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    This report will explore the Best-in-Class processes and practicesrelated to applying a Prescriptive Optimization Framework tostrategic sourcing and product/customer segmentation, anddiscuss how their differentiated approach supports and enablestheir superior performance over the competition.

    STRATEGIC SOURCING ANDSEGMENTATION: PRESCRIPTIVE

    CONTROL TOWER APPROACHApril, 2015

    Bob Heaney , Research Director Supply Chain, Wholesale and Retail Practices

    Report Highlights

    Best-in-Classcompanies have 89%total spend undermanagement vs. 51%for All Others. Yet

    only 35% cansegment cost andservice for theirproducts andcustomers

    The Best-in-Class are3.5 times more likelyto model andoptimize by product,source, and

    customer and enablesynchronization ofend-to-end activitiesinternationally,domestically, andcombined

    A culture oforganizationalintelligence and theuse of prescriptiveanalytics is a

    differentiating factorfor top performersthat allows them tooptimize and breakaway from thecompetition

    To accomplishevent-/customer-driven optimization,top performers areusing prescriptive

    optimizationtechniques tobecome moresynchronized and toaccrue/optimizetotal landed cost

    p4 p4 p7 p9

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    Strategic Sourcing and Segmentation: Prescriptive Control Tower Approach

    2

    Prescriptive Optimization Four Series:

    1. Strategic Sourcing andSegmentation: PrescriptiveControl Tower Approach -APRIL

    2. Best Practices for Closing theLoop on Multinational Inbound:Procure-to-Pay - JUNE

    3. Prescriptive Optimization:

    Linking Costs and Events forImproved P&L - AUGUST

    4. CSCO View on Optimization: APrescriptive Model for GlobalTrade -OCTOBER

    Each report builds on the prescriptiveframework to illustrate how each element ofprocess flow from source to final delivery canbe reengineered or optimized.

    Todays Chief Supply Chain Officer (CSCO) is beset by pressureson all fronts. He is struggling to understand and meet customerdemands for cheaper, faster, and more efficient logisticprocesses from source to final delivery. Under omni-channelcompetitive pressures, web and mobile orders tendered by 2PMmust be fulfilled and shipped on the same day and homedelivered within no more than 2 days. Today, 61% of companiesare shipping straight to the end customer or are bypassing thestore/DC. These growing B2C fulfill-to-deliver flows add shipping

    and labor costs and, if not optimized, impact margins andprofitability across the entire supply-demand network. Despiteadvancements in technology and new, more dynamicoptimization models few companies have the capability and areoperationally ready to embrace new strategies that address thechanging customer requirements across B2B and B2C segments.

    Aberdeen recently introduced a Prescriptive Model forOptimization that both defines and describes what leadingcompanies are doing to reengineer inventory and fulfillmentflows from source to end consumer. This framework requires amove from current state descriptive analytics to analyticaloptimization that applies prescriptive and predictive intelligenceduring both planning and execution phases. High performingbusinesses (from the 115 companies in the study) are 3.5 timesmore likely to model and optimize by product, source, andcustomer than low performers. Prescriptive optimizationmodels are one key to transforming business operations frominbound source-to-pay and outbound order-to-fulfill/transport/deliver. Figure 1 below expands on theprescriptive framework that we introduced in the initialFebruary report. This report, the first in a series (see sidebar), willbuild on the prescriptive framework and illustrate how eachelement of process flow from source to final delivery can bereengineered or optimized.

