Running the Numbers - June/July 2006

The latest facts and figures on Outsourcing, Working Capital Management, Supply Chain Visibility, Enterprise Application Integration, and Fulfillment/Logistics


The latest facts, figures and benchmarking data

[From Supply & Demand Chain Executive, June/July 2006]

Outsourcing

Average Outsourcing Contract Delivers 15 Percent Net Savings

Outsourcing contracts deliver an average of 15 percent savings, despite widespread market claims that outsourcing can reduce costs by over 60 percent, according to a new research by sourcing advisory firm TPI.

The study by TPI examined outsourcing contracts awarded between 2003 and 2005 and found that, net of professional fees, severance pay and governance costs, savings range between 10 percent at the bottom end and 39 percent at the top, with 15 percent being the average level of savings anticipated when contracts are first let.

"Opinions vary widely about the cost savings to be gained from outsourcing," said Duncan Aitchison, managing director of TPI. "This research proves that the promise of massive operational savings is unrealistic when you take into account the costs of procurement and ongoing contract management."

Aitchison said that, in TPI's experience, outsourcing arrangements that focus solely on delivering huge savings often fail to meet client expectations, but he noted that 15 percent is not only a realistic estimate of savings but also a significant one.

TPI's research, published in the firm's quarterly TPI Index, shows that cost reduction remains the primary motivation in current outsourcing contracts. However, an increasing number of companies are outsourcing primarily in order to improve quality, up from 11 percent in 2004 to 21 percent today.

According to TPI, 2006 to date has seen the largest number of outsourcing contracts ever signed in the first quarter of the year. IBM, EDS and T-Systems were the main beneficiaries, winning total contract values of $4.6 billion, $4.4 billion and $1.6 billion respectively.

Working Capital Management, Supply Chain Visibility

More than $1 Trillion Seen Unnecessarily Tied up in Working Capital

The 2,000 largest companies in the United States and Europe have more than $1 trillion in cash unnecessarily tied up in working capital in the form of invoices paid late by customers, suppliers paid too early and inventory moving too slowly through the supply chain, according to research from business advisory firm The Hackett Group.

By implementing best practices and achieving working capital levels seen by leaders in this study, companies would also reduce annual operating costs by up to $42 billion, Hackett reported.

Taken together, these working capital improvements could enable companies to boost net profits by up to 11 percent. Hackett's research also shows a strong correlation between companies that consistently grow shareholder value and those that excel at working capital management.

The research highlights a range of best practices that leading companies use to enhance their working capital performance, such as better understanding their customers and focusing proactive efforts on those that have the greatest material impact on working capital performance.

Hackett also sees next-generation opportunities for companies willing to take an extended view of supply chain operations, collaborating with customers, channel partners and vendors to enable better demand visibility, inventory optimization and other operational improvements.

"Working capital optimization is inherently complex, as it touches many business processes and people within an organization," said Hackett-REL President Stephen Payne. "It's a balancing act, and companies must manage it carefully to ensure that they keep working capital low and also have the critical resources they need to do things like fund product development, produce and deliver their products, and provide high levels of customer service. But the ability to impact the bottom line through working capital optimization is tremendous."

Enterprise Application Integration

Feature Rich, ROI Poor

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