Sustainability & Diversity

Sustainability in Supplier Relationship Management | Sustainability series part. 7

Jasmiina Toikka May 24, 2022

What is Supplier Relationship Management?


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.

 

 

Leveraging Supplier Relationship Management for sustainability


Leading procurement organizations have implemented processes and controls to manage sustainability performance of their supply base. SRM program serves as a pre-existing institute for communicating on sustainability targets and improving performance against those targets.

Sustainable procurement model

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.

 

What is supplier segmentation?

 

Supplier segmentation means allocating suppliers to different groups based on their business impact, criticality and spend. Common groups include key suppliers, volume suppliers, bottleneck and routine suppliers.  Segmentation enables organization 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 on in terms of sustainability targets. More on segmentation here.

 

What is governance model in SRM?

 

Governance model in SRM means the structured organization of people, controls and mechanisms. Governance model describes the processes and escalations related to relationship development and problem-solving. Governance model includes levels of accountable people, from top management to account management and operations, with their own roles and responsibilities. Governance model adds clarity to corporate relationships and responsibilities involving multiple stakeholders and levels of collaboration. In a sustainability context, the top management would align and agree on sustainable development targets, account management would translate those targets into roadmap and performance measures, whereas operations would ensure the execution and realization of the objectives in day to day business operations.

 

What is a steering group in SRM?

 

SRM steering group means structured approach to managing the relationship, making decisions and steering the work undertaken by others. Steering group consists of experts with experience, skils and knowledge on specific topics to enable them 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.

 


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.

 

In the HBR article “A new approach to contracts”, by Kate Vitasek et al., the authors suggest that the remedy is to adopt a different kind of arrangement: a formal 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. According to Kate Vitasek, crafting a formal relational contract involves five steps:

  • laying the foundation
  • co-creating a shared vision and objectives
  • adopting guiding principles
  • aligning expectations and interests
  • creating systems for staying aligned

 

Sustainable value creation in SRM

 

In "vested partnerships", based on relational contracts, each party is committed to each other’s success through joint commitments and development initiatives. Of the seven pillars of SRM is sustainable development. Integrating ESG 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 procurement in SRM

Picture: Seven Core Areas of SRM

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. The following chapter describes 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. Service level agreement specifies how and when KPIs are measured. Here are examples of environmental measures that can be tracked against a certain period of time:



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
  • Waste
  • Product waste by type, volume, and disposal method
  • % of recycled materials used
  • Returned/reused/recycled packaging
  • Chemical emissions



Social measures



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

Governance measures



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. The 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)

 

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