The Supply Chain IT Investment Enigma: Companies are Rethinking IT Investments

After a period of significant downsizing and reduction in IT, supply chain executives need to re-think their IT investment strategies, particularly given the dominance of the Web, social media and cloud computing.

Fundamentally, there are two components of IT investment:

1. Sustaining current capabilities

1. Developing new capabilities

Sustaining the status quo is often a given. But when it comes to creating new capabilities, the question is how much additional value and return can be gleaned from new IT investments, especially in uncertain economic times.

Based on recent conversations I’ve had, it’s clear that uncertainty is the biggest challenge in today’s economy. Regardless of what people think is causing the downturn, there is real speculation and risk associated with new spending in this environment.

What is Supply Chain Software?

The ultimate goal of supply chain management (SCM) software is to enable a company and its partners to “sense and respond” to changes in the characteristics of products, the demand for products and the supply of materials used to make products in a way that, at the end of the day, always meets consumers’ needs at an optimized cost.

The primary components of SCM software are as below:

• Demand Management (DM) – also called forecasting, DM gives the manufacturer better visibility into future demand.
• Product Lifecycle Management (PLM) – tracks the creation of products from ideas to R&D to production.
• Production Planning (PP) – manages the capability of the production facility in terms of the available inventory and the demand for products.
• Production Scheduling (APS) – time sequences the production assets and ensures that materials required for production are scheduled. Production Planning and Scheduling are often bundled as Advanced Planning and Scheduling (APS) in ERP packages.
• Supply Chain Event Management (SCEM) – Creates, controls and executes the critical elements of the supply chain process
• Supplier Relationship Management (SRM) – manages the flow of information between suppliers and the manufacturer around the design, source, order, and monitoring of incoming ingredients and products.

• Warehousing (WMS) – tracks the movement of inventories into and out of production and within distribution centers.

[Source – Food Engineering, Supply Chain Software moves into the Mainstream, Bill Friend and Olin Thompson]

Given these areas, there are many capabilities that may be required in different parts of the business, based on customer or supply chain requirements. It’s time for people to start thinking about these investments from a different perspective.

Sustaining Current Capabilities vs. Developing New Capabilities

When you think of overhead, most people think of services provided at the corporate level absorbed by the entire organization. For IT spending, a better paradigm is that some IT outlay is clearly for infrastructural requirements that every organization needs to have in place. This segment of IT is undergoing a squeeze as a standard line item, as companies are deferring upgrades and maintenance of that infrastructural utility and looking for any investment opportunity to show some improved business capability. Some companies have taken money out of infrastructure and maintenance and reallocated it to projects aimed at new capability. So the whole issue of IT as a required capability as opposed to a differentiating capability is under attack.

Companies Want IT to Bring Optimization Value

We’re also seeing that just because companies recognize that IT can provide capability, with a solid business case, doesn’t mean that funding will be forthcoming. Since most organizations have a cap on what they can spend on IT, and investment must be freed up by running the utility more efficiently, the discussion revolves around optimization. But some companies are looking ahead.

For example, HP had some specific goals in place looking out five years, 50 percent of which concerned infrastructural capability and utility; the rest focused on new capability. The company has made a point of redistributing that budget in the next two years to infrastructural, well-established projects such as data center consolidation. In addition, the Hackett Group has produced a number of white papers advocating a portfolio view of the IT investment.

In the last five years, IT investment has definitely taken a hit. While infrastructural maintenance is not something companies can skimp on, many have cut back on upgrades and investment, which was strongly felt in the supply side of the market and by technology buyers. But at the same time, discretionary budgets were also cut for capability development. Many companies changed allocation between the two, and as a result both budgets were hit.

The Position of Analytics in IT Investment

For companies that are investing in new capabilities this year, one of the biggest emphases has been on analytics. Analytics is the single area of IT that continued to flourish in the downturn. Because companies have invested so much in automating transactions, they suddenly have massive databanks that they recognize as valuable, including data on their supply chains. As Pierre Mitchell of the Hackett Group discussed at our last SCRC event, one of the reasons analytics is big is that master data management approaches have been developed that allow the construction of data warehouses with multiple forms of data.

Given the complexity of the operation and the physical fragmentation of operational and transaction data in the different sites, data warehouses allow companies to put their data into a cloud. This enables increased visibility of what’s happening; analytics are a great way to aggregate the data and to make physical processes across the supply chain more visible. This is also driving recognition of how fragmented these processes are. Executives are also more interested in tracking all the data that is fragmented across the enterprise and in how that data can be leveraged to address discontinuities.

The End Goal of IT Investment

Considering the issues organizations are having with intra-company fragmentation, the biggest capability they are seeking to develop through IT investments is around supply chain integration. This is the beginning of a journey toward consistent business semantics across a supply chain. As companies mature, they will evolve towards an EDI-(electronic data interchange) like set of broader defined business transactions and performance metrics. Industry- specific standards with similar types of semantics, definitions, and cross-reference models will begin to evolve.

Advice for Companies Investing in IT

As companies seek to re-balance their priorities following the downturn, they also need to recognize that while the rules of the game have changed permanently, the show must go on. There may be some different assumptions on what growth will be like as the economy recovers, but most companies are moving in the same direction.

On the procurement side, everyone continues to march the ERP death march – and most are trying to get synergy and scale. IT is driving the broader ERP roll outs, upgrades, data consolidation, and data-reengineering and process re-engineering, while moving through the big issues of SAP and Oracle. But the best companies are emphasizing there are gaps where ERP doesn’t help, such as supplier activity and analytics, service procurement and contract management. These companies are saying, “We will intelligently fill that hole with best-of-breed players until we catch up.” Investments in procurement and supply-chain technology as a percentage of IT spending continue to increase, and those that make these investments will see an ROI.

Thanks to Pierre Mitchell from the Hackett Group, as well as Bob Ferrari for sharing their thoughts!