Part 3 – 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 second of four challenges.

Part 3 – Second Challenge – Business analysis skills are lacking – “We are looking for the vendor to tell us!”

Can the Vendor Help?

After all, since the software vendor is proposing the solution, shouldn’t the vendor know how it will affect your company?  The vendor probably does have some useful information about whether the decision to purchase will be of some benefit.  They will be able to tell you in general what business symptoms can be affected.  They may even have survey data that show how other companies in your industry, or at least in other industries, have reported benefits.  They should have anecdotal evidence of how some existing customer plans to benefit or has benefited from investing in their approach or solution.

There are a couple of problems with the vendor’s input. First, the vendor cannot be objective. The vendor’s business is on the line.  It is probably a fierce competitor and its representatives may be under pressure to make this deal happen.  Second, directional information, surveys, and anecdotes may or may not be reasonable predictors of how your company will fare.

The current state of your business processes and how they are performing is pivotal to the potential return.

What Should You Do?

This reaction “We are looking for the vendor to tell us!”, is similar to the first challenge and reaction,“We need to know now!”  This second challenge is less driven by time than by the perception that the skill to perform the cause and effect analysis, data gathering, and statistical analysis does not reside within your company.  But, it is important for you to be able to understand, monitor and control the process, even if you use an outside consultant. Following these steps will help you do just that:

1. Identify and quantify undesirable symptoms.

2. Perform cause and effect analysis to find possible root causes.

3. Gather data by reason code (in order to prioritize root causes).

4. Quantify and analyze root causes (Pareto analysis).

5. Estimate the positive impact of your investment decision (e.g. a new supply chain management tool) on your root causes.

6. Extrapolate this to the positive impact on the undesirable symptoms.

7. Perform sensitivity analysis around your estimate in step 5 by varying the estimate and repeating step 6. This will give you a sense for the range of possible outcomes that is reasonable.

Your success at steps 1 through 7 will be most likely if you follow two additional guidelines:

1. “Time box” the analysis to a minimum of 2 weeks and a maximum of 30 days. These time frames are really only a guide to represent the order of magnitude for the minimum and maximum time frames.

2. Assign a primary internal resource for each area of analysis you undertake.

Once again, I’m grateful that you took a moment to read Supply Chain Action.  As a final thought, I remind you of the familiar words to ponder, “Luck is that point in life where opportunity and preparation meet.”

 

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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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