Relationships between buyers and sellers have existed since humans began trading goods and services. These relationships developed in a natural way over time as the buyers and sellers developed trust and friendship. In the past thirty years the landscape has changed somewhat.
In 1983, Purchasing, in its “Vendor Profile Forecast” predicted that within the following five to ten years almost every retailer will be moving to closer relationships with proven suppliers. Since then there is growing evidence that to be competitive, retailers are moving away from a traditional approach of adversarial relationships with a multitude of suppliers, to one of forging longer term relationships with a few select suppliers. More of a partnership if you like.
A new acronym was being widely used by 2009 – SRM or supplier relationship management. SRM is defined as the discipline of strategically planning for, and managing, all interactions with suppliers. This requires creating closer, more collaborative relationships with key suppliers.
Technology is assisting significantly in facilitating good SRM. Information gathered at the point-of-sale is cleansed by a third party, analyzed and sent to trusted suppliers who replenish automatically to previously agreed limits. This results in better merchandising and better sales. New technology solutions are purpose built to enable SRM. These systems can be used to gather and track supplier performance data across sites. The old system of “selling in” has now been replaced with “selling out”. Suppliers recognize that it is not smart to sell too much in. If they do, it often comes back to bite them.
A real live example is the way cosmetic companies used to force feed retailers in order to meet their demanding sales targets, usually imposed upon them from their overseas principals. A new season’s colors would be launched and the retailer would be “forced” to take the range. Last season’s range would remain indigestible. The cosmetic houses would take back a token amount sometimes but invariably the stockholding just grew and grew. Stockturn on this consumable item could be as low as 2!
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The benefit of collaboration includes a more comprehensive and objective picture which can be used to make better sourcing decisions. SRM software naturally requires SRM and this means business structure and process changes.
The more progressive retailers and suppliers have recognized that collaborating together will deliver significantly higher returns than working in isolation. SRM is a means, not an end.
Once the SRM strategy and software is in place, a significant improvement in GMROII (Gross Margin Return on Inventory Investment) can be expected.