Aberdeen InSight: Yield Savings With Total Cost Management

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 of

    procurement 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


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

5. Monitor: Measure and enforce internal contract compliance and external supplier


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

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


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.