Transformed for Savings

A.T. Kearney projects companies will save 13 times more with e-supply management

Plano, TX -- May 10, 2002 -- Companies transforming their supply management practices via e-procurement technology stand to realize savings 13 times greater than their investments in the technology and associated implementation and change management, according to a study of 147 large companies representing 22 industries on six continents by global management consulting firm A.T. Kearney, a subsidiary of global services leader EDS.

The 2002 Assessment of Excellence in Procurement (AEP), which identified practices used by e-procurement leaders, found that spending $1.5 billion on e-procurement would deliver savings of $19.1 billion. At that rate, A.T. Kearney estimated global 500 companies could save $330 billion annually by capturing e-procurement's full potential.

AEP 2002 is a comprehensive global benchmarking study focusing on the impact of e-supply management on large companies. e-Supply management 9 a term A.T. Kearney used to describe the technology advances in the supply management process 9 now encompasses sourcing, category management and ordering, and it includes linkages with suppliers for design and logistics collaboration.

The study defined leaders as companies that met or exceeded their e-supply management objectives for a significant portion of their spend base (35 percent coverage of direct materials spend, 60 percent of indirect materials or 40 percent of total spend). Only eight percent of companies surveyed were classified as leaders. This number is in dramatic contrast to A.T. Kearney's 1999 AEP study, which identified roughly one quarter of companies participating as leaders.

"The AEP study shows that the leading companies dramatically improve their supply management results by changing the rules for how they source and buy and taking a bold, more proactive approach," said A.T. Kearney Vice President John Blascovich, who helped lead the study. "They have broadened their thinking beyond transaction processing and have embraced the concept of e-supply management as an opportunity to leverage technology for benefits, from the initial design through manufacturing and delivery. The successful early adopters of the technology also have made it very difficult for other companies to catch up."

Companies that leverage e-supply management have gained benefits, including:
_ Reduced costs up to 10 percent for items acquired using e-sourcing tools to support strategic sourcing programs;
_ Reduced order cycle time 41 percent though e-catalogs and end-user ordering;
_ Reduced supply management head count up to 10 percent through eliminating or automating low-value activities.

The study found that even companies that successfully leverage procurement have only tapped into a fraction of e-supply management's potential to create value, and there is considerably more they could be doing. Although 96 percent of companies surveyed use e-supply management tools, only 11 percent of their spend base was supported. As a group the companies reported using e-supply management tools for 15 percent of their indirect materials spending, 14 percent of direct materials spending, eight percent of capital spending and 4 percent of services spending.

e-Supply management has been effective in helping meet cost-reduction goals in 50 percent of the companies studied. However less than one quarter of study respondents were able to use e-supply management initiatives to meet revenue-based objectives, such as supplier capabilities, to create product innovation and marketing opportunities.

Just one in 10 of the companies surveyed report extracting high value from their current e-design collaboration efforts. Within the next 12 months, however, nearly one third of companies expect to get high value from using design tools. Use of e-tools for supplier collaboration on research and development is expected to increase by 171 percent in the next 12 months. Although the study found the area of design is currently an untapped territory, "We see e-tools based around design collaboration as the next opportunity in supply management," said A.T. Kearney Vice President Lawrence Kohn. "Design collaboration tools can enable early identification of new technologies and suppliers, reduce the lifecycle costs of end-products and shorten the time-to-market for new products, all contributing significantly to a company's top-line growth."

In addition, the study revealed that companies find the most value in technology tools supporting basic sourcing and ordering functions. Among the tools companies said gave them the highest value were electronic order transmission (49 percent of companies said they gained high value), e-negotiations (44 percent of companies), and online catalogs (42 percent).

When asked to cite the main reasons e-supply management efforts don't meet their objectives, companies said it was due to lack of integration with existing procurement information systems (79 percent of companies); inability of the new system to provide useful analytical information (68 percent); and implementation taking longer than planned (57 percent).

Subsequent in depth interviews also revealed that companies often underestimated the significant change management challenges presented by the adoption of new e-supply management tools. A common situation was companies experiencing early success with an e-procurement pilot program but having difficulty implementing broad-based adoption of tools.

The study also revealed that as procurement matures into supply management, CEOs are going to place significant pressure on chief procurement officers (CPOs) to deliver clear competitive advantage as part of their function. CPOs 9 and the procurement organizations they lead 9 will have to become more strategic or will risk becoming functionally extinct.  According to Blascovich, "Procurement organizations can be likened to IT organizations around 1985 9 they can develop into a strategic force, become an internal utility or be left behind."

A.T. Kearney expects that e-supply management leaders will continue to break new ground by using technology-enabled outsourcing to increase the range of strategic options available to their organizations. Procurement organizations unable to seize such strategic opportunities risk extinction as corporate management begins to see outsourcing as a leapfrog strategy to improve an organization's supply market competitiveness.