Running the Numbers: December 2006/January 2007

Radio Frequency Identification

RFID-based MRO Strategies Spell Efficiency, Security for Aerospace and Defense Supply Chains

Aerospace and defense companies are increasingly looking for ways to gain competitive advantage through the enhanced management of supply chains and assets, and they increasingly are turning to radio frequency identification (RFID) technologies, according to a new report from ABI Research. In particular, A&D companies are looking to expand the use of RFID to manage maintenance, repair and overhaul (MRO) operations in their manufacturing environments.

Given the one-off equipment maintenance and supply chain management focus of most A&D organizations, an integrated MRO supply chain strategy with linkages between in-line equipment performance and supplier capability is critical. An integrated MRO supply chain can improve service performance in a manufacturer's storeroom by simplifying inventory, purchasing and other business processes, ABI reported.

In addition, integrated supply allows the centralization of all sourcing, procurement, receiving, internal distribution and service to one supplier. The full benefit of integrated supply is achieved when all MRO supply chain functions are outsourced, thereby allowing a plant to better focus on its core competencies.

"Integrated MRO strategies based on RFID tagging can deliver marked efficiencies to the processes of locating parts, tools and materials, and to producing the significant amounts of documentation required to meet regulations in the aerospace and defense industry," noted ABI Research Director Michael Liard. "RFID is an enabling technology that can facilitate a shift from corrective to predictive maintenance strategies."

ABI projects that by 2011 the A&D RFID market will realize revenue in excess of $2 billion.

Diversity Procurement

Women Businesses Gaining Ground with Corporate Purchasing Managers

According to a recent study commissioned by the Women's Business Enterprise National Council (WBENC), an advocate of women-owned businesses as suppliers to corporations and large government organizations, women-owned businesses are beating the industry average of keeping and growing corporate contracts.

Forty percent of WBENC's corporate members increased their spending by at least 10 percent over the last three years with women-owned firms, which is 16 percent above the average provider.

Not only are women-owned businesses gaining more ground, they are losing less when budgets are cut or the supply chain tightens, according to the study conducted by the Center for Women's Business Research. On average, 24.5 percent of corporations decreased their spending with suppliers, but only 14 percent cut contracts with women-owned providers.

The study indicated that there is competition for those corporate dollars within the community of women-owned firms. According to the study, the bulk of corporations — 59 percent — concentrate their spending with fewer than 200 women-owned businesses. Only 18.9 percent spend with 200 to 499 women-owned businesses and only 21.6 percent with 500 or more.

Other key findings:

  • 82 percent of corporations said that global procurement has had no effect or a positive effect on their suppliers that are women-owned businesses
  • 76 percent of corporations say their supplier diversity programs are too small
  • 82 percent of corporations have supplier diversity advocates in different areas of the company
  • 94 percent send supplier diversity representatives to women's business conferences and trade fairs
  • 67 percent of corporations have a budget of $199,000 or less for their supplier diversity programs
  • 81 percent of corporations do not discuss their supplier diversity programs in their annual reports
  • 45 percent of CEOs are involved in setting and communicating diversity policies and goals

Seventy-seven WBENC corporate members participated in the online survey programmed and administered by the Center for Women's Business Research.

Global Supply Chain

Offshoring of Back-office Functions Could Yield Big Savings for Fortune 500; 1.47 Million Employees Could Feel Direct Impact

The Fortune 500 could potentially save $58 billion annually, or over $116 million on average per company, by offshoring many of their back-office activities, according to research from strategic advisory firm The Hackett Group.

Advances in technology, along with increasingly educated global work forces, enable the portability of business support activities across information technology (IT), finance, human resources (HR) and procurement to take advantage of labor arbitrage. Hackett estimated that the increased use of offshore resources may have a direct impact on as many as 1.47 million general and administrative (G&A) jobs, or nearly 3,000 at a typical Fortune 500 company.

Hackett said that its research shows the best companies are strategically improving performance in finance, IT, HR, procurement, working capital and other areas in ways that help them respond to the pressures of globalization.

However, many companies are relying on outdated sourcing analysis techniques that lead them to materially underestimate the benefit available through off-shoring back-office operations. With labor arbitrage savings nearing 60 percent, Hackett finds that executives must analyze their process optimization opportunities to capture the potential value of centralization. Many organizations fail to examine the characteristics of business processes, allowing activities that provide no competitive advantage to remain decentralized in industrialized countries at a higher cost. Distributed activities are generally not portable and therefore not included within the scope of a globalization initiative. The education base and skill sets available in India, China, the Philippines, Pakistan, Eastern Europe, Brazil and other emerging countries continue to expand, offering a new level of savings combined with improved quality and talent, significantly strengthening the business case for globalization.

Having said this, companies still must use a well-balanced assessment methodology that fully considers the business' strategy, culture, transactional characteristics and readiness for change, Hackett advised.

Sourcing/Procurement

Smarter Sourcing Needed to Counter Rising Air, Hotel and Car Rental Rates

Continuing demand for corporate travel without a commensurate lift in supply will push costs higher across the board in 2007, with airfares worldwide forecast to increase, albeit at a slower pace than in 2006, and hotel rates pegged to remain at heightened 2006 levels and surge in key business centers, according to the American Express Global Business Travel Forecast.

"Keeping executives on the road while holding budgets in check will be a challenge for organizations in 2007," said Mike Streit, vice president and global leader for American Express Business Travel, Advisory Services. "For instance, as compared to 2006, the Forecast indicates an average domestic North America trip inclusive of air fare, car rental and hotel stay will increase $46, or 4.5 percent, in 2007, and an average international trip with its airfare and hotel stay will increase $180, or 4.6 percent."

The Travel Forecast shows a 3-5 percent increase in global domestic economy fares, and a 3-7 percent rise in global international business-class fares. Moderate airfare increases are expected as airlines pare back fare hikes, corporations focus on smarter buying and traveler security remains an area of concern.

Meanwhile, skyrocketing demand for hotels across all regions will continue to give hoteliers more control over negotiations, with few downward pressures available to stabilize pricing.

"We anticipate that more organizations will ramp up their procurement focus, implement new technology tools at the point of booking, update and strengthen their travel policies and focus on traveler behavior to ensure that negotiated savings are fully realized," added Streit.

He said that the migration to online booking, already well underway in North America, and the "visual guilt" associated with fare transparency will gain even more momentum as a strategic imperative across other regions of the globe. "We also expect to see a growing number of corporations zero in on corporate meetings spending as this area, until now, has been under-examined and is ripe for savings and control opportunities," Streit continued.

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