white paper Ten Key Procurement and Logistics Trends and How to Navigate Their Pitfalls

Transcription

1 white paper Ten Key Procurement and Logistics Trends and How to Navigate Their Pitfalls

2 Contents Introduction 01 Trend 1: More accurate demand planning 01 Trend 2: Globalisation 01 Trend 3: Increased competition and price pressures 02 Trend 4: More outsourcing 03 Trend 5: Shortened and more complex product life cycles 03 Trend 6: Closer collaboration between stakeholders 03 Trend 7: Maturing procurement and sourcing governance models 04 Trend 8: Improved procurement and sourcing skills 04 Trend 9: E-procurement enters a new, more holistic phase 05 Trend 10: Building sustainability into supply chains through e-procurement 05 Conclusion 05

3 Procurement and logistics processes are not as simple these days as getting goods from point A to point B even less so on an international scale. Today s supply chain management is about understanding and manipulating an easily overwhelming set of variables to achieve a deceivingly simple result: delivering on-time and within budget. Central to this is a requirement that underpins all current trends in the industry: understanding the product. The stronger this knowledge on the part of a supply chain service provider whether it s an internal or an outsourced function within the end-user organisation the better and more consistent the results. But without this basic expertise, the outcome can quickly become catastrophic. Trend 1: More accurate demand planning Vendors and manufacturing organisations in the IT supply chain are moving from plantlevel production planning to a demanddriven focus. This creates a more customeroriented mindset and drives down costs without sacrificing operational efficiency. But it also comes with a set of challenges that often impact on both the system integrators and their end-user clients. Demand planning is a key function of large-scale production. Large vendors usually have a manufacturing plant in almost every major country, in every region, and it depends on labour, materials and customer demand when and where they will manufacture the products most efficiently. Some vendors also outsource the actual manufacturing and don t hold stock themselves, but supply their partners on a per-order basis. Obviously, this makes it imperative to have the right amount of raw materials available at the right time and at the right plant, and to make sure there s adequate stock of these materials to service incoming orders. Careful demand planning therefore plays a crucial role, because how well vendors manage this function impacts directly on their partners business. If vendors don t plan properly, their partners run into restrictions. Lead times of between four to six weeks suddenly stretch to an unacceptable ten to fourteen, or longer, creating dissatisfaction throughout the supply chain. This is because everything from the shipping and customs clearance, up to the implementation and go-live date are delayed. It s important for end-user organisations to plan properly and keep varying lead times in mind. But these can differ so greatly owing to problems higher up in the supply chain, that it s important to keep communications with the implementation and integration partners open and efficient. These organisations have the best visibility across the entire supply chain thanks to their close relationships with vendors, and can add value and insight during the early stages of project planning and scheduling before orders are placed. This could go a long way towards managing expectations and circumventing some of the unforeseen problems caused by inaccurate demand planning on the part of vendors. It s important for end-user organisations to plan properly and keep varying lead times in mind. Trend 2: Globalisation Globalisation is dramatically influencing the way business is managed and transacted today, and no area of a business is affected more by this development than the supply chain. End-user organisations with an international footprint therefore need to partner with service providers that are experts in international delivery, that can supply whatever equipment is needed by sourcing from anywhere and delivering to any place, and can do so no matter in which country this assistance is needed. This involves ensuring there are no penalties or delays, that customs clearance is handled in the most efficient, cost-effective and lawful way, and that the overall order is effectively managed from the moment it s placed to when it s delivered. A better understanding of the total landed cost and service implication of, for example, alternative ports of entry, can help reduce supply chain costs and improve performance. The right supply chain configuration is therefore critical to managing the changes brought about by rapid globalisation. Where most end-user organisations still fall short is to underestimate the complexity of this process and, again, not to follow a consultative, transparent approach with their international procurement and integration partners. It s key to share international expansion strategies with service providers in order to give them visibility of what the needs and requirements will be in the near and long term. Your preferred service provider should be able to give valuable advice about how to navigate all the pitfalls of cross-border business in the targeted countries. 01

