Supply Chain and Logistics Technology: Maximizing ROI from technology
January 01, 2013
Since supply chain technology emerged on the scene a few decades ago, practitioners have been interested in what’s available, how it can improve their operations, and, more personally, how it will affect their job. And up until comparatively recently, the articles and industry events that addressed this technology focused on these aspects: What’s hot, how can I use it, and how will the technology affect me?
Those questions remain as relevant as ever, of course. But now, more and more we’re seeing another issue capturing mindshare: What can we do to maximize the ROI from our technology investment?
In fact, in just about every technology-related webcast that Peerless Media’s Supply Chain Group has conducted over the past two years, the ROI question has been one of the very first asked by attendees. Maybe it’s a sign of the economic times, which are still less-than-robust. Or it could be a more cautious approach to expenditures of any kind. In any case, all segments of the supply chain community—shippers, vendors, consultants, and academics—would likely agree that it’s a positive development.
This article will offer some practical advice on how to build a solid business case for investing in supply chain technology and, once you’ve made the investment, how to make sure you’re getting the most bang for your buck. We’ll also introduce some interesting findings from a recent survey that our Peerless Research Group conducted on what readers are doing to capture maximum ROI from technology—and where they could improve.
Making the business case
Before you can gain any return on supply chain technology, of course, you first need to make the investment. And in order to make the investment, you need a compelling business case that you can present to management. Boiled down to its essence, the business case has to answer the basic question: How will this technology investment make us a better, more profitable company?
Long-time supply chain educator, software analyst, and columnist for sister publication Supply Chain Management Review (SCMR) Larry Lapide says that the benefits proposition needs to center on three key areas: efficiency, asset utilization, and customer response. In a recent Insights column (SCMR November 2012), he broke down the benefit components this way:
• Efficiency: This benefit area is largely cost-reduction oriented and focuses on such elements as cost-of goods (COG) savings, operating cost reductions, and productivity improvements.
• Asset utilization: An often-overlooked source of advantage, asset utilization can include increased plant and warehouse usage and throughput, faster inventory turns, and deferred capital expenditures through better facility utilization.
• Customer response: Technology can bring benefits in the critical “customer facing” activities through improved cycle times, “perfect order” fulfillment, and enhanced product or service quality.
Lapide advises that the business case focus intently on all these areas, not just the cost-inventory-reduction aspects, which is often the tendency. The case is strongest, he adds, when multiple potential benefits can be demonstrated from the new software functionality.
In his column, he offered this example: “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.”
In making the business case, it’s critical to do so in terms that the decision makers—executive management and financial leadership—will understand. Robert Rudzki, a former Fortune 500 senior vice president and CPO, now president of Greybeard Advisors LLC and a blogger on scmr.com, characterizes this as the language of the CFO. Basically, this will be expressed in revenue- or cost-related terms, Rudzki says, but it also could be expressed in terms related to working capital or asset utilization. All of these elements can have a powerful impact on the overall key measure of ROIC (return on invested capital).
“Before you start on the business case, the best approach is to ask your own financial folks up front how they would like to see the return calculated,” Rudzki advises. “This will be especially advantageous when you’re measuring the effectiveness of your investment once the technology is implemented.”
A preliminary step to setting those metrics and putting them in place is to understand your current processes and performance. The experts we interviewed for this article uniformly stated that without the baselines in place, any subsequent measures of ROI will be deficient—and maybe even meaningless.
“Taking an initial, introspective look at the company’s current processes and resources before integrating technology into the global compliance mix is equally as important,” says Beth Peterson, president of BPE Global and an expert in trade compliance software. “The biggest mistake [companies] make is that they implement a solution without even beginning to measure what they were doing before they implemented it.”
Identifying exactly what you want to achieve from technology investment better positions you for successful capture of the ROI. Is it improved customer service and response time from a TMS system? Or a reduction in operating costs from a new WMS? Or is it more accurate transactions from an automated procurement solution? In all cases, try to be as precise as possible—and be realistic in your goals.
A couple of caveats apply in the expectations-setting process. For one thing, make sure that the objectives do not benefit one functional area to the detriment of others or to the company as a whole. Jeff Karrenbauer, president of the consulting and software firm INSIGHT, sees this as a recurring problem in the implementations he has witnessed. “The objectives need to be comprehensive,” he says.
