Calculating the Supplier Performance Management ROI Equation (Part 2)

In the first post in this series, we looked at one way, courtesy of Sherry Gordon and a whitepaper she wrote on the subject, to calculate the return on investment of supplier performance management. In this second post in the series, we'll share the second way Sherry has worked with companies to calculate SPM ROI. But first, I think it's important to step back for a moment and consider a few of the reasons why SPM ROI models are helpful to begin with.

First, they can help you build a business case for SPM that extends beyond hunches or one-off savings/cost avoidance calculations. Second, they can create a rallying point for key individuals in the business from different groups (e.g., procurement, IT in the case of vendor management, operations, quality, individual plants, etc.) to come together on the issue and create a shared understanding and common dialogue on the topic. And third, they can create a means of driving directly to benchmarks and measurement of actual program results.

In terms of calculating ROI, in addition to the first model Sherry proffers "another approach [that estimates the cost of] a poor-performance-to-cost ratio" is to consider that "for every dollar spent on critical suppliers, what percentage is lost to poor performance factors, such as poor delivery or poor quality performance?" By way of example, "for every 1% improvement in this ratio, how many more dollars would be saved? Or, how many fewer sales dollars would you need to make up for poor supplier performance?" In addition to the hard-dollar ROI calculation benefit, this method can help drive to a better total cost model and total cost understanding for both working with suppliers and actual parts and components.

Even after the final excel tab is calculated, an ROI model will only show part of the valuable possible from an SPM investment. Sherry suggests, "other beneficial qualitative value, such as joint overhead reduction and collaborative product development, are hard to measure but can deliver huge results." Yet you've got to start somewhere, and I suspect if more companies build hard-dollar ROI models for SPM, we'd finally see greater technology adoption and process investments in the area, transforming from a nice-to-have-curiosity to an overall procurement and supply chain priority.

- Jason Busch