Supply Chain Management Review

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Showing the Value of Compliance
January 2, 2008

One of the classic challenges for supply management and procurement departments is to establish credibility for their hard work and creative efforts. And, that often revolves around the issue of “show me the numbers on the bottom line.”

There are several reasons why negotiated cost reductions may not make it all the way to the bottom line:

• Weak initial contract implementation

• Lack of active contract management (ongoing basis)

• Maverick spend (poor compliance with new contracts)

• No link to budgets – savings in one spend area are spent on other things

• Supplier performance falls short

Let’s take a closer look at the issue of compliance.







I refer to the table in the Figure (© Copyright Greybeard Advisors LLC) as the “Strategic Sourcing – Compliance Multiplier.” It was developed shortly after I started my consulting practice, partly in response to a client who admitted that he was having trouble internally communicating the concept – and the specific impacts - of compliance. The chart proved to be an effective way to show the key interactions in a way that appeals to operations, manufacturing and finance professionals.

The matrix shows different levels of negotiated cost reduction for a new contract (5%, 10%, 15%, or more), and different levels of compliance with that contract (from 25% up to 95%). The table shows the amount of benefit that actually makes it to the bottom line based on each combination of negotiated cost reduction and actual compliance. Just to make the illustration easy to follow, we are assuming a $ 10 Million dollar amount of annual spend that could be directed to that new contract.

In the top left blue box, you can see the impact of negotiating a 5 to 10% cost reduction, combined with a 25 to 50% level of compliance. In the far right blue box, you can see the impact of negotiating a 10 to 15% cost reduction, combined with an 85 to 95% level of compliance.

Through employing a true and robust strategic sourcing process (to optimize negotiated results), and driving higher compliance, we are looking at a significantly-higher number hitting the bottom line. The “multiplier effect” is significant.

When you’re communicating about compliance, the table in the Figure can help. But, you should go one step further. On an operational level, perhaps monthly, show your internal stakeholders and clients the numbers that pertain to their operations. I’ve seen this done a few different ways. The conventional approach is to report the % compliance for each division or operation, or show the dollars of spend that were out-of-compliance. I prefer an alternative: show the “lost opportunity” of missed cost reductions because of the lack of full compliance. This latter approach converts the issue of compliance into a bottom-line impact that everyone can understand, and get interested in.


(note: the Figure is © Copyright 2005 – 2008 Greybeard Advisors LLC)

Posted by Robert A. Rudzki on January 2, 2008 | Comments (0)