“Services companies that understand the potential competitive advantage of an optimized supply chain are developing new services-focused supply chain management tools and processes.”
by Javier Perez, November 2013
The optimization of supply chain management has long been a key competitive differentiator in manufacturing. Manufacturers have designed their supply chain not only to find opportunities to reduce spend, but also to demand and ensure input quality and timely delivery. This is not surprising, with the supply chain being so critical for profitability. The sourcing and procurement of goods and materials directly impacts the cost of goods sold and thus the bottom-line. Input quality is directly reflected in the quality of the finished products and the willingness of consumers to purchase them.
In contrast, the services industries are often at a loss in describing the strategic and financial impact of superior supply chain management for their large strategic spend categories, such as IT services, legal services, and consulting. These companies also do not apply the same best-practice principles as manufacturers—for example, it is not unusual for important parts of the supply chain at services organizations to be managed in a decentralized fashion by line-of-business managers. These managers often make vendor decisions without the benefit of cross-company historic performance, such as on-time delivery and quality of services rendered. Strategic supply chain management concepts that are common in manufacturing, such as centralizing and coordinating sourcing and procurement, and bundling across business units, are not fully leveraged by the services sector. While these companies have utilized procurement one way or the other to reduce the cost of commodities such as office supplies, a direct linkage to the services they offer to their clients has been often missing.
As supply chain tools and processes in the services industry mature, strategic supply chain management has the potential to become essential to building a competitive advantage.
However, the financial impact of an improved supply chain in the services industry is not that different to manufacturing. Controlling costs is indeed part of the story, but the quality of the inputs (in this case, services provided by their vendors) will reflect as well on the final offering that services companies provide to their clients and will influence demand. What is more, industries such as financial services must ensure that their providers deliver their results, such as updates to IT systems, as timely and error-free as possible to meet changing regulatory and compliance requirements and avoid fines and reputational risk.
Services companies that understand the potential competitive advantage of an optimized supply chain are developing new services-focused supply chain management tools and processes, with different approaches and levels of maturity. This may take the shape of processes, such as procurement and its enabling technology, increasingly being integrated with other enterprise processes and applications to expand the ecosystem and increase control related to project development, costing/budgeting, and financial capital management. It could also mean an increased focus on controlling vendor risk management for compliance and business disruption prevention.
Recently, an Oracle customer that was a large bank moved from traditional procurement to the creation of a strategic supply chain focus. Online directories of suppliers for services such as legal advice, temporary staffing, and consulting services are now required to be used and closely tracked. According to a vice president of procurement at this institution, “it is no longer only about the cost of the service—we want to know which services firms are the best to employ in specific situations.” As a result, supply chain decisions are tied to demonstrable successful results, such as winning particular types of legal cases, executing particular types of campaigns, and helping implement new financial products.
Javier Perez is a director of Oracle Industry Strategy and Insight.
This is important; a key challenge with services vendors—in particular professional services vendors—has typically been trying to quantify the return for their results. Given the potential strategic impact of these results, it is essential to devise methods to assess and ensure cost and service level control. For example, if the heads of a large consultancy demand a rate premium for developing a new financial services product because they claim to have a superior project management methodology, then they should be held accountable for their success in meeting key project milestones and delivering results within budget. With the development of score cards based on high-quality information maintained in the supply chain management system, vendors should start expecting companies to hold them accountable for business results based on the quality of their services. So if a firm promises that its deep customer relationship management (CRM) skills will help drive cross-selling and retention, then risk sharing—again, common in manufacturing—should become part of the negotiations.
As supply chain tools and processes in the services industry mature, strategic supply chain management has the potential to become essential to building a competitive advantage. With the ability to better analyze categories of spend, services and project costs, and execution results, services companies are starting to find that supply chain management can be the same powerful strategic enabler that manufacturing companies have always seen it to be.