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!"
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:
- Identify
and quantify undesirable symptoms.
- Perform
cause and effect analysis to find possible root causes.
- Gather
data by reason code (in order to prioritize root causes).
- Quantify
and analyze root causes (Pareto analysis).
- Estimate
the positive impact of your investment decision (e.g. a new supply chain
management package) on your root causes.
- Extrapolate
this to the positive impact on the undesirable symptoms.
- 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:
- "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.
- 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.