What Are You Buying?

Fundamentals for supply chain automation

VISIBLE AND INVISIBLE OPPORTUNITIES

MRO and administrative support services generate the most amount of paperwork within the enterprise. A typical Fortune 500 company processes millions of invoices a year and 75 percent are for items costing less than $1,000. To support the procurement process for this category, supply chain technologies automate the underlying approval process to remove the administrative overhead. These technologies can have an immediate effect in reducing the time spent by personnel across the enterprise in nonproductive activities associated with the procurement process.

Administrative and support services, such as payroll processing and benefits administration, are necessary to support the whole organization, but can't be directly attributed to a product or service. Without a doubt, substantial opportunities are available for cost reduction within the company and across the supply chain in the procurement of goods and services (see Figure 1).

In order to reduce the readily apparent costs for the categories of MRO, commodity items, and administrative support services, the technology goals of procurement processes are to:

• Automate procedures with workflow technologies to reduce the administrative overhead in ordering a product or service. Pay attention to the costs of displacing existing MRO vendors who are providing value added services not reflected in the price.
• Make the approval process transparent and easy to follow.
• Ensure budgetary control through process automation. Most features allow auditing after the fact.

HIDDEN GOLD

Companies usually fail to tackle one of their single biggest sources of costs: the issue of dispute resolution between trading partners in a supply chain. Costs associated (accounts payable clerks and account representatives) with dispute resolutions are significant. Yet, companies aren't standardizing the resolution process to avoid these costs.

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Another example of hidden costs comes from payment terms and conditions between a company and its supply chain. Assume the company has payment terms of net 60, and its suppliers follow the same practice. For ease of exposition, assume that four companies are supplying to one another in a linear fashion. Working capital costs of 240 days (6034) are accumulated within this supply chain. Yet, the finance function follows the mantra "collect money early and pay late." The customer ends up paying for this practice because the excess costs roll into the final price of the product or service.

The supply chain area has significant hidden value that can directly affect a company's bottom line. If a company identifies and mines this gold correctly, it does not have to acquire new customers to significantly improve its bottom line. However, it requires that the enterprise must understand the nature of the goods and services that it buys and consumes. More importantly, a company must select supply chain technologies to enable the process improvements only after identifying the opportunities. The areas of biggest benefit, such as working capital, currently do not have any canned supply chain technologies available, but require a detailed understanding of the value chain that is unique to every enterprise to mine the gold.

Ram Reddy [ramreddy@tacticagroup.com] is the author of From Supply Chains to Virtual Integration (McGraw-Hill, 2001). He is the President of Tactica Consulting Group (www.tacticagroup.com), a technology and business strategy consulting company.