Enhancing Supplier Performance. Building the Business Case for SRM (Part 1)
Spend Matters welcomes this guest series from Sean Harley, co-founder and CEO of LUPR. In this post in our blog series on developing a business case for investing in Supplier Relationship Management (SRM) capabilities, we are focusing on enhancing supplier performance and the bottom-line impact that results. (See the first introductory post here.) The goal is to dramatically reduce service issues related to quality and delivery. This enables savings to be realized from suppliers such as those in low-cost countries that need to be developed.
The image below, taken from a whitepaper by Geller & Company, illustrates how savings from strategic sourcing can be eroded by inadequate supplier performance management and collaboration. In a category as simple as maintenance, repair and overhaul (MRO), a supplier may gradually introduce more expensive items to replace those with competitive prices in your contract. In more technically complex categories such as custom industrial equipment and components, quality can slip, delivery can become erratic and services previously offered, such as design engineering support, can become scarce. As a result, up to 75% of sourcing savings can be lost to a host of issues throughout the life of the contract.
Source: Geller & Company, “World-Class Procurement — Increasing Profitability and Quality,” 2003
Demonstrating measurable return on investment in SRM capabilities requires the development of a baseline cost of failure from “non conformances.” Too often, the cost of poor supplier quality (COPSQ) for a given organization is a complete unknown.
Determining a baseline cost of failure requires the engagement of key stakeholders who can document the cost impact of past incidents with suppliers in terms of rework, project delays, lost sales and additional oversight requirements for future projects. This can augment any existing data you may have on failures located across several sites.
Often, pockets of good practice exist where work has been done to quantify the effects and costs of non conformances. The best approach is to focus on these areas in measuring the COPSQ, leveraging high-quality data that has been accumulated to develop an estimate for that area. At one refinery, we identified $2.5 million in cost associated with downtime and excess maintenance costs in the previous 12-month period. We then extrapolated based on total production volume and other factors, to arrive at an annual cost estimate of $35 million across all business units.
That well-supported estimate secured buy-in for SRM from top management. As you go forward, a dynamic SRM platform helps you demonstrate your progress in real-time to management and other stakeholders.In our next blog, on improving procurement efficiency, we will quantify the benefits of minimizing non-value add activities performed by procurement.