With the recession squeezing corporate budgets, it was only a matter of time before companies turned for relief to one of their biggest sources of cost: suppliers.

Layoffs are the most obvious way to trim overhead, but the supply base runs a close second. According to the Gartner consultancy, for every dollar they earn in revenue, companies spend an average of 45 cents on external purchases. For commodity-based businesses like metals and chemicals, that amount can top 60 cents.

But smart companies are angling for more than a break on price. In taking a fresh look at suppliers, they're out to modernize a system that's driven by manual, paper-intensive processes - e-mail, phone and fax. Most have too many vendors for their production parts and basic supplies. They lack the means to identify the best partners and adjust spending plans accordingly.

All of which helps to explain the emergence of a new subset of the supply chain: supplier relationship management (SRM). An obvious echo of customer relationship management (CRM), it seeks to plug a communications gap at the other end of the chain. Until now, companies have had to make do with data drawn from internally focused enterprise resource planning (ERP) systems. "Procurement people in the plant never had an application they could call their own," says Jeff Herrmann, chief executive officer and president of SupplyWorks Inc.

SRM may have arrived, but its meaning remains fuzzy. Unlike CRM, it doesn't evoke a clearly defined set of software tools. It spans multiple stages of supplier management, including design, specify, source, process and pay, says Beth Barling, London-based senior analyst with AMR Research Inc.

In a report late last year, Gartner called SRM "the practices needed to establish the business rules, and the understanding needed for interacting with suppliers of products and services of varied criticality to the profitability of the enterprise." Gartner research director David Hope-Ross is more succinct, if equally vague: "It's a religion. A creed. A way of life."

With definitions like that, it's not surprising that industry experts can't agree on precisely what SRM is. But they don't quibble about its importance. Barling says SRM is more about relationships - sharing information, orders and forecasting data - than the physical flow of product. As such, it goes straight to the difficult task of balancing supply with demand, and cost control with customer satisfaction. SupplyWorks calls SRM one of the four "best-of-breed" applications that add value to corporate ERP systems, the others being CRM, product lifecycle management (PLM), and advanced planning and scheduling (APS).

At a time when companies are touting the need for customer- facing solutions, one might assume that projects aimed at suppliers would take a back seat in terms of spending priorities. Indeed, a recent AMR survey found IT managers favoring sales and customer-management over supply management, when allocating extra dollars to e-business initiatives. According to SAS Institute Inc., fewer than 5 percent of Global 2,000 enterprises have taken a strategic approach to supplier relationships.

Yet supply-chain managers are coming to realize that SRM can play a key role in corporate profitability, especially when sales are down. "This year, cost-savings applications have really risen to the fore," says Herrmann, "where there's less opportunity to affect the revenue stream."

With an SRM application in place, clerical staffers spend less time on order processing and tracking, and more on strategic issues. What's more, says Gartner, SRM can give companies a better understanding of markets, foster innovative products, lower the risk of applying new technologies, cut down on stockouts and overstocks, and reduce the cost of doing business globally.

A Multi-Pronged Approach
Software developers are coming at the still-evolving SRM market from all directions. ERP providers are seeking to tie the application into their core systems for financials and inventory control. Supply-chain vendors are emphasizing the planning and optimization angles. Specialists in indirect procurement - materials and supplies not used in the making of product - are jumping into the direct arena. And "niche" players are offering best-of-breed, stand-alone packages, often focused on the execution piece of supplier management.

PeopleSoft, based in Pleasanton, Calif., has its roots in ERP. Like its biggest competitors in that space, however, it has branched out into other areas of the supply chain, including supplier management. Bob Shecterle, vice president of SRM strategy, divides it into five components: sourcing, supplier engagement, procurement, settlement and product design. Underlying them all is the need for a robust analytical tool that can track supplier performance, on-time delivery, quality, price and other metrics.

