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How to prioritize SCM technology investments in this economy

Investments in supply chain management (SCM) initiatives take on a new significance in an economic downturn. In this column, SearchSAP.com contributor Anil Gupta outlines how to prioritize these investments.

This is the second in a two-part series on best practices in supply chain management from SearchSAP.com contributor...

Anil Gupta.

Every supply chain changes over time as companies add more products, suppliers, plants or distribution centers, evolve their customer or product mix, implement new postponement or replenishment strategies or simply scale in volume. If the underlying systems used to manage these supply chains are based on old technology, not well-integrated or based on manual methods such as Microsoft Excel, it becomes a challenge for these systems to keep up and manage the underlying processes. As a result, the performance of supply chain can deteriorate over time. Hence organizations need to continually invest in new systems and technology.

However, during difficult economic times, companies have limited IT investment dollars available. Executives thus lose the appetite to make investments that don't have a short-term payoff and select the functional areas within their supply chain where they need to invest. Here's a broad framework that can guide the investment process and be useful in making such decisions.

One can bucket supply chain investments into three categories of investments that:

  • Reduce operating costs within the supply chain
  • Increase scale by allowing the company to address a broader scope such as higher demand or more products, etc.
  • Increase flexibility by enabling the company to easily add a new product line in a plant or a new channel, etc.
  • Clearly, any money spent on technology that reduces operating costs, such that the payback is within six to nine months, gets the nod. For example, if an OEM can reduce its inventory liability from product obsolescence and reduce write-offs through supply chain collaboration, technology is a good investment even during the bad times. Another example could be a consumer goods company that upgrades its demand planning system to ensure it can meet retailer requirements while reducing excess inventory and increase their loyalty is a good investment even during the tough times.

    In general, any investment that allows the company to increase scale can be delayed. However there are exceptions. If a company is a market leader and financially strong, it may be worthwhile investing in scale during the tough times, knowing that it will come out of the recession poised to gain even more market share and increase profits with such investments.

    Any investments in flexibility are a grey area. Flexibility is both a luxury and a necessity during the downturn. It allows a company to profitably make tactical moves and seize a customer from a competitor or test new strategies undercover in a limited geography. In such scenarios, an investment in flexibility is warranted. On the other hand, many companies go into survival mode during tough times and burn as little cash as possible, waiting for the thaw.

    Adding to the confusion is the fact that an investment in any technology can fall into different buckets for different companies, based on their competitive landscape and their operating environment. For example, one company may find that their demand planning system does not perform well as they increase the number of SKUs. Clearly, investment in demand planning for this manufacturer falls in the "scale" category and they can afford to delay selecting and deploying a new system. However, another manufacturer may see investment in demand planning system as a way to ensure that they can improve forecast accuracy and avoid stockouts for their key customers. For them, demand planning investment may be critical even during the tough times. In general, I recommend at least 10 to 20% of their investments be made in such technologies.

    Effective SCM is one of the most strategic aspects of a manufacturer's business. Hence, it requires ongoing investments to ensure efficiency and effectiveness and provide competitive edge, where possible. A framework to guide the investment process during good and bad times is critical to sustaining the competitive edge.

    Anil Gupta is vice president of marketing for Bristlecone, a global supply chain consulting firm based in the heart of Silicon Valley in California. Anil is a veteran of the enterprise software industry and has managed marketing and strategy for a number of manufacturing and supply chain software companies. He can be reached at anil.gupta@bcone.com.

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