Supplier relationship management

Find out how to build strong supplier relationships to drive better procurement outcomes.
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What you need to know
  1. To get the best procurement outcomes, you should go beyond standard contract management to supplier relationship management (SRM).
  2. Under SRM you assign each supplier a different tier.
  3. Depending on their tier you manage and communicate with the supplier differently.
  4. This lets you focus on critical suppliers and achieve better results.

Why supplier relationship management (SRM) matters

We encourage you to take a supplier relationship management (SRM) approach to managing all your suppliers.

SRM goes further than standard contract management to:

  • build stronger supplier relationships
  • deliver even more value on your contracts and beyond.

This page gives you an overview of how SRM works. You can find a more detailed overview in the Supplier Relationship Manager Guidelines PDF, 553.86 KB.

Segment suppliers into tiers

SRM is built around segmenting your suppliers. This allows for a more flexible approach than standard contract management.

To start SRM, review suppliers’ capabilities, existing process and attitudes before assigning them each a category based on their relative importance to your business. Most usually this is expressed as tier 1, tier 2 or tier 3.

Segmenting suppliers provides real benefits:

  • It gives you a consistent framework to help you identify and classify different types of suppliers.
  • It helps you decide how much effort and resources you allocate towards a supplier. This can let you focus on critical suppliers.

Steps to segment suppliers

  1. Analyse your spend with each supplier and mobilise stakeholders. Look at your entire spend with a supplier and categorise it. You can also model your likely future spend. You should also identify stakeholders responsible for the supplier relationship.
  2. Conduct a high-level segmentation. Identify suppliers who account for 80% of your spending. However, use common sense to make sure no critical suppliers have been excluded based on your criteria. Then create a long list of potential suppliers. Relegate suppliers who don’t make the cut to tier 3 status.
  3. Conduct a detailed segmentation. Assign suppliers to tier 1 or tier 2 status based on your spend and how critical they are. Review your findings with stakeholders and then assign a relationship lead for each supplier.

Add extra segmentation for complex categories

For more complex categories, you can add extra segmentation based on other factors such as:

  • the risk of business impact
  • the supplier’s SRM readiness
  • a weighted value score around current and forecasted spends.

Set processes for each supplier tier

Institute different processes and procedures around each category of supplier.

Tier 3 suppliers

These suppliers are typically transactional and provide no business-critical goods or services.

  • You can limit your communication with them to buying activities. Use mass communications where possible.
  • Your supplier management efforts should focus on awarding and ending contracts, with governance focused on monthly reporting and compliance.
  • You can answer ad hoc queries and enquiries through the NSW Procurement Service Centre.

Tier 2 suppliers

These suppliers typically provide more business-critical goods and services. There are usually other buying options but switching can be difficult.

  • Build relationships with these suppliers via directors or category managers.
  • Discuss performance regularly but limit the amount of information you share.
  • It’s usually appropriate to report monthly and hold quarterly or annual performance reviews.

Tier 1 suppliers

These suppliers typically provide highly customised or unique products or services that have a significant impact on your business. They provide you with a competitive advantage. There are few, if any, alternatives and the cost of switching is very high.

  • Use senior staff to engage in long-term relationship building with these suppliers.
  • Communicate regularly to discuss performance and opportunities for innovation and progress on existing contracts. You should also share information.
  • At a minimum, you should do annual business reviews, quarterly performance meetings and monthly reports. You should also hold an annual continuous improvement, innovation or supplier development workshop.

Use effective KPIs

To get the most out of your supplier relationship, use effective key performance indicators. Make sure the time you spend reviewing them outweighs the time you spend preparing them.

Other things to keep in mind when preparing KPIs:

  • have a maximum of 10 KPIs in total
  • have up to 3 per metric
  • develop KPIs with the supplier and stakeholders.

Download SRM resources

Done effectively, SRM has the potential to deliver long and lasting benefits and potentially transform the way you procure.

You can find a detailed description in the SRM Guidelines PDF, 553.86 KB.

Use these templates to help you conduct the meetings for developing, implementing and managing SRM.