18 March 2010 | Adviser Q&A
Our company is developing a supplier relationship management programme, but is struggling to calculate the cash benefit of it. Is there a formula that could be applied?
Corporate buyer, Kaeng Koi, Thailand
ANDREW SWIFT
Head of global sourcing, WhiteConcierge
Consider the alternative. Can you calculate the cost of not implementing a supplier relationship management (SRM) programme?
The benefits of implementing SRM are mitigating supply risks, improving supply costs such as invoicing and introducing technological innovation advances.
In my experience SRM strategies can improve supply costs by 15 to 20 per cent. Quantifying each initiative is really dependent on the level of implementation of each stage but also on the categories that you are sourcing.
Other than that you could quantify the cost of having to go to an alternative supplier. If you are typically achieving 20 per cent discount against other suppliers, that can be factored in. If you order through e-procurement and you had to revert back to paper and fax, the cost of transactions could increase, some say to £60 per invoice. You can soon build up a picture of the cash benefits as you split up the deliverables of an SRM programme.
EAMONN PHILLIPSON
Owner, Interim Procurement SARL
The answer is partly dependent on the type of business and the status of your other supply chain management systems. There’s no “one formula fits all” answer.
Start with transaction-level improvements, which are easy to measure, but keep strategic improvements in mind. Measure your processes: the number of transactions between requisition and pay and time taken per process, for example.
Summarise the results. This could be the average transaction process costs as a percentage of spend, or the number of suppliers and full-time equivalents (FTEs) per £1 million spend. Studies suggest that world-class organisations have 77 per cent fewer suppliers and 69 per cent fewer FTEs than average companies.
Strategically, SRM pays dividends when collaborating closely with key suppliers. Joint development and improvement, shared processes and shared benefits (and costs) produce faster time to market, better quality, lower costs and increased flexibility, leading to competitive advantage and happier customers.
JAMIE NAPPER
Global SRM excellence manager, RSA
The realisation of cash benefit from SRM is a constant challenge given the intangible nature of some results. There are some simple steps to support the SRM business case, however.
First, track change impact from the start and adopt a simple method of measurement and reporting. If you find the results have no obvious unit cost or direct cash reductions you can be more creative to assign more tangible benefits. Process improvements internally (reducing call times, complaints and queries) can reduce headcount and increase productivity. Externally they can be developed with suppliers into longer-term overhead reductions.
Similarly, increased external customer satisfaction can improve customer retention rates. Increased supplier penetration can reduce overheads such as multiple invoicing.
Lastly, don’t dismiss intangible benefits such as risk mitigation and improved employee engagement. These are equally important in supporting the “relationship” part of SRM.
Key points
• Break down the possible advantages into quantifiable measures
• Take into account the number of suppliers you are working with
• Don't underestimate the importance of intangible benefits such as reduced risk
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Please note: responses can only be given on this page, represent writers’ personal views and should be regarded as general guidance only. The adviser panel includes experts from a range of disciplines
