The period between 2001 and 2003 was a rough time for ViaSat Inc. For the first time since its founding, the Carlsbad, Calif.- based maker of satellite communications equipment reported a loss. Business fell off as the electronics industry went into a steep downturn. And management decided to shift more manufacturing to outside contractors.

A perfect time to start spending money.

Ray Barger, director of procurement with ViaSat, admits the company's timing was problematic. But he insists that a boost in spending on information systems and business-process change was necessary. For one thing, ViaSat's various business units, some recently acquired, were running different systems for managing financials, orders and inventory. Management wanted to standardize on a single enterprise resource planning platform, that of Oracle Corp. At the same time, it needed to get a grip on product lifecycle management (PLM). And a greater reliance on outsourcing called for better systems to link ViaSat with its suppliers.

"We did a lot when business conditions were adverse," says Barger. "But making those tough decisions put us in a much better position to meet customer requirements and growth."

The economic downturn and high-tech crash have forced many companies into a defensive posture, with an obsessive focus on cutting costs. The problem is especially acute for publicly traded companies, who face relentless pressure from shareholders and Wall Street for uninterrupted growth and immediate profits. "The public company is a slave to the market," says Shoshanah Cohen, a director of Pittiglio Rabin Todd & McGrath (PRTM), a management consultancy. "It's very hard to make long-term investment decisions that require short-term hits."

But ViaSat, whose shares trade on the NASDAQ, knew that money spent now would translate into big savings later. By converging on a single instance of ERP, it could standardize key business processes. ("That cost us in the short run," recalls Barger. "I probably got a few gray hairs in the process.") The new supply-chain control system would allow the company to forge better links with contract manufacturers and capture more accurate data. The hosted software package, from Irvine, Calif.- based RiverOne Inc., helped ViaSat to avoid a big increase in direct spend on purchase-order and inventory management, Barger says.

ViaSat wouldn't have opened its checkbook without a strong business case. In the 1990s, all it took was a fancy new acronym and PowerPoint presentation to convince companies to load up on software "solutions" for every possible link of the supply chain. Then, with the end of the dotcom craze, IT spending came to a virtual halt. Today, with the U.S. economy slowly recovering, executives are still reluctant to allocate money for new projects without good reason.

	"Companies need to balance cost with meeting service requirements." - Gary Godfrey of Accenture

The mere promise of an eventual payback isn't enough. "Companies want the ROI [return on investment]," says Peter West, vice president of marketing with RiverOne, "but you can't sell based on ROI today. People have gone to the well too many times on too many projects."

RiverOne finds prospective customers whose executives have identified projects that will yield big benefits - not just cost savings, but top - line growth. "We look for some compelling business reason," says West, "so the chief executive will say, 'This is something we have to spend money on.'" Penny-pinching might help companies to survive for a while, but it won't boost revenues or capture market share.

In retrospect, ViaSat had little choice but to act. It was anticipating a flood of new business, both from the government and private sector, for high-end satellite and wireless communications systems. The only alternative was to ramp up in-house manufacturing, a costly and inflexible strategy. RiverOne's software, known as Interactive, let ViaSat maintain tight links with suppliers and contract manufacturers, and create accurate forecasts of demand.

Quality Forces Change
Growth was also the impetus behind investment in new supply- chain systems by Kia Motors America. The U.S. branch of Korea's Kia Motors Corp. has recently undergone "a significant transformation," resulting in a higher-quality car, says Steve Green, director of parts and logistics. The two-and-a-half-year project required Kia simultaneously to improve its aftermarket parts network. Customers now expect the same level of after-sales service as they get from market leaders such as Toyota, Green says.

Kia purchased the Service Parts Management (SPM) application from Dallas-based i2 Technologies Inc. Justifying the investment was a need to improve the company's inventory distribution and raise order fill rates. SPM helped Kia place the right parts in the right locations through better demand forecasting, Green says. Ultimate goals, under a three-phase implementation plan due to wrap up in 2005, include reductions of 15 percent in premium air freight, 15 percent in ground transportation costs, between 10 percent and 15 percent in total inventory levels, and 10 percent to 15 percent in obsolete or scrapped parts.

For software vendors, deals still aren't easy to close. Kelly Thomas, senior vice president of industry marketing with i2, says all purchases are highly scrutinized. Some companies require offsetting cuts in their operating budgets before they will authorize new expenditures. Vendors such as i2 are called on to help IT departments find savings that will free up the necessary funds. Making sales even tougher, says Thomas, is the fact that 80 percent of most IT budgets are devoted to running and maintaining existing systems.

