Wrong or Right? Equating Supply Chain Performance with Spend Management

Sometimes the context of a press release makes me think significantly more about the topic at hand than what the marketing writer originally intended when crafting it. Perhaps that's because it's my inclination to over analyze things, but when I came across this announcement that "leading supply chains" rely on Ariba, I felt slightly uneasy seeing procurement and Spend Management metrics linked so closely with supply chain metrics. In the above-linked release, Ariba cites that a number of their customers are featured in an AMR study that examined the world's top manufacturing supply chains.

But in my view -- and I hope I'm reading this correctly -- the study looked more closely at such areas as inventory reduction which is more closely correlated with return on assets (ROA) and return on net assets (RONA) than procurement ROI or year over year cost reduction / cost avoidance scenarios which I often see as a driver of near-term EBITDA.

According to the press release, the study was "designed to identify manufacturers and retailers that exhibit superior supply chain capabilities and performance, the AMR Research Supply Chain Top 25 ranks companies across basic metrics related to execution, including return on assets, revenue growth and inventory turns. It also factors in opinions from peer companies and AMR Research staff." Given this focus, I believe that Ariba is stretching the boundaries of these two areas by equating "supply chain performance" with Spend Management prowess or returns.

The two areas -- while I admit there is overlap -- are not in the same exact bucket, at least given the way AMR defined "supply chain" for the purpose of this study. This is not a knock on AMR at all – the study is fantastic. And perhaps there is a direct or indirect relationship between companies which have the best overall supply chain performance and inventory turns / levels / etc. and those who invest in the types of procurement and sourcing solutions that Ariba offers. But the two areas are not one in the same, at least if looked at by the top level categories that AMR considered in their research.

I'm curious to hear from the Spend Matters community if you agree or disagree with my analysis here. Perhaps this gets to the question if we should really lump procurement and supply chain together as one single area. Going forward, I believe that Spend Management and supply chain management should become one. There is no question about that (and in many advanced organizations, they are combined into a single function today). But for readers of this announcement in today's world, I believe it is important to consider a couple of things. First, correlation does not imply causation if you not believe -- as do I -- that AMR's evaluation criteria are focused more on supply chain factors than Spend Management ones. And second, there is not necessarily a direct link between procurement and supply chain metrics from an internal performance management perspective in many companies today -- although their should be.

This final point is especially true considering that many sourcing and procurement strategies prioritize unit cost uber alles and that supply chain programs focused on lean, JIT, VMI, etc. could in fact be in conflict with such approaches in less mature organizations. For example, companies that factor the complete supply chain picture – including total landed cost and risk -- into global sourcing initiatives often make very different decisions that those who look for cost rabbits.

Jason Busch

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