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ARIBA KNOWLEDGE NUGGETS                 Tracking and Realizing Savings from                   Strategic Supply Chain Initi...
3. Expansion of the roles of strategic sourcing and supply chain improvement project teams be-yond an analysis and recomme...
Improving corporate financial performance is certainly not the only strategic role for supply chain organizations, but it ...
Ariba Savings Pipeline and Tracking— If you are a current Ariba Sourcing user,    or even if you are thinking of adding th...
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Ariba Knowledge Nuggets - Savings from Supply Chain Initiatives

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Ariba Knowledge Nuggets - Savings from Supply Chain Initiatives

  1. 1. ARIBA KNOWLEDGE NUGGETS Tracking and Realizing Savings from Strategic Supply Chain Initiatives Most corporate supply chain organizations have the ability to impact 50 to 70 percent of their corporations total cost structure. Here are best practices to translate supply chain improvements into significant corporate financial results.When it comes to saving money from strategic sourcing, outsourcing or supply chain improvementinitiatives, "perception" isnt enough. Businesses have always strived for bottom-line impact fromprograms like these, but for years they have struggled with quantifying savings and creating tangiblecorporate financial results. This is particularly evident in supply chain improvement initiatives, forwhich the "facilitating" department, typically supply chain, procurement or logistics organizations, donot have direct control over the budgets that are impacted by the improvements.Research has found that companies that are successful at translating supply chain improvements intosignificant, tangible corporate financial results consistently applied most of the following practices:1. Use of a single, consistent and formal savings tracking methodology, based on total cost of ownership (TCO). There are many types of models used, but they all have the following characteristics: * Each is based on TCO, and most use some type of activity-based costing approach to quantify the total cost of ownership for a specific spend category or business process. * Successful companies consistently use one common approach for modeling total cost savings, regardless of the type of initiative (strategic sourcing teams, logistics redesign teams, procurement redesign teams). Unsuccessful companies have a very inconsistent approach to quantifying savings, resulting in low organizational credibility and buy-in. * Savings models clearly differentiate between "soft" savings and "hard" savings. Generally, soft savings are defined as those which result in productivity improvements, but are not significant enough to be able to translate into direct budgetary reductions, while hard savings have direct budgetary impacts.2. Formation of a cross-functional financial steering group comprised of financialrepresentatives from impacted organizations that review, approve and make budgetaryreductions for all supply chain improvement initiatives. Studies show that utilizing an auxiliary financial steering group dramatically improves companies success in driving savings to their corporations bottom line. Most senior steering councils are comprised of senior vice presidents, whose support is the cornerstone of a successful strategic sourcing or supply chain improvement program. But these senior representatives typically do not have the time or interest in understanding the financial details of the teams recommendations. The auxiliary financial steering groups are typically comprised of finance managers that have budget responsibility for each impacted organization, and have the skills and interest to review the details of each teams recommendation, the total cost models used for the basis of savings estimation and the specific budgetary areas impacted. This secondary oversight group adds significant credibility to strategic sourcing and supply chain improvement initiatives, and creates the "missing link" in translating reported savings to specific corporate budgetary actions.
  2. 2. 3. Expansion of the roles of strategic sourcing and supply chain improvement project teams be-yond an analysis and recommendation role into implementation responsibilities. One of the most common failures confessed by those companies that are not successful at real- izing supply chain cost savings is the adoption of a project-based approach in which the strate- gic sourcing or supply chain improvement "project" ends with a formal recommendation to senior management. Successful companies are able to expand the use of strategic sourcing and other strategic sup- ply chain initiatives into a "way of doing business" in which the teams that conduct the analysis and make the initial recommendations are also responsible for implementing, tracking and man- aging the improvements. This approach creates several benefits: * It causes the teams to be more realistic in developing recommendations and quantifying sav- ings, since they are going to be held accountable for implementing their recommendations. * It provides a seamless transfer of skills and knowledge from the analysis and strategy phase of a project into the implementation phase. * Appropriate resources are dedicated to the implementation phase – a phase that is tradition- ally under-resourced for many corporate improvement initiatives. * This approach helps to institutionalize the types of initiatives that are being addressed into a normal way of doing business.4. Utilization of broad unit-based cost metrics, balanced by service and quality metrics, to tracksavings at the spend category and initiative level. One approach that many companies use to drive savings to the corporate bottom line is to re- duce budgets once the financial steering group approves them. While this approach is highly effective in ensuring that estimated savings results in improved corporate financial performance, as well as creates a significant incentive for organizations to implement supply chain improve- ments, it is also important to be able to track the actual realization of savings from supply chain improvement initiatives. Most companies acknowledge that while the total cost modeling approach is a valuable tool for understanding total cost of ownership, driving the appropriate behavior in expanding supply chain improvement efforts beyond price, and identifying savings at very detailed levels, it is not easily updated on a frequent (weekly or monthly) basis. The most advanced companies utilize unit-based cost metrics to track cost performance on a frequent basis, usually weekly or monthly. These metrics are often automated and create a sim- ple and often visual way to track cost progress. They are typically balanced by service and qual- ity metrics to ensure that teams are not singularly focused on cost, and to ensure that quality or service are not negatively impacted by cost reduction efforts. The unit-based approach (e.g. cost per person, per unit of length, per weight, per unit of output, etc.) is useful for creating a usage independent benchmark that can clearly show progress over time, as well as for comparing performance to other companies or industries. The more complex cost models are typically updated on an annual or semi-annual basis, and are used for identify- ing future continuous improvement opportunities.5. Linkage of savings realization targets to supply chain departmental goals and personal devel-opment plans. In order to institutionalize strategic supply chain initiatives, the most successful companies are able to create a direct linkage between corporate goals and objectives to supply chain depart- mental goals and objectives down to the personal goals and objectives (and development plans) for supply chain employees. The savings identified from strategic sourcing and other strategic supply chain initiatives are almost always clearly linked, either as specific objectives at the cor- porate or supply chain department level, or as key planks that are enablers of the corporate and supply chain cost objectives. The most progressive companies expanded the inclusion of savings into personal development plans for not only supply chain employees, but additionally for selected business unit (client) employees. Inclusion of savings targets in individual performance plans and objectives is the final key to creating incentives for driving savings to corporate financial results.
