For the majority of our clients, Supplier Relationship Management (SRM) has remained among the top three priorities on the CPO's agenda for the last several years. However, SRM adoption has not lived up to companies' ambitions. The Global downturn shifted focus to more basic spend reduction strategies (e.g., demand management, negotiation) and ensuing market uncertainty dampened investment in strategic initiatives. In addition, companies have struggled to size and justify SRM initiatives -- there has been little hard data on SRM value and specific approaches -- until now. The Hackett Group's recently completed Supplier Relationship Management performance study brings a wealth of insights for organizations embarking on an SRM initiatives -- including extensive insight into value and ROI.
SRM is Driving Significant Value at a High ROI
The study indicates that SRM is driving extensive Procurement benefits for both Top Performers and Peer organizations. Top Performers report annual SRM benefits of 3.05% on their spend. Over 25% of reported Top Performer benefits come in the form of growth (Innovation and new business generation/revenue uplift). Peer organizations, typically not as far along in their SRM programs, report capturing SRM benefits at an annual rate of 1.78%, less than half that of Top Performers.
Figure 1: Annual SRM Benefit
SRM Will Eclipse Sourcing as a Value Driver for Top Performers in 3 Years
A key finding of the study is that SRM already drives 45% of total procurement value for Top Performers. Top Performers are already seeing SRM drive the majority of growth-related benefits and are gearing up their SRM programs in anticipation that SRM will drive more Procurement value than sourcing within three years. Peer organizations, typically lagging in their SRM rollouts, are planning, on average, that SRM will contribute 46% of their Procurement value in 3 years -- catching up to where Top Performers are today).
Figure 2: SRM Value as a percentage of total value
Key Differentiators for SRM Top Performers
The study has surfaced a significant number of insights about what it takes to be an SRM Top Performer. Key differentiators achieved by Top Performers include:
- They are laser focused on their strategic supplier relationships: they dedicate over 2.7x more resources to each strategic supplier
- They concentrate on fewer strategic suppliers: they have 2.3x fewer strategic suppliers per $ Billion spend than do peer organizations enabling them to drive SRM with 37.5% fewer resources
- They measure and quantify SRM value at a far higher rate: 60% quantify the majority of their SRM value vs. only 8% of peers
- They are more than twice as likely as peers to manage SRM via a single enterprise SRM group
- They focus on developing SRM skills: their resources have effective SRM skills at more than twice the rate of peer organizations
- They aggressively deploy SRM best practices: they have developed best practice capabilities at 3x the rate of peer organizations
Building SRM Momentum -- Advice and Lessons Learned
Survey respondents provided no shortage of input for organizations undertaking SRM programs. Words of wisdom include:
- "You need early executive support"
- "It is key to establish a program that has been designed with the stakeholders in the organisation so they feel some involvement and commitment to the program"
- "Have a good structure and tool to support the process"
- "Limit the number of suppliers in the upper tiers"
- "Invest in people, skilled resources are required"
A Model for SRM Success
Based on our implementation experience and research, we have developed the following SRM model to provide a solid structure for our clients' SRM programs. The model addresses each of the elements of a successful implementation, defining both strategic and tactical elements across the full scope of SRM practices:
Figure 3: SRM Model
- SRM Strategy: How should the organization define SRM objectives, scope and approach?
- Supplier Stratification: How should supplier relationships be stratified based on strategic importance to prioritize resources and tailor management processes?
- SRM Governance: How should supplier-facing staff be organized and internal collaboration and supplier interactions be conducted?
- Performance Management: How should supplier performance be managed across different supplier types and strata to maximize performance?
- Supplier Development: How should capabilities of existing suppliers be developed to deliver continuous improvement and ongoing cost reduction?
- SRM Systems: What tools are needed to manage SRM information and enable efficient SRM processes across the organization?
In the coming months we will be issuing a wealth of additional detail with findings, implications, and recommendations for organizations in both early and latter stages of SRM adoption.
-- Len Prokopets and Bob Derocher, Principals with Archstone Consulting (part of The Hackett Group) and Pierre Mitchell, Director of Procurement Research and Advisory at The Hackett Group