When it comes to SRM, Shecterle argues, ERP vendors have an edge because their expertise ranges across the enterprise. Vendors from other areas face the "huge challenge" of integrating their SRM modules with core business systems. And, with the release of PeopleSoft's version 8.0 in the fall of 2000, the company began offering the means for users to reach beyond the walls of their own organizations, to suppliers at one end and customers at the other. Future upgrades will delve more deeply into engineering, PLM and web portals that unite disparate internal systems, Shecterle says.

Of all the major ERP vendors, none has hawked the notion of a "one-stop" solution for supply-chain management more aggressively than Redwood Shores, Calif.-based Oracle Corp. But Oracle didn't necessarily set out to craft an entire SRM solution, says Frank Prestipino, vice president of supply-chain management product marketing. It was surprised to find that many of the key elements of SRM - design engineering, strategic sourcing, procurement, logistics and manufacturing components - were already part of its e-business suite of software applications.

Prestipino agrees that SRM is more than a collection of software modules. Oracle, for one, doesn't offer a content-management piece - the ability to create and maintain tailored catalogs. Yet it's still closer to providing a unified SRM solution than vendors who don't possess enterprise applications, he claims.

Prestipino dismisses the idea that companies will bypass SRM because it doesn't impact directly upon their own customers. "The failure of the SRM component handicaps your CRM system," he says. "It's as simple as that."

Planning Vendors Weigh In
Sellers of supply-chain planning software disagree that their SRM offerings are in any way inferior to those of enterprise vendors. In fact, Dallas-based i2 Technologies is generally credited with coining the term "SRM" in 2000, even though others claim to have used it informally before then.

Through a series of acquisitions, i2 cobbled together SRM functionality, which it says covers the full spectrum of supplier management. It begins with content, says Gayle Hayes, director of product marketing for SRM. i2 helps users to clean up and map data that might otherwise interfere with the smooth installation of other applications, especially when a company is running multiple, incompatible systems. In the process, the user can build a coherent, global sourcing directory, including financial data about its many suppliers. Other elements of i2's SRM suite include supplier and commodity management, to track supplier performance and rationalize purchasing; negotiation; contract management; product sourcing and procurement.

Hayes says it's easy to prove SRM's contribution to the bottom line. Citing Aberdeen Group Inc., the Boston, Mass.-based market research firm, she says a company with a 10-percent profit margin, and seeking to increase profits by $5m, can do it in two ways: boost revenues by $50m, or cut materials-purchasing costs by $5m. "You get a dollar-for-dollar payback by reducing supplier cost," she says.

i2's chief rival on the planning and optimization side is Manugistics Group Inc. of Rockville, Md. John White, group vice president of SRM, says the company views it as a natural extension of what it was already doing on the planning side. The common element is collaboration, a necessity when engaging in projects such as Collaborative Planning, Forecasting and Replenishment (CPFR), e-hubs and procurement management.

Like i2, Manugistics acquired much of its SRM expertise through acquisition, picking up tools for order management, purchasing management, procurement execution and supplier database searches. In building its SRM suite, Manugistics worked backward from optimization, collaboration and event management, to product design, analysis and sourcing.

While it offers a wide range of SRM applications, Manugistics allows users to implement them on a piece-by-piece basis. For companies burned by multi-million-dollar ERP installations, that's a necessity. Many prefer to retain some internal legacy systems, or lack the money to revamp their entire IT infrastructures. Says White: "Very few are looking to do a wholesale change of all the components of an SRM solution."

He sees SRM as evolving toward more options for collaboration, and more sophisticated tools for optimizing the supplier base, employing criteria such as service level, lead time, price, procurement cost, and credit risk.

Niche Providers Thrive
The mega-vendors of supply-chain and enterprise software aren't the only ones making a mark in SRM. Smaller providers are finding receptive customers among those who believe the space deserves a standalone approach. As Gartner's Hope-Ross says: "Niche is not a swear word."

