The business case for SRM: Highlights from recent research. By Jonathan Hughes and Jessica Wadd

Transcription

1 The business case for SRM: Highlights from recent research By Jonathan Hughes and Jessica Wadd

2 This publication may not be reproduced, stored in a retrieval system, or transmitted in whole or in part, or in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior written permission. Copyright 2012 by Vantage Partners, LLC. All rights reserved.

3 Overview Overview During the past several years, supplier relationship management (SRM) has become a major focus within the procurement and supply chain community and on the strategic agenda of C-suite executives. As SRM efforts mature, many companies are grappling with whether and if so, how best to expand SRM efforts and investment. Meanwhile, the ramifications of the economic downturn have added urgency to questions about the value of SRM and what kinds of benefits should be targeted. Executives wonder whether the benefits they are realizing are in line with what others in the marketplace are achieving, and what further value could be obtained by further investment in SRM. To provide further clarity around the business case for, and value of, SRM, Vantage Partners has conducted several research studies during the past several years. This report is a compilation of that work. 1

4 Part One Value at stake

5 Part One Value at stake Value leaks out of the relationship with suppliers somewhere between actually putting together the contract and how it gets executed in practice. Sometimes there s a large gap between what we thought was What is the size of the opportunity? Not surprisingly, customers report that their strategic sourcing efforts have not yielded the value they originally anticipated. These efforts began the process of putting more structure and rigor around selecting suppliers and establishing good contracts often a pre-requisite to more open, transparent, and effective relationships but stopped far short of completing it. Targeted value realized from strategic sourcing going to happen and what we actually find along the way, and I m not sure frankly that we have a really effective loop for then 45% 55% Value not realized Value realized revisiting what the expectations were when the contract was originally put in place now that we have some additional learnings in light of day to day operations. Director of Procurement Operations, Healthcare Sector In a study involving more than 500 companies, participants (on both the buy-side and sell-side) reported that a significant amount of potential contract value isn t realized during implementation. Average contract value realized during implementation 100% Buy-side respondents Negotiating deals with suppliers is hard enough, but frankly, that s the easy part. The hard part is implementing those deals. Director of Supply Chain Management, Electronics Sector Percentage of potential value realized 75% 50% 25% 0% Sell-side respondents 54% 66% 4

6 Value at stake Part One On its face, it is surprising that suppliers would report delivering so much less than the full potential value of their agreements with customers. Conversations with sell-side executives and professionals revealed that indeed, suppliers themselves are often significantly dissatisfied with the value they deliver to customers and that they blame their customers to a large degree. For Customers Expected innovation does not materialize Scope changes lead to additional costs Off-contract purchasing undermines expected savings Project delays due to supplier Quality problems For Suppliers Expected volumes do not materialize Changes in requirements lead to increased & unrecoverable costs Customers do not provide committed resources Project delays due to customers One significant area of unrealized opportunity is innovation. In a 2010 study, nearly 95% of respondents on both the buy-side and sell-side reported that a significant amount of the potential for innovation from suppliers remains untapped. Unlocking that potential will require both sides to focus not on better negotiations or contracts, but on a systematic and structured approach to working together that focuses on identifying and then realizing opportunities for longer-term value creation in other words, SRM. Degree of untapped potential customers and suppliers believe there is to drive additional innovation from/with suppliers 39% Buy-side perceptions 6% 55% Little to none A significant amount A great deal 36% Sell-side perceptions 6% 58% Working collaboratively with suppliers to spot innovative opportunities can yield benefits the customer never would have expected or considered. An international pharmaceutical company was spending millions of dollars annually on a chemical compound needed for the manufacture of one of their leading products. Because the chemical had a short shelf life, the company was ordering large batches just-in-time and paying exorbitant shipping fees. In conversations with the chemical supplier, they discovered that the chemical was a by-product of some processes at an industrial plant fewer than five miles away (the supplier knew this because the industrial firm was paying them to haul the chemical away). After some three-way discussions, the pharmaceutical company, supplier, and industrial firm agreed to jointly develop a pipeline between the two facilities through which the chemical could be easily pumped from one site to another within a very short time frame. In the short term, both customers made a large capital investment. In the long term, they lowered their costs and made their production processes more efficient. 5

