Investing in Supply Chain Initiatives

Jan. 8, 2009
Companies must streamline their supply chains in order to respond to changing customer demand without either carrying excess inventory or encountering stock outs.

During these tough economic times, it is a challenge for companies to predict customer demand well -- as a result, they are likely to end up with either excess inventory or stock outs. However, both these results are very expensive in these times. Due to tight credit markets, financing inventory is not only challenging, but also extremely expensive. However, one can not err on the conservative side either -- under declining business opportunities, companies can not afford to lose customers who are still buying. As a result, it is critical that companies streamline their supply chains -- so they are responsive to changing customer demand and can meet their requirements without either carrying excess inventory or encountering stock outs.

Most organizations feel that their supply chains are not as responsive as they would like. Every supply chain evolves over time as the organization adds more products, suppliers, plants or distribution centers, changes its customer or product mix, implements new postponement or replenishment strategies or simply scales in volume.

If the underlying systems used to manage these supply chains are based on old technology, not well integrated or based on spreadsheet-based techniques, then it becomes a challenge for these systems to keep up and manage the underlying processes as well as they could when they were first deployed. Consequently the performance metrics of the supply chain can deteriorate over time and it begins to show less responsiveness. As a result, organizations need to continually invest in new systems and technology to ensure their systems are in synch with ongoing changes to the supply chain and keep it working well.

However, during difficult economic times, the company has limited IT investment dollars available and executives lose the appetite to make investments that don't have a short term payoff. In addition, due to a smaller investment pool of funds, they struggle to prioritize the functional areas within their supply chain that most need the investment. This article presents a broad framework to guide the investment process.

These various investments in supply chain systems fall into three categories -- investments that:

  • Reduce operating costs within the supply chain, primarily by reducing inventory
  • 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 sales channel etc.

Clearly any money spent on technology that measurably reduces operating costs, such that the payback is within 6 to 9 months is extremely attractive during tough economic times. For example, if an OEM can reduce their inventory liability from product obsolescence and as a result reduce write-offs through investing in supply chain collaboration technology and show positive ROI within 6 to 9 months, then it is a good investment to make even during the bad times.

Another example of such an investment is for a consumer goods company that upgrades its demand planning system to ensure that it can meet the retailer's requirements while reducing excess inventory and increase their loyalty. Such an investment is a good investment even during the tough times since it not only reduces costs, but also prevents losing a customer to a competitor -- a loss that gets amplified during the tough times when the revenue is tight.

In general any investment that allows the company to increase scale can be delayed, since during the tough times most companies are more short term focused and not thinking about the end of the tunnel, when the revenues can begin to grow again. An example is investing in a new demand planning system that allows a company to use better statistical forecasting methods, manage more SKUs and enable collaborative techniques to ensure consensus among all stakeholders. Clearly such an investment is designed to support growing demand. Making a business case for such an investment in tough economic times is a challenge. 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 through such investments.

Any investment in flexibility is in the proverbial grey area. Flexibility is both a luxury and a necessity during the downturn. Operational flexibility allows a company to profitably make tactical moves to seize a customer from a competitor, reduce short term costs in a limited manner or even test new strategies under-cover in a limited geography. In such scenarios an investment in systems and technology that increase flexibility is attractive. On the other hand, many companies go into survival mode during tough times and want to burn as little cash as possible, waiting for the thaw Such companies do not have an appetite to invest in technologies that increase flexibility during these times.

Adding to the confusion is the fact that a technology investment can fall into different buckets for different companies, based on their competitive landscape and their operating environment. For example, one company may find that the performance of their demand planning system begins to decrease 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 significantly improve forecast accuracy and significantly reduce stock outs for their key customers and simultaneously lower excess inventory for other items. For them, demand planning investment may be critical even during the tough times, as they can reduce their operating costs and increase customer retention.

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

Ashok Santhanam is the CEO of Bristlecone, a supply chain consulting firm. Bristlecone brings expertise across the entire spectrum of supply chain including demand planning, supply planning, network collaboration, sourcing and analytics. In addition Bristlecone provides supply chain-focused KPO services.

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