By Jonathan Hughes, Partner; Jessica Wadd, Senior Consultant and Ashley Hatcher, Senior Consultant, Vantage Partners . February 27, 2014. Mypurchasingcenter.com
Supplier relationship management (SRM) continues to be a major focus within the procurement and supply chain community and on the strategic agenda of many C-suite executives. As companies refine their plans for 2014 (and beyond), many are grappling with whether to expand SRM efforts and investment, and, if so, how. To provide further clarity regarding which specific SRM practices deliver the greatest value and enable organizations to benchmark themselves against peers and cross-industry leaders, this article shares preliminary results from an ongoing global study conducted by Vantage Partners (comprising 669 responses from more than 330 companies to date).
SRM will be critical over the next 3-5 years, and many companies have significant room for improvement
While 78% of respondents indicate that their company has some form of SRM program, fewer than 10% of these individuals rate their company’s approach to SRM as “mature and highly effective”. At the same time, the survey results highlight an overwhelming belief that SRM will be important or very important to a company’s success over the next 3-5 years, suggesting that many companies should make considerable investments in SRM in the near future (figure 1).
When asked to estimate the percentage of the potential value of supplier relationships that is actually realized today, respondents indicate that, on average, they are only realizing 44% of the potential available value, which means they could be realizing 1.5 times more value from their supplier relationships (figure 2).
Companies who realize the most value from SRM make considerable investments – particularly in focus, governance and business processes, and skill building
Not surprisingly, the data indicate a direct causal relationship between the investment made in SRM (e.g., dedicated headcount, staff time, software tools) and results achieved. While companies who have made only minor investments in SRM (e.g., implementing only a few SRM processes or tools, defining SRM activities and adding them to existing roles rather than increasing headcount or reallocating responsibilities to enable a significant degree of focus) often realize limited value from their SRM efforts, organizations that invest heavily in SRM report realizing considerable, measurable benefits (figure 3). On average, study participants estimate the value generated by their SRM programs total approximately $40.7M per year.
Which investments will yield the highest returns depends in part on the current maturity level of a company’s approach to SRM. Still, a few options stand out a most likely to deliver results:
Time: The amount of time individuals spend focused on SRM activities matters far more than the number of tools available to them. If the people responsible for managing critical supplier relationships cannot focus at least one third of their time on SRM, they will struggle to gain traction.
Skill building: While today, companies allocate less money toward individual SRM skill development (training, coaching) for staff who have significant interactions with suppliers than any other form of investment in SRM, study participants note such investments are critical and recommend increasing investment in skill development more so than any other area.
Governance and business processes: Investments in formal SRM governance mechanisms and business processes (including joint strategic planning, performance reviews, etc.) yield large payoffs – on average, more than $1M of return on even minimal incremental investment, holding all other investments constant.
Many SRM practices generate returns, though some stand out as being most crucial
Looking more closely at the investments organizations have made in governance and business processes, nearly every practice tested in the study is correlated with realizing more value from supplier relationships. That said, comparing top performers (both in terms of SRM maturity and value realized from SRM) to those in the bottom quartile, there are a number of practices that stand out as most likely to yield positive, measureable results. However, these practices are among the least likely to be employed by companies with less mature SRM programs.
- Aligning and integrating SRM with strategic account management (SAM) programs at key suppliers
- Tracking and measuring the total financial & strategic value delivered by SRM
- Aligning and integrating strategic sourcing, category management, contracting and contract management, and SRM
- Focusing on both individual relationships with suppliers, as well as systematic engagement with multiple suppliers
- Developing multi-year strategic plans with the most important suppliers
Some of these practices may be difficult to implement in the early stages of SRM (e.g., systematic engagement with multiple suppliers). Our experience suggests, however, that many could be adopted by companies with the least mature programs, if they underwent a shift in organizational mindset.
Each of the practices listed requires a strategic, rather than tactical approach to managing critical suppliers. To implement these practices effectively, companies must think about suppliers not just in terms of spend, but also in terms of the degree and specific nature of opportunities (potential for new value) and risk (potential for loss of value). And, the organization would have to empower those responsible for managing supplier relationships to sit side-by-side with stakeholders in the business to set and execute strategies, rather than acting as an order-taker from the business, which, in our experience, is often the most difficult shift for many companies.
Given the scope of opportunity for SRM indicated by the data, it is not surprising that the vast majority of study participants report their company would need to undergo significant changes to realize the full potential of their relationships with suppliers (52% call for a major change or total transformation, and another 38% suggest moderate change is required). Despite this challenge, many responses indicate that with the continued focus on SRM and the value it generates, additional investment will be made over the next 3-5 years – and that both customers and their suppliers can expect to continue to realize significantly more value from their relationships over time as they increase their SRM maturity.