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 SRM?

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 SRM 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.

 

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.

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 an SRM program can help overcome these challenges.

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 SRM 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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