Running the Numbers - June/July 2006

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

Standardized functionality in enterprise applications is a myth, and many organizations are paying too much for these solutions while not using even half the full functionality of the apps that they license, according to a new report from Butler Group, a European IT research and advisory group.

The research revealed that none of the organization used more than 50 percent of the licensed enterprise application functionality, and a significant proportion of unused code was customized, unnecessarily prolonging upgrade cycles.

Butler points out that adaptive enterprises must have the ability to quickly transform business processes and must ensure that these changes are reflected in the supporting enterprise applications.

Good training is another key factor. Employees need to understand how the system relates to the tasks and processes in the broader context of the business as a whole, Butler writes.

In addition, the IT department must have an in-depth understanding of enterprise application usage and performance.

"Unfortunately, IT management tends not to spend enough time relating the organization's main value drivers to enterprise applications," said Teresa Jones, senior research analyst with Butler Group and coauthor of the study. "Too many follow a 'me-too' policy or purely a cost-saving attitude when considering investment in enterprise applications. Without strong links to business aims, it is impossible to formulate a strategy that will meet the organization's needs or get value from enterprise applications."

Fulfillment, Logistics

U.S. Air Exports, Domestic Ground Parcel Set Records in 2005

U.S. air exports shattered all-time records in 2005 for shipments, revenue and tonnage, reflecting a resilient global economy, the residual impact of a weak U.S. dollar and airfreight's importance in optimizing global supply chain performance and driving down inventory carrying costs, according to new reports from The Colography Group.

In addition, domestic ground parcel traffic set records in 2005, continuing its positive momentum since the turn of the century. Domestic airfreight and less-than-truckload (LTL) traffic, while posting year-over-year gains, have still not returned to their all-time highs set in 2000, according to the reports.

Air export shipments in 2005 approached 92.4 million, the first time shipments exceeded the 90 million annual mark. Export traffic increased nearly 8 percent from 2004 levels. Revenue of $9.5 billion and tonnage of 6.2 billion pounds were also all-time records in this segment.

Ground parcel shipments broke the four billion barrier for the first time, finishing 2005 at 4.1 billion shipments, paced by a surge in fourth-quarter volumes. Tonnage exceeded 42 billion pounds and revenue surpassed $26 billion, both all-time records and a year-over-year increase of nearly 5 percent for tonnage and more than 8 percent for revenue.

Slightly more than 2.5 billion domestic airfreight shipments moved in U.S. commerce last year, just above the 2.45 billion shipments that moved in 2004. Revenue of $33.5 billion was $1.6 billion above 2004 levels. Tonnage rose to 17.4 billion pounds from 17.0 billion.

Among other findings:

* FedEx and UPS actually saw slight declines in air export shipment share in 2005. DHL Express and the U.S. Postal Service, by contrast, saw slight gains. The air export market share held by the six major players remained steady at 76.6 percent of all shipments.

* UPS controlled 68.0 percent of the ground parcel shipment market at the end of 2005, by far the largest share. However, its share dipped from the 68.8 percent reported at year-end 2004. FedEx Ground and DHL Express gained modest share, while USPS' share declined incrementally.

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