Even a one-to-one dollar tradeoff isn't sufficient to justify new software purchases, says Larry Ferrere, chief marketing officer of Atlanta-based Manhattan Associates, Inc. "One-to-one would be disappointing to us," he says. "We're looking for 10 to 20 times payback."

Manhattan, a vendor of supply-chain execution and optimization software, guides customers through a lengthy process which includes benchmarking their spend on systems against the leaders of a particular industry. Internal information must come from all of the client's business units and departments, Ferrere says.

Every dollar saved in baseline operations is a dollar available for projects that generate new revenues, says Jack Heine, vice president in the research group at Gartner Inc. Most companies can achieve 10 percent to 20 percent savings just by improving the way in which they acquire goods and services, while good asset-management planning can cut inventories by 30 percent in the first year and 5 percent a year thereafter, he says.

Extra savings can be found by scrapping or implementing software that has been sitting on the shelf. Most organizations have about 20 percent more software licenses than they are currently utilizing, says Heine.

With the help of Accenture Ltd., the State of Pennsylvania recently embraced a strategic sourcing initiative which will save an estimated $200m in procurement costs over two years. Accenture helped it to figure out exactly what was being spent and where.

Such results can be powerful incentives to spending on targeted projects. "I don't think companies are petrified by the cost-cutting environment at all," says Gary Godfrey, an associate partner in Accenture's supply-chain management practice. "They need to balance cost with meeting service requirements."

Making the Case
New software and process changes are crucial for companies moving from build-to-stock to build-to-order environments. Yet the shift can be gradual, and IT managers often need a push before they'll undertake it in a serious way. i2 motivates companies through a series of "proof positives," whereby it implements the software on a limited scale - addressing a small business problem or a single location - to demonstrate its value.

Hans Thalbauer, vice president for applications solution management with SAP AG in Walldorf, Germany, says companies should look at the "total cost of ownership" for software systems, not just the purchase price. How a given application integrates with others is equally important, he says. Users need real-time interfaces that allow for the exchange of data both internally and externally. Systems that are exception-based, triggering alerts only when something goes wrong, can help to bring down software costs.

As with ViaSat and Kia, organizations faced with challenges like managing growth or fending off aggressive competition might be pre-sold. Such was the case when the internet emerged as a new sales channel for retailers, notes Ferrere. Rigid ERP systems couldn't support multiple channels, thus leading to the birth of distributed order management.

"Where there's a big burning bridge," says Thomas, "you get over the cost issue pretty quickly."

Companies not only must achieve big results from new supply-chain investments. They must do it fast. Godfrey says executives used to be happy with a return on investment of five to seven years. Now it's two to three years, and many Accenture clients are looking for less than that. Business models are changing too fast, and margins are too slender, for companies to enjoy the luxury of long-term payback.

Managers want to know how long it will take to get a system up and running. Gone are the days of ERP installation stretching over several years, and gobbling up millions of dollars in consultants' fees. Thalbauer says the introduction of new business processes in the supply chain might take a month to put into place. A warehouse management system could occupy three to six months of implementation time, including the period needed to train workers and debug the system.

Network optimization is a good way to start making the case for new systems, Godfrey says. It provides companies with a model of both cost and product flows. And it lets them test numerous variables to assess end results. Users can determine what will happen if, say, a new warehouse-management system performs differently than planned.

The exercise produces a "business-case model" which supply-chain managers can take to top executives. That's followed by a formal risk analysis, balancing the cost of a new system with its expected impact on service levels and revenues. Heine cites other factors that can help to prioritize spending, including length of implementation, degree of management expertise required, and potential yield.

To cost-conscious executives, any kind of investment in supply-chain transformation is a gamble. That's why risk analysis is such a key element of the decision-making process. AMR Research Inc. has gone so far as to create a formal Risk Assessment Profile (RAP), allowing companies to understand the ramifications of technology and business-process change. For example, RAP can help a client decide what to do when a software vendor offers its product for free, in exchange for exclusive systems-integration rights.

The RAP model addresses two major areas: maturity of data and maturity of business processes, says David Caruso, AMR's senior vice president of research. From the start, companies must know whether their data are accurate and complete. On the process side, they need to compare their own organizations with those of "best-practice" companies, to determine whether a given area is ripe for automation. Only then can they start choosing vendors and software to meet their needs.

