Daily Archives: December 11, 2013

The Value of Visibility: It’s More Than You Think

When someone mentions supply chain visibility, the first thought that probably jumps into your head is a foundation for resiliency, which it is, as we discussed in our last post on the value of visibility in your supply chain. The potential to prevent a major supply chain disruption that could cost an organization an average of 10% against potential revenue on the affected product lines for two years running and reduce that loss to 2%, or less, is huge. But it’s not the only savings enabled by good supply chain visibility.

In addition to per-event savings associated with disruption avoidance and crisis containment, there are ongoing savings associated with spend under management. Even if your organization employs advanced sourcing methodologies that include spend analysis and decision optimization, the value of multi-tier visibility goes well beyond what traditional advanced sourcing models can deliver.

For example, a 2012 FERMA4 study found that the majority of firms with advanced risk management practices, built on good end-to-end supply chain visibility, had EBITDA growth over 10% and revenue growth over 10%. The EBITDA growth came from lower costs. The lower costs resulted from better sourcing decisions enabled by better multi-tier supply chain visibility and total cost-of-ownership models. That’s a double digit savings! Up until this point, only spend analysis and decision optimization could consistently deliver that level of savings.

The observant among you might be thinking that this study is just one data point and maybe these savings aren’t obtainable by everyone because it’s statistical, but the proof doesn’t end there. In 2011, Haitao Li and Mehdi Amini undertook a comprehensive computational study on a five-tier multi-echelon supply chain for PC assembly that analyzed over 2,000 scenario variations and found that multi-tier visibility drives cost savings of 15% on average. This study, which built in the impacts of potential, and likely, supply chain disruptions at various levels of the supply chain, demonstrated that most optimal awards that only consider the first tier are highly dependent on the input assumptions and extremely susceptible to disruptions, which can increase the cost by up to 60%! Even the tiniest of perturbations was found to increase the total cost by over 5%. But when multiple tiers were considered and awards were made that were disruption resistant, the average cost savings came out to 15%! This is huge! (Especially given that, according to research conducted by IBM referenced in our last post, emergency re-sourcing efforts often increase costs by up to 30% over the optimum solution.)

This means that, even if your organization is lucky enough to be among the 14% that don’t experience a major disruption within the next year, the ROI from better sourcing decisions alone will pay for a supply chain visibility solution many times over. How much will you save? Up to 1.7% of revenue every year. (An average manufacturer will spend 59% of revenue on direct materials and services and 89% of this spend under management. Assuming that at least 1/3rd is sourced annually, and that the savings are only 10%, as per the FERMA4 study, that’s savings opportunity of 0.10 * 0.33 * 0.89 * 0.59 = 0.017 = 1.7%) So, if your organization does 1 B in revenue, it can expect a savings opportunity of up to 17 M a year from disruption-resistant awards to the supply base (which will, by their very nature, minimize the number of small disruptions the organization experiences).

And this is only one aspect of the year-over-year recurring savings that Supply Chain Visibility can bring your organization! For a deeper insight into the other ways in which Supply Chain Visibility can bring your organization recurring year-over-year savings, download SI’s latest white-paper on The ROI of Supply Chain Resiliency: It’s More Than You Think (Registration Required), sponsored by Resilinc. You might be surprised at just how much hidden value you can extract from your Supply Management operations with good visibility and resiliency.