THOUGHT LEADERS FOR MANUFACTURING & SUPPLY CHAIN
ARC INSIGHTS
By Larry O’Brien
Many end users today employ
purchasing stra...
ARC Insights, Page 2
©2003 • ARC • 3 Allied Drive • Dedham, MA 02026 USA • 781-471-1000 • ARCweb.com
most a third of end u...
ARC Insights, Page 3
©2003 • ARC • 3 Allied Drive • Dedham, MA 02026 USA • 781-471-1000 • ARCweb.com
did not employ them i...
ARC Insights, Page 4
©2003 • ARC • 3 Allied Drive • Dedham, MA 02026 USA • 781-471-1000 • ARCweb.com
mation strategy devel...
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Current Automation Purchasing Strategies Fall Short

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Current Automation Purchasing Strategies Fall Short
End users today have a paradoxical relationship with their suppliers. Primary
business drivers in today’s environment include maximizing asset
utilization, enhancing plant performance, and reducing capital, maintenance,
and operational expenditures, but many manufacturers employ
purchasing strategies and supplier relationship management strategies developed
during the heyday of the 1980s. Rather than
focusing on achievement of today’s objectives, the
current environment is characterized by an approach
that relies primarily on initial cost, driving discounts
off list price, and failure to employ a lifecycle costing
perspective.

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Current Automation Purchasing Strategies Fall Short