Global visibility and demand management are the two areas in which companies can realize the most value today, Caruso says. The first, "an over-arching initiative," can change the way in which organizations invest in inventory and business processes. The second embraces such technologies as radio frequency identification (RFID) and point-of-sale (POS) systems. Companies with a solid understanding of demand show a 5 percent improvement in demand management and 10 percent improvement in perfect orders, Caruso says.

Self-Service Cuts Costs
Also popular are systems that promote customer self-service. Banking, healthcare and stock brokerage are areas where this approach has proved valuable, says Heine. But goods-oriented companies are exploring the self-service avenue as well. They hope to cut down on after-sales expenses while boosting customer satisfaction.

At the same time, companies shouldn't be reluctant to invest in traditional customer service programs. The payoff in customer loyalty and repeat business is too attractive to ignore. Projects to streamline internal processes can help as well. "Generally, improved efficiencies in process nearly always benefit the customer, in the form of reduced delays and errors," says Heine.

Buying decisions often are motivated by outside factors, such as the new corporate reporting rules of the Sarbanes-Oxley Act. Also popular are tools to improve inventory visibility and collaboration with both customers and suppliers. But many cash- strapped companies are turning to cheaper point solutions instead of all-embracing software suites. This more conservative approach has boosted sales of execution-type systems, such as warehouse and transportation management, at the expense of long-term planning packages.

The larger problem, says Cohen, is that management's stance on supply-chain investment tends to swing between extremes. "Five years ago, you could turn on the tap and money came out," she says. "Companies were going crazy spending. Now the tap has dried up and gone to the other extreme. There's a lot of belt-tightening."

Major projects must demonstrate their worth and be approved all the way up to the board level. And the number of items on the agenda is likely to be smaller than it was five or six years ago. "The challenge is making sure that you are one of those top two or three projects," says Ferrere. "They're never going to get to number five."

Still, says Cohen, companies that view their supply chains as a strategic weapon haven't stopped spending entirely. "Continuing investment during a downturn is absolutely critical to long-term success."

One recent study by PRTM, funded by SAP, gives supply-chain managers some powerful arguments in making the case for investment with top executives. It shows that companies can reduce inventory days of supply by 22 percent through business- process change, and another 16 percent through software systems, according to Thalbauer. Inventory carrying costs can be cut by 28 percent through process change, and 35 percent with the help of software.

Companies using SAP's own demand-planning tool achieved on-time delivery 96.5 percent of the time, versus 86.1 percent for others, Thalbauer claims. Dow Corning, an SAP customer, achieved a 25 percent improvement in forecasting accuracy and reduced inventories by nearly 20 percent, he says.

Ironically, the biggest obstacle to investment in some companies might be coming from middle management. According to Ferrere, top executives tend to take a strategic view of the business and are more inclined to make decisions based on long-term value. It's those at the operational level who are concerned with day-to-day cost control, even if they were originally motivated by directives for cost-cutting from the top. "It's a juggling act," says Ferrere.

Burned by promises of software ROI that never materialized, buyers today are smarter about negotiating for new systems. They are taking more time to investigate prospective vendors, checking references, asking for scripted demonstrations and calling on outside analysts when necessary. But too much haggling can kill a deal or dilute the competitive advantage of investing in new systems or processes. Says Ferrere: "The longer you wait, the more you're leaving potential savings on the table."

Taking a Strategic View of the Supply Chain

Companies that realize the importance of an efficient supply chain are far more likely to make investments in its long-term health. Shoshanah Cohen and Joseph Roussel, partners at the management consultancy Pittiglio Rabin Todd & McGrath (PRTM), have written a new book which highlights the supply chain's strategic importance. In "Strategic Supply Chain Management: The 5 Disciplines for Top Performance," they outline five ways in which executives can transform their supply chains: view the supply chain as a strategic asset, develop an end-to-end process architecture, design the organization for performance, build the right collaborative model, and use metrics to drive business success. The book includes "best-in-class" performance data from leading companies, including Eli Lilly, Avon and General Motors. "If you only think about changing your supply chain when there's a problem," the authors say, "chances are that you don't see it as a valuable asset that can give your company a competitive advantage. And if this is the case, you risk being blindsided by companies that use their supply chain as a strategic weapon."