How Do You Measure Your Suppliers’ Value?
Supplier Relationship Management (SRM) is an important part of procurement. Creating deeper relationships and partnerships with your suppliers can lead to mutually beneficial growth, along with other advantages. As part of your SRM strategy, segmentation allows you to pinpoint where exactly the value is in your supply chain. However, implementation can be a challenge.
One of the objectives of deploying an SRM process is to identify opportunities for increased value. However, there’s an inclination to focus on cost-reduction, pushing for cut-throat negotiations and ever lower prices. This may seem like the logical approach but it’s often at the expense of long-term value. Teams congratulate themselves on saving 1% at the bottom line when they could have added 10% in value.
To avoid this, it’s essential to objectively analyse your suppliers and determine their value, so you can properly allocate your resources. The big question then is how exactly do you define supplier value?
A supplier’s value is more than how much you spend with them
When segmenting your suppliers, many companies prioritise the suppliers they spend the most with. It’s logical; if you’re spending a lot with a supplier, small savings can quickly add up. Additionally, the more you spend with a supplier, the more willing they’ll be to work with you.
Still, while it’s an important part of analysing your suppliers, it’s far from being the only factor. The value your suppliers represent is more complex than that. Limiting your evaluation to just spend will leave out other key metrics that contribute to your supplier relationships, ultimately affecting the bottom line.
You need to consider both the impact and the value a supplier brings to your business, each of which is made up of different criteria.
Before we even get to value, consider the impact they have on your business, both positive and negative. This includes any potential impact they could have in the future. How dependent are you on their service? By answering these questions for each of your top suppliers, you’ll learn how embedded they are in your business.
- What is your current annual spend with this supplier?
- What impact would a disruption of more than 24hr have on your revenue?
- What impact would a disruption of more than 24hr have on your reputation?
- How long would it take to restore service in the event of switching supplier?
- Does your spend account for more than 25% of the supplier’s turnover?
- What costs would be incurred switching suppliers?
Now it’s time to think about the strategic importance of this supplier to your business. What value do they bring to the table that would be difficult to replace? Again, don’t just answer these questions about the current performance. Look ahead and analyse whether they’ll be able to keep providing the same level of value in the future, taking into account any anticipated future changes for your business. This means that, while most of these are straightforward questions, you should think carefully before you answer.
- Is their pricing competitive?
- Are they consistently meeting agreed service levels?
- Do they have access to your business’s confidential information?
- Do they enhance your competitive position?
- Does their service align with your long-term strategy?
- How do you anticipate your spend with this supplier changing?
Are all factors equally important?
Answering the above questions will help you start thinking about the suppliers in a much more comprehensive way than most businesses ever will. Still, to be accurate, you have to determine how important each of these criteria are to your business.
For example, is the time spent restoring your service more or less of a priority than the cost of switching? Is competitive pricing as valuable as alignment with long-term strategy? In our experience, most businesses put too much importance on annual spend, where it accounts for anywhere from 80% to 100% of a supplier’s value. In our experience, 10% for supplier impact is more realistic.
Your priorities will likely be different from other businesses. For example, publicly recognised brands may rank impact on reputation much higher than a B2B commodity supplier. Think about how important each factor is to your business, then weight them accordingly.
Understanding the value your suppliers represent is a key part of your SRM strategy, but it’s important to realise that your supplier’s value is based on more than just how much you spend with them. By taking into account all the other factors that contribute to a supplier’s impact and value, you will have a better understanding of how they fit in with your business’ overall objectives and therefore allow you to achieve better relationships.
Would you like to get more out of your SRM activities? Perhaps you are looking to refresh your approach to SRM?
Our white paper covers how you can effectively segment your suppliers to improve efficiency, going into greater depth on classifying your suppliers, defining the key contributors to ‘supplier value’ and how to get even more value out of them. Download your copy today: https://graphite-partners.com/supplier-management-strategy-whitepaper/