Increasingly, fast-moving consumer goods (FMCG) brands see their suppliers not simply as vendors but as key assets in realising their business strategy.
However, measuring the value of this strategic supplier relationship is difficult as so many of the benefits are often intangible. Nevertheless, these are the key factors that all stack up to build return on investment (ROI) into your strategic supplier relationship:
1. The best price
This is not necessarily the lowest price, but a fair price for both the supplier and the customer, where both can benefit from a sustainable margin.
2. Operational effectiveness
In effect, a measure of your supplier's technological expertise can express itself in two ways:
i) Consistency of supply
• On time
• On budget
• Streamlined use of resources
• Fast response to increase in demand
83 per cent of decision-makers in FMCG industries cited ‘being out of stock’ as the number one factor impacting ROI. A supply chain disruption can cost a manufacturer up to $5 million, irreparably harm a brand and drive customers straight to the door of a competitor. A strategic supplier relationship can prevent this kind of disruption.
ii) Speed to market
To what degree is your supplier contributing to your effectiveness in capitalising on new market opportunities? Being first to market means:
• Locking out a competitor
• Being first in the minds of the consumer
• Greater market penetration and expansion
The length of time in bringing a new product to market is of critical importance for ROI.
There are two influences on ROI to consider:
• Consistent quality in keeping with the brand's promise, no matter where the product is made
• Maintaining this quality during rapid increases in demand
The ROI should be considered in terms of costs avoided. Cadbury Schweppes recalled one million chocolate bars after a salmonella scare. The total cost of the recall was in excess of £30 million, with a loss of market share of 1.1 per cent.
Quality is an arms race between you and your competitors. Each time your competitor improves their product, they change the basis of competition. A supplier who can meet dramatic improvement changes well satisfies ROI.
Most major brands put sustainability targets at the forefront of their business goals. More and more consumers are drawn to brands that can demonstrate that they are effectively lowering their impact on the environment.
Unilever has a comprehensive sustainable living plan, including the commitment to source 100 per cent of their agricultural raw materials sustainably by 2020.
Also, suppliers proactively reducing their environmental footprint make a positive payoff to ROI.
5. Innovation and technical expertise
Brands must innovate or die. Some 96 per cent of all new projects fail to meet or beat companies' targets for ROI.
Increasingly, brands don't have the resources to innovate effectively.
• Less than 25 per cent of companies have adequate resources to undertake all their planned projects
• Development personnel are being overcommitted on average by 75 per cent
• Many companies face as much as 37 per cent of their innovation projects becoming 'at risk' each year
A company with $200 million committed to innovation are therefore in danger of losing a whopping $74 million.
This is why FMCG experts believe that the extra value suppliers contribute through technical expertise and innovation has the biggest impact on the ROI of a strategic supplier relationship.
☛ Simon Ellis is vice president of European contract manufacturing services at wet wipes manufacturer Rockline Europe