7 Part One Value at stake It is in our long-term interest to actively help our key suppliers be successful. We get the benefit of their improved competitiveness and capabilities, and they get to grow their business and leverage that with other customers as well. The resources KT invests in their success can pay dividends later on. Scott Paull, Chief Procurement Officer, KLA-Tencor What is the potential value of more collaborative relationships? All of the data we ve collected during more than ten years of studying customer-supplier relationships suggest that working more collaboratively with key suppliers delivers significant value to customers. In a 2007 study, 68.7% of companies with an SRM program reported that it was delivering considerable value to the organization (and 98.8% of companies reported it was delivering at least moderate value). Additional value generated through collaborative relationships Considerable measurable value Considerable, but difficult to measure, value Moderate measurable value Moderate, but difficult to measure, value One leading company that aggregated their SRM benefits found that the cost savings delivered by their SRM program increased exponentially year by year. In the first year of their program, they realized substantial savings of $20m and, by year four, that savings had increased to $350m. As a direct result of the value senior management placed on these cost savings, the organization increased the number of dedicated supplier relationship managers in the Procurement function rising from two to 22 during the four year period. Little or no value Average value achieved in 2007 though SRM programs was US$101,450,000 Note: only 11% of buy-side respondents reported a figure 0% 25% 50% 75% 100% Percentage of Respondents Additional value generated through collaborative relationships Customers report realizing an average of 40% more value 7% 14% 26% 4% 14% 35% from their most collaborative key suppliers 10% 10% 41% < 10% more value 10-25% more value 26-50% more value 51-75% more value % more value >100% more value Suppliers report delivering an average of 49% more value 4% 3% 33% to their most collaborative key customers 6

8 Value at stake Part One And, customers who begin with a fundamentally collaborative approach to negotiating with suppliers are far more likely to realize their goals. A collaborative negotiation process is correlated with greater value from strategic sourcing per buy-side Bottom 10% of buy-side respondents in percentage of value targeted through strategic sourcing that has actually been realized 36% 7% 57% Buy-side characterization of negotiation process with suppliers Highly adversarial Somewhat adversarial Somewhat collaborative Highly collaborative Top 10% of buy-side respondents in percentage of value targeted through strategic sourcing that has actually been realized 60% 3% 3% 34% When capacity was short in , the customers who received priority weren t necessarily the ones with the largest or most profitable accounts. The customers I took care of first were the ones who were willing to transparently discuss their needs, frequently update their forecasts, and treated me like a human being even when things weren t perfect. Account Executive, Chemical Manufacturing Sector 7

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10 Part Two Sources of value

11 Part Two Sources of value Achieving breakthrough value requires new ways of thinking about key suppliers. KLA-Tencor Corp., the leading manufacturer of inspection equipment for the semiconductor industry, worked with the CEO of a key supplier to improve the supplier s overall competitiveness, which helped lead the supplier to make an acquisition to expand both its capabilities and geographic reach. Where does that value come from? Our study results and experiences with clients across a number of industries suggest that working collaboratively to reach a minimum threshold of mutual trust, mutual understanding, mutual respect, and open communication is a pre-requisite for the more tangible business value their organizations desire. These four value enablers lay the groundwork for effectively using various levers (such as joint planning meetings or joint performance scorecards) to generate cost savings, incremental revenue opportunities, and improved management of risk. Organizations who attempt to employ the tactical tools and processes of SRM without first laying the foundation for collaborative thinking inevitably find themselves dissatisfied with their results. A framework for thinking about SRM value Value Operational and Value Levers Value Enablers Spend consolidation Inventory level reductions Joint demand management Tangible Joint should-cost modelling Demand reduction Joint relationship governance Reduced costs Most-favored customer pricing Joint strategic planning Increased revenue Reduced capital expenditures Quality improvements Preferred access to best supplier talent Mutual Understanding Mutual Respect Improved New innovative products Two-way performance scorecards Increased speed to market Risk-reward sharing Increased share price Intangible Enhanced brand reputation New market access Increased customer end-user satisfaction and productivity Increased supply chain visibility Fewer supply disruptions Fewer quality / service issues Balance of dependency (reduced risk of supplier opportunism) Shared investments Joint new product design Preferred access to new supplier technology Shared marketplace insights Joint forecasting Preferred access to supplier capacity Joint risk management Open Communication Mutual Trust 10

