Pain Points in Procurement Series
Moving Supplier Relationships from Transactional to Strategic
Tips for shifting your supplier relationships from transactional to strategic in an effort produce more cost-saving ideas and value.
By Hugo Britt | April 13, 2023
Welcome to Una’s Pain Points in Procurement series. Each week, the Una team will explore one of ten common pain points impacting procurement today, and put forth actionable solutions to each of these challenges.
Do you enjoy steak? I hope so, because we’re going to use the act of buying a steak to illustrate the difference between a transactional and strategic supplier relationship.
In scenario one, you’re in a bit of a hurry. You go to the supermarket, head for the meat aisle, pick out a pre-packaged steak, and take it to the checkout. The quality of the product is fine and the price is acceptable, but the whole process was purely transactional because you don’t have a relationship with the supermarket.
In scenario two, you have time to visit your local butcher. You’ve a great relationship with the head butcher and always make time to have a brief conversation with them. Over the years, they’ve come to understand your needs – how much you typically prefer to spend on dinner, how many kids you have at home, the fact that your youngest is a picky eater, and so on.
Rather than telling them exactly what you want, you lean on their experience by asking them to recommend a suitable cut of beef. They’re a fountain of knowledge, suggesting a new way to prepare the steak that you haven’t tried before, and offering advice on affordable alternatives to help save you some money.
Transactional versus strategic supplier relationships
See the difference? There’s nothing wrong with simply getting what you’ve paid for; in fact, up to 80% of your supplier relationships are likely to be purely transactional. But there are some challenges involved.
For example, transactional relationships that are typically based on a one-time purchase or short-term contract may lead to a lack of trust or issues such as misunderstandings, miscommunications, and disputes. Transactional suppliers may not be motivated to provide the highest quality products as they are not invested in the long-term success of the buyer’s business. Similarly, a transactional relationship may discourage suppliers from suggesting new ideas or innovations that could benefit both parties.
Putting in the time and effort with the top 20% of suppliers will help you extract additional value from these relationships. Like the butcher, your strategic suppliers can offer cost-savings ideas, efficiencies, and will know and understand your needs much better than a transactional supplier. What’s more, the relationship will be stronger, more stable, and the supplier will regard you as a customer of choice – an important benefit when supply shortages begin to bite.
Nurturing the top 20% of your suppliers will help you extract additional value from these relationships. Strategic suppliers can offer cost-savings ideas, efficiencies, and will know and understand your needs much better than a transactional supplier.
Identify your top 20% of suppliers
The benefits of cultivating relationships with strategic suppliers are clear, but which suppliers should you choose?
Procurement experts often invoke the 80/20 rule (otherwise known as the Pareto Principle), which states that 80% of the value in your supply chain will come from only 20% of your suppliers. But don’t make the mistake of identifying your top suppliers based purely on the amount you spend with them – move the focus beyond cost to also consider factors such as:
- The importance of the supplier to your business and the risks involved in interruption to supply
- Quality standards
- ESG factors such as sustainability and social impact
- Reliability
- Ability to innovate
- Financial stability
One of the most common methods for supplier segmentation is to use the 2×2 Kraljic Matrix that plots suppliers into one of four quadrants – check out Una’s explanation of Kraljic segmentation here. Once you have identified the segmentation criteria, categorize suppliers based on these factors. These vendors are now a part of your Supplier Relationship Management program.
What does Supplier Relationship Management (SRM) involve?
Broadly, the goal of a Supplier Relationship Management program is to optimize the value and performance of your key suppliers to achieve your business objectives.
Here are some of the ways to do so:
Performance management
Go beyond the basics of DIFOT (Delivery In Full, On Time). Performance management for strategic suppliers involves formulating, tracking, and evaluating an extended set of key performance indicators (KPIs). This enables you to take action together to improve performance where necessary.
Relationship management
Build and maintain relationships with strategic suppliers through effective communication, collaboration, and conflict resolution. Help suppliers understand your organization’s goals and strategy by inviting them to strategy days – this will enable them to come up with innovative ways to help you meet your goals.
Risk management
Identify and mitigate risks such as supply chain disruption, quality issues, and reputational risks. The more critical a supplier is to business continuity, the closer a supplier will need to be monitored.
Driving continuous improvement
Work with suppliers to identify opportunities for improvement and implementing changes to optimize the relationship and associated benefits over time.
Save time, effort, and money by outsourcing your transactional spend to Una, and free up your procurement team to focus on your SRM program. Contact us to learn more.
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