Reducing costs through supply chain outsourcing

In today's challenging economic environment, CIOs are under more pressure than ever to show that the IT department can provide a meaningful impact on profits, while at the same time securing sustained IT costs savings and making better use of existing IT infrastructure in order to support key business priorities.

Delivering strategic value is often difficult when, according to Gartner, up to 80 percent of today's IT budget is spent keeping existing systems up and running. IT departments spend more money trying to achieve consistently high levels of software performance and availability when that capability is kept in-house.

Gartner predicts that through 2005, enterprises that want to remove the majority of planned downtime (99.0-99.5 percent) will need to spend approximately three and half times the cost of a standard application. Only 20 percent of applications will actually achieve 99.5 percent availability.

As today's supply chain environments become increasingly complex, IT staff spend more time simply managing the IT infrastructure than focusing on supporting the core business.

However, there are ways to minimise the management of supply chain software while simultaneously eliminating faults in the technology, cutting costs and protecting reputation.

One approach is to outsource the management of software applications. The case for outsourcing is strong. Not only does it reduce total cost of ownership, free up IT staff to work on more strategic tasks and improve the quality of service to users, but it also leads to better processes for key areas of systems support such as disaster recovery and system availability.

Size is not a barrier for outsourcing either, and outsourcing supply chain software doesn't mean turning over the entire IT department to a third party. Oracle defines outsourcing as how the Oracle software is managed, not where it is kept. For example, customers may outsource their Oracle software to the Oracle data centre or a partner, or keep it on their premises and have Oracle manage it remotely via a continuous connection.

According to IDC Research, outsourcing IT can save up to 66 percent (The Financial Returns of Software as a Service, IDC, 2002) in hardware and support costs, while The Standish Group, a leading international market research firm, found that Oracle Outsourcing customers saved 49 percent by outsourcing their supply chain applications management (The ROI of ASPs: Examining Oracle Outsourcing).

Today, thousands of organisations are reaping tremendous business benefits by outsourcing their supply chain software. For example, Kvaerner Pulping Inc., a division of Kvaerner Group, reduced its inventory by almost $1 million and shaved a massive 31 percent off the company's annual IT budget by outsourcing its supply chain management software.

John I. Haas, the world's largest producer of hop products for the brewing industry, has seen an 80 percent cut in maintenance costs through outsourcing. 'Outsourcing is one of the best moves we've made,' said Kyle Lambert, vice president of information systems. 'I've got other things to think about, like running our business.'

Hence, a model whereby the software vendor maintains and upgrades the software online makes more sense than the organisation worrying about the task. With effective outsourcing, customers can lower costs by as much as 50 percent (IDC data for Oracle Outsourcing).

Just as important, outsourcing customers are realising 60 percent fewer service requests, 50 percent faster problem resolution, 60 percent fewer outages and close to 99.99 percent availability.

IT is constantly undergoing a process of change. CEOs will continue to demand that every part of the company plays its part to drive revenue. With an unpredictable economy, additional government regulations and rapid technological advances, the IT department is extremely agile and must be well equipped to support the organisation's business priorities. The sensible way to do this is to arrange an organisation so that effort is focused on the core competency.

Bottom line, outsourcing the management of your supply chain is about making sure that your valued customers receive their orders and that your supply chain is working for you, not the other way around.