12 Sources of value Part Two And, how do you measure the value of SRM? As illustrated above, 70.5% of buy-side respondents report that while their SRM programs deliver considerable or moderate value, that value is difficult to measure. Because much of SRM is about coordination and consistency of interactions and expanding the scope of what customers and suppliers do together, many (very significant) benefits from SRM can be difficult to quantify. How do you measure the financial value of not having delays in delivery of goods or not suffering damage to your brand because of lead content in children s toys? If you collaborate with a supplier to design a new product, how do you determine what it would have cost you to produce without their early input? I would estimate that our return on investment from SRM is more than 50:1 for cost reductions alone and more than 100:1 when incremental revenue is included. Global Procurement Director, Natural Resources & Energy Sector In addition, isolating the causation of additional savings or improvements or innovation can be quite challenging (i.e., is the value we realized from SRM specifically and how much did we get from continued good sourcing practices?). For these reasons, we have found that documenting case studies of SRM success, both to build an early business case as well as to track SRM benefits, is a powerful compliment to tracking KPIs and metrics. In thinking about the value an SRM Program might bring to their organization, a multi-national clinical research organization developed a robust accounting of their SRM expenses (including some substantial technology investments for sourcing and supplier management that they had recently made) and compared that to a projection of the cost savings, incremental revenue, and productivity gains they would expect. Even by the most conservative estimates they considered, the benefits substantially outweighed costs as early as the second year of the program. Over the life of the program, the company calculated an internal rate of return in excess of 200%. Investments in formal SRM are offset by increases in productivity and revenues Investment / Return (in millions of dollars) $5.5 $5.0 $4.5 $4.0 $3.5 $3.0 $2.5 $2.0 $1.5 $1.0 $0.5 $0.0 Customer investments Reduction in costs Incremental revenue Productivity gain Year 1 Year 2 Year 3 11

13 Part Two Sources of value French engineering company Areva SA and Finnish customer Teollisuuden Voima Oyj (TVO) have run into significant challenges while building the world s first new-generation nuclear reactor. The planned cost of around $4b has nearly doubled to $7.2b, and construction is four years behind schedule. Much, if not all, of the overrun has its roots in how the customer and supplier have chosen to measure their goals. Rather than focusing on setting quality standards and risk management plans for use with sub-contractors, the budget was set as the primary measurement of success. As a result, Areva chose subcontractors who promised to meet the price, but lacked much of the experience or expertise needed. Below are some best practices for developing KPIs and metrics for an SRM program. Given the inherent complexity of measuring value from an SRM program, it is critical to involve Finance early in both defining the forms of value targeted through the program and setting rules for how that value will be reported Many types of value that are worth measuring are neither feasible nor appropriate to set hard, measurable targets for (e.g., increases in internal stakeholder satisfaction with suppliers or reduction in time spent to resolve unexpected issues). In these cases, softer forms of quantitative data (such as survey information) are incredibly effective in bridging the gap between anecdotes and hard facts and invariably give a gestalt sense of results. One of the major benefits of SRM is that through a higher level of trust, transparency, and communication, serious liability and commercial problems are avoided. The big challenge with measuring those kinds of benefits (essentially reduction in risk factors leading to a reduction in adverse events) is that you re trying to measure the benefit of something that does not happen. In these cases, having a realistic articulation of the baseline is critical. How often do you experience supply chain disruptions today? What is the magnitude of those disruptions? Only with this information can a downward (or not) trend be measured over time. 12

