Construction is all about the physical resources at your disposal. While many kinds of businesses rely on equipment and materials to function, few can match the sheer scale of creating whole buildings from scratch.
That’s why effective supplier relationship management (SRM) is especially vital for construction companies to keep profits high.
Let’s take a look at how managing supplier relationships works, the role it plays, and the measurable benefits it can bring to your company’s bottom line.
What Is Supplier Relationship Management?
Supplier relationship management is an umbrella term for a collection of practices used by businesses to identify suitable vendors, form and maintain working partnerships, and track supplier performance over time.
It’s essential for maintaining supply chains, preventing disruption, and really getting the most out of your supplier network.
Like any relationship, SRM is all about communication, and we don’t just mean making a virtual phone call to a company’s customer support team every so often. Supply chain management is an ongoing process. It involves:
- Comparing and vetting potential suppliers
- Negotiating costs and services
- Coordinating supply chain management
- Communicating changes in supply needs
- Monitoring supplier performance
How Modern Organizations Manage Supplier Relationships
Strong relationships between procurement teams and key suppliers are essential if you want to streamline construction projects and maximize profit. Supplier relationship management is a practice as old as business itself, but the ways we go about it have changed significantly.
Traditionally, businesses have viewed suppliers as interchangeable, focusing mainly on costs and addressing issues as they arise. Modern supplier relationship management instead positions your supply vendors as long-term, strategic partners.
Instead of focusing strictly on costs, SRM looks at the value of suppliers in a more three-dimensional way. What do they bring to the table besides a good deal? One vendor might be cheaper, while another has more efficient deliveries and supply connections nearer your construction sites.
A proper approach to supplier relationship management requires you to engage and communicate much more extensively. While this may sound like a lot of extra work, the result is that your organization and its suppliers are much more likely to be on the same page.
Plus, modern SRM software allows your team to keep track of supplier correspondence and automate routine workflows. As a result, it’s easier to manage than you might think.
The State of Modern SRM
State of Flux’s 2024 Global SRM Research Report is something of a mixed bag. They surveyed people from over 330 organizations, ranging from charities right up to major corporations like Starbucks. This helps them to cover the different types of supplier relationships that various businesses can have.
On the upside, 46% reported that their company’s supplier management policies delivered annual financial benefits exceeding 4%. Additionally, 87% of leaders have gained continuous improvement from SRM activities with their key vendors.
Unfortunately, 75% of “followers” don’t know if their organization’s supplier management delivers financial benefits. On top of that, while 92% of leaders report having a “defined and fully documented” supplier management business case, this falls to just 11% for followers, and 35% for “fast followers.”
How Supplier Relationship Management Boosts Profits
Now that we’ve established what supplier relationship management is and how it works, it’s time to explore the benefits in detail.
Here are five ways using modern SRM practices with your procurement teams and strategic suppliers can improve profitability and support business objectives:
1. Better Supplier Relationships for Reduced Costs
Although you should try to look at the larger picture with supplier relationship management, construction cost management is still an unavoidable factor. So, you might be wondering, how can investing in a strong supplier relationship help to bring down costs?
For starters, engaging with your strategic suppliers more extensively allows you to learn about their side of business. After all, construction materials and safety gear don’t arrive at a site by magic. There’s an underlying mix of acquisition, storage, and transportation solutions required to get the supplies you need where you need them on time.
Understanding how things work for your vendors allows you to achieve cost reduction through compromise. If your business strategies can help them to cut the costs of their supply chain, like a more effective way to coordinate your deliveries, they’ll be more willing to give you a favorable rate.
Speaking of rates, while some vendors may have rates that they won’t deviate from, others may be open to negotiation. Again, this is where industry knowledge comes in handy. Rather than make wildly uninformed demands, you can enter negotiations with some understanding of things like vendor profit margins.
2. Continuous Improvement for Enhanced Supplier Performance
According to data from Statista, improving collaboration was tied as the top supply chain management priority cited by brands alongside increasing manufacturing capacity. This should give you some idea of how important continuous improvement is.
Working more closely during supplier relationship management makes it easier to identify operational inefficiencies. Modern supply chain management software also makes it much easier to collect data from different areas and centralize it. This way, you can pinpoint and address specific issues and set concrete improvement goals.
Of course, identifying operational inefficiencies is only half the battle. The next step is to collaborate with suppliers to enact improvements. Effective supplier relationship management makes this a lot easier since you and the vendor representatives you work with will have built up a dialogue.
3. More Effective Risk Mitigation
Unfortunately, construction projects can’t run without supply chain disruption all the time. There are numerous risks related to the suppliers you choose, from work accidents due to shoddy equipment to project delays waiting for supplies.
Cybersecurity risks in construction are another good example. In forming a partnership with key suppliers, you’ll inevitably share some sensitive data with them, like budgetary information or unannounced, upcoming projects.
A critical first step in managing supply chain risk is researching and choosing the right vendors. From there, you have to monitor their performance and ensure they’re doing their due diligence.
For manufacturing, this might mean effective quality testing for hardhats. For cybersecurity, it means making sure they’re compliant with data protection regulations with regularly updated encryption and security software.
Whether physical or virtual, risks can be costly for your construction project. Delays can push you over-budget while accidents threaten employee wellbeing and create legal concerns. Prevention is the best medicine, especially when it comes to saving company profit margins.
4. Improving Supplier Communications for Efficiency
Extensive communication plays a key role in supplier relationship management, whether it’s through video call meetings, a VoIP phone system, or asynchronous reporting. While you can take a silent, hands-off approach to supplier relationships, doing so will limit your ability to manage supply chains in an agile way.
Collaborative partnerships between procurement teams and vendors helps to keep both parties in the loop for more mutually beneficial relationships. If one experiences a change in circumstance, they can alert the other in a timely way.
For example, a key vendor might suffer a major equipment breakdown or the loss of one of their own suppliers upstream. Strong vendor relationships with active communication mean you’ll find out about any issues quickly and can get information like a timeline for the return of normal services.
This information allows you to make effective decisions to prevent unnecessary delays for construction projects. Similarly, circumstances might develop on a project, resulting in a change to your supply needs. In times like this, timely communication with suppliers helps to prevent wasted expenditure.
5. Supplier Performance Monitoring
Last but not least, effective supplier relationship management enables in-depth performance monitoring. Delivery times, supply waste (damaged goods), supply quality, and transportation costs are just a few examples of the kinds of data you can collect to assess supplier risks and value.
This data allows you to gain a competitive advantage by assessing the operational efficiency and overall value of the suppliers with which you’ve partnered. With this information, you can enable the kind of continuous improvement we’ve talked about above.
In the worst case scenario, supplier performance monitoring combined with market research can help you decide if it’s time to end supplier contracts.
A distant relationship with suppliers makes it harder to collect this kind of info. Less communication means less transparency. Ongoing communication with regular reporting helps to ensure that suppliers are on the level and that they align with your business goals.
All this is to say that data-driven performance monitoring brings a measure of objectivity to supplier performance management. Gut feelings and guesswork don’t reliably raise profits. Established performance metrics, on the other hand, can keep you on track for mutually beneficial partnerships.
Build a Collaborative Relationship With Suppliers
By now, you should have a clear understanding of how focusing on supplier relationship management strategies can financially benefit your business. It allows you to form closer working relationships with vendors for stronger supplier collaboration. This primes them to deliver a more effective service and gives you a competitive edge.
From continually improved performance and cost savings to more comprehensive risk management, the profit-based benefits of closer supply chain management relationships can’t be ignored.