    Supply and demandsynchronization willencompass sourcing,trade/transport rateand lane analysis,and synchronization

    from the point oforigin of rawmaterials all the waythrough to the B2Band B2C endconsumer delivery ofproducts

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    Strategic Sourcing and Segmentation: Prescriptive Control Tower Approach

    3 Figure 1: Strategic Sourcing: Segmentation and Dynamic Optimization Approach

    Source: Aberdeen Group, April 2015

    Definitions, sample applications and opportunities, and underlying process capabilities

    Descriptive Predictive Prescriptive

    Increase in g lobalization and complexityPredict product and supplier losses or failures,f orecast facility space demands

    Increase asset utiliz ation within suppliers andmanufacturers and improve trade/transportefficiencies

    Growth in B2B and B2C convergence withnew cross-channel orgin to end-consumerinventory and fufillment flows

    Predict origin-to-destination costs and profits bycustomer, product, transport/fulfill, and inventorystream, forecast profits and margins

    Remain agile and competitive. Increaseasset/inventory utilization. Optimize resourceschedules

    Improve purchase/production/sourcingcosts and reduce trade, fulfillment,transport and inventory costs

    Predict capacities by customer, product,transport/fulfill, and inventory stream, forecastcapacities

    Optimize efficiency and supply-demand in phasewith sourcing & inventory/trade/transport shifts

    The number and types ofsupplier/Mfg/asset failures

    How to anticipate sales/ shipments for specificchannels and assets/facilities

    How to increase asset production and productquality or compliance?

    Why sourcing/ trade/transport/logisticscosts are high?

    When to consolidate spend or underutilizedfacilities across carriers, suppliers, ormanufacturers, or to expand volumes

    Where to optimally deploy/route products,materials, inventory & shipments?

    The amount and value of the multi-partyinventory

    How to determine and segment costs to improveservice levels and costs (CTS)

    Which strategic partners, sourcing footprints, andDC network plans provide the highest long-termutilization and flexibility ?

    Specificproduct/trade & customercompliance requirements from origin todestination

    How to determine/rank baseline and futurescenarios and costs to improve service levels andcost-to-serve (CTS)

    Standard reporting - What happened? Predictive modeling - What will happen next? Optimization - What is the best possible outcome?

    Query/drill down - Where exactly is theproblem?

    Trends forecasting - What if these trends continue?Random variable optimization - What is the bestoutcome given the variability in specified areas?

    Ad hoc reporting - How many, how often,where?

    Simulation & segmentation - What could happen?

    Control tower process, alerts - What a ctions areneeded?

    Alerts, reports, dashboards Predictive models , forecasts, statistical analysis ,scoring

    Business and process rules, organization models ,comparisons, optimization

    Business intelligenceTrend in mix of transport lanes and modes

    Event-driven and customer-driven optimization

    Forecasting - What if these trends continue? Dynamic collaborative supply chain executionand efficiency

    Current state and future state modeling and CTSsegmentation - What is the best profit andlogistics flow for each product and segment?

    What HAS happened? What COULD happen? What SHOULD happen?

    What theuser needs

    to DO

    What theuser needs

    to KNOW

    Howanalytics

    gets ANSWERS

    WhatLeaders do

    to makethis

    POSSIBLE

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    Strategic Sourcing and Segmentation: Prescriptive Control Tower Approach

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    Definitions:Strategic Sourcing Optimization is the process of aggregatingspend and origin-to-destinationvolumes across businesses andleveraging it to optimize the mostfavorable terms with arationalized set of suppliers andlogistics/trading partners.

    Control Tower Approach is a set

    of integrated processes andtechnologies that support aseamless and optimal flow ofproduct from source to endconsumer, segmented by source,product, and customer andregardless of global complexity,or sales and logistics channel.

    The Prescriptive Optimization Framework for StrategicSourcing and Segmentation

    For the purposes of this paper, we will define and differentiatestrategic sourcing and product/customer optimizationcapabilities in order to distinguish how Best-in-Class companies(defined in sidebar) put themselves in a position to segment andoptimize sourcing efforts compared to their competition.

    Todays global supply chain requires more than spend and basic

    track-and-trace visibility. The top 20% of companies (from the115 companies in the study), the Best-in-Class, are 3.5 timesmore likely to model and optimize by product, source, andcustomer than low performers. Their sourcing strategy involves asegmented, control tower approach, a high degree ofoperational readiness, and prescriptive event-driven customerand product synchronization of end-to-end activities;internationally, domestically, and combined.

