Vendor Management: The Pros and Cons of a Vendor Relationship Management Program

Supplier relationship management (or SRM) programs are designed to create a closer working partnership with your critical and strategic suppliers. This should result in better value for both organizations. However, opinions are mixed on whether the benefits outweigh the potential risks.

Arguments for SRM

– Eliminates waste and barriers to effective service. The contracts state what has been agreed between the buyer and the seller in terms of what will be delivered and for what price. In practice, waste can be generated due to inefficiencies in the way the processes, systems and ways of working of the two parties are put together. An SRM program can identify these sources of waste and eliminate them, creating lower costs and better service.

– Generates mutual dependence. If both parties value the benefits they derive from the relationship created by their SRM program, then they have an expectation that the relationship will last. This means that in times of scarcity, your organization is unlikely to be affected by the need for the supplier to ration its production.

– Encourages investment. If the critical and strategic vendors in your SRM program see that you create value for them and that the business relationship is likely to be long, then they are more likely to make investments that increase your capacity and ability to deliver what you need.

– Motivates providers to go the extra mile. Conflicting supplier relationships in which all problems are seen as belonging to the supplier create disillusionment and disinterest in them and result in a lack of motivation. SRM programs create shared responsibility and this equity translates into motivated providers who go out of their way to help you.

Arguments against SRM

– Create barriers to exit. Long-term dependency relationships with key vendors (for example, investing in shared IT systems) can create a barrier to switching vendors. The risk is that new entrants to the market will be discouraged and innovation from other vendors may be lost.

– Makes it difficult to test the market. It is financially healthy to test current prices and sourcing solutions from time to time with the alternatives. If your SRM program has indeed created a tailored solution, you may not be able to find a comparable alternative to test if you are still getting value for money.

– May result in complacency. A long-term relationship with key suppliers can make both parties overly familiar with each other. The result of this can be an acceptance of the status quo in ways of working with new ideas that are running out.

– Need to select the right provider the first time. Obviously, if you are going to enter into a long-term relationship with a supplier and implement SRM, it is vitally important that you make this selection with the correct criteria, as it will be increasingly difficult to switch suppliers if a better one emerges later on. Treat your choice of SRM providers as if you were going to marry them. Easy to do, but with dire consequences later if the choice was wrong!