Executive Briefings

Defending SCM Technology: It's Not the Answer, but a Damn Good One

I'm sick of people telling me that technology is not the answer to supply chain problems, or that supply chain management (SCM) technology has, in general, been a disappointment to those companies that have made major investments in them. What's more disturbing to me is that I feel like I too have been brainwashed to repeat the same mantra. I've noticed that, in recent years, I've become somewhat tentative in describing what I do for a living. I preface everything I say with caveats about the limited efficacy of supply chain technologies.

When I think of SCM technology, I typically classify it into three categories: foundational, operational, and planning.

The foundational category spans any tools that help build visibility and connectivity among trading partners. These technologies create data that can be later used either in operations or planning. B2B connectivity, EDI, RFID, and voice recognition are all examples of foundational SCM technologies. I would probably put supply chain performance management in this category as well, since it builds the foundation for measuring the health of the supply chain.

I can comfortably say that SCM technology has generated billions of dollars in return on investment across hundreds of projects.

The operational category spans technologies that help manage an organization's day-to-day needs in supply chain. This includes a transportation management system that helps select the right carrier for a load, or a warehouse management system that determines the pick order for a shipment. Distributed order management is another example of an operational technology that allows companies to best fulfill their demand. Demand sensing is another.

The planning category spans all technologies that help companies come up with a better plan for managing their supply chains. This can include modeling-based tools, simulation-based tools, or any decision-support technology. This ranges from demand forecasting, to inventory optimization, to price optimization, to what-if analysis tools, to network design.

In defense of SCM technology: Can we quantify the total benefits of SCM technology? Not easily, since technology investment is typically one factor in a bigger picture of cause and effect. But over the past 20+ years, I can comfortably say that SCM technology has generated billions of dollars in return on investment across hundreds of projects. These benefits span reduction in supply chain costs, improvement in inventory turns, reduction in lost sales, better utilization of production capacity, and more.

Because of technology, we can now dream of building visibility across our supply network, collaborating with key trading partners, and optimizing our human resources and production capacity. Because of technology, we can figure out what's happening at our stores and, based on that, readjust our replenishment plans and pricing to improve margins and customer satisfaction. Without technology, the best process and the best organization can only go so far in reaching this supply chain utopia.

In the foundational category, especially on the data collection and automation side, there have been many studies that attempted to quantify the benefits of EDI connectivity. More recently, connectivity over the Internet has been viewed as a less costly, more effective way to enable electronic trade. There are strategic benefits, such as a lift in sales or improvements in market share or order fulfillment cycle. The tactical benefits include a reduction in manual errors, number of faxes and phone calls, administrative head count, and inventory, as well as improvement in cash flow.

The discussion has recently included Auto-ID technology and its impact on and benefits for the supply chain. Based on many studies, there are major benefits--that is, if they're used correctly and the business case is built. For example, in a study on Wal-Mart's RFID program, MIT found a 19% increase in promotional sales attributable to RFID tags, readers, and data analysis. For a giant like Wal-Mart, this can quickly translate into billions of dollars in profit, and for a small mom and pop, this could mean the ability to better compete with giants.

In the operational category, tools like warehouse management systems and transportation management systems have been deployed widely, although not ubiquitously. Transportation management systems have resulted in reduction of transportation spend in the double digits, based benefits of carrier contract compliance, better load consolidation, and route execution. Warehouse management systems have resulted in better capacity utilization, better inventory turns, and higher customer satisfaction because of increased visibility of pick, pack, and ship of inventory within the warehouse.

Planning technologies have been probably the most vilified category in supply chain management. There have been many voices over the years that were against planning, with declarations that optimization is dead or that forecast is no longer necessary. The cycle of change, those pundits would claim, is so short and frequent that companies need to focus on execution rather than create a plan that will undoubtedly become immediately obsolete. We tend to forget that good, wholesome planning exercises like facility location optimization; sourcing and procurement optimization, product flow optimization, and demand forecasting have generated billions of dollars of efficiencies across supply chains. This is because these tools allowed us the power of math and science to take the real world and model it, find the best plan of attack, and execute it--or get close to executing it.

Let's get to the truth: Technology becomes the scapegoat: Okay--so if even half of what I am claiming is true, why does SCM technology still get a bad rap? And why doesn't everyone fully believe in its power? I think there are many reasons.

When technology--not surprisingly--doesn't solve the organizational and process problems, it gets blamed for the organizational shortcomings.

First, I think that enterprise application vendors in general have done their applications a disservice. Under-promising and over-delivering were habits that certainly weren't encouraged or practiced in these vendor organizations. In fact, in the early 1990s, vendor promises were so egregious that it was inevitable buyers would be disappointed with the results. The most outrageous claims had to do with how "lights out" or hands-free the applications would be. Ultimately, the applications needed care and nurturing from human users that had mastered the art of supply chain. The more care the users gave the applications, the better they became and the more helpful they were in solving business problems.