4 Trend 3: Increased competition and price pressures In the logistics arena, fuel costs are a primary driver of price and a key focus when companies need to find ways of cutting down on expenses. There s no sign of relief for this yet; fuel costs are only set to keep rising. The mistake end-user organisations make is to see logistics expenses, in general, as the first place to try to reduce costs. One of the reasons for this is that it s expensive to move product across borders, and organisations immediately assume there s fat built into logistics costs, when the true expense actually lies in fuel surcharges that are beyond their control. Here, the location of the vendor s manufacturing plant has a major part to play. A large IT manufacturer, for example, recently moved three US-based plants to a selected country and merged them in a consolidation effort aimed at saving manufacturing costs. However, it s unusually expensive to ship products in and out of that country, owing to the fewer number of flights to and from its airports. It s also more difficult to monitor and control costs in this specific country owing to elements of corruption. These factors contribute to the higher price of logistics, which is simply passed on to the end-user organisations. The best cost-saving strategy would be to outsource all procurement and logistics to a supply chain service provider that has sufficient expertise and experience in international logistics to know how and where to save. There are, however, some countermeasures these organisations can take, such as order consolidation, multimodal transport, sea freight versus air freight, and so forth. The best cost-saving strategy, however, would be to outsource all procurement and logistics to a supply chain service provider that has sufficient expertise and experience in international logistics to know how and where to save. Attempting to handle logistics in-house without the proper expertise often leads to higher costs, rather than lower, because it s not part of the organisation s core focus. All too often, organisations wrongly assume that they d be able to handle logistics better than external suppliers, only to run into a host of problems. They would then have to call in the experts to try and solve their issues at the last minute, and at a far higher cost than if they d simply outsourced the process from the start. Where these problems usually become glaringly obvious is at the destination. By this time, the product had been ordered, shipped from the plant, and arrived at the destination country without the correct paperwork, because it hadn t been processed correctly at the origin. Parts of the order may be incorrectly labelled or even missing altogether. In these cases, it s often necessary to ship everything back to the origin and re-start the process from scratch, at double the cost. It s also important to be aware that the intense competition among system integrators providing supply chain services sometimes causes them to hide logistics costs in other areas such as margin or maintenance charges. It s best to partner with a systems integrator that s completely transparent as far as logistics costs are concerned, expressing these charges separately and clearly as a percentage of the value of the equipment. In addition to fuel costs, import duties and taxes are other areas where you can achieve savings by ensuring you re not overcharged by customs and that goods are cleared in the most cost-efficient way possible. For example, in some countries, items that can be connected to a network may be duty free, while standalone products carry a 5% surcharge. Laptops can therefore be cleared as part of the network it just depends on how they re tariffed and classified on the commercial invoice. This practice is perfectly legal, and can save a great amount on large-scale imports, provided the procurement and logistics partner has an understanding of the product and its environment, and can therefore clear it through customs smartly. Connected to this, is the experience to know when customs have cleared, and tarrifed certain products incorrectly. This is not an uncommon occurrence, but in order to challenge incorrect charges successfully, you need to understand the entire clearing procedure and all its relevant codes and processes in order to claim a refund. Again, if this expertise doesn t fall within the enduser organisation s core focus, it s best to leave such negotiations to an expert supply chain logistics partner. 02

