Measuring ROI from Supplier Relationship Management Program

author

By: Ddivya Kumar -- Senior Domain Analyst, Global Business Services- Procurement and Finance

08 May, 2022

Listen to this article



Measuring ROI from Supplier Relationship Management Program
WHITEPAPER

Supplier relationship management

Almost 80 percent of the organizations including Best-in-Class organizations that have high level of procurement maturity would face challenges in obtaining commitment and funding for their Supplier Relationship Management (SRM) program. This is mainly because Procurement teams are always challenged to showcase the financial benefits out of the SRM program. Building a business case and justifying investment in SRM to the CPO involves a lot of effort from the Procurement and SRM teams and therefore it is often ignored. To gain buy-in from the top management for investment in SRM, it is critical to show a positive ROI and to achieve this, it is important to involve the Finance team to support in defining the impact of SRM on the company's financial statements.

This paper discusses how to calculate and build a business case to showcase ROI from SRM program. It also provides some benchmarks which can be used as a reference while estimating ROI from SRM for an organization.

Introduction

In many organizations, SRM is among one of the top 10 CPO priorities. However, the steps taken, and areas covered within SRM does not fully meet organization's goals; and that’s because thus far the major focus for SRM has only been risk mitigation, performance, and compliance management. Supplier partnership, collaboration, and development are areas which are not commonly emphasized in the SRM program as it is hard to measure the benefits. Below are some strategies on how to build a business case for all areas or processes within SRM, success factors and benchmarks.

Building a Business Case to showcase ROI from SRM program

The ROI or value derived from robust SRM includes incremental gains because of investment in SRM technology, people, and time with suppliers. If the goals of the SRM program is focused on cost savings, estimated ROI should be calculated with the help of Finance teams who can build a hard dollar case for the SRM program. However, Finance team's involvement may not always be warranted if the SRM program is focused on objectives such as risk reduction and value maximization.

Organizations can realize 9X -11X ROI by following the strategies given below.

Challenge

SRM Value Driver

Strategy

Benefits

Procurement Team dedicates more than 50 percent of time on operational tasks like manual supplier on-boarding, query handling etc.

Automation of Supplier Information collection via Supplier Information management tool

Supplier self- registration via Supplier portal. Automated data gathering via pre-built registration form

About 50 percent FTE Cost savings due to reduced manual work

Organization exposed to high supplier risk due to poor risk tracking

AI enabled Supplier risk monitoring tool

Real-time risk monitoring ensures risk reduction and helps in proactive risk mitigation planning

About 60 percent reduction in risk incidents which impacts material supply and service

Supplier performance issues affecting organization’s business operations

Centralized Supplier performance management tool

Reviewing supplier performance on a quarterly basis adopting 360 degrees approach (multiple stakeholder evaluation)

Reduces risk of supplier failure by 30 percent

Supplier Non-compliance to industry’s sustainability requirements

Integrate Sustainability and CSR in SRM program

Ensuring supplier’s compliance to organization’s sustainability standards through periodic audits

High level of organization and supplier’s sustainability compliance can increase overall brand value of the organization

Suppliers suggest very few innovative solutions

Building transparent relationships based on trust by sharing organization needs and objectives and leading supplier led innovation initiatives

Collaboration with strategic suppliers for innovative ideas, strategic planning, product roadmaps, and investments to remain competitive 

  • Companies perceived as easier to do business with and more collaborative are more likely to get the best pricing and ideas from suppliers.

  • Implementation of such ideas and process improvements suggested by suppliers can result in increased operational efficiency and cost reduction

Inconsistent SRM process across the organization

Standardize the SRM process

Devise a Best-in-Class SRM process for various types of suppliers and ensure process compliance across business units

Organizations standardize SRM program and focus on minimum 90 percent of suppliers. Realize 30-35 percent more value compared to others that focus only on strategic suppliers

 

SRM program performance benchmarking

According to Vantage Partner’s survey results, it has been observed that high levels of SRM investments have been correlated with greater ROI.

