Most corporate supply chain organizations have the ability to impact 50 to 70 percent of their corporation's total cost structure. Here are best practices to translate supply chain improvements into significant corporate financial results.
When it comes to saving money from strategic sourcing, outsourcing or supply chain improvement initiatives, "perception" isn't enough. Businesses have always strived for bottom-line impact from programs like these, but for years they have struggled with quantifying savings and creating tangible corporate financial results. This is particularly evident in supply chain improvement initiatives, for which the "facilitating" department, typically supply chain, procurement or logistics organizations, do not have direct control over the budgets that are impacted by the improvements.
Denali Consulting recently conducted research to identify common enabling practices that differentiated companies that have successfully quantified and driven strategic supply chain improvement savings to their corporation's bottom line from those companies that were not successful.
The research included an analysis of best practices from the past 10 years over dozens of companies and various industries. Denali found that those companies that were successful at translating supply chain improvements into significant, tangible corporate financial results consistently applied most of the following practices:
1. Use of a single, consistent and formal savings tracking methodology, based on total cost of ownership (TCO).
2. Formation of a cross-functional financial steering group comprised of financial representatives from impacted organizations that review, approve and make budgetary reductions for all supply chain improvement initiatives.
3. Expansion of the roles of strategic sourcing and supply chain improvement project teams beyond an analysis and recommendation role into implementation responsibilities.
4. Utilization of broad unit-based cost metrics, balanced by service and quality metrics, to track savings at the spend category and initiative level.
5. Linkage of savings realization targets to supply chain departmental goals and personal development plans.
Best Practice No. 1: Use of a Consistent, Formal Savings Tracking Methodology, Based on Total Cost of Ownership
One of the most visible differentiators that Denali found between companies that are successful at realizing supply chain savings and those that are not is the use of a formal process for quantifying total supply chain costs, which is then used to create detailed savings estimates by spend category, supply chain initiative and impacted department.
There are many types of models used, but they all have the following characteristics:
* Each is based on TCO, and most use some type of activity-based costing approach to quantify the total cost of ownership for a specific spend category or business process.
* Successful companies consistently use one common approach for modeling total cost savings, regardless of the type of initiative (strategic sourcing teams, logistics redesign teams, procurement redesign teams). Unsuccessful companies have a very inconsistent approach to quantifying savings, resulting in low organizational credibility and buy-in.
* Savings models clearly differentiate between "soft" savings and "hard" savings. Generally, soft savings are defined as those which result in productivity improvements, but are not significant enough to be able to translate into direct budgetary reductions, while hard savings have direct budgetary impacts.
Best Practice No. 2: Use of a cross functional financial steering group comprised of financial representatives that reviews, approves and makes budgetary reductions for all supply chain improvement initiatives
Most companies reviewed have a senior cross-functional steering group that is responsible for approving strategic sourcing or supply chain improvement recommendations and providing overall organizational support, but few companies utilize an additional financial steering group that focuses specifically on approving savings and making budgetary reductions.