5 Trend 4: More outsourcing Outsourcing all, or part of, the procurement and logistics processes is a growing trend among all global organisations, particularly those re-focusing their attention on core competencies and cost-efficiencies in the current economic slump. This is true for organisations such as financial services providers that have minimal expertise in logistics, as well as for manufacturing businesses, such as pharmaceutical companies that have their own supply chains connected to their core business. But even though pharmaceutical companies may have experience in moving products that fall within their area of expertise, like medicine or tissue samples, other types of products they need might require a different kind of specialised logistics knowledge. So when it comes to procuring and transporting their IT equipment, for example, they require the assistance and services of logistics experts just as much as any other organisation. While there s an international trend towards outsourcing IT procurement and logistics, it s important to realise the benefits of entrusting the entire IT supply chain to a single outsourcing partner that has expertise across the board. It s not advisable to outsource piecemeal, thinking it will be more cost-effective. A fractured supply chain creates complexity, and complexity creates cost. This is owing to the need to manage and co-ordinate a range of suppliers, as opposed to having a single point of contact. With one supply chain and systems integration partner, the end-user organisation can purchase from a single supplier that s also responsible for: Delivering the product on time; Co-ordinating with project managers to ensure engineers are on site to install and integrate the product; and Ensuring the equipment is maintained and operating at optimum efficiency throughout its lifecycle. Thanks to sophisticated control mechanisms to proactively monitor the various components of the supply chain, as well as information systems to connect and co-ordinate the supply chain seamlessly, the client enjoys complete end-to-end visibility at all times. And if something should veer off course during this entire process, there s only one number to call. While there s an international trend towards outsourcing IT procurement and logistics, it s important to realise the benefits of entrusting the entire IT supply chain to a single outsourcing partner that has expertise across the board. Trend 5: Shortened and more complex product life cycles Today s business world is all about speedto-market. This applies to how quickly new and unique products can be designed, manufactured and delivered to endusers via distributors and retailers, but also includes the discontinuation of old products. Both processes place a great deal of pressure on logistics processes to adapt and change accordingly. In the IT industry, complexity increased particularly fast in the area of security products following the 9-11 event in the US. This is owing to the sensitive nature of the products themselves and the compliance challenges they ve created. From a logistics perspective, it became increasingly challenging to ship security products across international borders with the correct paperwork attached, and ensuring that the right sign-off had taken place. Supply chain services providers need to keep abreast of these developments in order to avoid unnecessary delays and additional costs that can easily be caused by the dynamic nature of modern-day international business. Trend 6: Closer collaboration between stakeholders The greater integration seen in maturing supply chains requires closer collaboration between all players in the value chain. It s again a mistake to think of supply chain management as simply the freighting of the product, when the process begins far earlier. Successful procurement and logistics begins with the supply chain service provider s involvement and collaboration in the client organisation s early project planning and scheduling phases. The supply chain partner helps the end-user organisation understand and incorporate in its planning aspects such as accurate pricing, the legal and timing complexities of moving goods around the world, taxes and monetary regulations. There are many extended parties involved in a successful supply chain. The commercial, bid and sales teams would, for example, engage the core supply chain teams to ensure they re costing accurately and adopting the right transactional model. The questions that need to be considered include the following: From which country in which region are we purchasing the products? To which destination are we moving the equipment? What are the implied tax exposures and implications? What are the risks for each country involved and across the entire process? Procurement teams, on the other hand, provide valuable input in terms of vendor negotiations, quantities, product specifications, pricing, discounts, lead times, and so forth. Finance departments take care of invoicing, managing all payments and collections, and checking that taxes and duties were paid correctly. All parties also collaborate closely with project management teams to ensure that the supply chain timing remains coordinated with project timing, as there s no sense in having equipment delivered at end-user destinations without the required teams of engineers present to receive the goods and start integrating the products. The aim is visibility and cost-reduction across the board. The closer all these parties collaborate, the more efficient, transparent and cost-effective the entire supply chain and all its connected processes will be, and the more visibility and management control the end-user organisation will enjoy. 03

6 Trend 7: Maturing procurement and sourcing governance models In the area of procurement governance, there are currently two models at play in the market. In the centralised model, both the budget and the procurement process is controlled by the organisation s head office and dictated to its regions. All products are procured centrally and shipped out to the rest of the organisation. The benefits of this model include greater control of the budget, technology choice and related organisational standards. This model is typical of older organisations that have grown and expanded organically. The downside to this model is that it causes complications in terms of taxes and crossborder shipping of equipment. In a decentralised model, often favoured by organisations that expanded mainly through acquisition, each region or, in some cases, even each country is responsible for controlling its own budgeting and procurement, leading to a range of vendors and service providers among an organisation s various regions and countries of presence. In some instances, this model is more cost-effective in terms of taxes and duties, but far more complex to manage from a global perspective. The trend is therefore towards a centre-led sourcing strategy but, where possible, with local execution and invoicing to avoid unnecessary taxes. Commercial constructs and transactional models A key procurement decision Locally Global framework agreement, to ensure consistent engagement No adverse tax implications End to-end process within local geography Central visibility and control can still be enjoyed while transacting locally Simplified ordering and delivery mechanism Regardless of the transactional model, however, the ideal supply chain services partner should be able to help a client organisation manage governance by, firstly, automating the sourcing and purchasing process through e-procurement. This will allow for centrally stipulated configuration specifications and restrictions to be loaded onto the system. In other words, if head office has set a corporate standard in terms of only procuring Cisco networking equipment across all regions, the e-procurement system will only make those relevant products visible and available to regions. Among its many reporting functions, an advanced e-procurement system should also be able to create regional or per-country spending reports to give head office complete visibility of what and when these geographies have purchased. Overall, e-procurement improves the end-user organisation s ability to govern its procurement strategies more effortlessly and cost-efficiently. Decide if it is simpler to procure... Centrally Global agreement at host level Potential VAT liabilities and withholding tax implications Client is the importer of record Maintain central control, and use of central budget Single ordering mechanism Trend 8: Improved procurement and sourcing skills Organisation that are not outsourcing their supply chain functions are beginning to recognise the need for advanced procurement, sourcing and supplier relationship management skills among their staff. Many of these businesses are re-evaluating their current internal supply chain capabilities and moving away from hiring people with basic and intermediate skills, and towards looking for talent with specialist expertise. These capabilities now include skills in areas such as sustainability, supplier collaboration, relationship management, performance management, analytics and financial procurement. In the next few years, more and more organisations will start to develop advanced supply chain and leadership strategies as a competitive advantage, which include strategy and change management, analytics, performance management and supplier relationship management. The result is that organisations are themselves growing far more savvy, and it s important for supply chain service providers to remain close to their client s strategic plans in order to provide valuable input and feedback during the early stages of decision-making. 04

