Show Me the Money - Measuring Supply Chain Management's Financial Contribution to the Corporation
Lorrie K. Mitchell
Lorrie K. Mitchell, Relationship Manager, BellSouth Telecommunications, Inc. Atlanta, GA 30375, 404/420-6068, Lorraine K. Mitchell@bridge.bellsouth.com
84th Annual International Conference Proceedings - 1999
In the past, procurement departments were evaluated on the amount of dollar savings they were able to negotiate on a particular deal for their internal client. At times, the size of procurement's negotiated savings was questioned and labeled as possibly unrealistic. Today, Supply Chain Management (SCM) managers are being asked to participate in the selection and oversight of large, complex contracts. SCM wants to ensure their clients understand and appreciate their value added services and how it affects each client's budget - both capital and expense.
BellSouth Telecommunications, Inc.'s (BST's) SCM Department has developed a Financial Contribution Process to track, measure, and document the financial benefits that SCM adds to the corporation's bottom-line. This process improves the credibility of the SCM function in the eyes of its customers, establishes the Supply Managers' commitment to deliver value to their customers, and provides a mechanism to validate SCM's financial contribution to the corporation's bottom-line. The corporate finance team, representing the BST entities served by SCM, validates this contribution.
Corporations have recognized the importance, value, and sensitivity of these potentially high dollar and high visibility programs, and have turned to SCM managers to ensure and measure success. A process such as this is necessary for any corporation to achieve and maintain a competitive advantage in today's marketplace.
Through several measurement iterations, benchmarking efforts, and some trial and error, BST's SCM Department has developed a process that will illustrate how any corporation may track, validate and document their contribution. SCM has been successfully utilizing this process for the past three (3) years. This Financial Contribution Process tracks and documents SCM's contribution to the bottom-line. The net financial contribution is presented to and validated by a committee comprised of corporate finance representatives (budget decision makers) from the BST customer departments that SCM serves. As a result, one of the most important features of the process is the trust relationship that has been established between SCM, their internal clients, Finance, and the budget team. It allows the company to allocate savings to fund projects that may not have been approved or that were underfunded. The primary component of this highly organized, systematic approach is the Business Case, and its ultimate presentation to the Finance Department.
The Business Case is the tool to identify and document the savings and impact to the corporation's bottom-line. The development, review, tracking, and reporting of the information contained therein is the key to the process. This process reports capital, expense, and revenue dollars forecasted to spend/save, actual amount spent/saved, and value provided to our clients. It also identifies any roadblocks that would hamper a successful implementation. The increase in communication and trust between SCM and their internal clients is a byproduct of the process.
The goal of SCM is to facilitate the selection of the supplier who can best meet the client's needs, at the fairest negotiated price, and within the client's budget. Previously, SCM fought the stigma with their clients of perhaps claiming unrealistic savings on their behalf. Now, this process gives SCM the chance to set the record straight. It allows the SCM's clients, Finance department, and the corporation to sit up and take notice of SCM's true value.
One of SCM's services includes identifying the amount of capital or expense dollars SCM can save them through the solicitation process and/or negotiation. But, how realistic are the savings and did the SCM manager really make a different in the final price or fee paid to a supplier?? SCM wants to show their internal clients that they are not basing savings on unrealistic supplier list prices. Through this process, SCM can validate assumptions, document savings and/or additional costs, track actual results, and transfer money from budget to budget, if appropriate. Most importantly, SCM shows their client the true value add of their services. Sometimes this value add is budget affecting, and at other times the value is inherent to the SCM process.
The Financial Contribution Process documents the "SCM Deal", both administrative and monetary. Anyone in SCM with responsibilities to negotiate arrangements is welcome to use this process. It may be used to document a deal, get credit for work, ensure SCM gets credit for all value added, and track the implementation of a deal and actual dollars spent/saved. The process may be utilized before the fact (during the client/SCM planning stage)or after the fact (after the deal has been implemented), but in NO way should this process slow down the deals in the making. Prior to the deal, Supply Managers will need to do a particular amount of data collection and market analysis. When the monetary deal is discussed, this does not simply mean the forecasted dollars spent pursuant to a new contract negotiated with a supplier as a result of a solicitation. It may also be referring to an amendment to an existing contract, a letter purchase order, etc. Any type of transaction that involves dollars, is included in the process. Ultimately, this process will report the capital and expense dollars to be saved, revenue dollars to be achieved, actual dollars saved, and the value provided to the clients.
