Plugging the Savings Leak

Organizations looking to capture the full benefits of procurement and supply chain technologies are looking to a "Total Cost Management" framework.

[From iSource Business, August/September 2002] Companies that have reduced headcount and streamlined internal processes are now looking to trim fat and inefficiencies from their extended supplier networks, and procurement and supply chain managers are leading this charge. But while Internet-based sourcing procurement and supply chain management (SCM) technologies have delivered considerable cost and performance benefits, deployment of these technologies has often been isolated and disconnected from larger SCM and business initiatives, resulting in the "leakage" of procurement savings.

Aberdeen studied early adopters of e-sourcing and found that users reported cost savings of 14.3 percent on average, but most users were unable to fully implement or realize these savings due to a lack of savings-implementation strategies, an inability to effectively communicate negotiated terms to the enterprise, and insufficient integration between e-sourcing and order execution systems. Further, our research of e-procurement users found that, on average, enterprises push only 18 percent of total indirect spending through these systems. The reasons cited for such a low number include failure to conduct detailed spending analysis at the outset of a project, poor supplier enablement or the lack of an adoption plan for the system.

As a result of these types of "leakage," most enterprises have only realized a fraction of the potential benefits of procurement and SCM automation, indicating that technological advances in these fields have outpaced the strategies needed to effectively deploy those technologies. To gain maximum benefits from enabling technology for the future, a new and better infrastructure must be built.

The TCM Opportunity

Effectively controlling costs and managing performance across the supply chain will require the development and coordination of new organizational and technological infrastructures that blend the proven supply chain strategies and commodity expertise of an organization's procurement professionals with emerging technologies for sourcing, planning, procurement, monitoring and analytics. This new "total cost management" (TCM) framework provides companies with the supporting infrastructure necessary to identify, capture and maintain cost savings and operational efficiencies across all areas of enterprise spending - from operating supplies and business services to production materials, parts and assemblies.

Developing an effective TCM framework requires enterprises to organize and integrate their strategies for every cost category around five key processes: conducting an enterprise-wide spend analysis to identify and prioritize savings opportunities; developing optimal sourcing and procurement strategies for both direct and indirect expenditures based on existing and future purchase requirements; sourcing suppliers and establishing trading relationships; conducting buying activities against negotiated trading agreements and contracts; and measuring and enforcing internal contract compliance and external supplier performance.

Effectively executing these activities requires organizations to build a technology infrastructure that supports intra- and inter-enterprise collaboration for all procurement and supply chain processes. Organizations must also build a central platform for standardizing and enforcing common processes across the enterprise and the supply chain, as well as a procurement intelligence system that provides a "single point of truth" for all purchasing-related data.

In addition, companies must adopt a technology infrastructure that supports system-to-system and system-to-person communication between trusted trading partners, as well as integration with internal business systems and the exchange of all document types and formats, particularly electronic data interchange (EDI) and eXtensible Markup Language (XML). This TCM framework provides a comprehensive and consistent approach to identifying, capturing and managing supply chain costs and performance.

The TCM Evolution

TCM isn't merely a new technology segment - it's a larger business movement, like SCM or total quality management (TQM). Just as enterprises and the IT industry supported these business concepts, thought-leading enterprises, solution providers and consulting firms are now also embracing TCM.

It is true that economic and resource constraints will force most enterprises to take an incremental approach to deploying TCM. However, TCM presents a self-funding model in which savings in one area, such as e-sourcing, can fund other TCM initiatives.

Regardless of the approach, capturing the full savings opportunity will require enterprises to make application purchases and organizational decisions with the TCM framework in mind.

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Tim A. Minahan is vice president and managing director for supply chain research at Aberdeen Group, an IT market analysis and positioning services firm.