[From Supply & Demand Chain Executive, February/March 2005]
According to research from the advisory firm The Hackett Group, world-class procurement executives leverage technology more effectively and have created procurement organizations that are much less labor-intensive. Although they spend 27 percent more than their peers on technology ($1.4 million versus $1.1 million per billion dollars of spend), world-class executives spend 27 percent less than typical companies on total procurement operations than their peers (0.74 percent of expenditures versus 1.01 percent) and operate with 38 percent fewer staff.
Hackett's research found that world-class procurement organizations also see an array of benefits tied in part to their increased use of technology, such as a shift in focus to more high-value activities like sourcing and supply management, increased investments in analytical activities, faster cycle times and lower error rates.
"Few back office functions have been more dramatically impacted by technology over the past decade than procurement," said Christopher Sawchuk, a senior business advisor at Hackett. "But there's still tremendous variation in the level of technology utilization in procurement and how much value companies are generating."
- World-class procurement companies allocate 34 percent of their overall procurement activities to decision support and risk management activities, representing a 36 percent increase over the actions of typical companies.
Source: The Hackett Group, 2005
- World-class procurement companies process more than three times the number of purchase orders and material receipts per procurement staff person, and cycle times for requisitions and purchase orders are 34 percent faster.
Source: The Hackett Group, 2005
The number of companies sourcing from China, Eastern Europe and India has increased significantly in the last five years and will continue to rise in the future, according to A.T. Kearney's Assessment of Excellence in Procurement study, covering procurement practices at 275-plus international companies. By 2009, 72 percent of companies plan to source from China, a rise from less than 30 percent in 1999. Fifty-nine percent of companies plan to source from Eastern Europe by 2009, an increase from one-in-three five years ago. Half of companies surveyed plan to source from India in 2009, nearly tripling the number sourcing from there in 1999.
Yet companies surveyed revealed they are not prepared to effectively manage this increased sourcing from low-cost countries. Only 53 percent have category strategies that indicate a clear understanding of the supply chain and logistics costs associated with emerging market alternatives. Just 41 percent of companies make emerging market skills and language capabilities a high priority for their sourcing organization. And just 39 percent have formal plans in place to increase their supplier base from global sources.
"Companies are chasing savings through overseas sourcing, but their internal structures are likely to prevent the full benefits of these savings from occurring," said John Blascovich, an A.T. Kearney vice president and leader of the study. "They need a sharper understanding of these new markets. Waiting too long to develop the right strategy or skill set could mean losing access to scarce, capable resources and the competitive edge they provide."
- Procurement continues to shed its back-office reputation, with 60 percent of companies now using their procurement expertise to help set, rather than just execute, corporate strategy.
Source: A.T. Kearney, 2005
- 28 (in 1999) versus 67 (in 2005)
Number of organizations pursing goals in value creation through approaches such as product and service innovation, advanced cost management, risk management and supply continuity and value chain optimization
Source: A.T. Kearney, 2005
Supply Chain Integration & Technology Infrastructure
A new study from the National Retail Federation, prepared in conjunction with consulting firm BearingPoint, revealed that the majority of retailers cite supply chain optimization as a priority initiative for getting closer to the customer.
"Retail Horizons: Benchmarks for 2004, Forecasts for 2005," a survey of more than 300 retailers from an assortment of department, specialty, apparel, grocery and home center stores, with as few as a single store to more than 2,000 locations, showed the following:
- Almost 25 percent of retailers plan for half of their merchandise assortments to be private label;
- In the next 12 months, more than half of retailers (57 percent) plan to replace or upgrade their point-of-sale systems;
- While 38 percent of retailers will focus on domestic expansion, 17 percent will focus on international expansion;
- This year, 33 percent of retailers will focus on redesign and relocation of stores; and,
- More than one in five retailers (21 percent) list outsourcing as a priority for 2005.
"Retailers realize that in order to improve their businesses, it is important for them to reinvest in new technologies and programs," said NRF President and CEO Tracy Mullin. "Consumers are rewarding retailers who utilize resources to feature new merchandise, new technology and new ideas."
Source: National Retail Federation, 2005
More than 60 percent of companies use overly simplistic inventory management methods, such as ABCD inventory policies or simple weeks-of-supply rules for products, and these companies frequently have 15 to 30 percent more inventory than they need and lower service levels, according to "The Supply Chain Inventory Strategies Benchmark Report," a recent AberdeenGroup report.
Only 5 percent of manufacturers and distributors surveyed use multi-echelon inventory optimization that takes into account multiple types of demand and supply variability.
Companies that reported using new optimization methods that manage inventory holistically across multiple stages in the supply chain, including suppliers and downstream partners, commonly drove 20 to 30 percent reductions in on-hand inventory and 10 to 20 percent improvements in time to market.
The Aberdeen study also found that nearly half of respondents have shifted away from purchase orders or release notices for some suppliers, setting a minimum and maximum inventory target level for an item at a plant or other company location, and then asking the supplier to take responsibility for ensuring that inventory is maintained within that range. This has led to dramatic inventory reductions, sometimes over 30 percent, while reducing stockouts.
- Companies that reported using new optimization methods commonly drove 20 to 30 percent reductions in on-hand inventory and 10 to 20 percent improvements in time to market.
Source: Aberdeen Group, 2005
For more information on the current state of the sourcing and procurement markets, see the articles "The Analyst Corner: Sourcing" in the June/July 2004 issue of Supply & Demand Chain Executive, and "The Analyst Corner: Procurement" in the August/September 2004 issue of the magazine.
For more information on the latest trends in the fulfillment and logistics space, see the article "The Analyst Corner: Fulfillment & Logistics" in the October/November 2004 issue of Supply & Demand Chain Executive.