Among the specialists is Wesupply, headquartered in the United Kingdom. Robert Bower, general manager for North America, says the growth of SRM has been hampered in part by supplier doubts. "They don't necessarily see themselves as wanting to have a relationship," he says. "They want a business process that helps them meet what their customers want."

Suppliers view new initiatives by their powerful customers as yet another opportunity to get beaten up on price, Bower says. They're forced to go along - a fact that doesn't speak well for the notion of a "relationship." Still, he says, SRM properly applied can be a valuable tool for achieving visibility of demand, inventory and orders. And the application of best practices can go a long way toward improving the fulfillment of direct materials.

Acting as an application service provider (ASP), Wesupply delivers its system over the internet. Users pay a subscription fee, without the need for extensive up-front costs. As for suppliers, they're able to measure their customers' performance, not just the other way around. And that, says Bower, makes the tool more attractive to the beleaguered supplier community. "Maybe it's a whip with a feather on the end," he says.

The roots of SAS Institute Inc., based in Cary, N.C., are in data warehousing and analytics as applied to purchasing, says SRM global strategist Christine Kelly. Using historical data, companies can understand who's buying what from whom, and how to get the most from their limited purchasing budgets.

SAS helps users to determine the best source for a given product or part, while monitoring "leakage" - who's not abiding by the company's purchasing contracts, or is engaging in "rogue spending." The tool works for both direct and indirect materials, Kelly says, although key performance indicators in those two categories tend to be sharply different.

The economic downturn has focused top management's attention on supplier analytics. "Three years ago, a lot of CEOs might not have known who their purchasing people were," says Kelly. But obstacles to SRM's acceptance remain, especially among second and third-tier suppliers without direct ties to the original equipment manufacturer. In theory, they should want to share information for the good of all, "but that's not the reality of today."

A shift in the power balance between suppliers and retailers has helped to propel Paxar Corp., based in White Plains, N.Y., into the SRM universe. Having made its name as a labeling and identification vendor, Paxar added SRM when retailers began demanding that suppliers provide special packaging and tags, allowing product to be shipped directly to store shelves. At the same time, says Paxar CEO Paul Griswold, retailers sought lower manufacturing costs through private branding and a tighter supply chain. That called for a whole new level of communication between the two sectors.

Internet is Crucial
The internet is critical to that goal, says Griswold. It makes possible the globalization of retail supply chains, irons out differences between systems, and allows for the direct, real-time flow of data. Most of the buzz about the internet has concerned online auctions, exchanges and other means of driving down suppliers' prices. To Griswold, its real value lies in the ability "to manage communications over huge spans of geography, and basically simplify the process."

Several software vendors are attempting to parlay their expertise in indirect procurement into a tool that manages relations with direct suppliers as well. Commerce One Operations Inc., headquartered in Pleasanton, Calif., has unveiled a product that automates source-to-pay processes, while linking buyers with trading partners. Installable in phases, the new 5.0 suite comprises several e-commerce purchasing applications - Commerce One Buy, Source and Collaborative Platform.

Some argue that vendors with backgrounds in indirect procurement cannot easily master the stricter requirements of direct procurement. After all, they point out, there are huge differences between buying office supplies and critical parts for an assembly line. Duncan Jackson, Commerce One solutions director, replies that the company has a history of direct materials management as well; its customers in that sector include General Motors. In any event, he sees pronounced similarities between the direct and indirect worlds, especially when it comes to opportunities for cost savings through improved supplier management and rationalization.

It's far from certain as to whether supply-chain, enterprise or niche vendors will prevail in the still-developing world of SRM. As Kelly of SAS says, "We're a long way from knowing what a complete SRM solution will look like."

AMR's Barling sees a continued role for smaller specialists, despite the market power of integrated providers. And a recent Gartner report doubts there will be a "one-stop" solution to SRM any time soon. On the contrary, it says, "enterprises in search of business results must ready themselves to support an array of technologies from multiple startup and legacy vendors."