  1. 1. THOUGHT LEADERS FOR MANUFACTURING & SUPPLY CHAIN ARC INSIGHTS By Larry O’Brien Many end users today employ purchasing strategies that fail to enhance plant performance, optimize asset utilization, or achieve real business value. INSIGHT# 2003-18M APRIL 16, 2003 Current Automation Purchasing Strategies Fall Short Keywords Automation Systems, Purchasing Strategies, Supplier Relationships, Collaborative Partnerships, Real-time Performance Management Summary End users today have a paradoxical relationship with their suppliers. Pri- mary business drivers in today’s environment include maximizing asset utilization, enhancing plant performance, and reducing capital, mainte- nance, and operational expenditures, but many manufacturers employ purchasing strategies and supplier relationship management strategies de- veloped during the heyday of the 1980s. Rather than focusing on achievement of today’s objectives, the current environment is characterized by an approach that relies primarily on initial cost, driving discounts off list price, and failure to employ a lifecycle costing perspective. Analysis Based on the results of a recent survey conducted by ARC, many end users today employ purchasing strategies that were conceived in the 1980s and fall short of achieving real business value in areas such as enhanced plant performance, and optimized asset utilization. In many cases, these strate- gies impede business goals and fall short of providing real, substantial business value in today’s business climate. Current Supplier Agreements Rely on Old Business Models Most of the end users we spoke with feel satisfied with their supplier rela- tionships, but almost all feel that they are not getting the most they can out of them. Most have supplier relationships that do not maximize potential or provide real business value. Most of the users surveyed stated that they had formal agreements with one or two suppliers that they use exclusively. Many of these agreements typically last for several years and provide users with discounts on the purchase of hardware, software, and services. Al-
  2. 2. ARC Insights, Page 2 ©2003 • ARC • 3 Allied Drive • Dedham, MA 02026 USA • 781-471-1000 • ARCweb.com most a third of end user respondents, however, rely on a short list of pre- ferred suppliers or an RFQ process only. Out of the majority that has some sort of formal alliance or purchasing agreement with their suppliers, most do not have what ARC describes as a true collaborative partnership with the goal of maximizing performance potential and asset utilization. Standard purchasing agreements, however, do not typically address real business issues like asset utilization and RPM implementation. Purchasing agreements address pricing, not performance. Most Users Have Formal Alliances with One or Two Process Automation System Suppliers Lifecycle Cost Tops Pricing Evaluation, But Awareness Limited Survey respondents were asked to rank the importance of several key fac- tors when evaluating the cost of automation systems. These criteria ranged from initial cost to increased asset utilization. Most users ranked issues such as initial cost and installed cost as less important, while they placed higher importance on issues such as lifecycle cost and enhanced asset utili- zation. Lifecycle cost was ranked as the most important criterion for evaluation of automation system price, while issues such as initial cost and installed cost were ranked the least important. Most respondents did not have a complete methodology in place for meas- uring control system lifecycle costs. Most suppliers have some way of measuring aspects of lifecycle cost, but lack a cohesive, holistic picture. Most respondents that have methodologies for measuring lifecycle costs 2.4% 9.5% 21.4% 28.6% 33.3% 4.8% No preferred suppliers. RFQ process only. Long term, formal agreement with one or more suppliers for systems sales. Formal alliances with selected suppliers. Short list of preferred suppliers. Formal alliances with one or two suppliers used exclusively. Other
  3. 3. ARC Insights, Page 3 ©2003 • ARC • 3 Allied Drive • Dedham, MA 02026 USA • 781-471-1000 • ARCweb.com did not employ them in the purchase of control systems or as a tool for driving increased value out of supplier relationships. 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Initial Cost Installed Cost Lifecycle Cost Return on Investment Return on Assets, Increased Asset Utilization Increased Plant Performance Not Important At All Not very Important Important Somewhat Important Very Important Extremely Important Lifecycle Cost and Increased Plant Performance Are Top Concerns for Users When Evaluating Control System Price Time Investment Correlates to Higher Satisfaction Most of the users that reported high levels of satisfaction with their suppli- ers were first able to form a well-defined strategic relationship with their suppliers and were able to devote time to maintaining that relationship once it was established. Ongoing relationship maintenance is essential. Users who have little or no time to devote to their supplier relationships are generally not satisfied with them. Relationships between suppliers and users should be symbiotic. Collabora- tive partnerships are high maintenance and can be more time consuming in the long run than the traditional competitive bidding process. In the final analysis, however, the time you spend managing the relationship should result in increased productivity, return on investment, and enterprise opti- mization. Conversely, the time you spend in a competitive bidding process may result in a lower purchase price but does not guarantee a higher return on investment. Rift Remains between Engineering and Purchasing Many users surveyed regretted the persistent rift between engineering and purchasing organizations. Engineers continue to be concerned with auto-
  4. 4. ARC Insights, Page 4 ©2003 • ARC • 3 Allied Drive • Dedham, MA 02026 USA • 781-471-1000 • ARCweb.com mation strategy development and driving more value out of the control system, while purchasing continues to focus on initial cost. Purchasing is more concerned about what will happen in the next fiscal quarter while en- gineering is concerned about the next several years. For purchasing and engineering to find common ground, it is necessary for both to look at the total value that automation brings to the enterprise versus the initial cost. This requires adoption of a lifecycle costing methodology, cost/benefit per- spective, and ultimately adoption of real time performance management (RPM) to measure automation performance and its impact on the enterprise. Recommendations • Achieving sustained value with supplier relationships is a major chal- lenge moving forward. The users most satisfied with their supplier relationships put in time and resources to maintain it. Collaborative partnerships require the attention of user and supplier alike. • Collaborative partnering involves working with suppliers to drive in- creased performance out of plants. Collaborative partnerships should be viewed with an eye toward achieving maximum asset availability and implementing Real Time Performance Management (RPM). The data presented in this Insight is the result of an ongoing survey of automation users and is part of a new ARC Automation Benchmarking Service. Since you are an ARC client, you can respond to this survey and view results of the complete survey online by going to http://www.arcweb.com/myarc/home/webcast/websurvey.asp. Please help us improve our deliverables to you – take our survey linked to this transmittal e-mail or at www.arcweb.com/myarc in the Client Area. For further information, contact your account manager or the author at lobrien@arcweb.com. Recommended circulation: All MAS clients. ARC Insights are published and copyrighted by ARC Advisory Group. The information is proprietary to ARC and no part of it may be reproduced without prior permission from ARC. End User Respondents Estimate Initial Cost Is Less than 32 Percent of Total Lifecycle Cost 31.9% 14.1%16.4% 18.1% 13.2% 3.1% 3.2% Initial cost Installation, Commissioning, & Startup Operational Phase Maintenance Upgrades Decommissioning Other 31.9% 14.1%16.4% 18.1% 13.2% 3.1% 3.2% Initial cost Installation, Commissioning, & Startup Operational Phase Maintenance Upgrades Decommissioning Other

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