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Making the Supply Chain Software Business Case

Making the Supply Chain Software Business Case

In making a strong business case for supply chain software, it pays to focus on three  categories of benefits: efficiency, asset utilization, and customer response. By Larry Lapide September 14, 2013 Supplychain247.com

I’ve had a career that included jobs in six professions: marketing consultant, high-tech marketing manager, supply chain consultant, software analyst, academic researcher, and part-time college lecturer.

Looking back, the job I enjoyed most was as a software analyst at AMR Research (now part of Gartner) from 1998 to 2003. It was a challenging job because as the Chinese curse goes: “I lived in interesting times.” Yet I’ve always viewed living in interesting times to be a blessing.

The Evolution of SCM Software My tenure as an analyst was during the phenomenal growth of supply chain management (SCM) as a discipline. The Supply Chain Council was formed during that period and introduced its Supply Chain Operations Reference (SCOR) model.

The model’s iconic logo depicted an integrating Plan arrow atop three process arrows—Source, Make, and Deliver—aligned below. It represented what companies should be doing to integrate their logistical functions (such as warehousing, transportation, and inventory management) with their manufacturing and procurement functions.

During that same period, a marketing war erupted between two software vendors, Manugistics and i2 Technologies (now both part of JDA), that turbocharged technology innovation throughout the supply chain software industry. The vendors were aggressively selling applications, riding the wave of interest in SCM.

Companies were purchasing software to enable integrated supply chain processes, and million-dollar software implementation deals were common. This got the attention of the Enterprise Resource Planning (ERP) software vendors (such as SAP and Oracle), who decided to market SCM software as well. At first they tried to partner with “best of breeds” like Manugistics and i2, but afterwards decided to develop their own solutions or buy companies offering the functionality.

That time period, which lasted until the Internet bubble burst, saw a lot of innovation. By 2002 the SCM software market was littered with hundreds of best-of-breed vendors as well as the ERP vendors. Since then, the market has consolidated dramatically.

Convincing Business Cases Needed Given the market’s complexity, users were frequently asking AMR to help them understand what each software vendor offered. Since implementing software (in and of itself) is not particularly useful unless it enables a process that improves business performance, our basic advice hinged upon the answer to the following question: What is the business case for the process changes that the software will be enabling?

Addressing that question entailed an analysis of the costs and benefits accrued over the life of the particular software.

The business case for SCM software, especially planning systems, needed to be even more convincing than that for ERP software. I learned this from i2 Technologies’ co-founder, Sanjiv Sidhu, who believed that users considered planning software to be “Phase 2 or maybe Phase 3” software.

Companies prefer to first implement transactional systems—the Phase 1 systems such as ERP systems including accounting, MRP and order management functionality —followed by execution systems such as transportation and warehouse management. They tend to implement planning functionality last, and only if a very convincing business case can be made.

The business case for planning software oftentimes involves estimating softer, less-tangible benefits that are derived from improved decision-making, rather than simply from more efficient operations.

I further learned that companies were able to justify implementing ERP software with marginal business cases because these systems impacted large swathes of enterprise-wide employees.

For example, if a company was considering spending $10 million on an ERP implementation that supported 10,000 employees, that translates to a cost of $1,000 per employee or “seat.”

However, that same company considering implementing a $1 million forecasting or supply chain planning system that would be used by only 25 employees or less would incur a cost of  $40,000 or more per seat. Most organizations would think long and hard about such an investment.

A common reaction was: “That’s a lot more money to spend just to support employees in making better decisions.” Thus, the software needs to offer clear and significant benefits—demonstrated by a strong business case, as we discuss below.

The Software Business Case While at AMR, I was briefed by countless software vendors. The briefings covered the software being marketed, its functionality, and case studies of the benefits achieved by implementation.  Benefits were often stated in terms of operating cost savings, increased fill rates, and inventory reductions.

I once discussed these advantages with managers from the consumer packaged goods (CPG) industry and several of them told me that I was missing an important type of benefit: increased asset utilization.

They claimed they were able to justify implementing planning software because it scheduled operations so efficiently that production increased to such an extent that their company deferred building a new plant.

This benefit, deferring capital expense, is especially important in capital-intensive industries.

After that discussion, I revised my list of major benefits that might result from software implementations, as follows:

Efficiency

  • Cost-of Goods (COG) savings
  • Operating cost savings
  • Productivity improvements

Asset Utilization

  • Increased plant and warehouse use and throughput
  • Inventory reductions
  • Deferred capital expenditures

Customer Response

  • Improved cycle times and Perfect Order fulfillment
  • Greater customer satisfaction
  • Resulting revenue and market share enhancements

Software functionality enables process improvements leading to one or more of these benefits. Consider a Warehouse Management System (WMS) integrated with an Inventory Management System (IMS).

These might be implemented primarily for the sake of efficiency, such as to reduce operating costs and improve productivity. However, customer response benefits might accrue as well, such as less order-splitting, shortened cycle times, and improved Perfect Order performance.

In addition, asset utilization benefits might include deferring the need to expand storage space and reduce the use of overflow warehousing. Also, enabling dynamic distribution techniques, such as cross-docking, direct store delivery (DSD), and differentiated product flows, could negate having to build a new distribution center.

I found that making the business case for planning systems is trickier. Reason: the potential impacts of the planning system—both positive and negative—permeate the entire supply chain. These impacts must be carefully analyzed in the business case.

For example, the business case needs to consider the trade-off between improved customer response resulting from the new planning system and any attendant increase in costs and inventories.

While I’ve focused on a list of benefits to consider during the development of a software business case, the list is the same whether software is involved or not.

So if you want to develop winning business cases, make sure to estimate all potential operational performance impacts (both positive and negative) in order to pitch a complete, enterprise-wide story to your executive team.

 

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