Different ROI Perspective Between Buyer and Seller

The return on investment calculation, while similar, is fundamentally different for the buyer and supplier. While the categories are nearly identical, the treatment within the savings calculation is different

As a supplier, a decision to implement a B2B connection weighs these factors:

(SROI1.gif)

On the Cost side, the implementation (On-ramp) cost includes time and effort to understand, clarify, and install the necessary tools and systems. There will be a new cost for processing each transaction. Finally, there is on-going support needed for the new system.

Savings, for the supplier, is most visibly the difference in transaction costs. But there is a second factor that provides potential savings. We’ve called it “Motivation.” The supplier, typically, will have to see something beyond the transaction cost savings.

For the return on investment to make sense, the savings need to be greater than the costs. For the small Tier 4 supplier, the number of transactions to capture the savings difference is also small. Unless their manual system is a total economic disaster, some other reason or savings must be present, hence additional motivation.

Motivation might be in the form of: (a) rebate per transaction from the buyer, (b) increased business, (c) one-time incentive from the buyer, or (d) business survival. This later situation is more coersion than motivation, sometimes in the form of “..if you want to continue to be a supplier….”

While the business survival argument might get the supplier to change, it does not lead to the open discussion needed for a quality trading partner relationship. The relationship for negotiating price and terms becomes increasingly adversarial.

Now let’s look at the Buyer’s view.

(BROI1.gif)

The Costs side has the same categories. Some hand-holding with the supplier will be needed, to get them on-board. There will be transaction and on-going support costs.

The Savings side is significantly different. There is the same net differential of transaction costs. But now, for the buyer, the notion of “Incentives” subtracts from the savings.

Incentives are actually costs for the buyer: (a) rebate per transaction to the supplier, (b) increased orders to this supplier, (c) one-time incentive from the buyer to the supplier, or (d) business pressure on the supplier. Again, (d) is not the best supply chain strategy.

We’ve place Incentives into the Savings equation rather than list it as a cost. This is to highlight the use of Incentives as a separate topic of discussion. The incentive might be unique to each supplier. And while the accountants would treat it with all the other costs, breaking incentives loose from the cost discussion leads to more robust discussions of what “motivates” a particular supplier.

This document is a DRAFT for inclusion in a later document.

Copyright 2003 Piquero Insights, Inc.

Document Ver 0.0 – May 19, 2003