Dangers of Cost-cutting Focus

Accenture: Outsourcing supply chain functions lowers costs but can overshadow strategic needs

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New York  February 7, 2002  A down economy is prompting companies to increasingly outsource supply chain functions, but enterprises risk jeopardizing their long-term supply chain strategy by focusing solely on immediate-term cost-cutting benefits, according to a new study from consulting firm Accenture.

In a survey conducted for Accenture, 80 percent of 150 surveyed executives at large enterprises said their companies were able to cut costs, improve efficiencies, enhance customer service and revenues or improve competitiveness by implementing supply chain management initiatives.

Slightly more than 50 percent said they believe outsourcing non-core functions  such as transportation and logistics  is critical to improving supply chain management and therefore achieving excellence in their company's operations.

Moreover, a growing number of companies are considering outsourcing additional supply chain activities, such as procurement, to enhance performance, the survey showed. Bill Copacino, the global managing partner for Accenture's Supply Chain Management Practice, said the trend toward outsourcing supply chain functions is being accelerated by the economic downturn and the pressing need to enhance competitiveness.

We've seen an increase in outsourcing in the economic downturn because it can often save companies significant costs, reduce fixed costs and assets, and create greater operating flexibility, Copacino said. We are also seeing a willingness to consider outsourcing non-traditional activities, such as procurement, supply chain IT applications development and maintenance, and even supply chain planning, to enhance effectiveness in these critical activities.

However, Copacino said that focusing solely on cost cutting can overshadow long-term strategic needs, which can be counterproductive at a time when supply chains need to become more global and customer-focused.

We are encouraged by the results of this survey that seem to indicate corporate executives are increasingly seeing supply chain initiatives as a means of improving operational performance, and not just another cost cutting measure, said Bill Copacino. Still, too many are missing the opportunity to refine their company's strategy by making supply chain capabilities the core of the company's business model. Effective supply chain management is critical in linking supply with demand and integrating the individual functions or departments within companies together into a harmonious operating model.

Survey participants also said that one of the greatest challenges to achieving positive results from supply chain improvement was the difficulty in scaling pilot programs across functions or divisions. The least difficult challenge was garnering senior executive sponsorship of these initiatives  another indication that supply chain management is seen as a major strategic thrust in achieving corporate objectives.

The survey revealed the integral role the Internet plays in supply chain management success. More than 70 percent see the Internet as one of the most important factors in facilitating greater collaboration with key trading partners because of the visibility it provides upstream and downstream in the supply chain.

Finally, 70 percent of executives see creative partnering agreements that move beyond traditional time and materials agreements as critical to successful supply chain management. Outsourcing key supply chain activities involves major changes, noted Bill Copacino. "When approaching these endeavors, we advise clients to view it as a merger rather than as outsourcing. If the relationship is more transaction-based, it's not likely to work as well. Company leaders need the right mindset and that includes moving beyond the status quo when outsourcing because they are really building a new supply chain.

Accenture conducted the survey in conjunction with Wirthlin Worldwide. Wirthlin interviewed, by telephone, a sample of 150 executives in the Fortune 1000 across a range of industries in December 2001.