7 Trend 9: E-procurement enters a new, more holistic phase A combination of different market pressures is creating an expectation on the part of multinational and multi-regional organisations to be able to transact in smaller volumes, just in time. Whether internally within an organisation s own procurement department or through an e-procurement facility, organisations are also demanding end-to-end and selfservice capabilities. Inevitably, once the manual processes of procurement were converted to an electronic format in the 1990s, companies began to reap the enormous cost and time savings of automated quoting systems, tracking ability from vendor to delivery, and electronic invoicing and payment. Now, having bedded down these enhanced efficiencies and levels of control, businesses are looking to exploit e-procurement to its fullest potential by increasing the scale of products and geographies, as well as the extent of the integration, but reducing the volumes they buy through a just-in-time approach. Supply chain service providers need to keep up with these demands and be able to offer seamless automation and integration with the client-organisation s procurement systems, but to a level with which the client is comfortable. The benefits mainly include greater efficiency, time and cost-savings through simplification and the elimination of process duplication. However, end-user organisations have traditionally been hesitant to integrate fully, and it s important to seek out supply chain partners with a series of successful integration case studies as proof of concept before attempting such integration. Although these cases may still be few and far between, the convenience, cost-savings and competitive advantage that a successfully integrated e-procurement system will bring may be worth investigating with the guidance of organisations that lead the field in this respect. The trend is towards greater integration it simply depends on the enduser organisation s appetite for change and innovation when and how this step should be taken. Over 50% of an average organisation s carbon emissions are typically from the supply chain, rather than from within its own four walls. Trend 10: Building sustainability into supply chains through e-procurement Sustainability has become a critical component in corporate and government sourcing strategies. This is because one of the first steps in becoming a sustainable business is to change the processes by which the organisation purchases through its supply chain, as well as the types of environmentally responsible products and services it buys. But sustainability is more than reducing the impact on the environment. It s also about taking steps to maximise longevity in the market, recognising that higher energy costs and taxes, as well as stricter government legislation, will raise the cost of operations in the long term. Driven by changing client expectations, pressure from investors and shareholders, and increasing regulation, organisations around the globe are now looking at ways to integrate sustainable purchasing process standards into their sourcing strategies. Paperless e-procurement systems and energy-saving cloud computing strategies are obvious areas of potentially enormous sustainability improvements. Increasingly, these organisations are also asking their supply chain services partners pertinent questions about their ability to consolidate orders on their behalf to save on shipment costs and fuel consumption, the amount of incorrectly placed or shipped orders, the amount of stages in the logistics route, and so forth. The aim is to collect information in order to compile reports on the changes they ve brought about in conjunction with their supply chain partners in bringing their products to market in more sustainable ways. Similarly, supply chain organisations are increasingly required to deliver services such as packaging collection after delivery for, and more. Over 50% of an average organisation s carbon emissions are typically from the supply chain, rather than from within its own four walls. 1 Procurement executives or directors are therefore either thinking about how to implement a sustainable procurement programme, or are already in the process of doing so and becoming well versed in the litany of challenges. It s important to partner with supply chain services providers who can respond to these requirements promptly, appropriately and adequately in leading the charge towards sustainability not simply because they re under pressure to do so. Conclusion Largely driven by end-user demands and the need to stay competitive, the speed at which business is conducted on the international stage shows no sign of diminishing, putting increasing pressure on supply chains to function equally efficiently. With this, come the challenges of integration, consolidation, automation and ultimately sustainability. Success in the area of logistics and procurement, however, still depends on the indepth knowledge of the product being procured and the industry that produces it. End-user organisations would do well by sticking to what they know best, and to forge long-term partnerships with expert supply chain management service providers that can take care of the rest on their behalf. 1 Carbon Disclosure Project, Supply Chain Report 2011 CS / DDMS-0988 / 05/12 Copyright Dimension Data

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