Another reason is that SCM technologies tend to be lumped with other enterprise app categories like CRM and ERP that offer a less-clear ROI picture. I know I am probably biased, but the benefit of reducing inventory by 10% is a lot more straightforward than streamlining your HR operations. A corollary of this is that since the ERP vendors have started offering SCM tools, the distinction between supply chain management and other enterprise applications has become even more blurry.

Another issue leading to this general dissatisfaction is that the same tools are deployed at all companies, regardless of level of SCM sophistication. This implicitly means that complex technology will magically elevate the level of SCM sophistication.

I have been involved in countless conversations and followed the implementation of demand-forecasting tools within Fortune 1000 companies. The focus is on the algorithm that will generate the most accurate forecast and reduce the forecast error, however it's measured, to a single digit. The elephants in the room, of course, are the obvious questions: What will you do with this improved accuracy, and is your supply chain ready to handle this improvement?

What happens is that user companies obsess about the technology because it's a known quantity and process and organizational changes are much trickier to cope with. When technology--not surprisingly--doesn't solve the organizational and process problems, it gets blamed for the organizational shortcomings.

And still another reason is that bad technology stories are a lot more popular than good ones. Who can forget the Nike-i2 nightmare, or the countless SAP APO challenging deployment fables? Companies don't readily share their success stories about improving their forecast accuracy and order fulfillment or doubling their capacity utilization because, ultimately, these are added competitive advantages they don't want made public.

Where do we go from here? The good news is that despite what we want to believe, we're so far behind on using technology that we're still in the early days of adoption. This means technology returns on investment are still barely touched. The bad news is that instead of thinking of a better strategy for consuming SCM technology, we're getting the nay Sayers that want to give up on technology altogether because it hasn't delivered on the insanely inflated ROI promise.

Maybe vendor organizations need to be responsible for the usage, not just the selling, of technologies. And maybe user companies should take entry exams to qualify for using certain technologies. Just like a driving license, they can't implement sophisticated technology until the company reaches certain organizational and process maturity level. I know this is highly improbably, but in the long run, it's better for both vendors and users.

Alternatively, maybe outsourcing SCM technology needs is the way to go. This way users focus on how to consume the output of the technology, rather than on running the tools.

What do you think needs to happen for SCM technologies to gain wider adoption? I'd love to hear your thoughts at ntohamy@amrresearch.com.
AMR Research

I'm sick of people telling me that technology is not the answer to supply chain problems, or that supply chain management (SCM) technology has, in general, been a disappointment to those companies that have made major investments in them. What's more disturbing to me is that I feel like I too have been brainwashed to repeat the same mantra. I've noticed that, in recent years, I've become somewhat tentative in describing what I do for a living. I preface everything I say with caveats about the limited efficacy of supply chain technologies.

When I think of SCM technology, I typically classify it into three categories: foundational, operational, and planning.

The foundational category spans any tools that help build visibility and connectivity among trading partners. These technologies create data that can be later used either in operations or planning. B2B connectivity, EDI, RFID, and voice recognition are all examples of foundational SCM technologies. I would probably put supply chain performance management in this category as well, since it builds the foundation for measuring the health of the supply chain.

I can comfortably say that SCM technology has generated billions of dollars in return on investment across hundreds of projects.

The operational category spans technologies that help manage an organization's day-to-day needs in supply chain. This includes a transportation management system that helps select the right carrier for a load, or a warehouse management system that determines the pick order for a shipment. Distributed order management is another example of an operational technology that allows companies to best fulfill their demand. Demand sensing is another.

The planning category spans all technologies that help companies come up with a better plan for managing their supply chains. This can include modeling-based tools, simulation-based tools, or any decision-support technology. This ranges from demand forecasting, to inventory optimization, to price optimization, to what-if analysis tools, to network design.

In defense of SCM technology: Can we quantify the total benefits of SCM technology? Not easily, since technology investment is typically one factor in a bigger picture of cause and effect. But over the past 20+ years, I can comfortably say that SCM technology has generated billions of dollars in return on investment across hundreds of projects. These benefits span reduction in supply chain costs, improvement in inventory turns, reduction in lost sales, better utilization of production capacity, and more.

Because of technology, we can now dream of building visibility across our supply network, collaborating with key trading partners, and optimizing our human resources and production capacity. Because of technology, we can figure out what's happening at our stores and, based on that, readjust our replenishment plans and pricing to improve margins and customer satisfaction. Without technology, the best process and the best organization can only go so far in reaching this supply chain utopia.

In the foundational category, especially on the data collection and automation side, there have been many studies that attempted to quantify the benefits of EDI connectivity. More recently, connectivity over the Internet has been viewed as a less costly, more effective way to enable electronic trade. There are strategic benefits, such as a lift in sales or improvements in market share or order fulfillment cycle. The tactical benefits include a reduction in manual errors, number of faxes and phone calls, administrative head count, and inventory, as well as improvement in cash flow.