“Projected cost savings in transportation, for example, might result in higher costs in inventory or other areas. The silo mentality is still alive and well in many organizations, so this is something to watch for.”
Rudzki of Greybeard Advisors argues that the objectives of any investment in technology need to be expressed within the broader context of strategic goals. “You first need to understand the strategic objectives of your business whether it’s ROIC or other metrics your executives are focused on, and also the role of supply management in supporting those objectives. You then develop goals for the technology investment that supports that role and those broader objectives,” he says. “The technology is the enabler of those objectives and initiatives—it’s not technology for technology’s sake.”
Vendor evaluation and selection
Once the investment gets the green lights (and in many cases even before the official go-ahead is given), the critical process of vendor evaluation and selection gets underway. An excellent summary of the key questions to ask in this process comes from Beth Peterson whose firm, BPE Global, helps companies with their global trade strategies.
In an October 2012 webcast presented by SCMR and Logistics Management, Peterson advised shippers to use these seven questions as a guideline when evaluating prospective supply chain technology vendors:
1. What is the vendor’s planned capability?
2. What has the vendor developed in the previous two years?
3. Was the vendor on track with what was planned on their roadmap?
4. Has the vendor switched strategies based on their biggest accounts/highest revenue opportunities?
5. Does the vendor have a user group and/or advisory board?
6. Is there an opportunity for you to benchmark with other companies who use the vendor’s solution?
7. How closely does the vendor track product releases against their roadmap?
(Note: To hear Peterson’s webcast presentation in full, go to http://www.scmr.com click, on the “Webcast” tab, and sign on to her presentation at the “Best Practices in Global Transportation & Logistics” Conference.)
Virtually everyone we spoke with underscored the importance of checking references before making any commitment, particularly if the vendor is new to the organization. Importantly, these reference checks should be fairly in-depth. Too often, this activity is just a quick phone call that does not go into any detail or provide any feedback that would aid in decision making, one consultant told us. A prospective buyer should come in with a well-researched set of questions for the reference to get as much useful information as possible. And, there should be more than one reference contacted.
Then there’s the hard-to-define but important factor of “fit” with your company? Does the prospective vendor understand your business, your culture, and your priorities in getting the software up and running? Oftentimes, good insight into these questions can be gained from a test pilot using a slice of the vendor’s software.
Rudzki likens this to “playing in the sandbox.” He explains: “The idea is to use the software in your environment for a week or so, applying it on your own terms and with your own people.” This approach not only gives you sense of the software’s capability and intuitiveness, but also of the vendor’s willingness to cooperate with you going forward, he adds.
The implementation process
How effectively you proceed with the implementation process is central to a successful launch, consistent usage, and ultimately ROI capture. Key factors that need to be in place include the flowing: effective user training; management support of and commitment to the initiative; sufficient allocation of resources; and, perhaps most importantly, buy-in from the users.
Speaking to the that last point, Rudzki of Greybeard Advisors says that one of the biggest obstacles to buy-in relates to the users’ understanding of the business reason for the technology. “If the users understand the bigger picture of how the technology will make the company more efficient and successful, they are more likely to become excited about it,” he says. “But if they view it as just another task they’re adding to our to-do list, they are more likely to resist.”
Another success factor in ongoing implementation revolves around redundancy—that is, making sure that multiple users know how to use the various components of the system. “One of the biggest problems we see with our clients is continuity in terms of employee turnover,” says Jeff Karrenbauer of Insight, a provider of supply chain solutions and consulting services. The solution, he says, lies in
an aggressive and comprehensive training program.
With some types of supply chain software, WMS and TMS solutions for example, it’s advantageous to begin by implementing certain modules as opposed to the entire package. “Getting one element up and running successfully and delivering results can create good momentum and help ensure that the project is on track,” Karrenbauer says.
Measurements in place
The exact measures used will vary depending on the specific application employed, but they will typically center on cost savings, revenue generation, or other quantifiable operational improvements. So for an operations-oriented system like a WMS, TMS, or procurement automation system, the measures could focus on administrative expenses, greater throughput, inventory turns, or labor productivity.
Costs for each of these areas can be measured against the baseline established as part of the ROI assessment.
Beyond the core measures that focus on cost reduction and lower inventory, other measures need to be considered as well. In particular, Larry Lapide points to the “customer facing” metrics that address customer satisfaction and that can lead to more business and greater market share—i.e, a revenue-generation metric.