Metrics

Description

Average Performer

Best-in-Class

Average Investments for SRM Program to-date

Average Investment in SRM relative to other procurement and supply management investments to-date

$61 million

$554 million

Average Investments for SRM program in the last year

SRM investments made in the last year

$17 Million

$25 million

Average value/ ROI realized from SRM investments in the last year

Value realized from SRM investments

$34 million

(Approximately 1X)

$304 Million (Approximately 11X)

 

 

 

Allocation of SRM investments

 

 

 

SRM Software tools

63 percent

14 percent

Increasing number of people and

amount of time spent on SRM

20 percent

60 percent

Individual SRM skill development

(training, coaching) 

10 percent

10 percent

Defining and utilizing formal SRM

governance mechanisms &

business processes

7 percent

16 percent

Source: Vantage Partners. The SRM program benchmarking study was conducted by Vantage Partners in 2019 which involved around 950 respondents representing more than 500 companies from all industries. Majority of the companies belonged to the revenue group between $1 billion to $10 billion.

Strategies for Success

Getting buy in from suppliers and all relevant teams in the organization is most important. All the strategies given below can help in achieving the expected/ estimated ROI from SRM program in an indirect way. Moving a company to play a more strategic role in managing suppliers requires change management and a shift in perspective both internally and on the part of the supplier.

Success Factors

Strategies

Clear Vision

  • SRM team needs a compelling value proposition, at department and supplier level, aligned to the organization's strategic and business objectives.

  • It should fulfill an organizational purpose that links supply chain capability together with the organization's internal capabilities to create added value for the organization and suppliers

Sufficient investments

  • It is important to get organization's leadership support for investments related to SRM as most organizations do not appreciate importance of SRM investments.

  • It should be emphasized that SRM investments are not only for procuring some fancy SRM software but are also for forming dedicated SRM team and upbeat training needs

Establishing a common understanding between Category and SRM teams

  • Strategic alignment between SRM and Category teams is very essential as in most cases they have opposing aims. Category teams focuses on individual spend groups and how to maximize value from these. Conversely, SRM focuses on individual vendors -- many of whom span multiple categories -- and therefore do not share the same interest in category strategies.

  • Without careful coordination, the two approaches to strategically manage procurement spend do not co-exist well

Increase supply base coverage for SRM program

  • SRM program should cover and focus on at least 90 percent of the whole supply base

Common understanding

  • Supplier relationships should not only be based on financial transactions, but also on mutual trust and loyalty. Ensure that suppliers feel like they are a part of the business and there should be a singular purpose on collaboration and continuous improvement activities.

Supplier Partnerships

  • Supplier partnerships will be effective only if there is equality in power dynamics between the organization and supplier.

  • While considering long-term joint working, SRM teams should ensure high levels of engagement and collaboration between in-house Product development team and Supplier team

  • Partners in an SRM relationship should recognize that the business success of each benefit both

Relationship investment

  • Successful engagement requires investments by both the supplier and organization. Suppliers will achieve different levels of investment depending on where they sit in the hierarchy -- strategic or preferred or approved.

  • The supplier ensures executive engagement in critical functions, active participation in business reviews, and early access to product development roadmaps. In return, the receiving organization provides access to key decision makers across the enterprise and feedback to the supplier for wins and losses of competitive bids.

Avoid over emphasis on Cost reduction

  • The objective of an SRM is to create a situation that benefits both parties. Focus on the long-term goals instead of short-term gains.

 

Conclusion

Organizations should look for realistic returns and sustainable benefits. Organizations cannot expect to see returns from SRM immediately within 12- 24 months. The actual returns from SRM can be expected over 3-5 years’ time period and sometimes even beyond. SRM needs an organization-wide cultural change towards expectation of long-term joint working and strategic gain. This must be explained very clearly to the top management while presenting the business case.

References

https://www.pwc.nl/nl/assets/documents/pwc-supplier-relationship-management.pdf

https://blog.stateofflux.co.uk/blog/ten-critical-success-factors-to-secure-srm-value-and-roi




x

LiVE Event: Category Management For Procurement Professionals