    Three Principal Analytics Stages Prov ide Answer s and

    Distinguish the Leaders

    Across the columns in Figure 1 we capture Three PrincipalTypes of Analytics:

    1. Descriptive , which uses business intelligence and data miningto ask: What has happened?

    2. Predictive , which uses statistical models and forecasts to ask:What could happen?

    3. Prescriptive , which uses optimization and embedded decision

    rules and simulation to ask: What should we do?

    The three types build on one another, with descriptive analyticsbeing the most common to describe the current state, predictiveto describe the future or alternate states, and prescriptiveanalytics to optimize outcomes during planning and executionphases. They share goals for optimization of logistics and

    Best-in-Class Rankings

    Best-in-Class companies perform inthe top 20%. Below are theirsuccess metrics versus All Others:

    89% of total spend undermanagement vs. 51% forOthers

    12.8% average yearlysavings REALIZED bysourcing team vs. 5.6%

    40 Days average CYCLETIME to create, negotiate,and approve contracts vs.49 days

    82% on time delivery (torequired date, to commitdate, to established leadtime) vs. 59%

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    5 transportation flows and of costs and service, to meet balancedbusiness objectives.

    This outline will help companies understand how to move to aprescriptive optimization model by identifying the primary stepsthat the strategic sourcing process encompasses, along with abrief description of what occurs at each step.

    The analytics progression in Figure 1 spans:

    1. Strategy/process development problem identificationand process gap analysis

    2. Planning requirements gathering and dataneeds/analysis

    3. Execution data visualization, assessment analysis,predictions and trends, and optimization/simulation

    4. Answers and dynamic optimization - concludes withwhat Leaders do to get answers and close the loop acrossplanning and execution stages

    Some companies may combine, group, or identify these stepsslightly differently, and the process may involve some iterationswithin each step depending on the complexity of the product orservice being sourced, but the basics are there to distinguish thestrategic framework of the process as companies progressthrough the three analytical stages of sourcing and strategicoptimization.

    Driving for Answers Event and Customer Segmented

    Prescriptive Optimization

    Maybe the easiest way to understand the progression ofanalytical capabilities and distinguish between businessintelligence and predictive/prescriptive analytics is to look at theanswers or value that they can generate. For example, businessintelligence (descriptive analytics) allows you to answer

    Supply and demandsynchronization will

    encompasstrade/transport rate,

    lane analysis, andsynchronization

    from the point of

    origin of rawmaterials all the way

    through to the B2Band B2C end

    consumer delivery

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    Strategic Sourcing and Segmentation: Prescriptive Control Tower Approach

    6 questions about the demographics or characteristics of yourorigin and destination pairs across customers, products, stores,logistics channels, and shipments. The new logistics formatssuch as direct home delivery or DC bypass require understandingof new B2C as well as B2B requirements. Todays global supplychain involves linking financial and cost-to-serve (CTS)components with visibility events and segmentation of source todestination flows for each product and process step in thenetwork. We see that, in addition, linking these components

    from inbound to outbound is severely curtailed at even topperforming companies (only about 35% of top performers cansegment their logistics/transport rates and costs).

    Through each stage of analytics descriptive, predictive, andprescriptive the goal is to answer questions (see Figure 1)about the performance of your business across a number ofdifferent dimensions:

    1. What the user needs to DO

    2. What the user needs to KNOW

    3. How analytics gets ANSWERS

    4. What Leaders do to make this POSSIBLE

    Following the prescriptive framework and analytics progressionleads to answers in each of the four dimensions, the rows, inFigure 1 above. This framework also illustrates the specific typesof technologies and optimization capabilities the Leaders utilizeto optimize their operations and close the loop on planning andexecution though each current and future state scenario.

    In the sections that follow, we will be covering the keycomponents found in the prescriptive column under the rowWhat Leaders do to make this POSSIBLE:

    61% of companies areshipping straight tothe end customer orare bypassing thestore/DC, adding newshipping and laborcosts.

    One key goal ofstrategic sourcing orinbound optimizationis tying costs/rate andevents together. Thisallows companies to

    segment costs andactivities across eachcombination ofcustomer, product,and logistics flows.

