Estimating the value of SRM

27 April 2012

Last week I enjoyed the experience of working with MBA students at the University of Birmingham, on a day dedicated to concepts and implementation of SRM, when we snagged on the tricky issue of quantifying the benefits that result from supplier management. I suggest this is ‘tricky’ because there remains no consensus on the quantum of additional value that can be predictably achieved from SRM, nor how you would actually measure the benefits.

Research in recent years has endeavoured to place a percentage on what procurement leaders can hope to achieve and the figures range from an incremental 1 per cent up to 23 per cent. It can be done - I know of one organisation that achieved 21 per cent on price reductions alone from post-contract activity with suppliers, and that was on top of improvements in quality and delivery. These are big numbers but such a range of results provides a real headache for purchasing chiefs looking to gain support for a programme of SRM upscaling. Some resort to sector benchmarking to gain an indication of what is possible, but you wouldn’t bet your house on replicating what a competitor has reportedly achieved in this territory. SRM isn’t like a relaunched strategic sourcing programme where category experts can sometimes be deployed in a ‘bish-bash-bosh’ approach, concentrating volume and leveraging the supply base against savings expectations often reliably pre-estimated based on market trends. Estimating savings and other benefits from SRM is tricky because they depend on the unique circumstances that exist between two or more organisations. For example, two competing suppliers may provide the same service for comparable rates, yet each may display widely different performance in relation to quality, delivery, innovation, technology provision, customer support, amongst many other elements, all of which represent the total of value provided. Each of these elements (or ‘levers’ if you prefer) are opportunities to improve the value secured from the relationship, even if at the beginning, the priority is likely to be on reducing value leakage caused by failure of the supplier to perform to some elements of the contract. So, when it comes to the task of building the business case, you have to define the full range of value levers that you know impact on the purpose of your organisation, whether that’s generating a financial return for your shareholders, or delivering outcomes to citizens reliant on public services. Once those levers have been defined (typically under cost-impacting, risk-impacting and revenue-impacting headings) and appropriate metrics designed, then the task becomes benchmarking current performance. With that baseline data to hand, you and your team, and with the timely input from the supplier, can set quantifiable goals and set up a programme of improvement initiatives that can be successfully implemented. Tracking the benefits derived from such effort should provide a bank of case studies and knowledge of what initiatives work in some circumstances and less so in others. It may be the best you can hope for when it comes to estimating what your SRM programme can achieve. Clearly there will be great uncertainty, but it beats setting up ‘SRM’ meetings with suppliers, asking them to improve, and hoping for the best.
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