What Is Supplier Relationship Management? Why & How to Do It

Supplier relationship management (SRM) is the set of practices and approaches that a business uses to create and maintain a friendly, productive relationship with its suppliers. The purpose of building a good relationship with suppliers is to increase the efficiency and reliability of your inventory flow, purchasing operations, and product sourcing—reducing overall costs and wasted time, money, and effort.

Why Practice Good Supplier Relationship Management?

Taking steps to improve your supplier relationship will result in tangible benefits for your business.

Smoother & More Predictable Operations

When you take the time to work with a supplier consistently and form a relationship with them throughout the supply chain management process, this results in more efficient collaboration. Your supplier will be familiar with how much product you need, how frequently you need it, and the logistics necessary to fulfill orders for you.

Over time, this means you won’t need to constantly coordinate with your supplier as much, and they will fulfill your orders more accurately and reliably.

Optimal Stock Levels & Increased Profits

Once you’ve built up a good relationship with your supplier and optimized purchase orders and fulfillment, you’ll always be carrying just the right amount of stock—not too much, not too little. Too much inventory means higher carrying costs and maintenance; too little (stockouts) means frustrated customers and missed sales.

With the optimal inventory level, your customers are never left wanting and you maximize profits. The increased efficiency will also benefit your overall supply chain management process.

Advanced Notice & Enhanced Collaboration

If you’re on great terms with your supplier, they’re more likely to keep you in the loop about upcoming issues such as interruptions in the supply chain, as well as good news or opportunities such as deals or reduced prices. On the other side, if you experience unexpected changes or need something on short notice, your supplier is much more likely to roll with the punches and support you because maintaining a positive relationship benefits both of you.

Related: Supply Chain Issues & Strategies

Reduced Costs & Better Deals

Finally, you’re more likely to become aware and take advantage of good deals if you are on excellent terms with your suppliers. If you and your supplier have worked together a long time and trust each other, they are more likely to let you know about things like reduced material or shipping costs, enabling you to save money.

They may do this in order to get on your good side and build up your own trust and investment in them, but you’ll get the same result either way—reduced costs, better return on investment (ROI), and a stronger relationship going forward.

Reactive vs Strategic Supplier Relationship Management

There are two types of supplier relationship management: reactive and strategic.

• Reactive supplier relationship management is a short-term or “emergency” approach concerned with fixing supplier-related problems that suddenly pop up—for example, if the wrong type or quantity of ordered product is delivered to your business. The goal of reactive management is to fix the problem as quickly as possible, without affecting the customer, and while maintaining as much goodwill as possible between the supplier and yourself.
• Strategic supplier relationship management is a long-term process and practice of working with your supplier, laying out plans and goals with them, crafting systems and operating procedures, and generally building trust through doing business well with each other. An example would be a retailer proactively doing market research with its suppliers, or even brainstorming new markets and developing new products together.

As the names imply, reactive management is about responding to emergencies and incidents to solve problems and do damage control, while strategic management is about putting systems and procedures into place so that things run smoothly and emergencies happen as infrequently as possible. This is the bread-and-butter approach to supplier relationship management, and where you should be spending most of your time.

Components of the Supplier Relationship Management Process

The overall supplier relationship management process can be divided into several components. These are not exactly sequential steps, as you’ll need to perform some of these actions multiple times or continuously, as you develop relationships with new suppliers or strengthen ties with existing ones.

Finding the Best Suppliers for Your Needs

Before you begin developing a good relationship with your suppliers, you’ll need to find the most suitable suppliers for your business in the first place. Determine exactly what products or raw materials you’ll need to be supplied with, and then research vendors to find the best fit. During the research stage, consider reviews and testimonials from other retailers, referrals, and the reputations and track records of any suppliers you take a look at. You want to choose suppliers who not only are able to provide exactly what you want but can also maintain the quality and cadence you need.

Learn more:

• Guide to Product Sourcing
• Types of Retail Suppliers for Product Sourcing

Creating a Supplier Directory

Once you’ve got potential suppliers in mind and have made initial contact with them, it’s helpful to put together a supplier directory. Gather the contact information for each supplier as well as any notes from your initial conversations with them.

Having this information all in one place (and updating it as necessary) will make it easier to keep track of all your suppliers and their capabilities, as well as give you a picture of what your extended supply chain looks like. A survey from Deloitte found that 90% of organizations have, at best, only a moderate degree of visibility into their extended supply network. The less you see, the more difficult it will be to spot potential problems down the line.

Writing a Supplier-Retailer Contract

As with any business relationship, you’ll want to draw up a contract with your supplier that specifies some vital agreements: the materials, goods, and services to be provided by the supplier, delivery schedules and time frames, pricing and payment terms, and more. Contracts may also include non-disclosure agreements to protect trade secrets or business practices. A contract can also designate a particular vendor as the retailer’s exclusive supplier of a certain product.

