.
These benefits, in turn, can only be achieved by companies that use both operational and historical supplier data to evaluate supplier performance. Armed with that information, they can quickly stamp out incidences of non-compliance or unacceptable quality or delivery times. And by making internal ratings accessible to suppliers, they can make them aware of areas for potential improvement – or reasons that led to the cancellation of a contract.
PeopleSoft launched its Supplier Rating System in December 2002. The system – again part of PeopleSoft’s SRM suite – enables organisations to track supplier performance using more than 80 criteria including product quality, invoice accuracy, delivery reliability and price.
The approach works well, says Pat Quirk, general manager of PeopleSoft’s supply chain management business. “All suppliers are not equal, and some perform certain functions better than others. To really increase profits, you need to determine the lowest-priced supplier that fits all of your operational and performance requirements for each unique strategy or contract,” she says.
His message is clear: No organisation wants to select on the basis of lowest price only to incur greater costs down the line when its supplier fails to meet expectations. But equally, neither does it want to pay a premium price when a less expensive supplier could do the job just as well. Measuring supplier performance can help organisations tackle that problem more logically.
SRM, however, will be a steep upward path for many organisations for reasons totally unrelated to technology, warn analysts at the Hackett Group. “Year after year, data from our ongoing benchmark study of procurement has substantiated that no company can successfully reduce costs simply by overlaying technology onto inefficient processes,” they say. Decentralised procurement, archaic processes, organisational politics and outdated infrastructures must all be tackled first. Only then can the paybacks from real-time SRM start to flow.