14 Part Three Realizing value

15 Part Three Realizing value For a leading chemical manufacturer, the value of alignment between their SRM program and sourcing process has become crystal clear. Traditionally, chemical mixing vats would be offline for a week while being cleaned, not because it took that long for the cleaning workers, but because of the scaffolding that would need to be erected and then later demolished. And, of course, the scaffolding services and cleaning services were sourced separately. In conversations with a supplier, the company discovered the supplier had recently developed a portable elevator that could move cleaners around quickly (enabling them to complete the job in two days rather than five). On the surface, the cost of using the elevators was higher than the scaffolding services that had always been used, and so the traditional Procurement team was not interested. However, looking at the overall situation and need, the firm realized that having the vats back online three days faster would translate into enhanced efficiencies that would more than offset the increase in costs. Does investment in SRM make a difference? Not surprisingly, there is a real correlation between level of investment in SRM and returns, and many companies significantly underinvest. SRM programs are focused on making major changes to the way a company works with suppliers. As with any other organizational change, it doesn t just happen. The company must consciously devote resources new roles must be filled, stakeholders need to be trained, processes should be created or revised and implemented. The level of investment a company makes in SRM is correlated with achieving greater results through the SRM program Considerable measurable value Considerable, but difficult to measure, value Moderate measurable value Moderate, but difficult to measure, value Spearman s rho = Little or no value 0% 25% 50% 75% 100% Percentage of Respondents Respondents who perceive their company as having made a considerable investment in SRM Respondents who perceive their company as having made a moderate investment in SRM Respondents who perceive their company as having made little to no investment in SRM Source: Ongoing global research conducted by Vantage Partners (reflects ~ 130 survey responses to date) From both an investment and change management perspective, it is critical to recognize that SRM is already happening in your organization just probably not in a fully systematic and, therefore, fully efficient and effective way. Designing an effective approach to SRM (and building an appropriate business case) involves not only identifying wholly new practices that should be adopted, but also looking at what your organization is already doing, albeit not systematically, and cleaning that stuff up so that the business case is built on a foundation of successful efforts. 14

16 Realizing value Part Three Which investments yield the best results? The correlation between investment in SRM and results noted on the previous page is high, but not perfect. Just because you are investing doesn t mean you re doing it wisely. Looking across most and least crucial success factors, at the end of the day, a huge amount of SRM comes down to people. SRM is very cross functional in nature unless you have appropriate governance, clearly articulated roles and responsibilities (with associated accountability), and processes to get people working well internally and with suppliers, no amount of investment in systems or tools will significantly move the needle in terms of results. Perceived importance of SRM success factors Coordinated, cross-functional engagement (procurement, supply chain, business units, etc.) in SRM activities Individuals skills related to SRM Formal governance and business processes for SRM Procurement incentives focused on total long-term value vs. short term cost and price considerations Software tools for SRM 0% 25% 50% 75% 100% Percentage of Respondents Very important Somewhat important Not very important It is only by institutionalizing a sophisticated, collaborative way of thinking and behaving (one that is not an invitation to be taken advantage of suppliers under tremendous pressure to extract the last possible penny from their customers) that a company can realize the full benefits from SRM. Many companies begin the change management and mindset shaping effort required for SRM, but stop short of what is needed. Changing individual mindsets and behaviors requires more than just the occasional memo or training event. The organization needs to articulate the new expectations regarding mindset and skill, embed those expectations in accountability and incentive systems (e.g., role descriptions, performance reviews, bonus structures), and provide ongoing training and reinforcement to enable individuals to really hone their skills. The ROI on skills training and other mindset shaping efforts is tremendous. When we launched a training effort focused on negotiating more collaboratively with suppliers, we expected to realize between 2-6% savings on our supplier contracts; we actually achieved 17%. Chief Procurement Officer, Transportation Sector 15