Supplier-retailer contracts are important because they specify the duties and expectations of both parties. They provide a basis for retailers and suppliers to plan timelines, production schedules, and key performance indicators (KPIs). Finally, in the case of disputes, a written contract can provide clarity on previously agreed terms.

Strategizing/Collaboration

Strategizing refers to the internal steps and processes within your business to maximize the value you get from suppliers while collaboration means working with suppliers to figure out what you both want and the steps it will take to get there.

When crafting your overall supplier strategy, you might include the following points:

• Create an ordering cadence: Based on market research and your first few sales, you should be able to sketch out a rough picture of how much product you’ll be selling over a specified period, such as every month. From this, you can determine the typical quantity needs and optimal ordering cadence for your business, and get your suppliers on board. Learn more about demand forecasting in our guide.
• Agree on a minimum order quantity (MOQ): Suppliers typically create and sell products to retailers in batches. A supplier will want batch sizes to be large so that they can earn greater profits, while a retailer will want batch sizes to be small so they don’t risk buying more inventory than they can sell. Negotiate with your supplier to agree on an acceptable middle ground that both parties can profit from and stick to consistently.

For collaboration, you’ll be communicating and coordinating directly with suppliers to find optimal arrangements for both of you. This means sitting down with each supplier to come up with mutual goals, targets, and timelines, plus getting buy-in from higher-ups such as business executives on the supplier side. The more clearly you can lay out your goals and plans, and the more invested you can get your supplier to be, the more likely they are to work energetically with you to achieve mutual success.

Maintaining a Continuous Line of Communication

Even when you’ve hammered out a final agreement with your suppliers, don’t go quiet on them. Get in contact regularly to ensure that both sides are still aligned on goals and action plans. Ask them if anything is changing on their end and if both parties need to come together again for a new discussion. Keep them abreast of the goods, services, and materials you’ll need, along with how much of these you’ll need and how frequently. You’ll also want to create KPIs or other metrics for your vendors to keep them informed, and collaborate to help them meet these goals consistently.

This kind of proactive monitoring and communication not only lets you learn potentially critical supplier information early but also shows your supplier that you treasure the business relationship and want to keep it as healthy as possible.

Adopting a Vendor Management Solution

Retailers have lots of tasks to stay on top of when managing vendors and laying the groundwork to build great relationships with them—onboarding new suppliers, handling payment, tracking costs, generating and examining reports, creating a replenishment schedule, and more. Retail businesses can handle these vendor management tasks manually or use purpose-built software.

• Manual method: This involves recording and updating everything on separate platforms like spreadsheets or hard drives. You may also need to use individual or ad hoc tools for tasks like vendor briefings and debriefings, reports, payments, and purchase orders. The manual method is typically not optimal as it requires using and coordinating many separate tools and the risk of errors and oversights is significant. It may also be tricky if an emergency arises (such as a product recall or stockout) and you need to access or change vendor information immediately.
• Automated approach: You can also use a software program (often a cloud-based one) to perform all vendor management tasks. Many point-of-sale (POS) systems or dedicated inventory management systems will have at least some tools for compiling and managing vendor information, purchase ordering, keeping track of suppliers, forecasting demand and trends, entering and filtering by vendor codes, and analyzing and tracking stock quantities in real time. The software solution is a far better way of handling vendor-related tasks, as it allows all information to be visible on a single platform, and data often updates in real time and automatically.

Frequently Asked Questions (FAQs)

These are some of the most common questions we get about supplier relationship management.

Any business, regardless of size, will benefit from improving its relationship with suppliers. The overall goal of this relationship management is to reduce costs, enhance profits, and smoothen operations, all of which will help a business run more efficiently and effectively.

Gather quantitative and qualitative information about each supplier; categorize all suppliers according to your chosen criteria; develop internal strategies to maximize the value of these relationships; collaborate regularly with suppliers to ensure a constant win-win scenario; monitor and adjust as needed.

Developing a good relationship will take time. You’ll have to compile a list of all your suppliers and figure out how best to approach each one. You’ll also need to constantly communicate with your suppliers (especially early in the relationship) in order for all parties to figure out their needs, schedules, and the best ways to collaborate.

Bottom Line

Whether you’re starting a retail business or trying to improve the operations of your existing one, developing and maintaining good relationships with your suppliers is vital for making things as stress-free and profitable as possible. Gather information on your suppliers, work out ways to optimize your business relationship with each one, and keep an eye out for emergencies while building your long-term relationship strategy—and watch your business perform better than ever.