What are the Three Basic Components of Supplier Relationship Management

Supplier relationship management practices or SRM help increase buyers’ and sellers’ ability to coordinate and collaborate. The field of supplier relationship management grew out of a need among procurement experts for a method that would assist them in recognizing important partners, developing strategic methods for purchasing, protecting their supply chains from risk, and increasing gains.

Supplier Relationship Management

Supplier relationship management refers to a systematic strategy for assessing the businesses that provide a company with the goods, materials, and services it requires.

There are several schools of thought about what is involved in supplier relationship management. However, this article will give you the three basic components that makeup supplier relationship management. SRM involves:

  1. Supplier segmentation
  2. Supplier strategy development
  3. Supplier strategy execution

Let’s take a look at them, one after the other.

Supplier Segmentation

Supplier segmentation refers to dividing up the pool of potential suppliers into subsets to determine the level of involvement you should maintain with each provider. In addition, supplier segmentation helps establish the appropriate degree of resources needed to manage the supplier on several levels. In addition to meeting the business requirements, segmentation must also be in line with category strategy and take into account the organization’s goals.

The structure and terminology of segmentation tier levels can be very different from one organization to the next, but in general, there are only three or four levels, with “strategic” being the highest level. The lower level has the greatest number of suppliers and interactions (not considering the typical transactions that take place daily), and they are more of an exception. The middle tier typically consists of different providers, all of which require performance management and offer chances for ongoing improvement. Top-tier suppliers offer products or services that either give their customers a competitive advantage or offer an opportunity to drive revenue growth and create value.

  • Matrix Method

It is common practice to begin segmenting suppliers based on the money spent. When a value is considered, we have a model that can be used to construct a framework for dividing your supplier base into several categories. A provider’s significance in maintaining business operations is one definition of value. In most cases, approximately 10–15 percent of the total number of suppliers included in the database are strategic suppliers. This classification system, which is derived from the original Kraljic matrix, is malleable and can be altered to offer more specific subgroups included inside each quadrant.

  • Pyramid Method

The supplier database can also be viewed through the lens of a pyramid, which prioritizes the same categories—strategic, important, and transactional information—as before. This is typically the method that firms of medium and smaller sizes use when dividing up their suppliers. A supplier pyramid normally consists of three to four tiers, which are determined by whether or not partners are separated into their group at the top of the pyramid or grouped in the strategic category. As we progress up the pyramid, the value of the suppliers grows while the number of suppliers available in that category drops. Various ways to divide up the suppliers.

The primary objective of supplier segmentation is to determine the area to concentrate on or necessary to maximize the potential of relationships with suppliers. There is no one-size-fits-all supplier segmentation, so choose the one that works best for you based on your company’s unique circumstances.

Supplier Strategy Development 

In this stage, the company prepares a strategic plan to engage with each category of suppliers or individual suppliers selected in the first component. This component ensures that the relationships are effective and profitable to both parties.

Organizations should begin with the category of suppliers regarded as being the most critical, but they should also acknowledge that all suppliers play a role in the success and, as a result, all their suppliers merit a strategic approach. This approach should involve governance and performance management models to align business processes and assign stakeholders according to business goals.

Business stakeholders must take ownership of their supplier relationships to make the most of supplier relationship management. These points of contact are the ones who are accountable for locating unrealized possibilities, unintentional redundancy, and potential threats to the supply chain.

Supplier Strategy Execution

Implementing the supplier strategy is the next logical step now that you have one developed. The team will need to develop rules and procedures, establish performance management systems, and receive training on using the systems.

The supplier relationship management team also records the actions, meetings, and joint efforts to implement projects to guarantee that value is produced, and objectives are attained. This process is carried out with a chosen group of vendors essential to your company’s operations.

The executives in the organization responsible for the supplier relationship management ensure that the strategy is implemented, and either they or the managers must take on the day-to-day duties necessary to operationalize the SRM plans. They should also design methods for monitoring and measuring the success of SRM and identifying faults and points of failure in the proposed strategy or its execution.

Altering the tasks at hand are carried out is also necessary. There might be, for instance, a need to begin putting orders through a centralized system or start using a new form of communication. Both of these things could be necessary.

Making these adjustments might be nerve-wracking, but it’s crucial to keep in mind that the effort put into the chosen strategy will only be worth it in the long run if that effort isn’t put in place. You’ll be able to cultivate strong and long-lasting connections with your suppliers if you act in this manner.

Utilizing a Software for Supplier Relationship Management

Utilizing supplier relationship management software is among the most effective methods for putting your supplier management strategy into action. This software category offers a centralized location for collaboration, communication, and documentation.

When working on supply chain management, using the appropriate SRM software will provide transparency and make it easier for the company and the supplier to share data. Additionally, it can assist you in automating a large number of the day-to-day operations related to managing supplier relationships, such as the procurement process and the monitoring of supplier performance. This will free up more time to concentrate on other aspects of running your firm.

When looking for SRM software, you should ensure that it provides the features you need and requires a little initial training. The onboarding process needs to be uncomplicated. In addition, there needs to be functionality and communication directed toward the suppliers to generate a higher level of involvement.

There is a wide variety of SRM software available today; however, not all systems are built equivalently. When selecting SRM software, you must carefully consider cost, functionality, and user-friendliness.

Benefits of Supplier Relationship Management 

When it comes to managing suppliers strategically and following SRM best practices, there are various benefits to be had. Here are some of the most obvious benefits

  • Improved procurement

By focusing on supplier relationships, you’ll learn which vendors are most important to your supply chain. You’ll learn about bottlenecks and other disruption-causing situations. This knowledge is important for all procurement players in your company. Knowing the functions your team needs to replace, and the relationship with the prior supplier might help you identify a new source.

  • ‍Supply-chain optimization

SRM seeks optimal supply chain management. We’re not simply talking about stocking shelves and boosting profits. SRM helps monitor supply chain sustainability and transparency, minimize geopolitical disruptions in supplier locations and more.

  • Risk management

Supply chain risk mitigation is crucial. SRM goes beyond risk assessments and contingency preparations. Working with suppliers to decrease risks is continuing. If they rely on downstream suppliers, they benefit from risk minimization. A strong SRM strategy connects your business and suppliers and proactively reduces risk, responds to volatility, and minimizes interruption.

  • Data-sharing

Big data rules our world. You can better examine, analyze, and evaluate situations and make informed decisions with additional data. AI and machine learning systems provide real-time data, early warnings, and reports at the push button. With so much potential in data, sharing and using supplier data makes sense. Developing mutually beneficial data-sharing procedures is easier with good supplier relationships. Imagine what you could do with supplier data on quality control and assessment. Could your suppliers improve if they knew your client satisfaction levels? SRM facilitates data sharing, which has endless benefits.

  • Service improvements

Spending time on supplier relationships can pay off in increased service levels and priority for new advancements and innovations. With that rapport, you can handle pandemic-related disruptions or contract management oversights quickly and with no fuss.


A firm will save time and money by effectively managing its relationships with its suppliers, and the company should not ignore the influence that this can have on sales and profit margins. If a company follows best practices and uses online digital technologies, it can easily streamline its supplier relationship management.

Additionally, it will provide its employees with clear purchasing practices and the insights and transparency necessary to maximize your organization’s value from its suppliers.

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