The discussion has recently included Auto-ID technology and its impact on and benefits for the supply chain. Based on many studies, there are major benefits--that is, if they're used correctly and the business case is built. For example, in a study on Wal-Mart's RFID program, MIT found a 19% increase in promotional sales attributable to RFID tags, readers, and data analysis. For a giant like Wal-Mart, this can quickly translate into billions of dollars in profit, and for a small mom and pop, this could mean the ability to better compete with giants.

In the operational category, tools like warehouse management systems and transportation management systems have been deployed widely, although not ubiquitously. Transportation management systems have resulted in reduction of transportation spend in the double digits, based benefits of carrier contract compliance, better load consolidation, and route execution. Warehouse management systems have resulted in better capacity utilization, better inventory turns, and higher customer satisfaction because of increased visibility of pick, pack, and ship of inventory within the warehouse.

Planning technologies have been probably the most vilified category in supply chain management. There have been many voices over the years that were against planning, with declarations that optimization is dead or that forecast is no longer necessary. The cycle of change, those pundits would claim, is so short and frequent that companies need to focus on execution rather than create a plan that will undoubtedly become immediately obsolete. We tend to forget that good, wholesome planning exercises like facility location optimization; sourcing and procurement optimization, product flow optimization, and demand forecasting have generated billions of dollars of efficiencies across supply chains. This is because these tools allowed us the power of math and science to take the real world and model it, find the best plan of attack, and execute it--or get close to executing it.

Let's get to the truth: Technology becomes the scapegoat: Okay--so if even half of what I am claiming is true, why does SCM technology still get a bad rap? And why doesn't everyone fully believe in its power? I think there are many reasons.

When technology--not surprisingly--doesn't solve the organizational and process problems, it gets blamed for the organizational shortcomings.

First, I think that enterprise application vendors in general have done their applications a disservice. Under-promising and over-delivering were habits that certainly weren't encouraged or practiced in these vendor organizations. In fact, in the early 1990s, vendor promises were so egregious that it was inevitable buyers would be disappointed with the results. The most outrageous claims had to do with how "lights out" or hands-free the applications would be. Ultimately, the applications needed care and nurturing from human users that had mastered the art of supply chain. The more care the users gave the applications, the better they became and the more helpful they were in solving business problems.

Another reason is that SCM technologies tend to be lumped with other enterprise app categories like CRM and ERP that offer a less-clear ROI picture. I know I am probably biased, but the benefit of reducing inventory by 10% is a lot more straightforward than streamlining your HR operations. A corollary of this is that since the ERP vendors have started offering SCM tools, the distinction between supply chain management and other enterprise applications has become even more blurry.

Another issue leading to this general dissatisfaction is that the same tools are deployed at all companies, regardless of level of SCM sophistication. This implicitly means that complex technology will magically elevate the level of SCM sophistication.

I have been involved in countless conversations and followed the implementation of demand-forecasting tools within Fortune 1000 companies. The focus is on the algorithm that will generate the most accurate forecast and reduce the forecast error, however it's measured, to a single digit. The elephants in the room, of course, are the obvious questions: What will you do with this improved accuracy, and is your supply chain ready to handle this improvement?

What happens is that user companies obsess about the technology because it's a known quantity and process and organizational changes are much trickier to cope with. When technology--not surprisingly--doesn't solve the organizational and process problems, it gets blamed for the organizational shortcomings.

And still another reason is that bad technology stories are a lot more popular than good ones. Who can forget the Nike-i2 nightmare, or the countless SAP APO challenging deployment fables? Companies don't readily share their success stories about improving their forecast accuracy and order fulfillment or doubling their capacity utilization because, ultimately, these are added competitive advantages they don't want made public.

Where do we go from here? The good news is that despite what we want to believe, we're so far behind on using technology that we're still in the early days of adoption. This means technology returns on investment are still barely touched. The bad news is that instead of thinking of a better strategy for consuming SCM technology, we're getting the nay Sayers that want to give up on technology altogether because it hasn't delivered on the insanely inflated ROI promise.

Maybe vendor organizations need to be responsible for the usage, not just the selling, of technologies. And maybe user companies should take entry exams to qualify for using certain technologies. Just like a driving license, they can't implement sophisticated technology until the company reaches certain organizational and process maturity level. I know this is highly improbably, but in the long run, it's better for both vendors and users.

Alternatively, maybe outsourcing SCM technology needs is the way to go. This way users focus on how to consume the output of the technology, rather than on running the tools.

What do you think needs to happen for SCM technologies to gain wider adoption? I'd love to hear your thoughts at ntohamy@amrresearch.com.
AMR Research