Identifying the ROI of a Software Application for Supply Chain Management
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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:
- 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
Product/service
Innovation
- Reduced
time from concept to production
- Less
frequent engineering change orders after production release
- Increased
rate of innovation
Customer
Satisfaction
- 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)
Higher
Margins
- 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
Conclusion
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 mark.wells@oracle.com.