Top performers cut costs by 5 percent

By Staff -- Logistics Management, 11/1/1999

What's it worth to be at the top of the class when it comes to supply chain management? Four to 5 percent of the cost of sales, according to a new survey of supply chain practices. The Performance Measurement Group, a subsidiary of the Westwood, Mass.-based consulting firm PRTM, canvassed 110 companies in North America, Europe, and Asia for the survey. The metric for gauging performance was based on the Supply Chain Operations Reference Model (SCOR), which was developed by PRTM in collaboration with the Supply Chain Council.

Stephen Geary, an analyst with PRTM, says that a best-in-class supply chain company with $500 million in annual sales would have a $25 million to $30 million cost advantage every year due to improved supply chain management. "A company with strong supply chain management performance is likely to have 60- to 100-percent better asset utilization," he says, "which frees up cash to use on investment opportunities to reduce debt."

The study also noted that best-in-class companies reduced cash-to-cash cycle time by 18 percent between 1995 and 1998. The cash-to-cash cycle time for best-in-class companies averages less than 30 days. The cash-to-cash cycle for median performers, by contrast, can extend up to 100 days.

Top companies also do better on their delivery performance, the survey reported. The study found that companies operating at the best-in-class level of delivery performance were meeting their customers' request dates at least 94 percent of the time. In some industries, best-in-class companies were meeting their customers' request dates close to 100 percent of the time, while median companies' performance ranged between 69 and 81 percent.

"Surprisingly, a large number of companies do not track performance against customer request date, and many track performance against their commitment to customers rather than the customer's actual request," says Geary. "Yet the most fundamental measure of customer satisfaction is the frequency with which companies can meet request dates."