Effectively controlling costs and performance across the supply chain will require the
development of new operational and technology infrastructures that blend proven supply chain
strategies and market intelligence with emerging sourcing, planning, procurement execution,
monitoring, and analytics technologies. This “Total Cost ManagementTM” framework will position
organizations to identify, capture, and maintain the complete cost savings and operational
efficiencies available in the supply chain.
Procurement Leads the Charge
Cost cutting has become job one for most businesses. After reducing headcount and streamlining
internal processes, companies are looking to trim fat and inefficiencies from their extended
network of supplier partners. Procurement and supply chain management are heading this charge.
With half of every revenue dollar spent on external goods and services, procurement provides the
largest opportunity to reduce costs. Procurement is also responsible for organizing and managing
a wide array of supply relationships. Procurement’s role is becoming increasingly important as
firms outsource critical activities, such as manufacturing, logistics, and design.
Suffering Savings Leakages
In their short existence, Internet-based sourcing, procurement, and Supply Chain Management (SCM)
technologies have delivered considerable cost and performance benefits. However, deployment of
these technologies has often been isolated and disconnected from larger SCM and business
initiatives. This fragmented approach has resulted in the “leakage” of procurement savings.
Examples include:
- Planning: Traditionally focused on production (“direct”) material purchase requirements, most
planning initiatives and engines fail to examine supplier capacity and capabilities. Planning
technologies also overlook non-production (“indirect”) expenditures, limiting opportunities to
aggregate buying volumes and optimize purchase plans for indirect spending.
- Sourcing: Aberdeen research of early adopters of e-Sourcing found that users reported cost
savings of 14.3%, on average. However, most users were unable to fully implement or realize these
savings. Reasons include 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.
- Procurement: Aberdeen research of e-Procurement users found that enterprises push only 18% of
total indirect spending through these systems, on average. Reasons for low penetration rates
include a failure to conduct detailed spending analysis at the outset of a project, poor supplier
enablement, and lack of a system adoption plan.
- Contract management: Nearly 80% of business transactions are governed by a contract, yet few
companies effectively communicate and manage the terms of these contracts. As a result, companies
miss huge savings opportunities by not enforcing internal compliance with contracts or ensuring
appropriate price breaks and rebates from suppliers.
- Supplier performance measurement: Evaluating a supplier’s operational and financial
performance requires metrics to be assimilated from multiple enterprise systems. Capturing an
accurate view of a supplier’s current and future performance also requires enterprises to
access information from external sources as well. Lack of insight into supplier performance can
cause buyers to make poor sourcing decisions and to miss indicators of supply chain risk.
As a result, most enterprises have only realized a fraction of the potential benefits ofprocurement and SCM automation. Such findings are evidence that advances in procurement and
supply chain technologies have outpaced the strategies needed to effectively deploy them.
TCM: Capturing the Total Opportunity
Effectively controlling costs and managing performance across the supply chain will require the
development and coordination of new organizational and technology infrastructures that blend
proven supply chain strategies and deep commodity and market intelligence with emerging sourcing,
planning, procurement, monitoring, and analytics technologies.
This new Total Cost Management (TCM) framework provides 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.
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TCM is an organizational and technology framework for effectively analyzing, sourcing, and
managing purchasing costs and supply chain performance enterprise-wide. This framework blends the
supply chain strategies and commodity expertise of an organization’s procurement professionals
with supporting sourcing, planning, procurement execution, monitoring, and analytics
technologies.
Developing an effective TCM framework requires enterprises to organize and integrate their
strategies for every cost category around five key processes:
1. Analyze: Conduct company-wide spending analysis to identify and prioritize savings
opportunities, including supply base rationalization and purchase aggregation.
2. Plan: Develop optimal sourcing and procurement strategies for both direct and indirect
expenditures based on existing and future purchase requirements across the enterprise.
3. Source: Identify, evaluate, negotiate, and configure trading relationships.
4. Buy: Communicate, execute, and settle payment against negotiated trading agreements and
contracts.
5. Monitor: Measure and enforce internal contract compliance and external supplier
performance.
Effectively executing these activities requires organizations to build technology infrastructure
that supports the following:
- Collaboration – enables intra-/inter-enterprise collaboration for all procurement and supply
chain processes;
- Process control – provides a central platform for standardizing and enforcing common
processes across the enterprise and the supply chain; and
- Procurement intelligence – provides a “single point of truth” for all procurement-related
data and intelligence.
To support integration and interoperation within the enterprise and across the supply chain,
companies must adopt a technology infrastructure that supports system-to-system and
system-to-person communication between trusted trading partners.
This infrastructure must also support integration with internal business systems, including
financial, Enterprise Resource Planning (ERP), Manufacturing Resource Planning (MRP),
Design/Product Data Management (PDM), and legacy applications. Finally, TCM requires the exchange
of all document types and formats, particularly the dialects of EDI and XML. This TCM framework
provides a comprehensive and consistent approach to identifying, capturing, and managing supply
chain costs and performance.
The TCM (R)evolution Has Begun
TCM is not merely a new technology segment but a larger business movement, like SCM or Total
Quality Management (TQM). Just as enterprises and the IT industry supported these business
concepts, TCM is now being embraced by thought-leading enterprises, business software application
providers, and consulting organizations – even if the term TCM has yet to proliferate.
Pure-play solution providers in the areas of spending analysis, contract management, and supplier performance measurement
are aligning themselves with consulting firms and procurement technology providers to solidify
their position in the TCM framework. e-Sourcing vendors are expanding
their solution footprints beyond online negotiations to address the broader requirements of TCM.
And SCM and e-Procurement platform providers
are moving beyond their transactional roots to support additional TCM functions.
The TCM opportunity is also attracting leading ERP players, who are developing
process-
focused, Web-based suites built around the TCM concept. Leading consulting firms are also
entering the fray by partnering with procurement, sourcing, and SCM solution providers and
creating strategies supporting the TCM framework.
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.
Aberdeen Conclusions
Procurement is at a critical inflection point. Empowered as a leading business initiative, the
procurement function finally has the resources to deploy automation to support and improve
operations. Early experiences with e-Sourcing, e-Procurement, and SCM technologies indicate that
there is a wealth of cost savings and performance improvements to be had through the automation
of supply chain activities. While incremental benefits provided by these technologies are
significant on their own, capturing the full procurement savings opportunity will require
companies to adopt a well-defined and integrated strategy that addresses all procurement costs
and processes.
Total Cost Management provides a framework for organizations to identify, capture, and manage the
cost and performance of all corporate purchasing dollars and supply chain resources. Early
signs indicate that TCM will also be the next hotly contested enterprise business technology
segment.
Tim A. Minahan is Vice President and Managing Director, Supply Chain Research, for Aberdeen Group, an IT market analysis and positioning services firm based in Boston. For more information go to www.Aberdeen.com.