ROI Calculator
A common challenge for procurement and supply chain professionals is obtaining support from C-level leaders to invest in a robust supply chain risk management (SCRM) program. Despite mountains of evidence that a truly mature SCRM pays for itself by 1) protecting revenue, 2) informing new product design strategies, and 3) enhancing brand value, many corporate leaders are still reluctant to elevate SCRM to a strategic focus.
While a mature SCRM program can deliver significant topline and bottom-line value, such an investment often doesn’t start in earnest until crises like the 2008-2009 financial crash, the 2011 Fukushima disaster, the Hanjin Shipping bankruptcy in 2016, or Hurricane Maria in 2018 wake top management up to the fragility and the strategic importance of having visibility into their supply chains.
The unprecedented supply chain disruptions caused by COVID-19 provide potent arguments for supply chain pros seeking greater support of SCRM from C-level leaders. But to make their strongest case, SCRM advocates need to focus on one key metric: return on investment. And that means building the business case for category managers, functional units and especially C-level leaders.
ROI analysis: core to a strong business case
A strong business case will articulate clear goals aligned with the company’s strategy as well as providing answers to anticipated objections. But the core is the ROI analysis.
On the investment side, a detailed budget for staffing, training, software, cloud subscriptions, consulting fees, etc., is needed. To forecast anticipated returns, sensitivity analyses should be performed to evaluate a wide range of scenarios. These can be built with historical data and anecdotal expert opinions about past supply chain disruption events and outcomes in terms of costs, revenue impacts, customer relations and extra time spent scrambling to react vs. implementing the kinds of proactive risk mitigation measures that are possible with a mature SCRM—one that provides visibility into sub-tier suppliers and logistics, and uses AI to generate prescriptive mitigation measures.
To reflect the reality that SCRM programs take time to mature, ROI should be calculated over a three-year period. Other best practices that will enhance a business case’s credibility:
- Acknowledge those risk mitigation and resiliency measures that are already in place and include only new revenue and savings anticipated with new SCRM measures
- Anticipate and answer objections
- Collaborate with stakeholders in finance, sales, manufacturing, etc., to ensure functional leaders understand how SCRM can advance their interests
It’s important to frame the program in strategic terms and to ensure that decision-makers understand the linkages between the tactical objectives of the SCRM and key metrics such as revenue, earnings, brand, and shareholder value. What’s more – as mentioned above – the business case should anticipate and handle likely objections from internal stakeholders. Here are three common types of objections that should be anticipated:
Lack of incentives. Few executives are incentivized to rigorously manage supply chain risk, so they focus on urgent short-term issues, leaving little time to work on SCRM capabilities. The business case should include recommendations for compensation incentives.
Perceived high costs and conflicting objectives. Stakeholders often balk at supporting supply chain risk mitigations, such as building buffer inventory and engaging secondary suppliers, because they fear these will add costs and undermine efficiency goals. The business case should demonstrate how SCRM can strengthen lean and just-in-time initiatives.
Difficulty in valuing risk management. A rigorous and credible ROI analysis is essential to convincing senior leaders to support the change management required to create a mature SCRM capability.
Coronavirus = new perspective on risk management in supply chains
In the first half of 2020, Resilinc supported its customers in responding proactively to the massive global supply chain disruptions that were occurring. While the disruptions were truly unprecedented in scale and geography, companies that had already built mature SCRM programs did not have to frantically hunt for information like their less-prepared peers and competitors. They could start mitigating their disruptions immediately.
In the following months, company reports, case studies, and media coverage revealed how robust SCRM programs helped some manufacturers respond to the COVID-19 crisis proactively, safeguarding revenue, achieving competitive advantages in their markets and likely enhancing customer relations and brand reputation.
This shift in perspective—along with a strong business case—can be used to convince C-level leaders that now is the time to design, fund and implement an SCRM program that can position their company to take maximum advantage of supply chain digitization, visibility and intelligence.
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