Part 2 – Finding the ROI for an Investment in an Analytical SCM Solution

Technologyevaluation.com published a piece of mine on this topic a few years ago, but the ideas are important, so I am recapitulating the them here.  The first post in this series introduced the topic of overcoming the challenges to calculating the return for an investment in an analytical supply chain software application.  This post deals with the first of four challenges.

Part 2 – First Challenge – Limited time to perform analysis – “We need to know now!”

It is usually true that, at some point, the incremental benefit of additional information decreases as one moves along the continuum from limited information toward the goal of perfect information about the future.  However, you will reap significant benefit from knowing with some certainty what you can know in a 2-4 week period.  So, the output of some rigorous analysis should not be under valued.

If you truly do need to know something with immediacy, here are some tips for a quick, cursory approach to identifying the potential return from an investment in several aspects of analytical tools for supply chain or value network, management.

Collaborative Forecasting and Planning

If you track the accuracy of your forecasts, then you have some idea whether or not your company anticipates marketplace requirements well.  However, you must look beyond the aggregate annual revenue projection.  To understand the impact of demand planning on operations, it must be examined at a level that can be executed.  In other words, are you accurately anticipating the requirements for parts, people and processing at a fairly detailed level?  If significant forecast misses regularly occur, then working together with your major customers to plan for demand may have a notable impact on your operating costs.

Your suppliers may levy additional charges because you have passed on abrupt corrections in your demand for their products and services as a response to changes in your own demand profile.  These additional charges derive from additional setups, work-in-process inventory, and lost material incurred by the vendor on your behalf.  If the structure of your industry prohibits suppliers with less bargaining power from passing on these charges, they are still no less real a cost.  Everywhere that the value network generates unnecessary costs, a savings opportunity exists for the members of the value network.  In this case, such savings might be with reach if you extend the collaborative planning loop to include not only your customers, but also your suppliers.

Optimized Manufacturing Planning

Optimized manufacturing planning entails the use of math and analytical tools to choose the least cost combination of plant, equipment, personnel, and material that will meet planning objectives that may include one or more of the following examples:

• Maximizing inventory turns

• Maximizing on-time delivery

• Maximizing revenue

• Maximizing profit

• Maximizing throughput

Because optimized manufacturing planning provides decision support that considers multiple tradeoffs and constraints, it may not be easy to point to one indicator that demonstrates the potential for improvement through implementation of this powerful technique.  However, clues can be found in your manufacturing cost variances and in your performance against the business metrics that correspond with the objectives you want to maximize.

Inventory Planning and Optimization

Look at your financial reports and make a judgment as to whether your balance sheet or your income statement will be positively affected by the decision.  For example, examine inventory levels relative to your revenue.  Calculate inventory turns by dividing revenue by the annual ending (or better yet, trailing 12-month average) inventory.  Compare your turns with your competitors.  If that information is not available, you can use a general industry measure that is more readily available.  The higher the turns, the more working capital you can invest elsewhere and/or the less total interest you pay the bank for the working capital that you borrow.

Gauge your company’s interest expense.  If turns are low and interest expense seems high, then you probably have some significant room for improvement in the way that you make decisions about acquiring and producing inventory.

Does your company keep a financial reserve account against inventory assets (a contra account)?  Does the proportion of your inventory that may have to be written down at the end of the year indicate that your company is making enough of the right decisions around purchasing, distribution and manufacturing?  If the reserve account seems high, that underscores the importance of having the right inventory at the right time in the right place.  It means that obsolescence is becoming an issue because your planning process is not keeping pace with the volatility of supply and/or demand.

Synchronized Planning and Scheduling

Does your company pay the freight for the product or do your customers pay it?  Perhaps it varies by customer.  It may be that you are paying a significant amount of premium freight in order to meet customers’ demand.  If the premium freight you have paid each month for the last several months is anything but negligible, there may be an opportunity to eliminate most of that expense through tools that facilitate synchronized planning and fast planning cycles.

Take a walk through the plant.  Do you see a lot of inventory that is partially completed?  Are there piles of work-in-process inventory that are not being rapidly used up, either on the shop floor, or in the warehouse?  That is an indication of a planning problem.  It may be that the distribution, purchasing and scheduling requirements are not synchronized.  Or, perhaps there are bottlenecks that the plant manager cannot deal with systematically because he does not have the right tools.  There could also be significant setup times that can be eliminated with more sophisticated planning algorithms.

Accurate Order Promising

Tally up the amount of charge backs you have received from customers in the last 12 months for late delivery.  If you are consistently getting charge backs for late deliveries or short orders, that is another area of cost savings that should be available to you. Accurate order promising that considers your real capabilities might eliminate a portion of those charges.

The sales force may also have a feel for orders that they lose because they cannot accurately commit to customers in real-time.  An integrated software application that provides that capability might yield a competitive advantage.

Transportation Planning

There may be savings available through transportation planning.  If you have any significant level of less-than-truckload shipments, you may be paying too much for freight.  The challenge of determining the least cost route when many alternative groupings of multiple stops into routes must be considered requires the rapid use of advanced algorithms in order to achieve an optimal, or near optimal result.

If most of your shipments are to consumers, almost every pair of order lines that ship separately to a customer within a given 24-hour period is an opportunity for improvement through co-packing.

Statistical Process Control

Another place to look is in the area of returns.  Unless you are an electronic retailer or a mail order house, returns should not be a significant cost of doing business.  How are they trending?  Talk to manufacturing, distribution, customer service, or all three and you will get an understanding of how often things come back and why. You may find an indication of a quality problem in manufacturing, packaging or distribution processes (shipping and handling, or possibly sorting).

That’s Part 2 — the longest part, so I promise the others will be shorter.

Thanks again for stopping by. I’m not sure who said this, but I will leave you to ponder it this week:  “Don’t be troubled if the temptation to give advice is irresistible; the ability to ignore it is universal.”

 

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About Arnold Mark Wells
Industry, software, and consulting background. I help companies do the things about which I write. If you think it might make sense to explore one of these topics for your organization, I would be delighted to hear from you. I am employed by Opalytics.

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