Consulting » SUPPLIER MANAGEMENT – CSM manages bags of savings.

SUPPLIER MANAGEMENT - CSM manages bags of savings.

Aspect Development's CSM system can increase corporate earnings by up to 15%. That, the analysts claim, is the difference between administering a supply chain (as ERP does) and actually managing it.

Those in the know began becoming excited about the new concept towards the end of 1997. Others became aware of it during 1998. For some people, word only reached them in early 1999. And many others still haven’t even had a glimmering. But that looks set to change in the wake of a celebratory conference held in Palm Springs, California, at the end of April. The new concept is called component and supplier management (CSM). Suddenly, as a result of it, management of the inbound supply chain – the purchasing of goods and services, in other words – is centre stage. And it’s all because a company in California called Aspect Development has created a software package targeted at managing the process in a new way. Whereas enterprise resource planning (ERP) systems effectively do little more than administer the procurement process – raise the appropriate procurement orders and so forth – Aspect Development’s component and supplier management (CSM) software actively manages it. And the excitement? The results are startling. As the conference showed, the companies that have tried out the software have achieved some remarkable savings. Again and again, highly credible companies such as IBM, Emerson Electric, Celestica, GEC-Marconi and Dana Corporation put up seasoned supply-chain professionals to explain how their key business metrics have been transformed by CSM. Experiences differed but the overall picture looked something like this: a reduction in product costs of 5%; a cut in new product introduction lead times of 50%; raw material and component inventories reduced by 20%; and reduced expenditure on indirect materials, repairs and operating supplies (MRO in US terminology) of 10% or so. Overall, on the bottom line, independent analysts – more from whom below – reckon that the combined effect of these savings could increase earnings per share by as much as 15%. Add it all up and some startling numbers emerge. Quietly-spoken Romesh Wadhavani, Aspect’s founder and chairman, reckoned that put together, Aspect’s customers had saved $1bn over the past three years – all of it in hard cash and all of it attested to by the companies involved. Extra revenues from (say) quicker product introductions and so forth were additional to these savings; so too were nebulous “productivity savings” and the like. With the gathering pace of implementation this level is set to rise ten-fold as savings kick-in from customers which have signed up or already have implementations underway. However you look at it, savings – once again, let’s stress, in hard cash – on such a scale are worth taking notice of. For a start, they compare extremely favourably with those attainable from other currently fashionable software flavours – such as ERP systems, for example. Top flight analysts and experts – people such as Jim Shepherd, vice president of research at Boston-based manufacturing and supply chain analysts AMR Research; the META Group’s senior vice president Barry Wilderman; PricewaterhouseCoopers’ global supply chain practice leader James Warner; and David Burdick, vice president of research at Gartner Group – stood up and declared the CSM concept to be “a killer application”. It had, they said, an extremely high ratio of return to implementation time and cost: in other words, you get more bangs for your buck, more quickly and with lower risk. And, as chart after chart explained, the improvement to the inbound supply chain is significantly better than that achievable with advanced planning systems (APS), ERP systems or product data management (PDM) systems. “The inbound supply chain is the overlooked opportunity,” enthused Barry Wilderman, a vice president with META Group, who contrasted the returns available from ERP systems with those available from the as yet nascent CSM market, which Aspect dominates. A recent survey of META’s clients, for instance, had identified that ERP systems typically took 31 months to deliver any benefits, cost at least $15m, and had an average net present value of minus $1.5m – hardly a performance that justified the effort poured in to developing and implementing them. The difference, it seems, is between administering a function, which is what ERP systems do, and actually managing it, which is what a CSM system does. How? Firstly, Aspect’s CSM technology cleans up parts and component databases across multiple systems. Then it puts into practice a vast database that contains the parametric information on over four million common industrial components such as motors, fasteners, valves, connectors, electronic devices and so forth, from nearly 1,000 suppliers. So if a company has (as GEC-Marconi, one of Aspect’s first two customers, had), say, 168 separate materials requirements planning (MRP) and procurement systems across its sprawling empire, then the Aspect software identifies duplications and builds up a single company-specific common parts number database. So for the first time, for instance, a company might find that it is buying, under 168 different part numbers, the same item from (say) twenty different suppliers. The opportunities for procurement leverage and inventory pooling are obvious. Secondly, thanks to the internally-generated database of common parts, component re-use across divisions and new products is encouraged. The message to design engineers is simple: Design in a component where we already have procurement leverage – and not a part we don’t currently use, where we therefore don’t have any leverage. The result: faster new product introduction and cheaper products. And the message to procurement people in other divisions and plants within the business is just as clear: here are the parts where we’re currently getting the best deal from suppliers, let’s re-use them ourselves, gain the same leverage and increase our overall leverage to boot. Thirdly, Aspect’s comprehensive database (remember those four million common components) can be used to source products from wholly new suppliers. Aspect maintains a whole division of people in low-cost Bangalore, India, whose sole task is to maintain and enhance this database. They continually add new components, materials and suppliers, and they also provide purchasing managers with a helpful start when it comes to