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    7 Business and process rules/solutions - organizationmodels, comparisons, optimization

    Event-driven and customer-driven dynamicoptimization - to include dynamic or in-flightcollaborative supply chain execution

    Business and Process Rules/Solutions

    Best-in-Class companies have 89% of total spend undermanagement vs. 51% for All Others. Yet only 35% can performcost and service segmentation or CTS for their products andcustomers.

    It is clear that one needs to 1) be able to harness Big Data in thedescriptive stage to understand CTS segmentation under currentsourcing footprints and volumes, and 2) to predict/developalternate sourcing models/flows in the predictive stage. Theprescriptive stage turns the raw data mined in the prior twoanalytical stages into answers. It is through business process

    decision rules and interoperable collaborative modeling that thisraw data is segmented, compared, and optimized.

    The Best-in-Class are more capable, automated, and advanced.Across a spectrum of key strategic sourcing processes they aremore prescriptive (Figure 2). Research shows that the move fromhistorical descriptive analytics to a culture of organizationalintelligence and the use of prescriptive analytics is adifferentiating factor for top performers that allows them to

    optimize and break away from the competition.

    Through organization models, comparisons, optimization, and simulation the Best-in-Class turn the volume of raw datamined in the descriptive and predictive stages into business andsupply chain intelligence.

    Supplier AssessmentsDefined

    Formal Supplier Assessment : the rigor ofhaving a formal processrequires a formal review thatwould look at all aspects ofa supplier's capabilities

    Risk Assessment : beyond just price; evaluating therisks associated with a givensupplier

    Best-in-Class Advantage : theBest-in-Class are more than 1.5times as likely to utilize theabove capabilities

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    Strategic Sourcing and Segmentation: Prescriptive Control Tower Approach

    8 Figure 2: Prescriptive Business Solution AnalyticalCapabilities

    Source: Aberdeen Group, December 2014

    As companies strive to become more analytically evolved, they

    become more organizationally intelligent and have aggressivelymoved up the analytics hierarchy to optimize their business oroperational processes from current spend assessments, throughtrack and trace performance, during execution, and even duringsupply risk assessment. This allows companies to emerge asleaders in strategic sourcing and segmentation and conductprescriptive optimization so that they are able to both plan andexecute as they should.

    Event-driven and Customer-driven, Dynamic Optimization

    Companies today need to link events rates and costs withproducts, customers, and shipments by origin-destination tounderstand, and then optimize, sourcing and logistics flows. Onekey goal of strategic sourcing or inbound optimization is makingit easier for companies to segment shipment across theseparameters for each origin destination pair. Best-in-Class

    36%

    50%

    52%

    46%

    72%

    64%

    77%

    86%

    86%

    96%

    0% 20% 40% 60% 80% 100% 120%

    Supply risk assessment

    Tracking / monitoring of sourcing results,

    performance, and execution

    Formal sourcing strategy

    Supplier assessment

    Current spend / needsassessment

    Percentage of Respondents n=115

    Best-in-Class

    All Others

    dvanced nalyticsto Link Rates andEvents

    The new logistics formatsrequire segmentation ofnew B2C as well as B2Bprocesses. They involvelinking financial andcost-to-serve (CTS)components with visibilityevents.

    Leaders are 1.54x as likelyto capture actuals andaccrue landed cost updatesas an order or shipmentprogresses.

    For more details on CTSsegmentation see SupplyChain Visibility andSegmentation: ControlTower Approach

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    Strategic Sourcing and Segmentation: Prescriptive Control Tower Approach

    9 visibility provides a view of the events and activities as well ascosts.

    To accomplish optimization that is event-/customer-driven, topperformers are using prescriptive optimization techniques tobecome more synchronized and to accrue/optimize total landedcost across the following areas.

    Supplier and Production Management . Best-in-Classcompanies are 2.9 times as likely to utilize collaborative

    supplier portals and interoperable decision rules to on-board new suppliers, schedule capacity, managepurchase orders and raw material orders, as well asmonitor work-in-process and production status.

