Identifying the ROI of a Software Application for Supply Chain Management
The competitive environment for every industry grows increasingly intense. Fast, reasonably accurate information about the impact of a software investment decision grows more critical. Many decision-makers look for an exact forecast of return on investment (ROI) from the purchase of a supply chain management application. At least four very real challenges make such perfect information elusive. Commonly, executives meet these challenges with responses that are not carefully considered. The challenges and the corresponding reactionary refrains are as follows:
- Limited time exists to perform analysis - "We need to know now!"
- Business analysis skills are lacking - "We are looking for the vendor to tell us!"
- The data to perform the analysis are almost always not available in the corporate databases - "We have tons of data, but we don't have it broken down like that."
- It is always difficult to predict the future … like forecasting, certain laws about a prediction of ROI will forever hold true…
- the prediction will always be wrong
- the prediction will always change for as long as the analysis continues
- someone is going to be held accountable for the prediction
- "Just give us the bottom line!"
After a quick look at these issues, one might question the effort to undertake the analysis to predict an ROI, as well as the validity of the outcome. Perfect, or even complete, information may not be feasible, but if a few basic principles are followed, some analytical work can provide an understanding of the potential for bottom line impact. It can also yield insight into the root causes of undesirable symptoms from which your business may be suffering.
The reactions of some decision-makers to each of the four challenges that are listed above provide a convenient outline for exploring a more thoughtful and strategic approach to evaluating a potential investment in supply chain management software.
About This Note: This is a four part note, each part addressing one of the four challenges.
Part One covered "We need to know now!"
Part Two covered "We are looking for the vendor to tell us!"
Part Three discusses the challenge of performing the data analysis.
Part 4. "Just give us the bottom line!"
This reaction to the need to understand the future impact of an investment decision is reminiscent of an individual who wants to know what stock they should buy. This person does not want to learn about industry performance. He or she is not interested in the relative competitive strengths of one company versus those of the other companies in the same industry. Nor is this person motivated to research financial statements in order to understand what might be driving a company's performance or whether that performance is getting better or worse. Such an individual simply wants to know if it will be a good investment and how much can be made at the end of 12 months if it is sold. So he or she scans a list of stock picks in one of the many financial publications, chooses the company ranked at the top, and then "places a bet" because at that point, the decision is little more than a bet based on an uninformed hunch. It is likely that this person will be sadly disappointed in the return. The investor will probably try to recover the loss with an equally unconsidered investment decision, leading to a cycle of poorly informed decisions. Obviously, this individual is putting the amount of money about to be invested at great risk because he or she has latched on to an answer without context.
In the same way, decision-makers in a company may rush to a "bottom-line" conclusion, only to have their efforts frustrated because they did not take the time, or do the work, necessary to gain some understanding of what is driving their pain and how their investment decision may affect those drivers. This will often lead to additional decisions that are made without adequate research and consideration in an effort to recover from the first one.
Where To Start
An investment in supply chain management software may accrue to your company benefits that manifest themselves through four strategic effects. They are top line revenue growth, reducing requirements for working capital, return on assets, and higher margins. The intermediate effects and the metrics (bulleted) that drive them are outlined below:
Top Line Revenue Growth
- Reduced time from concept to production
- Less frequent engineering change orders after production release
- Increased rate of innovation
- Better on-time delivery (Less canceled orders; also few late penalties)
- Higher quality (fewer returns)
Reduced Requirements for Working Capital
- Finished goods inventory
- WIP inventory
- Raw materials inventory
- Inventory obsolescence
Higher Return on Fixed Assets (plant and equipment)
- Lower shipping costs (to customers, premium and otherwise; internal distribution)
- Reduced late penalties
- Lower manufacturing costs (reduced setups, downtime and overtime, better resource allocation)
- Lower scrap
- Improved product mix
- Reduced inventory carrying cost
Improvements in the above metrics can be driven by the following capabilities in a supply chain management application:
- Collaborative Product Design
- Collaborative Planning and Forecasting
- Optimized Manufacturing Planning
- Inventory Planning and Optimization
- Synchronized Planning
- Powerful Detailed Scheduling
- Accurate Order Promising
- Optimized Transportation Routing
- Statistical Process Control
The Causal Metrics Matrix in Figure 3 summarizes how supply chain management software capabilities interact with opportunities for business improvement. It shows metrics across the top that lead to overall improvement in competitive position along the four dimensions previously outlined-top line revenue growth, more available working capital, higher return on assets, and a reduced overall cost structure. Down the left side are the capabilities of supply chain management software that drive improvement in the metrics across the top, and as a result, move the business toward the overall business objectives.
Figure 3. Causal Metrics Matrix
Click here to view larger image
If you are not experiencing some organizational stress in some of the areas where the benefits may occur, then perhaps a decision to invest in supply chain management software should be postponed. If you do have some pain in one or more of these areas, then you can follow the concepts in this article to understand the potential of supply chain management software to fix the cause of the pain and improve your bottom line.
You can probably find out more than you think you can. At a minimum, you will probably identify the decision criteria for which you do not have sufficient data to gain much visibility. As a result, you can at least focus your qualitative judgment in those areas.
Successful business is driven by quality decisions that can be executed in a timely fashion. Some of these decisions relate to investing in software applications that support supply chain management. At least four hurdles face those seeking to make a timely, but intelligent decision. Reliable predictions of ROI will continue to evade decision-makers who react to these challenges with the responses we have studied here. However, if you do not succumb to that temptation, some careful analysis can provide information that will guide your software investment strategy.
About the Author
MARK WELLS has extensive experience on many aspects of supply chain management from within the industry, as a supply chain consultant, and as part of a software development organization. He has CPIM certification and an MBA from Drexel University where he has also taught operations management and operations research. He currently works for the applications development division of Oracle Corporation, focusing on supply chain planning.
He can be reached at email@example.com.