Supplier relationship management (SRM) is a business initiative that aims for mutually beneficial supplier relationships. Every supplier is valuable, but some are more critical and strategic than others. SRM is a technique leading procurement organizations have adopted.
In this article, we'll go over the fundamentals of sustainability in SRM, and how to create value for both parties.
Wondering how to start implementing sustainable procurement in your company? Read our comprehensive guide Sustainable Procurement 101.
3 ways to apply SRM to sustainability
Leading procurement organizations have implemented processes and controls to manage the sustainability performance of their supply base.
SRM is a proven technique for communicating sustainability targets and improving performance against those targets.
Successful SRM relationships aim to create value for both parties. This value may be increased sustainability, reduced risk, greater process efficiency, more efficient use of materials, improved product or service quality, or access to insights and innovation.
SRM has its own challenges: lack of data visibility, lack of effective KPIs, lack of reporting systems, poor measurement practices, and poor communication channels. To overcome these challenges, it is important to focus on segmentation, governance model, and relationship steering.
1. Supplier segmentation
Supplier segmentation allocates suppliers to different groups based on their business impact, criticality, and spend.
Common segmentation groups include key suppliers, volume suppliers, bottleneck, and routine suppliers. Segmentation enables organizations to manage their internal and external resources more efficiently.
Often SRM efforts are focused on strategic partners and key suppliers. Key suppliers have the highest amount of spend to have a positive influence in terms of sustainability targets.
2. Governance model
A Governance model in SRM is the structured organization of people, controls, and mechanisms. A governance model describes the processes and escalations related to relationship development and problem-solving.
Governance models include levels of accountable people, from top management to account management and operations. They add clarity to corporate relationships and responsibilities involving multiple stakeholders and levels of collaboration.
In a sustainability context, top management would align and agree on sustainable development targets. Then, account managers would translate those targets into roadmap and performance measures. Operations would ensure the execution and realization of the objectives in day-to-day business operations. A governance model clarifies these roles and processes.
3. Steering group
An SRM steering group gives a structured approach to managing the relationship, making decisions, and steering the work undertaken by others.
Steering groups have people with expertise on specific topics to help make decisions that are best for the companies and joint success.
The steering group of a key supplier relationship could include sustainability, human rights, or circular economy advisor.
Sustainable value creation in SRM
Integrating sustainability goals into an SRM program is effective when there are already good working relationships. The start of a new business relationship is a good opportunity for introducing a more sustainable focus.
Communication and data should be timely and reliable to ensure information flows in both directions on a real-time basis.
Sustainable value creation is one of the key target areas of SRM. By working together, the organizations can become more resource and energy-efficient, optimize their processes, reduce waste and generate sustainable insights and new innovations.
Here are some measures for sustainability to start tracking in the scope of SRM.
Selecting sustainability metrics for key suppliers
Select performance measures (KPIs) relevant to your supplier’s and your own business performance. Effective KPIs are based on joint objectives.
The service level agreement specifies how and when KPIs are measured. Here are examples of environmental measures that can be tracked:
Carbon emission measures
Organizations can assess how their products or services contribute to climate change. Measuring scopes 1, 2, and 3 emissions gives information about companies' ecological footprint.
- CO2 emissions direct
- CO2 emissions indirect
- CO2 emissions from business travel per employee
- Other toxic emissions by type
Power and energy usage measures
Establishing how much energy operations consume can identify where to use less, resulting in cost savings and fewer emissions expelled from energy production facilities.
- Energy consumption used in production kWh / month
- Energy use in offices, kWh / m2 / month
- Energy saved due to implemented improvements, %
- Fuel consumed in the transportation of goods
- Total supply chain miles
- Water usage
- Water consumption in liters
- % of water recycled
- % of water reused
- Product waste by type, volume, and disposal method
- % of recycled materials used
- Returned/reused/recycled packaging
- Chemical emissions
To track how suppliers are positively contributing to the communities in which they operate, KPIs should include measures on projects that actively improve the quality of life for citizens, including eliminating child labor and paying a living wage. Suggested KPIs are:
- Number of community-based initiatives
- Number and type of unsafe behaviors reported
- % Innovations that include sustainability goals
- Employee engagement and satisfaction
- Near miss incidents reported
- % increase in diverse suppliers
- Level of penetration of sustainability awareness training
In a vested agreement, the parties agree on the governance and management mechanism at the outset. This includes monitoring the relationship health, how to track innovation and continuous improvement, and operational efficiencies. Suggested KPIs are:
- % supplier compliance to code of conduct/guiding principles
- Compliance with industry regulations
- % of suppliers reviewed on their sustainability goals
Business conditions and requirements for sustainable performance are constantly changing. Market dynamics are changing and suppliers adapt their products and services every day.
A note on contracts: traditional vs. relational contracts
Traditional contracts are aimed to describe the transaction and commercial responsibilities between two parties.
Traditional purchase and supply agreements are often not designed for nurturing mutually beneficial long-term relationships. Many professionals use the word partnership loosely even when the benefits are one-sided, and contracts favor the buyer.
A relational contract that creates a flexible framework designed to foster collaboration in strategic relationships over the long term.
These legally enforceable contracts specify mutual goals and establish governance structures to align the parties’ expectations and interests.
Complex agreements such as those involving the outsourcing of key services and others that are strategic alliances or joint ventures need flexibility.
This becomes more relevant when supply agreements incorporate sustainability commitments.
Sustainability goals need regular review, validation, and adjustment. Without timely and reliable data, it's hard to set realistic targets against your spend and follow the realization of those measures.
Sievo helps hundreds of customers to focus their efforts and target-setting to areas of spend where it matters most. Want to hear how to improve your supplier performance and address the sustainability targets for your supply chain? Let's discuss!
Header photo by Josh Power (unsplash.com)