What are You Waiting For? Low Cost of Capital Means You Should Be Investing in Supply Chain Analytics
Many executives I speak with express reluctance at wanting to invest people, time, and money into projects that have a dubious return on investment. Supply chain analytics projects, particularly those involving “big data”, “Internet of Things”, and real-time data are all being talked up in the popular press, but most companies are loath to dive in. Why? The response is often “we are waiting to see what happens in the market”, or “we are on the sidelines until we see a real benefit in terms of return on investment.”
So what exactly is the right “return on investment” number you have to hit to give the go-ahead?
The “wait and see” excuse, in my humble opinion, is the wrong one when it comes to the digital supply chain, and it will cause you to miss out on many opportunities for growth. This opinion is supported by a recent article in the Harvard Business Review, “Strategy in the Age of Superabundant Capital“, that provides a compelling argument for how investment in new technology are imperative for success. The authors argue that as financial assets have grown faster then the global GDP, the weighted average cost of capital has shrunk to about 5-6%. And yet, hurdle rates for internal business investments have not changed significantly in the past two decades. As a result, too many investment opportunities are being rejected, while cash is building up on balance sheets, and companies have no other option but to buy back stock. But share buyback only makes sense if the company’s common stock is undervalued in the market….which is hardly the case, with equity prices at an all time high!
So what is the alternative? Growth. For companies to grow, they need to invest in new technologies, new products, and new businesses. One of the biggest opportunities for growth today is the massive set of changes we are seeing in the ecosystem, in terms of real-time data, supply chain analytics, mobile computing, cloud computing, and the massive trove of data that exists in most companies. DATA, as I’ve indicated in the past, is the gold at the end of the rainbow, yet few companies I meet with are truly exploiting this data in a fashion that will produce insights and new business opportunities. Investments in creating the real-time LIVING supply chain are all around us, yet so many companies are dragging their feet. A good place to start would be to invest in creating a data governance council, and assemble a center of talented individuals tasked with verifying data standards, but also start to experiment with new approaches for working with this data.
Mankins and his colleagues support this view. Amassing cash on the balance sheet is a poor use of capital on behalf of shareholders, and leaders should have a strong bias towards reinvesting earnings in new digital products and technologies that is rapidly shaping our new world. These projects should be focused on growth opportunities, and may involve tolerating failure. As Bill Harris, the former CEO of Intuit and PayPal once said, “Rewarding success is easy, but we think the rewarding intelligence failure is more important.” That means putting together special teams of individuals who have the time and motivation to work on new digital products, explore the art of the possible, and creatively test new technologies. Not all these projects will succeed. In fact most will fail. But the learning that occurs will reward those organizations who truly view themselves as research leaders, and who are intent on growth.
