Supply Management Breakthrough Coming?
As the technology and application spend increases, supply management professionals are pushing harder for more robust solutions.
By Mickey North Rizza -- Supply Chain Management Review, 5/1/2006
One of the fastest growing segments of the enterprise software market last year was supply management—specifically sourcing and procurement. AMR Research estimates that supply management grew by 25 percent and could show comparable growth in 2006.
Fueling the growth is a need for companies to create new business processes that quickly capture the potential of strategic relationships. Transactional procure-to-pay processes and catalogs are still needed to automate work flow and aid in payment processing. But the greater value will come from technology that is focused on the strategic side of the business. Our research confirms that buyers are seeking out this higher value. In particular, we believe that the 2006 supply management spend will focus on spend visibility, buy-side contract management, and supplier-development monitoring.
This is consistent with the findings of a survey we conducted in November 2005. In a study of 264 North American procurement professionals, we found the largest gaps in supply management performance centered on:
- Finding reliable sources of supply.
- Understanding and measuring end-user demand.
- Creating supply analytics and visibility.
- Measuring and attaining cost savings and avoidance.
As we said in that earlier study and reemphasize now, the key to successful supply management is synchronizing demand and supply while achieving high inventory turns, leveraging low costs, and measuring the results. With cost increases and issues of reliable supply expected to continue through 2006, supply managers need to fully engage their organizations in order to synchronize demand with supply in all areas of spend management—direct; indirect; services; and maintenance, repair, and operations (MRO). Market data, inflationary indexes, and benchmark analytics all need to be leveraged to measure progress in this effort. Add in supply management applications and technology enhancements, and you have the formula for successfully managing your supply management activities.
Buyers, Budgets, and FundingOne surprising finding from our research was the growing influence of the "line of business" buyer, relative to the information technology (IT) department. This year, 47 percent of supply management projects will be funded by business buyers, compared to 53 percent by IT. Yet while business managers are playing a growing role, they acknowledged that they need help in the process. Specifically, three-quarters of the respondents turned to the chief financial officer, supply chain director, and/or chief procurement officer for additional help in funding new applications.
The good news is that the funds are available. Of our survey respondents, 43 percent said that their supply management budgets were increasing this year—at an average of 18.5 percent. An additional 40 percent said that 2006 budgets would stay the same. Only 17 percent saw budgets shrinking. The November 2005 study also noted that the typical budget for supply management applications and technologies was a mean of $5.4 million and included software, hardware, external IT services, and internal headcount. In 2006 the average supply management application spend will represent 25 percent of the overall enterprise and desktop application budget.
As these numbers suggest, it's generally accepted that applications and technology can make a difference in supply management. Yet the technology buyer's purchase decision remains a difficult one. The reason: The goals of the organization—and the organization itself—keep changing while the application markets remain relatively immature. Put another way, currently available software offerings do not match the organization's needs. In fact, our study findings reveal a large gap between what the buyers need in product functionality, ease of use, and integration capabilities, and what is currently available in off-the-shelf software. (See Exhibit 1.)
One big issue is that the available supply management solutions cannot meet the needs of all types of spend, including indirect, direct, services, and MRO. Buyers are thus forced to weave together disparate applications and end up buying point or partial solutions. Instead, they should be focusing on building a supply management architecture that includes all of the major spend categories. (But there is hope here.)
Four Trends Driving SpendLooking toward the remainder of this year, AMR Research expects to see strong spend growth in supply management driven by four emerging factors:
- Compliance Role Growth: Contract management accounted for 9 percent of the supply management market in 2005. While Sarbanes-Oxley is the most talked about compliance requirement, our research shows that more companies are actively monitoring their supplier infrastructure in connection with social responsibility initiatives. This is especially true in high-tech and electronics and in the apparel and footwear industries. In addition, we are seeing more focus on minority and diversity spending.
- Continued strong spending by Fortune 1000 companies: Large companies, which represent 30 percent of the total market, are spending more on supply management. Sales to this sector grew 21 percent last year. Larger organizations bring two distinct capabilities to the table: One is the formation of strategic commodity strategies and councils; the other is a focus on large projects to aggregate spend and thereby increase their negotiation power. These two areas will require enhanced vendor capabilities in market intelligence, supplier development, and spend visibility.
- Growth in the European market: Since the first supply management applications were introduced, the United States has been the primary market for the new software. This is changing. In 2004, Europe represented 27 percent of the total supply management technology market, up from 12 percent the previous year. Most of the growth historically has come from the United Kingdom. Going forward, though, lower-cost sourcing projects currently underway in Eastern Europe are expected to drive the growth.
- Strong momentum in services: The services market is expanding and with it the growth in consulting, maintenance, and software as a service. Large investments in consulting with an eye towards business-process improvements and complete procurement transformation is one area of growth. Employee education and training as well as business-process outsourcing are the other areas. Business- process outsourcing, in fact, is expected to account for 34 percent of the total supply management investment in 2006.
2006 is a year of change in supply management. Technology applications, which to date have been mostly immature, are being pushed for depth and breadth to satisfy demands. As buyers are being forced to "think and act globally," most will need broader technology enhancements, education and training, and well-defined business processes. Companies are demanding more in terms of real dollar savings, compliance and control, reliable supply, and supplier-development monitoring.
Supply management professionals can become major change agents in advancing the technology and applying it to their organizations. They can demand more complete solutions. They can forge a new vision of the future in their organization by integrating demand and supply with the right applications, business processes and employee skill sets. For these professionals, there's no better time than now to take supply management to a new level.
| Author Information |
| Mickey North Rizza is a research director at AMR Research. |
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