    Material and Product Management . Helps brands, theirsuppliers, and material suppliers to collaborate anddeliver more innovative products. Best-in-Classcompanies are 1.59 times as likely to source private labelproduct designs and bills of materials. By efficientlymanaging the sampling and testing processes, planning,forecasting, these leaders are dynamically reserving rawmaterials and sourcing finished good production.

    Risk and Quality Management. Best-in-Class companiesare 1.7 times as likely to use prescriptive segmentationand optimization supply risk management. This helps toensure that what is produced meets internationalregulatory testing and trade requirements, brandspecifications, and social compliance standards withcomprehensive functionality to manage component andproduct testing, auditing, and finished goods qualityinspections.

    Cost Components for AccruedTotal Landed Cost:

    Direct product cos t -inclusive of material andmanufacturing

    Variable transactionlevel costs - direct andindirect trade/transportand logistics costsattributable to eachproduct and inboundplus outbound shipment

    Fixed indirect andoverhead costs -allocated by virtue ofallocated overheadcosting. Costs of orderselection, fulfillment,inventory holding,storage, and general andadministrative costs

    Accrued total costs -aggregated from each ofthe above cost categoriesby applying costsattributed to eachproduct and shipment asorders are tendered forspecific customers andchannels, and flowoutbound for finaldelivery

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    10 Shipment Visibility and Logistics Management . Foreach customer and product flow, the activities and costsfrom direct and indirect production are accrued (seesidebar). Additionally, it is necessary to add direct andindirect trade/transport and logistics costs attributable toeach product and inbound/outbound shipment to buildtotal landed cost. The Best-in-Class are 1.54x as likelyto capture actuals and accrue landed cost updates asan order or shipment progresses . One leading apparel

    manufacturer and retailer has adopted a PrescriptiveStrategic Inbound Optimization solution to document,manage, and monitor all sourcing and logistics activities.Using this solution platform places the retailer in theBest-in-Class range for dynamic optimization (seesidebar). This retailer can segment costs by product andshipment and can prescribe dynamic last minutebreak-bulk or in-factory carton label creation, advancedshipping notice generation, carrier booking and tracking,

    and invoicing receipt into the warehouse or final homedelivery.

    Key Takeaways and Considerations

    Best-in-Class companies have 89% total spend undermanagement vs. 51% for All Others (please see sidebar on page 4for Best-in-Class definition). The percentage of total spend undermanagement and the average yearly savings realized by theBest-in-Class are both nearly double that of low performers.

    Coupled with the "on time" delivery performance, that is greaterthan 40% better than the competition; the two core metrics ofcost and service draw further attention to the Best-in-Classapproach.

    Best-in-Class companies demonstrate their commitment to theprescriptive optimization framework that we describe in this

    Dynamic Optimization EnablersThe Best-in-Class, top 20%, whencompared to All Others are

    1.86x as likely to automatetrade and transport costing

    1.59x as likely to automatespot bid capability

    1.43x as likely to automatecountry-skipping support

    1.14x as likely to automatesuppliers and inbound carriersinformation exchange

    1.14x as likely to automatesupport for dynamic huboptimization

    1.11x as likely to automatetotal landed cost forecastingand tracking

    1.08x as likely to automateoptimization tools to effectnear real-time control

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    11 report. This commitment gives them an enhanced capability tounderstand sourcing and address customer, product, andlogistics flows under the new added cost of B2B and B2Cconvergence.

    This framework requires a move from current state descriptiveanalytics to analytical optimization that applies prescriptive andpredictive intelligence during both planning and executionphases. Top performing companies are 3.5 times more likely tomodel and optimize by product, source, and customer than low

    performers. Prescriptive optimization models are one key totransforming business operations from inbound source-to-payand outbound order-to-fulfill/transport/deliver. Companies thatunderstand the business value are more than twice as likely toinvest in collaborative technology solutions that enhancevisibility, segmentation and the Prescriptive Control TowerApproach to Optimization.

