Building business case for a supplier management program

Building the business case for a supplier management program

 

Do you want to start a serious SRM program but don’t know how to convince your CFO/CEO about the investment needed? Then please continue reading.

In this blog we will explain how you can develop a business case to invest in your Supplier Relationship Management (SRM) capabilities. We define SRM as the joint development of capabilities of both the customer and supplier for the purposes of reduced costs, process improvements, and innovation in products or services creating more joint value.

The objectives of SRM are to significantly minimise costs and maximise value related to supplier delivery and collaboration in the supply chain. The cost reduction or value generation in SRM can be difficult to measure but in the following, it will become much clearer how you can build your own business case with real bottom line effect.

Why invest in a supplier management program?

The short answer is: Because there is money in it! Your CFO/CEO just doesn’t know it yet, and this is why it is critical to build a solid business case so your CXO understands the true value of SRM.

A serious supplier management program can help your company not only reduce supplier pricing but also total operational costs, and at the same time increase your competitiveness in the market because your entire supply chain (including suppliers) becomes more agile, lean, responsive and innovative.

Geller & Company has made a well-known and recognized study that shows how savings from strategic sourcing can be eroded by poor supplier performance management and collaboration. In a spend category as simple as maintenance, repair and overhaul (MRO), a supplier may gradually introduce more expensive solutions/items to replace those with competitive prices in your contract.

In more complex categories such as custom industrial equipment and components, quality can drop, delivery can become erratic and services previously offered, such as design engineering support, can become scarce. As a result, up to 75% of cost savings can be lost to a range of issues throughout the life of the supplier contract.

 

Increasing Profitability and Quality in procurement. Graph shows 3 stages after signing contract with suppliers. x=time, y=value, 1- not-so-benign neglect, 2-supplier performance to maintain and gradually improve value, 3-supplier collaboration to create new supplier value beyond what is in the contract. Netween 1 and 2 - without rigorous contract management, 75 % of sourcing savings can disappear within 18 months

Source: Geller & Company, “World-Class Procurement — Increasing Profitability and Quality”

 

In 2012, McKinsey surveyed more than 100 large global companies on supplier collaboration practices. The survey distinguished traditional sourcing tools (such as clean-sheet cost models) from strategic investments and long-term projects with suppliers for co-development.

The results were fascinating. Although over a third of the respondents said they collaborated with suppliers, fewer than 10 percent could demonstrate systematic efforts on supplier collaboration. More importantly, among those who did collaborate, the EBIT growth rate was double that of their peers. See below.

Leadrer in supplier collaboration beat industry trends by ~2x in growth metrics (n = 100+ global companies) Percentage growth in EBIT (2004-10) No projects to innovate with suppliers (1.0-2.0 - company score on supplier collaboration) - -5.1%, selective innovation(2.1-3.9) - 0.3%, innovative regularly (4.0-5.0) - 4.9%

Source: Mckinsey & Co, 2012.

How to develop the SRM business case

The value in SRM is clear as stated above. Now the question is how to develop a solid SRM business case for your business and hereby convince your CXO to invest in SRM.

The basic value derived from robust SRM includes incremental gains in traditional procurement focus areas, such as price improvement, enhanced inventory management and improved order-delivery cycle time. Even greater value derives from more aspirational areas such as risk reduction and the promotion of innovation and supplier diversity.

Where would Apple be today without the suppliers that helped tackle the manufacturing and technological challenges of devices dreamed of by Steve Jobs? Supplier innovation can generate value far exceeding the amount spent on them in any given year.

So what are the key value drivers in a solid SRM program? Below we have highlighted five general business challenges and described how a supplier management program can help overcome these challenges.

column 1 -business chalange, 1# supplier quality, deliver or service-related issues are eroding savings, and procurement lacks a systematic way to address these issues. #2 Procurement staff spend excessive time compiling suppliers data from various sources for reporting/scorecarding, #3 The has a dates view or no view at all about where risks lie in the supply base, #4 Stakeholders are frustrated by the slow pace of contracting, poor supplier performance and out-of-date information on supplier performance, #5 Suppliers bring too few innovative technologies and business practises. Column 2 - SRM value driver, #1 Implementing an SRM solution will enable close tracking of supplier quality and delivery performance. Red flags will be highlighted. An SRM solution will also enable easy supplier follow-up processes in real time, #2 Implementing an SRM solution will make all supplier performance and relations data available in one solution. An SRM solution will aslo ease supplier access to these data, #3 A key element of an SRM program is to segment your supplier base. One way to segment is according to risk. So by implementing an SRM program you will gain a better understanding of who your high risk suppliers are, #4 A key element of an SRM program is to engage your stakeholders. With an ARM solution you will be able to collect information from your stakeholders on their needs, and lated on their experiences related to supplier performance, #5 SRM enables tou to engage the right suppliers in a more transparent collaboration where your strategies,objectives and needs are shared openly, whilst building trust in the relationship, which is crucial for creating innovative cooperation. Column 3-SRM benefits , #1 Improves supplier performance enables the realization of the benefits that were expected at contract award instead of firefighting supplier performance issues. Problem solving time is significantly reduced. #2 Improved procurement efficiency means procurement can maximize time spent on value-adding activities with strategic suppliers, #3 Reduced supplier risk by identifying weak quality, safety, insurance, environmental and security practises at suppliers and putting mitigation in place, #4 Stakeholders enjoy being asked about their needs and experiences, which will ensure that only the most suitable suppliers are used and performance is optimised according to stakeholders needs. #5 Innovative products or process improvements arise from collaboration between a trusted customer and its trusted supplier.

In our experience points #1 and #2 are still relevant in most large organisations today, and #4 and #5 represent the situation in nearly all organizations we collaborate with.

How to put real figures for your business into the SRM business case?

Having defined the typical business challenges, SRM value drivers and SRM benefits, it is time to estimate some real SRM benefit figures for your specific business. This is where it becomes complex and this is where most people stop because they don’t know how to move ahead. We will help you overcome this hurdle.

Demonstrating measurable return on investment in suplier management program capabilities requires the development of some kind of measurable figures for each of the above five points. Too often this task of putting real figures on the SRM benefits is left undone, which makes the SRM business case weak.

If you want to receive a build-for-purpose business case template that you can use to build your own SRM business case, please contact us here.

 

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