  3. 3. Improving corporate financial performance is certainly not the only strategic role for supply chain organizations, but it isinarguably a very important one. Most corporate supply chain organizations have the ability to impact 50 to 70 percent of their corporations total cost structure, so creating a model that can optimize this lever is critical to any supply chain organizations success. Furthermore, the ability to track savings directly to organizations budgets ensures the ongoing success of supply chain management initiatives. Negotiated Savings* Realized Saving** Definition Savings on a new or existing deal or Portion of identified savings that finance contract that was driven by the Pro- confirms will have a direct impact on curement team in collaboration with the budget / forecast or be used to their business partners offset expense increase elsewhere Business Driver Aligned with Contract Negotiator’s goal Aligned with business goal of expense to maximize value of each contract for reduction their business partners In Scope Negotiated savings from Savings that has a direct impact on the “baseline” (defined below) for new or budget or forecast or used to fund existing contracts spending in other areas Rate Reductions Must be tracked (cost center impacted, effort accelerated, etc.) Savings from a proposed increase Innovative recommendation resulting Out of Scope Favorable outcomes (example: addi- Any identified savings that does not tional work added to the contract for meet the above criteria the same cost) Favorable outcomes and business unit These will be captured separately scope or volume changes for reporting purposes Business unit driven scope or volume Measurement Contract of 1 year or less: Savings confirmed by Finance through performing budget analysis (operating Savings over the 12 months fol- or capital) and analysis of impact to the lowing contract signing Income Statement. Contract of more than 1 year : Savings over the 12 months fol- lowing contract signing + NPV of Out Year Savings (5% Discount Rate) High Level Process •Establish Baseline: starting point for •Same as left + … negotiation as agreed upon by the •Submit identified savings and backup business partner materials to Expense Management •Upon Contract Signature, calculate team difference between final price and •BU / CU Liaison will work with local fi- baseline using the method described nance teams to determine realized in the above Measurement section savings •Confirm savings with Procurement Management *Negotiated Savings is validated and tracked by the Procurement team **Realized Savings will be tracked and validated by the Expense Management / BU Finance Teams
  4. 4. Ariba Savings Pipeline and Tracking— If you are a current Ariba Sourcing user, or even if you are thinking of adding this solution to your Ariba suite of products; did you know we have a solution to help you with this critical step in your procurement process? Implementing an online sourcing solution can play a significant role in achieving program goals, yet many companies still struggle in driving the usage of their tools and associated processes to realize the full benefit. To further complicate the matter, it been challenging for many companies to fully measure and report on the benefits driven by their sourcing initiatives. Business Needs The problem most organizations face is being able to consistently track the current transactions and histories associated with each savings initiative, and have the necessary information available for immediate analysis. In order to meet savings targets, companies must create, manage, and report their sourcing pipeline. Additionally, savings initiatives can involve many different stakeholders and can last for several months—or even years— making this an even more-daunting task. Ariba has worked extensively with customers to help them accelerate the adoption of their technology and drive results. An effective solution must be able to: • Allow users to manage their sourcing pipeline and create a shared plan of upcoming sourcing activities to be executed • Help determine if necessary resources are available for upcoming projects • Warehouse all transactional data to create reports and analyze savings • Effectively capture and share savings insights across stakeholders using a collaborative team workspace • Provide warnings when at risk of not meeting savings goals • Track current transactions and histories associated with individual savings initiatives and use that information as a template for future initiatives Solution Benefits Ariba Savings Pipeline and Tracking provides companies with a powerful method for driving and evaluating the impact of their sourcing programs, helping them to define their sourcing program activities and measure their success by tracking and reporting savings and spend • Save time and money by reducing manual processes, errors and oversights • Gain visibility on upcoming sourcing activities and quantitatively measure the delivered value of sourcing activities • Measure the success of Sourcing programs by tracking savings and spend • Easily track savings by time period, regions, supplier and spend type • Streamline the way savings initiatives are conceived, approved, and executed • Track estimated, negotiation, implemented, realized and actual spend on savings • Capture historical data to help in planning future sourcing initiatives • Acquire a highly secure way to track savings through document access control and approvals • Gain productivity and visibility into spend process • Achieve on-demand Infrastructure with rapid deployment • Obtain training and support Contact me today for more information on Ariba Savings Pipeline and Tracking!**Information from John Evans report on major companies Savings Initiatives