    For more information on this or other research topics, please visit www.aberdeen.com .

    Related Research

    Supply Chain Intelligence: Descriptive,Prescriptive, and Predictive Optimization ; February 2015

    B2B Integration & Collaboration: The Leader'sAdvantage ; November 2014CSCO Profile: Whats in Your Organization ; January 2015

    Supply Chain Cost-to-Serve Readiness forConvergence ; February 2015Procure-to-Pay and B2B Integration: Leveraging

    the Synergies ; September 2s014Supply Chain Visibility and Segmentation: ControlTower Approach ; August 2014

    Author: Bob Heaney, Research Director Supply Chain & Retail Practices, ([email protected] )

    http://www.aberdeen.com/http://www.aberdeen.com/http://www.aberdeen.com/http://www.aberdeen.com/http://www.aberdeen.com/research/10210/10210-RR-supplychain-Analytics-Optimization.aspx/content.aspxhttp://www.aberdeen.com/research/10210/10210-RR-supplychain-Analytics-Optimization.aspx/content.aspxhttp://www.aberdeen.com/research/10210/10210-RR-supplychain-Analytics-Optimization.aspx/content.aspxhttp://www.aberdeen.com/research/9853/kb-b2b-integration-collaboration/content.aspxhttp://www.aberdeen.com/research/9853/kb-b2b-integration-collaboration/content.aspxhttp://www.aberdeen.com/research/9853/kb-b2b-integration-collaboration/content.aspxhttp://www.aberdeen.com/research/9805/rr-csco-profile-%20vpsupplychain/content.aspxhttp://www.aberdeen.com/research/9805/rr-csco-profile-%20vpsupplychain/content.aspxhttp://www.aberdeen.com/research/9863/kb-ops-readiness-b2b/content.aspxhttp://www.aberdeen.com/research/9863/kb-ops-readiness-b2b/content.aspxhttp://www.aberdeen.com/research/9863/kb-ops-readiness-b2b/content.aspxhttp://www.aberdeen.com/research/9666/rr-procure-to-pay/content.aspxhttp://www.aberdeen.com/research/9666/rr-procure-to-pay/content.aspxhttp://www.aberdeen.com/research/9666/rr-procure-to-pay/content.aspxhttp://aberdeen.com/research/9556/RR-sc-visibility-control-tower-cts.aspx/content.aspxhttp://aberdeen.com/research/9556/RR-sc-visibility-control-tower-cts.aspx/content.aspxhttp://aberdeen.com/research/9556/RR-sc-visibility-control-tower-cts.aspx/content.aspxmailto:[email protected]:[email protected]:[email protected]:[email protected]://aberdeen.com/research/9556/RR-sc-visibility-control-tower-cts.aspx/content.aspxhttp://aberdeen.com/research/9556/RR-sc-visibility-control-tower-cts.aspx/content.aspxhttp://www.aberdeen.com/research/9666/rr-procure-to-pay/content.aspxhttp://www.aberdeen.com/research/9666/rr-procure-to-pay/content.aspxhttp://www.aberdeen.com/research/9863/kb-ops-readiness-b2b/content.aspxhttp://www.aberdeen.com/research/9863/kb-ops-readiness-b2b/content.aspxhttp://www.aberdeen.com/research/9805/rr-csco-profile-%20vpsupplychain/content.aspxhttp://www.aberdeen.com/research/9853/kb-b2b-integration-collaboration/content.aspxhttp://www.aberdeen.com/research/9853/kb-b2b-integration-collaboration/content.aspxhttp://www.aberdeen.com/research/10210/10210-RR-supplychain-Analytics-Optimization.aspx/content.aspxhttp://www.aberdeen.com/research/10210/10210-RR-supplychain-Analytics-Optimization.aspx/content.aspxhttp://www.aberdeen.com/http://aberdeen.com/http://www.linkedin.com/company/aberdeen-grouphttp://www.twitter.com/aberdeengrouphttp://www.aberdeen.com/
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    Strategic Sourcing and Segmentation: Prescriptive Control Tower Approach

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