Identifying the ROI of a Software Application for SCM Part 2: We Are Looking for the Vendor To Tell Us

Executive Summary   

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:

1. Limited time exists to perform analysis - "We need to know now!"
   
   
2. Business analysis skills are lacking - "We are looking for the vendor to tell us!"
   
   
3. 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."
   
   
4. 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!"

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 Four contains links to the prior parts.

Part 2. "We are looking for the vendor to tell us!"

After all, the software vendor is proposing the solution, shouldn't the vendor know how it will affect your company? The vendor probably does have some useful information about whether the decision to purchase will be of some benefit. They will be able to tell you what business symptoms can be affected. They may even have survey data that show how other companies in your industry, or at least in other industries, have reported benefits. They should have anecdotal evidence of how some existing customer plans to benefit or has benefited from investing in their application.

There are a couple of problems with the vendor's input. First, the vendor cannot be objective. The vendor's business is on the line. It is probably a fierce competitor and its representatives may be under pressure to make this deal happen. Second, directional information, surveys, and anecdotes may or may not be reasonable predictors of how your company will fare. The current state of your business processes and how they are performing is pivotal to the potential return.

This reaction "We are looking for the vendor to tell us", is similar to the first "We need to know now", but less driven by time than by the perception that the skill to perform the cause and effect analysis, data gathering, and statistical analysis does not reside within the company. While that may be the case, it is important for you to be able to understand, monitor and control the process, even if you use an outside consultant. Following these steps will help you do just that:

1. Identify and quantify undesirable symptoms.
   
   
2. Perform cause and effect analysis to find possible root causes.
   
   
3. Gather data by reason code (in order to prioritize root causes).
   
   
4. Quantify and analyze root causes (Pareto analysis).
   
   
5. Estimate the positive impact of your investment decision (e.g. a new supply chain management package) on your root causes.
   
   
6. Extrapolate this to the positive impact on the undesirable symptoms.
   
   
7. Perform sensitivity analysis around your estimate in step 5 by varying the estimate and repeating step 6. This will give you a sense for the range of possible outcomes that is reasonable.

Your success at steps 1 through 7 will be most likely if you follow two additional guidelines:

1. "Time box" the analysis to a minimum of 3 weeks and a maximum of 45 days. These time frames are really only a guide to represent the order of magnitude for the minimum and maximum time frames.
   
   
2. Assign a full-time resource for each area of analysis you undertake.

This concludes Part Two of a four-part note.

Part One covered "We need to know now!"

Part Four contains links to the prior parts.

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 mark.wells@oracle.com.