A couple of weeks ago I was enjoying my regular experience of working with MBA students at the University of Birmingham, on a day dedicated to concepts and implementation of Supplier Relationship Management (SRM), when we snagged on the tricky issue of quantifying the benefits that result from supplier management. I suggest ‘tricky’ because there remains no consensus on the quantum of additional value that can be predictably achieved from SRM, nor how you would actually measure the benefits.
Research in recent years has endeavoured to place a percentage on what procurement leaders can hope to achieve and the figures range from an incremental 1% up to 23%. It can be done; I know of one organisation that achieved 21% on price reductions alone from post-contract activity with suppliers, and that was on top of very significant improvements in quality and delivery. These are big numbers but such a range of results provides a real headache for procurement leaders looking to gain support for a programme of SRM up-scaling. Some resort to comparing the results of competitors through sector benchmarking to gain an indication of what is possible but you wouldn’t bet your house on replicating what a competitor has reportedly achieved in this territory.
SRM isn’t like a re-launched strategic sourcing programme where category experts can sometimes be deployed in a bish-bash-bosh approach, concentrating volume and leveraging the supply base against savings expectations often reliably pre-estimated based on market trends. Estimating savings and other benefits from SRM is tricky because they depend on the unique circumstances that exist between two or more organisations, and the specific opportunities that can be dervied from a wide range of value-improvement possibilities. For example, two competing suppliers may provide the same service for comparable rates, yet each may display widely different performance in relation to quality, delivery, innovation, technology provision, customer support, amongst many other elements, all of which represent the totality of value provided. Each of these elements (or ‘levers’ if you prefer) are opportunities to improve the value secured from the relationship, even if at the beginning the priority is likely to be on reducing value leakage caused by failure of the supplier to perform at some elements of the contract.
So, when it comes to the task of building the business case, you have to define the full range of value levers that you know impact on the purpose of your organisation, whether that’s generating a financial return for your shareholders, or delivering outcomes to citizens reliant on public services. Once those levers have been defined (typically under cost-impacting, risk-impacting and revenue-impacting headings) and appropriate metrics designed, then the task becomes base-lining current performance. With that baseline data to hand, you and your team, and with the timely input from the supplier, can set quantifiable goals and set-up a programme of improvement initiatives that the organisation can rally-around and implement successfully.
Tracking the benefits derived from such effort should provide a bank of case studies that can be shared amongst stakeholders, and you’ll also gain knowledge of what initiatives work in some circumstances and are less so in others. It may be the best you can hope for when it comes to estimating what your SRM programme can achieve. Clearly there will be great uncertainty, but it beats setting up ‘SRM’ meetings with suppliers, asking them to improve, and hoping for the best.
By David Atkinson
This is an updated version of a blog that was published by Supply Management magazine in April.