Running the Numbers - June/July 2005

Procurement/Payment

A survey of 50 government officials from 13 markets around the world found that 68 percent cite automation as their key priority, and they also believe that there is further opportunity for improving their procure-to-pay process.

Additional results of the survey, which was conducted by card issuer Visa, showed that:

  • 22 percent of government officials expect that improving process automation will be the most important benefit their organization will derive from implementing a commercial card program, followed by replacing cash (18 percent) and increasing procurement transparency (18 percent).
  • 82 percent of respondents report that their organization has implemented policies that aim to provide greater opportunities for small businesses to work with the government. Of those organizations that have not implemented a small business policy, 78 percent believe that small and midsize businesses will become a focus within the next five years.
  • 35 percent of government organizations plan to implement new technologies in the next five years, followed by outsourcing functions (31 percent) and new organization-wide processes (30 percent).

Source: Visa, 2005

Supply Chain Management

Companies continue to make outsourcing decisions that are driven by cost reduction and the desire to focus on their core operations, rather than pursuing outsourcing in order to drive more revenue and seize competitive advantage, according to a new study released by CAPS, the Center for Strategic Supply Research, and management consulting firm A.T. Kearney.

More than 80 percent of companies polled said that reduced operating costs, reduced capital investment and the need to focus on their core business were the primary reasons for their outsourcing activities. Fewer than half of the companies cited reasons related to revenue growth, such as increased speed to market (46 percent), improved quality (42 percent) and faster customer response time (40 percent).

The majority of companies with cost-related goals for outsourcing said they met or exceeded those goals. The average cost savings for these companies was 13 percent, but more than one-third reported savings greater than 15 percent. In contrast, the majority of companies with revenue-related goals for outsourcing reported falling short of those goals.

"It's clear there are two different approaches to outsourcing at work," said Bill Markham, a principal with A.T. Kearney and co-leader of the study. "Companies seeking quick savings focus their efforts on finding less-expensive alternatives to operating their business today. Companies focused on tomorrow's business needs are seeking more significant long-term benefits and looking to leverage marketplace skills, technologies and scale to cut costs and increase revenue."

The report suggests companies define from the outset whether the strategic intent of their outsourcing efforts is cost reduction or revenue generation. It also recommends the following steps to give companies an edge in achieving their outsourcing goals:

  • Anticipate shifts in the future business environment, and consider the effect these shifts would have on future outsourcing activities.
  • Build tomorrow's corporation by seeking skills, technologies and scale from the marketplace rather than assuming that these capabilities must be developed internally.
  • Address the execution issues inherent in any outsourcing activity by clearly defining roles and responsibilities across the corporate functions involved.

Source: CAPS, A.T. Kearney

Sourcing/Logistics

An Aberdeen Group study of 170 companies found that 91 percent feel pressured to make changes to their global trade process because: 1) lead times inhibit their ability to respond to market demands, and 2) expected product cost savings are eroded by unanticipated global supply chain costs. The top driver is finding ways to make global supply chains more responsive to changes in customer demand and shifts in market dynamics.

Aberdeen said that rather than create the absolute-lowest-cost fixed network, leaders are building more points of flexibility into their logistics networks, which helps them scan their environment for bottleneck symptoms or spikes in demand. Logistics directors cite specific actions that are helping them become more responsive while still letting them take advantage of lower-cost offshore procurement.

Global sourcing is all about remaining price competitive in what has been a declining pricing environment for many industries. Companies are seeking to minimize the unanticipated costs that can erode the expected savings from offshore sourcing by minimizing documentation and supply chain issues through better automation and creating cross-functional teams. Best-in-class companies are further reducing unexpected costs by better synchronizing the physical and financial supply chains, including by implementing collaborative financing.

Global trade leaders are succeeding in driving out cost, time and risk from their business. A number of companies reported reducing delayed shipments by over 25 percent, documentation issues by over 40 percent and total landed cost by more than 25 percent.

Source: Aberdeen Group, 2005

Supply Chain Integration & Technology Infrastructure

AMR Research recently released its annual report on the state of the enterprise resource panning (ERP) market, "The Market Analytix Report: Enterprise Resource Planning, 2004-2009," which reveals that ERP market revenues increased 14 percent in 2004.

While the ERP market has grown in revenue, consolidation continues to change the industry. In 1999, the top five vendors (J.D. Edwards, Baan, Oracle, PeopleSoft and SAP) in the ERP market accounted for 59 percent of the industry's revenue. AMR Research expects the top five vendors in 2005 (SAP, Oracle, Sage Group, Microsoft and SSA Global) to account for 72 percent of ERP vendors' total revenue.

"The ERP market showed solid organic growth in 2004 as IT spending improved," says Jim Shepherd, vice president of research at AMR Research. "The market was also affected by consolidation within the segment, as well as ERP vendors acquiring best-of-breed players to broaden their portfolios."

The report revealed several trends that affected the ERP market in 2004, including:

  • Service-oriented architectures (SOA) may have the same disruptive effect that other technologies have had on the market, such as the emergence of client-server systems in the 1990s.
  • The pace of acquisitions shows no sign of slowing down.
  • The midrange ($50 million – $1 billion in annual revenue) and SMB (less than $50 million in annual revenue) markets continue to be a major focus area for many of the ERP vendors. Midrange solutions and channels are critically important for penetrating China, India, Eastern Europe and Latin America.
  • ERP buyers have moved away from large, upfront purchases, opting to license user seats and functional ERP modules incrementally as they deploy a product.

Source: AMR Research, 2005

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