Supply Chain Synchronization

How CIOs should think about business value

CIOs are under increasing scrutiny to demonstrate the value that IT can deliver to the enterprise. Those CIOs who are able to successfully use IT to transform siloed business processes into new value-creating business processes that transcend hardened silos will be rewarded with influence on the enterprise far beyond the role traditionally reserved for IT.

There are many lenses through which value can be interpreted. In "How CIOs should think about business value" two consultants at McKinsey have provided a nice framework for thinking about this issue.

"If there’s any issue that routinely frustrates executives in many organizations, it’s how to get a true fix on the value that information technology adds to the businesses it serves. IT is undoubtedly central to creating value and therefore continues to account for a rising share of total investment. But defining, measuring, and maximizing that value remain elusive. To throw light on this crucial issue, McKinsey collaborated with CIGREF* to study the best practices of major French and international companies across various sectors."

Later in the article the authors provide important insight about change management and how HR is a necessary ally to ensure success. This is an area that is often overlooked when deploying sophisticated enterprise solutions that necessitate changed user behavior:

"If the corporate goal [of IT] is operational excellence, HR is more likely to be the CIO’s preferred ally. This is due to the critical role of change management. Take the example of deploying a new enterprise-resource-planning (ERP) system: the critical challenge is ensuring that the target processes are codified correctly in the system, and that when it is implemented, the end users are sufficiently trained to effectively leverage the potential of the new tool. This requires a joint effort from HR and IT to synchronize and coordinate their tasks from the initial design to the rollout and subsequent life of the system."

If this is not managed carefully, an IT project may be considered a failure with the blame being placed on the IT department and the software when the real problem may instead rest with the inability of the enterprise to effectively implement a change management strategy.

The following six points (and their accompanying Exhibits) provide additional insights about how CIOs can effectively engage with the enterprise to facilitate deeply meaningful success:

IT generates value at two complementary levels: the core asset value (eg, hardware and software) and the vitally important value-in-use (Exhibit 2).

In the context of optimizing investments, the value of IT derives from dynamic control over the impact of IT investments on each company’s operating ratios (Exhibit 2).

For CIOs focused on operational improvements, IT’s value is measured mainly by process performance indicators: productivity, on-time delivery, and quality (Exhibit 3).

Developing value-in-use requires a CIO to examine new levers found at points where the IT department and the business units intersect (Exhibit 4).

The CIO builds alliances with peers in areas relevant to supporting the company’s priorities (Exhibit 5).

The best companies at creating value-in-use embed their IT governance within the broader governance practices (Exhibit 6).

Be sure to also read the section "Next steps: Identifying the challenges" for a helpful framework explaining the dynamics of value creation through IT.

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*CIGREF, the “Club Informatique des Grandes Entreprises Françaises,” founded in 1970, strives to “promote the use of information systems as a driver of value creation and a source of innovation.” It includes more than a hundred public and private organizations from every economic sector in France.

About the McKinsey authors: Michael Bloch and Andres Hoyos-Gomex are principals in McKinsey’s Paris office.

A conversation with Léo Apotheker, co-CEO of SAP

Léo Apotheker, co-CEO and a member of the Executive Board of SAP AG and Andrew Mcafee of the Technology and Operations Management Unit at Harvard Business School, share their ideas about IT and enterprise software in this 25-minute interview with Charlie Rose.

Both explore ideas about cloud computing, open source, and enterprise application integration (EAI) -- three big trends that have now been evolving for a while. The focus on application integration has become central to most forward-looking enterprise software companies. However, the boundaries for cloud computing and open source in the enterprise space are still being explored.

Léo and Andrew agree that business is evolving quickly and that more collaboration will occur in networks of trading partners powered by IT. Léo also noted that leading companies are taking the economic downturn as an opportunity to invest in critical enterprise applications -- such as supply chain -- to further reduce costs and become even more efficient so that they can be positioned to grab market share.

A shift in the enterprise software upgrade cycle

The current turmoil in financial markets and the growing challenges in the real economy are causing many companies to look closely at how they manage their enterprise software upgrade cycle.

In a Gartner report, Joanne Correia, managing vice president at Gartner, says: “Most companies updated their software systems during the period 1997 through 2001, so we are in the middle of an upgrade cycle that should extend past the end of this decade. However, the replacement of systems does not automatically equate to new software market growth. Software as a Service (SaaS)/cloud computing, service oriented architecture (SOA)/Web 2.0, and open source software are causing huge changes to the software market. Many of these factors are impacting market growth as enterprises replace assets with per-use services.”

