Running the Numbers - October/November 2006

Radio Frequency Identification

RFID in Manufacturing Can Boost Productivity

Global growth consultancy Frost & Sullivan finds that the European RFID Markets for Automotive, Aerospace and Industrial Manufacturing generated revenues of $23.7 million in 2005 and estimates this will reach $109.3 million in 2012.

The competitive nature of modern manufacturing is driving manufacturers to reduce costs and adapt business to increasingly demand-oriented systems. In this context, RFID can enhance product availability for customers and boost productivity across the entire production process, said Frost & Sullivan.

However, the firm added, the return on investment (ROI) from RFID deployments is difficult to quantify, as the full benefits of the technology depend on its degree of integration into wider business processes. Difficulty in identifying a clear standalone ROI, coupled with its high implementation cost, poses a significant challenge to prospective entrants into the RFID market.

" As the RFID market starts the transition from technology trial stage toward early adopter phase, a key challenge will be to clearly identify the range of expected benefits," cautioned Frost & Sullivan Research Analyst Rengarajan Srinivasan.

According to the firm, the maximum ROI achievable from the adoption of RFID can only be realized if the designing of business processes allows operation within real-world environments and well-integrated IT infrastructures.

" Manufacturers need to establish a strong business case for implementing RFID systems and develop flexible frameworks for evaluating ROI," advised Srinivasan. " New entrants are likely to have a better understanding of the nature of ROI that is practically achievable from the experience of early adopters and increasing numbers of credible pilot schemes."

Global Trade Management

Identity Authentication, Automation Seen Essential for Global Supply Chain

For many companies, especially small and midsize enterprises (SMEs), the ability to trade globally may well hinge on the extent to which they can authenticate their own identities and those of their business partners, according to a new survey of 127 senior executives worldwide conducted by the Economist Intelligence Unit and sponsored by IdenTrust.

Nearly three-quarters of the executives surveyed were from SMEs. Only one-third of respondents said that their companies comply fully with identity verification and other commercial transaction rules. In addition, 45 percent of respondents report that their systems are minimally integrated with those of their suppliers, with little or no visibility into transactions. These findings strongly suggest that the process of integration into the global supply chain still has a long way to go, according to the study's authors.

The study finds that authenticating the identity of counterparties in supply chain transactions is a particular dilemma for companies, given the widespread fraud and identity theft that often plague Internet commerce. More than one-fifth of survey respondents, and 31 percent of the manufacturers in the group, are concerned about the difficulty of performing due diligence on the financial soundness of counterparties, particularly overseas suppliers.

Other key findings of the report include the following:

  • More SMEs than the overall sample (38 percent compared with 33 percent) say the single most important step to safeguard the global supply chain is for governments and the United Nations to designate counterparty authentication standards.
  • Fewer manufacturers (26 percent) and fewer SMEs (28 percent) than the overall sample (33 percent) comply fully with identity verification and other commercial transaction rules.
  • SMEs are more concerned about the lack of international electronic standards (43 percent) than the whole group of respondents (38 percent).
  • Manufacturers are more concerned about guidelines for interoperability (29 percent) than the respondents overall (21 percent).
  • Most companies say the greatest risk in automating the global supply chain is the reluctance of their suppliers to "go paperless."

  • Twenty-nine percent of small and midsize companies cite "financing constraints" as their greatest obstacle to setting up a fully automated supply chain.
  • Sourcing/Procurement

    e-Procurement Benefits Continue to Grow as Best-in-class Get Better

    e-Procurement continues to serve as the leading vehicle for a procurement organization to place more spend under management, reduce costs and improve the speed of transactions, and best-in-class enterprises are reaping the most enviable advantages, according to " The e-Procurement Benchmark Report," an Aberdeen Group study.

    On average, enterprises participating in the August study reported the following trends since adopting e-procurement:

    • An almost 40 percent increase in spend under management;
    • A 40 percent reduction in off-contract or maverick spending;
    • Practically 60 percent decrease in the overall requisition-to-order costs;
    • Requisition-to-order cycles shortened by almost 14 days.

    By comparison, best-in-class adopters of e-procurement — roughly 20 percent of the market — on average were able to achieve the following advantages versus the market at large:

    • 203 percent more spend under management;
    • 20 percent more savings in overall requisition-to-order costs;
    • 24 percent impact on requisition-to-order cycle time.

    Aberdeen found that best-in-class companies achieve these results by taking a more holistic view of their e-procurement program. For example, the businesses in this category were most likely to invest in complementary applications and services; address large change management issues at play in an e-procurement deployment and invest time and resources in management and training; have a 40 percent reduction in off-contract or maverick spending; and leverage a strong e-procurement champion and utilize a power-user structure to drive adoption.

    Payment

    Top U.S. Companies See $72 Billion in Improved Working Capital

    The top 1,000 U.S. companies liberated $72 billion of cash from working capital in 2005 by enhancing the way they collect bills from customers, pay suppliers and manage inventory, according to the 9th Annual Working Capital Survey by Hackett-REL, the Total Working Capital practice of The Hackett Group.

    However, U.S. companies still have $450 billion unnecessarily locked up in working capital, based on the gap between typical companies and top-quartile total working capital performers in the Hackett-REL analysis.

    Excluding the automotive sector, which can sometimes skew results because of the large financing arms of the major manufacturers, the top U.S. companies showed a 4.0 percent reduction in total working capital in 2005 (up from 2.5 percent in 2004).

    "Several trends played a role in helping U.S. companies generate the results they did in 2005," said Hackett-REL President Stephen Payne. "It appears that more companies are adding a cash flow performance element to their executive compensation plans, so there are now stronger incentives for business leaders to focus in this area. The greatest improvement this year was in Days Sales Outstanding, in part because accounts receivable is the area of working capital where chief financial officers have the most influence. Finally, many companies are increasing their use of offshore manufacturing, which extends the supply chain and can drive higher inventory levels."

    Hackett-REL found that the top 1,000 U.S. companies achieved Days Working Capital (a measure of total working capital) of 50.4 days. Improvements came in all three areas that make up total working capital, with the greatest progress seen in receivables, as expressed by Days Sales Outstanding, which dropped by 3.9 percent. Days Inventory Outstanding had a 2.9 percent reduction, and Days Payables Outstanding increased by 0.6 percent.

    Of the 82 industry groups examined by Hackett-REL, 12 managed to post a double-digit improvement in working capital. Most improved sectors included cable broadcasters (46 percent reduction), oil (45 percent reduction), marine transportation (30 percent reduction), coal (19 percent reduction), and toys (19 percent reduction).

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