Running the Numbers - October/November 2005

Price Cuts Seen Speeding RFID Adoption

A new report from consultancy ABI Research shows that Alien has cut the price of its straps to 12.9 cents, while Avery Dennison is offering inlays at 7.9 cents. Even that sub-eight-cent price is still well above the five cent point that some industry analysts earlier touted as the price needed to ensure a viable RFID industry. But that number has more recently been viewed as too simplistic in any case.

"These new low prices may represent loss-leaders," said Erik Michielsen, ABI Research's director of RFID and ubiquitous networks. "But when you tie them to the new products and services offered by software companies to help end-users make sense of their RFID data, and to the recent spate of EPC Gen 2 announcements, we may have a three-headed ‘benevolent monster' that will promote demand."

Michielsen added: "What we are starting to see is lower cost hardware, tested and proven performance requirements around a new standard, and software that enables non-technology focused end-users to make better decisions and find ways to drive revenue growth and cost refinement. All together, these factors support widespread RFID deployments across a wide range of vertical markets, to a degree we have not seen before."

Supply Management Takes a Strategic Step Up

CEOs now expect their supply management organizations to deliver value beyond traditional cost cutting. To find out what kinds of value and how the organizations expect to deliver it, A.T. Kearney surveyed supply management executives from 275 companies in Europe, North America, Asia Pacific and Latin America.

Product and marketing innovations, for example, are being conceived by suppliers and brought to market through joint development. A.T. Kearney said leaders are not just receptive to suppliers with new ideas; they expect supplier innovation and involve key suppliers in the earliest stages of new product development.

Also, leaders pursue global sourcing like a pit bull. They consolidate volume and evaluate best prices for hundreds of items. What's left? The leaders use an arsenal of advanced cost-management strategies that address multilayered problems, such as tiered sourcing that combines volume purchases with tier-one suppliers to negotiate more favorable contracts, or collaborative cost reduction to generate and implement cost-reduction ideas with suppliers.

A.T. Kearney also noted that the leaders in the study have identified supply risk as a strategic issue. They pinpoint potential weak spots in supply lines and plan for alternative sources and supply routes. They choose suppliers to avoid exposing the company to embarrassment or liability. They also anticipate possible intellectual property risks from offshoring or outsourcing decisions.

Among leading companies, supply management is recognized as a strategic contributor. But executives see room for improvement. Bridging boundaries within and across companies remains a constant challenge. Continued attention is needed to further develop staff skills and capabilities, IT tools, processes and measurement techniques that will enable supply management organizations to deliver even more value in the years ahead.

Sarbox Drives Finance Cost Rise

Finance costs at typical companies rose by 18 percent over the past two years, in part due to increased compliance-related costs, according to 2005 Book of Numbers research from The Hackett Group, a business process advisory firm. Typical companies now spend 1.26 percent of revenue on the finance function.

According to Hackett's research, world-class finance organizations now spend 42 percent less than typical companies overall (0.73 percent of revenue versus 1.26 percent). Typical companies have seen an 18 percent increase in total finance costs since 2003, while world-class finance organizations have seen a 5 percent drop during the same period. Compliance costs have risen significantly for both world-class and typical companies since 2003.

World-class companies now spend 36 percent less on compliance than typical companies (.060 percent of revenue versus .094 percent). Overall, we see that the typical company is spending an additional $340,000 per billion in revenues, or a total of $940,000 per billion in revenues, for additional internal finance and external resources to meet today's compliance requirements.

Richard Roth, Hackett's chief research officer, said: "At many typical companies, the bright-line focus on compliance has forced CFOs to put alignment initiatives and support of the business on the back burner. World-class CFOs, on the other hand, have been able to better manage through this period. While they've also seen a rise in compliance costs, they have continued to improve overall efficiency and effectiveness."

U.S. Businesses Expect Foreign Sales to Increase; More Than One-third Still Lack Effective Global Network

U.S. businesses expect sales revenue generated outside the United States to grow to an average of 42 percent of their total revenue over the next three years, up from 35 percent today and 26 percent three years ago, according to a study released this week by Accenture.

Despite the strong growth expectations, U.S. companies' market share in foreign markets might be at risk of declining. Nearly half (47 percent) of the sales and marketing executives surveyed said a poorly designed or executed global operations strategy has contributed to a failure to grow market share in important new markets.

Additionally, 40 percent of all executives surveyed said their companies do not have a global procurement, manufacturing and distribution network that is designed to deliver products on time and at the budgeted cost.

However, upgrading global operations is clearly a priority, as virtually all (97 percent) of respondents said their companies are doing so. More than three-quarters (80 percent) of respondents said their companies are upgrading global operations due to a desire to penetrate new markets, and two-thirds (67 percent) said their companies are doing so to combat new competition from emerging market companies.

Bill Read, executive partner in Accenture's Supply Chain Management practice, said: "While new markets provide the opportunity to grow the top line, they are also producing bold new competitors. In this environment, the lack of a global operations strategy…will impair the ability of U.S. businesses to grow profitably in new markets."

China is the most important emerging market for U.S. companies: Of the respondents who are upgrading their global operations to penetrate new markets, the greatest number — 82 percent — selected China as one of their most important emerging markets.

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