The first step in utilizing this process was to educate the SCM managers. All supply managers were trained on how to document the deals in simple and concise Business Case format; how to best present the cases to the budget team; and how to track the actual results. Anyone who negotiated a "SCM Deal" was trained in the Financial Contribution Process. A Business Case template was developed to assist managers in developing their Business Cases. Additionally, a Financial Contribution Process Glossary was developed to assist SCM managers and their clients in defining the key terminology. To ensure a level of confidence, Supply Managers were given the opportunity to audit a Business Case presentation. Initially, these presentations to the budget team were scheduled monthly. Now they are scheduled every two (2) months depending on the quantity of Business Case activity. Enhancements to the process have resulted in the Business Case being mechanized and reports being available to anyone within the district.
The Business Case provides a disciplined approach to document not only business deals for the supply managers but also value-adds to their internal clients and the corporation. The Business Case describes the Team Members, Executive Summary, As-Is Situation, Assumptions, To-Be Situation, Quantifiable Budget Impact, and Implementation Plan. The Business Case does not solely describe savings. It is the vehicle to track all dollar transactions pro-rated for the current year plus one (1), increases or decreases, as they relate to the budget. The Executive Summary sets the scene of the "SCM Deal". The As-Is and To-Be Situation will contrast the current situation with the scenario being proposed and identify any assumptions. The Quantifiable Budget Impact is the conclusion. You'll have to know the difference between capital and expense budgets, and was this deal a result of a cost avoidance, price increase/decrease, or was it revenue generating. Lastly, you'll need to describe your implementation plan. How do you plan to make it happen?
Once everyone is accustomed to the process and the Business Case, the next step is to track actuals. Why?? Because few corporations have a reliable way of tracking actuals. BellSouth is in the same situation, but they realize that actuals (no matter where you get them) are the real proof of success. Although everyone is interested in actual dollars spent and saved, no one really likes to track actuals. If a great deal is worked for internal clients and they never purchase the product/service you negotiated for, there are no savings to the corporation. BellSouth is now tracking actuals as proof of the quality of their services.
Once a Business Case is developed with team members, the next step is to get buy-in from the Finance Department. Only Supply Managers with a Business Case savings of $100,000 will present Business Cases. The number one tip in presenting your Business Case is "Be Prepared". Know who the clients and departments are, the type of financial contribution, type of benefit, etc. Ask your client to participate in presenting the Business Case. Remember - buy-in is EVERYTHING!! Listen attentively to questions, concerns, and comments posed by the Budget Team and provide all the answers you can. It's OK if you don't have all the answers. Just get the answer in a timely fashion.
What you DON'T want to do is work the issues in the budget meeting. Also, don't be combative or defensive - just state the facts calmly. Don't read your business case. No one is more familiar with it than you are, so be confident and show it!!
Historically, the Procurement/Purchasing function has been viewed by the customers it serves and the company that supports it, as a "cost function." It has always been difficult to find a way to prove its financial contribution to the corporation's bottom-line. This process will enable Procurement's customers to react faster to the financial impact that supplier negotiations and buyer/supplier relationship building have on their budget. It can and should be directly related to a corporation's annual strategy alignment process. Additionally, the process may be compared to the high, expected, and minimum strategy targets identified by a corporation, and be tracked and reported by individual, group, SCM, district, and/or customer's department.
Lorrie K. Mitchell is a Relationship Manager in the Supply Chain Management Department of BellSouth Telecommunications, Inc. Lorrie has a B.A. in Mathematics from the University of Miami and a Master of Science in Technology Management from the Stetson School of Business and Economics of Mercer University. While at BellSouth, she was formerly a full-time faculty member at the Keller Graduate School of Management where she taught Contracting and Procurement Management in addition to Mathematics. Prior to her work at BellSouth and Keller Graduate School, Lorrie was a Buyer for Burdines in Miami, Florida and taught Mathematics at the Secondary Level in Miami, Florida and Monterey, California.
In May 1998, she presented "Having It All - Select the Right Supplier AND Develop and Maximize the Relationship" and "Outplacement Services - Contracting for Employees' Future Careers while Downsizing/Reorganizing" at the 83rd International NAPM Conference in Dallas and presented "Performance Based Contracts - Maximizing Success and Sharing Risk" in May 1997 at the 82nd International NAPM Conference in Washington, D. C. Lorrie has been interviewed for articles appearing in Supplier Selection & Management Report - August 1997, Procurement Management Magazine - January 1998, Electronic Components Magazine - January 1998, Sales & Marketing Executive Report - April 1998, Supplier Selection & Management Report - July 1998, Supplier Selection & Management Report - October 1998, Supply Chain Review - November 1998, and Purchasing Today - February 1999. Additionally, Lorrie was profiled by Ron Karr in his book "The Titan Principle - The Number One Secret to Sales Success", a text for sales executives.