17 Part Three Realizing value One powerful, yet common, example of how poor internal coordination and alignment undermines customer-supplier collaboration occurred at a large consumer products company. Desiring to tap into the expertise of key suppliers to develop new and innovative products, R&D reached out to its suppliers, and a number of suppliers enthusiastically agreed to contribute ideas and form joint development teams. Before long, these efforts brought new products to market that incorporated novel and proprietary supplier inputs. No sooner did this happen, however, than the procurement organization sought to commoditize what it identified as high-priced inputs and immediately searched out or tried to develop alternate sources. Before long, it too was successful at what it was rewarded for, namely reducing costs. Soon afterwards, R&D found itself with suppliers complaining about breaches of faith and goodwill and refusing to participate in further joint development efforts. Collaboration with key suppliers was largely shut down for years as a result, with the lost opportunities on just one critical relationship estimated by key executives to be in the hundreds of millions of dollars. What level of integration is required? As noted in the chart on the previous page, coordinated, cross-functional engagement in SRM activities is crucial for success. An effective SRM program is aligned with all other aspects of your approach to selecting and managing suppliers. As the data below shows, SRM programs that work continuously to bring alignment among all of the touch points with a strategic supplier (business leaders, Procurement professionals, and relationship managers) realize significantly better results (on average, 59% greater realization of value targeted through strategic sourcing efforts). Alignment among category management, SRM, & negotiation strategy is correlated with more value from strategic sourcing Supplier negotiation strategies determined through a systematic process informed by category management strategies, nature of relationship with supplier, & overall goals for that relationship per SRM program Supplier negotiation strategies primarily determined based on type of relationship with supplier, and overall goals for relationship per SRM program Category management strategies are the primary determinant of supplier negotiation strategies Category management strategies, SRM program & strategies, & supplier negotiation strategies are not at all coordinated or aligned Our company generally does not follow a formally articulated negotiation strategy when negotiating with suppliers 44% 60% 59% 54% 70% 0% 25% 50% 75% 100% Percentage of targeted value actually realized 16

18 Conclusion

19 Conclusion I didn t just sell SRM once. I articulated the compelling business case up front for that initial investment and, every quarter, I m in front of the C-suite sharing our success stories to reinforce why we began this journey and maintain enthusiasm for the ongoing shift in mindsets SRM is a journey Developing a supplier relationship management capability can dramatically enhance the value of supplier relationships for any organization. And, building that capability often occurs in stages. As more stakeholders within the organization see the benefits of SRM and a new mindset is used to integrate supplier collaboration with business strategy and operations, the company s focus and rigor regarding robust SRM tends to evolve and value follows. SRM Maturity model Integration of supplier collaboration with business strategy and operations Level 4 and ways of working. Head of Supply Chain Management, Pharmaceutical Sector Stakeholder involvement & buy-in outside Supplier Management/Procurement Level 1 No formal supplier relationship management program Level 2 One or more SRM programs at business unit level Risk management and targeting and measurement of opportunities to create value is ad hoc Level 3 Enterprise-wide SRM / collaboration program with clear links to overall business strategy Systematic, relationship-specific risk management plans and targeting and measurement of value Supplier agreements are aligned with client agreements Collaboration activities, behaviors, and capabilities are embedded in all business processes that involve or affect key suppliers SRM programs are integrated with key supplier reciprocal SAM programs Value realized Supplier relationship management program maturity 18

20 About Vantage Partners About Vantage Partners Vantage Partners, a spin-off of the Harvard Negotiation Project, is a management consulting firm that specializes in helping companies achieve breakthrough business results by transforming the way they negotiate, and manage relationships with, key business partners. To learn more about Vantage Partners or to access our online library of research and white papers, please visit 19

21 Vantage Partners 10 Guest Street, Boston, MA USA T F Copyright 2012 by Vantage Partners, LLC. All rights reserved.