Report calculates benefits of supply chain efficiency

Related tags Management Best practice

A leading consultancy argues that if companies install
cross-functional planning across their operation and rationalise
their supplier base, they can make savings of 30 per cent on
procurement operations, achieve 60 per cent higher return on
investment (ROI) than typical companies and rely on less than half
as many suppliers.

The research, carried out by The Hackett Group, highlights several key areas where companies can improve their procurement processes. At most world-class companies, says the group, procurement is formally involved in cross-business planning and budgeting.

"This is virtually never the case at typical companies. World-class companies are also about twice as likely as their peers to engage in significant supplier rationalisation annually, and they have greater control over indirect spending."

The Hackett Group's 2004 research into world-class performance is compiled in its Book of Numbers series, which provides senior executives fact-based performance metrics and insights based on Hackett's database of best practices. To receive Hackett's world-class designation, an organisation must score in the top 25 per cent of Hackett's current database in both efficiency (cost and productivity) and effectiveness (quality and business value) output metrics in a given functional area.

In this way, Hackett claims to define 'world-class' with empirical data, isolating the characteristics shared by today's world-class organisations. Typical or peer companies are defined as the median of companies not included in the world-class category.

World-class organisations rely on several key strategies to achieve superior efficiency and effectiveness. According to the consultancy, they reduce staff in part by swapping labour for technology and provide much broader access to self-service tools such as electronic purchasing systems.

Overall, they have shifted their investment in procurement to higher-value activities. For example, world-class companies spend significantly less on purchase order processing and more on supplier management and development. Typical supplier management and development efforts can include the monitoring of supplier performance as well as joint development efforts in training and other programmes designed to improve the ability of key suppliers to support the companies' business.

"The results that world-class procurement organisations generate are quite impressive, particularly in light of the fact that the bar for excellence keeps rising. Practices that were real differentiators a few years ago aren't any more, because by now they've been broadly adopted,"​ said Hackett senior business advisor Chris Sawchuk.

"For companies that aren't at world-class levels, an important message of this research is that there are opportunities for improvement here. It's not an overwhelming challenge for companies to identify, analyse, and prioritise areas where unnecessary complexity is causing increased spending or operational costs. Implementing changes that integrate best practices will very quickly pay for themselves and more."

Hackett's research identified several key areas where typical companies, and in some cases world-class companies, can improve. "Involvement of procurement during both cross-business and cross-functional planning and budgeting processes is a clear area where world-class companies and their peers diverge,"​ said the report.

"Only 3 per cent of all companies said that procurement was formally involved in the planning and budgeting process, while a full 60 per cent of world-class companies are actively involved."

Supplier consolidation is another key strategy for world-class organisations. While typical companies operate with 7,805 suppliers per billion dollars of spending, Hackett says that world-class organisations rely on 55 per cent fewer. In part, this smaller supply base is a direct result of an increased focus on supplier rationalisation at world-class companies.

"It's not surprising to see that even the best companies find it challenging to gain comprehensive visibility into global spending,"​ said Sawchuk. "With many companies running multiple non-integrated systems across various business units and geographies, it's easy to see how this is something that can be difficult to manage.

"Unfortunately, this problem can be a real stumbling block to success. It's difficult to develop a truly effective enterprise-wide strategy if you don't have a clear picture of total procurement spending."

The Hackett Group​, an Answerthink​ company, specialises in best practice research and process benchmarking. The group offers analysis backed by research at more than 2,400 client organisations, including 93 percent of the Dow Jones Industrials.

Related topics Processing & packaging

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