In-Depth

Seven Strategies to Maximize Your Supply Chain Solution

Research firm Aberdeen Group says 2004 will be the year enterprises extend their supply chain solution, integrating it with other systems to reduce costs and improve performance.

• By Stephen Swoyer
• 01/21/2004

Aberdeen recently identified seven strategies that it says will help organizations achieve supply chain success in 2004, starting first and foremost with integration: As companies strive to capture the next level of supply chain value, Aberdeen researchers Tim Minahan and Christa Degnan note, they will look to extend the integration of key value chain processes.

“From a tactical perspective, this might include e-procurement users extending their initial requisition-to-order footprint to streamline and automate the invoice reconciliation and payment process,” Minahan and Degnan write, noting that companies can spend $40 and $80—and take up to 90 days—to reconcile and pay a single purchase order. “Early adopters of electronic invoice and payment solutions have been able to reduce such process costs to below $10 and cut payment cycles by more than 70 percent,” the researchers write.

In addition, Aberdeen research found companies can reduce costs by another 3 to 15 percent by integrating sourcing and suppliers earlier in the design process.

With a mind to further reducing costs, Aberdeen says companies should also focus on compliance management in 2004, paying careful attention to the areas of contract management; transaction management; invoice, payment and reconciliation management; and supplier performance management. “Returns from many supply management strategies and investments have been muted by inadequate compliance procedures and controls,” Minahan and Degnan warn. “Enterprises should look beyond basic spend compliance to focus on the total cost of ownership of supply relationships, including the cost of poor performance.”

No next-generation SCM strategy would be complete without an emphasis on risk management, Aberdeen says, and managing supply chain risks involves unusual vigilance because supply managers must monitor not just market trends but supplier attributes—such as financial stability, performance, and capacity and competence—as well. “Risk management is increasingly important—and even more complicated—when sourcing offshore, particularly in emerging markets where companies must also assess geopolitical and infrastructure risks and local content rules,” the researchers note.

Aberdeen also counsels organizations to improve their SCM efforts in an area it calls “category management,” which involves applying the same rigor companies have traditionally applied to the organization of production materials, parts, and assemblies to spend categories, such as temporary labor, travel, utilities and telecommunications, and advertising and marketing. To a large extent, category management of this kind will require companies develop strategies for determining the underlying cost structures and market costs for specific strategies, Aberdeen researchers say: “When sourcing printing services, buyers must understand setup fees, color separation costs, collation costs, material costs, logistics costs, or other fees that might be negotiable. Similarly, sourcing telecommunications requires an understanding of complex carrier tariffs and company usage commitments.”

Most companies are outsourcing to one degree or another, so it’s not surprising that Aberdeen recommends that organizations incorporate outsourcing of some kind into their next-generation SCM strategies. “It is important to note that outsourcing can extend the value of existing supply management automation investments,” they argue. “Areas to consider augmenting existing procurement automation infrastructures include spend data classification, supplier and category intelligence, transaction processing, … and document imaging and storage.”

The research firm’s next-gen SCM strategy also includes a prescription for a strong dose of business intelligence, with an emphasis on updating basic spreadsheets and what Aberdeen calls “gut intuition” with more sophisticated tools. “Fully informed sourcing and supply management decision making requires enterprises to aggregate spend and performance data from all relevant business systems; cleanse, classify, and enhance data as appropriate; and leverage advanced analytical and reporting tools,” Minahan and Degnan write. “For example, enterprises using optimization tools for bid analysis have recognized additional cost savings of 6%, on average, above and beyond savings achieved through standard online sourcing approaches.”

The researchers note that the use of analytic tools will become increasingly important with the advent of Sarbanes-Oxley and other regulatory measures.

Lastly, Aberdeen urges companies to development and monitor metrics for internal and external performance. “Supply managers should also develop metrics to measure the impact of supply strategies on key business drivers, such as revenue, profits, customer satisfaction, and market expansion,” they conclude.