“Measurements like order cycle time and perfect order performance are critical,” says Lapide, “because this is what your customers actually see. They don’t see your internal metrics.” Another effective metric Lapide has observed is the amount of time that sales reps spend on order management “administrivia.” By reducing this time, he notes, you not only reduce order cycle times from a customer perspective, but from a revenue-enhancing standpoint free up valuable selling time.
Technology also can greatly enhance asset utilization, adds Lapide, and thus should be measured as well. “In a number of cases, I’ve seen the adoption of new technology enable a company to take an existing asset and greatly improve its productivity,” he says. “This can have a huge impact on the company’s balance sheet, particularly if it means that an enhanced existing asset means that they will not have to build or acquire new assets.”
In this regard, production and changeover cycle times are operational metrics that when improved can increase production capacities and possibly defer building a new plant or installing a new production line. With the right measures in place and with accurate data available, it becomes far more feasible to measure the progress of a given technology investment toward delivering the expected return.
What the survey says
We’ve heard from a number of experts about maximizing ROI from your technology investment. Now let’s take a look at what logisitics and supply chain practitioners are doing—or are not doing—on this front.
Peerless Research Group in late 2012 conducted a survey among our readers to determine the practices and procedures they had in place to maximize return on their supply chain technology. The results reveal that in many cases they are following the counsel of the experts we just cited, but in other important areas there was need for improvement.
Most of the 100-plus respondents to our survey do, in fact, conduct some sort of cost/benefit analysis on their technology implementations. The most commonly used measures, mentioned by over three fourths of the survey sample, was cost savings. This was followed by on-time delivery of orders and better operational performance. The last measure incorporated such activities as number of shipments processed, loads handled, and inventory accuracy.
As for their general assessment of the benefits received for the cost of the technology, the supply chain managers expressed satisfaction overall—though room for improvement was certainly evident. Forty-five percent noted that their overall return was either excellent or very good. On the other hand, over half gave the ROI a good or fair rating. Considering the level of expenditure for many of the technology investments, that number is probably not as high as it should be.
User acceptance and underlying supply chain processes were cited as key to maximizing return from the investments in software and solutions. Fully half of the respondents, in fact, mentioned these factors. Improved customer service resulting from the technology was another major success factor cited.
Asked about what specific types of technology yielded the top return, readers gave a mix of responses, reflecting the range of software typically in place in their organizations. TMS received the highest number of mentions (40 percent) as the top-ROI technology, followed closely by inventory management systems at 38 percent. By contrast, the technology application where ROI was most often reported as failing or disappointing was forecasting/demand-planning systems. Twenty percent reported disappointment with these systems.
The survey respondents pointed to several obstacles that kept them from achieving the hoped-for return. The biggest, not surprisingly, was the cultural change associated with implementing anything new—in this case, new software. In fact, close to half of all respondents cited the change component as a major obstacle to implementation success.
Problems around data gathering was another obstacle to maximizing ROI, cited by 42 percent of respondents. “Data timeliness and accuracy is the key factor to obtaining a successful ROI for your investment,” one respondent commented.
The survey findings had some important implications for vendors as well. In particular, the users felt that the vendors could be a little more proactive in helping them gain the expected return. A number of respondents offered their views on how this could be done. Better training for users, a more timely response to issues the customer may be experiencing with the software, and greater post-implementation accessibility were among the recommendations offered.
Several comments centered on the vendors’ need to become more conversant with the user’s business. The advice of one responding manager: “Hire business-knowledgeable, transaction-savvy talent—not system wonks.”
As to the timeline of the expected return on investment, the majority of respondents were looking for fairly quick results. Close to 80 percent expected an ROI within two years; of that, 17 percent were looking to capture the expected return within six months of implementation. “ROI is everything when discussing technology with prospective clients” one vendor told us. Or as one respondent put his implementation objective: “Quick install, short learning curve.”
Interestingly, in most cases those high expectations were met. Twenty percent of respondents reported achieving ROI on their investment within six months and another 33 percent did so within a year. Asked what is the one key factor to obtaining a successful ROI for your investment in supply chain technology, one supply chain manager wrapped things up succinctly: “The effort needs to be led by supply chain, not IT; reviewed and endorsed by senior management; and the right skills applied with adequate time allotted to do the job.”
Frank Quinn is Editorial Director of Supply Chain Management Review; Judd Aschenbrand is Research Director of Peerless Research Group (PRG)
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