information such as indicative prices, lead times and so on. Supplier consolidation is the name of the game – but there’s no guarantee that a business’s existing pool of suppliers contains that optimal supplier around whom procurement will coalesce. The Aspect database provides – if not a cast-iron guarantee – a little more certainty that the net has been cast as widely as possible and to as highly qualified a pool of suppliers as possible. It’s exciting stuff. But why the excitement now? After all, the logic behind supplier reduction programmes, inventory consolidation and partnerships dates back to the mid-to-late 1980s. Just a few months short of the year 2000, isn’t it a little late to be looking at supply chain management now? In part, the answer has to be “yes.” There’s a lot here that isn’t new. But equally, there’s plenty that hasn’t actually been achievable before – particularly for corporates. The will has been there but the wherewithal was lacking. So why is it achievable now? The answer is information technology, which is in large part why specialists such as AMR Research and META have climbed on the bandwagon. Much of what organisations such as these do revolves around evaluating IT options for the clients who subscribe to their research programmes – and with no IT element, there’s little to attract them to a concept, no matter how exciting. The reason IT is so essential to CSM is quickly made clear by delegates such as Russ Armitage, group procurement director at GEC-Marconi, and one of the key speakers at the conference. GEC-Marconi was one of Aspect’s first two customers. With 97,000 suppliers, bloated inventories and a complicated decision process, Armitage had come to realise by the early 1990s the magnitude of the task that faced him. With an empire of a hundred or so sites scattered across the globe (35 of them in the US), and the consequent 168 separate MRP and procurement systems, trying to pool demands and consolidate suppliers simply wasn’t possible without IT. As speaker after speaker confirmed, there’s a limit to what people can achieve with manual lists, spreadsheets and the like. But with IT, startling improvements are possible: Marconi was able to slash the number of suppliers by 80% in two years; it achieved a 10% reduction in component costs; cut inventories; and sharply slowed the level of new component introduction – as well as boosting the procurement function’s productivity. Overall, although Marconi company policy is to avoid publicly quantifying the levels of savings, Armitage is happy to attach his name to estimates in the region of “hundreds of millions” of dollars. Others were less cautious about pinning a figure to their savings. For example, at Emerson Electric – a diversified $13.4bn business with 41 years of consistent quarter-on-quarter growth in earnings per share and dividends – the spur for acquiring the Aspect software was the sheer complexity of the decision-making process that resulted from trying to do it without information technology tools. Over the period 1993 to 1998, a 1.7% improvement in the operating margin had been achieved thanks to cross-divisional purchasing initiatives – but it had been hard work, conceded Larry Kremer, vice-president of materials. “We’ve got 70 divisions, over 300 manufacturing sites, 150 procurement sites and over 50 MRP systems – each with a different numbering system,” he said. Potentially, he explained, the same part could be held fifty times under fifty separate numbers – the classic CSM problem. Hence the adoption of Aspect’s tools. And although the implementation was only part-way through (covering just six divisions, 195,000 parts and 6,600 suppliers), savings of $128.4m had nevertheless been achieved and the project was on course for a 22-month payback. The next stage would see the implementation rolled-out to cover 34 divisions in total. A similar story came from Johnny Barnes, director of hardware common tools at IBM. In just two years, said Barnes, IBM had saved $250m in hard cash, with a further $260m anticipated this year. The base manufacturing cost of the products covered by the Aspect implementation had fallen by 15%, and the proportion of parts re-used across the 37 IBM manufacturing sites that had deployed the software had soared from 2% to 18%, with the number of suppliers falling from 5,000 to 1,200. And so on, and so on. Speaker after speaker – electronics subcontractor Celestica, US automotive supplier Dana Corporation, for example – stood at the podium to attest to what they had achieved. In between times, consultants and analysts lined up to endorse the approach, often in glowing terms. Jim Shepherd at AMR Research, for example, was happy to acknowledge Aspect’s CSM software “as representing for many businesses today the single most significant opportunity in terms of supply chain management.” Roll it all up and one begins to see why enthusiasm is mounting. Already, Aspect claims 150 of the world’s 200 largest manufacturing companies as its customers. Nor is this an idle boast: not only does Aspect publish the list, but executives from many of the companies attended the conference, busily networking with their peers in order to learn from each others’ experiences. Unlike, say, SAP, where a huge body of user experience exists on tap in the form of the implementation consultants, Aspect’s arrival on the scene is too recent for much knowledge to be available in any form other than from the horse’s mouth itself. (That said, both Ernst & Young and PricewaterhouseCoopers have fast-growing Aspect Development implementation practices – and were much in evidence at the conference, explaining their offerings to anyone who would listen.) Is there a fly in the ointment? Or is CSM unalloyed good news – an opportunity merely waiting to be grasped? The answer appears to lie with that statistic about the world’s largest manufacturing companies. For smaller and single-site companies the case for the investment is less credible. Lists and spreadsheets can do the task. But often these simple tools are no longer brought to bear with the intensity that they ought to be: supplier consolidation and so forth is after all 1980s-style old hat. That the rewards of such programmes are still there to be had – even for small companies – is probably the message most FDs should take on board, following CSM’s arrival on the corporate scene. Indisputably, the benefits are there – and you don’t necessarily need a fancy software package to take advantage of them.

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