Part 1 - Supplier Relationship Management (SRM)
Series of articles on digitization of purchase:
- Digitization of procurement processes strengthens the company's competitiveness (introductory part)
- Part 1 - SRM for Strategic Purchasing
- Part 2 - Sourcing for operative purchasing
- Part 3 - Procurement for Catalog Purchasing
SRM in Promitea optimizes the relationship between buyers and suppliers through digital communication. The goal of SRM is to initiate and develop close and sustainable cooperation between purchasing and its suppliers for the equal benefit of all participants along the entire value chain.
SRM does not focus on short-term effects, but rather, unfolds its full effects over the long term and promotes strategic advantages for all stakeholders. In general, the depths of the cooperation depend on the relevance of the suppliers: Purchasing department pays more attention to strategic suppliers and less to the others. Methodologically, however, thanks to the digitalization of SRM processes, the same approaches may apply to all suppliers.
Promitea offers the following main functions for SRM introduction and development:
1. Onboarding new suppliers
Interested suppliers register themselves in the Promitea portal, which is freely accessible for all suppliers, at no cost for purchasing.
The purchasing department sets the scope of registration data. The suppliers enter the required data it in their browsers. In addition to the communication parameters, the suppliers provide data about their deliverables as well as business data such as
- Financial and personnel data (turnover, EBT, number of employees ...)
- Certificates for the delivered goods
- References in the market
- Other evaluation criteria set by purchasing.
From the registration data, Promitea automatically calculates the first supplier evaluation value by Initial Supplier Qualification (ISQ).
2. The continuous process of improvement
After completion of ISQ, the cyclical process esof supplier qualification, evaluation, and development follow.
2.1. Supplier Approval
The purchasing department classifies all suppliers into qualification groups such as
- Strategic suppliers
- Approved suppliers
- Non-approved suppliers
according to ISQ results. The qualification groups are set by the purchasing department.
Note: On the average, 5-10% of suppliers will classify as strategic suppliers, 20-40 % of suppliers will get approval, and the remaining suppliers are temporarily blocked, but remain in the list of all suppliers.
2.2. Supplier Evaluation
The next SRM step is the periodic and more detailed evaluation of the approved and strategic suppliers. The purchasing department sets the default frequency, scope, and detail for each product category or vendor individually.
The evaluation data will be grouped to evaluation segments. Examples of the segments:
- Financial data (total/regional sales, EBT, payment terms)
- Personnel data (personal classified by qualification)
- Delivery quality (rejection and return rate, post-processing costs)
- Logistics (adherence to quantities and delivery dates, EDI capability)
These are "hard facts" entered by the suppliers (e.g. financial data) or transferred to SRM from the ERP of the purchasing company (delivery quality).
In addition to hard facts, Promitea also takes "soft facts" into account, which provide other company departments as subjective assessments. Examples:
- Innovation strength of the supplier
- Communication skills
- Willingness to make individual adjustments
Purchasing sets and maintains all necessary evaluation data. To reduce setting effort and to refine it at the same time, the evaluations will be set
- per product group/category in general
- per each purchased good individually.
All evaluations are automatically consolidated and aggregated by weighting and scaling to a single score for each supplier. The final score is between 0 and 1 (ideal) and provides the basis for more accurate qualification of all suppliers. The system of consolidation and aggregation is shown schematically in the following figure:
The suppliers are evaluated annually or in shorter periods as required. The result of the evaluation is sent electronically to each supplier - if wished - at predetermined times as a complete evaluation report.
2.3. Supplier development
Strategic suppliers and, approved suppliers if required, are included in supplier development. In principle, it consists of two steps:
- Agreement on development goals
- Definition of the measures agreed upon to achieve the objectives.
The development goals are proposed by the purchasing department and agreed upon with the suppliers. The supplier suggests suitable measures to achieve the objectives.
Promitea supports supplier development with the following steps:
- Identification of suppliers for whom supplier development is necessary
- Electronic exchange of information between purchasing and the respective suppliers as well as documentation of objectives and measures
- A permanent monitoring of the achievement of the goals and the implementation of individual actions, including the electronic exchange of accompanying documents and status and control information.
Generally, SRM can be used for purchasing all A-B-C products and for all suppliers. The full scope of SRM is applied for A-products that are essential for production, or are ordered in high volumes. The procurement of these products often concentrates on a single supplier (single sourcing) or, for reasons of supply security, on 2-3 suppliers. The cooperation with these suppliers can turn into a joint development and open price calculation (open book) so that competitive purchase methods are unnecessary or are used only for control purposes.
Dr. František Bumba