In the same report Jim Tully, vice president at Gartner points out that:
“Organisations are switching from company-owned hardware and software assets to per-use service-based models. This will impact the industry in various ways. The projected shift to cloud computing, for example, will result in dramatic growth in IT products in some areas and in significant reductions in other areas. In general, assets will be utilized with greater efficiency, and we are assuming that the overall effect on market growth will be neutral. We also recognize that there is considerable upside potential for higher growth.”

My partners and I remain confident that during economic downturns, companies with strong leadership will make strategic IT investments to rapidly drive costs out of their supply chains and to accelerate adoption of software platforms that further reduce the total cost of ownership. SaaS, SOA, and open source are all critical components of this paradigm shift, and are central to the Evavi Supply Chain Synchronization suite.

IT and Competition

This short interview with MIT Professor Erik Brynjolfsson touches on one of the key issues that supply chain executives are grappling with every day: How to create and replicate new business processes that cross traditional functional boundaries and extend across the enterprise. Brynjolfsson also advises companies that they must leapfrog the technology capabilities of their competitors. It is not enough to merely try to match them by utilizing the software applications of yesterday.

Getting supply chain software right

With global markets charting uncertain territory and the economy shrouded in uncertainty, the conditions are ripe for companies to closely examine their supply chains to find areas for improvement. “Getting supply chain software right,” from The McKinsey Quarterly, offers some useful insight for those wanting a solid introduction to key supply chain concepts and to how software can help in this domain. Here are some excerpts:

“An urgent need to improve supply chain management can arise when product margins shrink, demand drops, customers ask vendors to manage inventory for them, or new products are introduced. … Because the costs of managing the supply chain — inventory, the warehouse and distribution center, and freight — can represent 10 to 15 percent of sales in most industries, the savings that effective supply chains bring have a genuine impact.

“…A supply chain, simply stated, comprises the flow of a company’s products, information about them, and the money that changes hands between the company and its suppliers and customers. When a company manages the processes that support these flows well, it can fill orders from customers quickly yet keep its inventory to a bare minimum. When it doesn’t, the supply chain breaks down. Customers place orders but hear that the products are out of stock, even when they might be available somewhere in the company. Raw materials fail to show up on loading docks, and shipments to customers arrive late. Factories run below capacity because customers cancel their orders. The result can be a quick drop in sales, lost margins, and inventory write-offs.

“…Managers often focus on automating transactions, something that might be important but typically fails to extract the greatest value from supply-chain-management software. The greatest value tends to come from harnessing its ability to improve decisions — how much of what product should be shipped to which warehouse, for example — by making forecasts more precise. Since decision support affects inventory turns and customer-service levels (avoiding stock-outs, for example), improving it has more impact than, say, migrating an order process from telephones or fax machines to computer systems, a change that at best reduces head counts.

“…The promise of real benefits rests on the potential for seamlessly integrating data flows and work processes across entire enterprises and even industries.  The primary benefits will come from their ability to speed up the flow of information and to make it available more widely — which alone can produce gains large enough to justify big investments.

“…When supply-chain-management software works, it can help cut inventory levels, improve delivery schedules, and ensure that supply meets demand—all of which should make customers more satisfied.

“…The performance of supply chain software depends not just on its features and quality but also on the way people use it. This is particularly true of forecasting and inventory planning solutions. Four guiding principles to consider when implementing supply chain software:

        1) fix only important broken processes
        2) promise only what you can deliver
        3) improve training
        4) make people accountable                     

“…The greatest improvements in supply chain management occurred when companies both improved their processes and correctly installed and used the software.”

Read the complete article here

Managing IT in a downturn: Beyond cost cutting

The McKinsey Quarterly just published an article about the importance of carefully evaluating how IT can help a company improve its performance during an economic slowdown and help it be better prepared for a rebound.

In the article, Managing IT in a downturn: Beyond cost cutting, the authors specifically highlight the potential for significant return on investment by investing to improve supply chains and logistics during economic slowdowns. They also point out: “As IT becomes tightly integrated with processes, breaks in workflows often get built into systems and diminish productivity.” Simply by zeroing in on these broken workflows that have become embedded in legacy systems and correcting them with improved processes, a company can reap significant returns. IT investments that improve supply chains and improve business processes should be high on the priority list even during economic slowdowns.

The following are a few excerpts from the article:

“- As the economic slowdown intensifies, companies are looking for ways to cut costs, and IT budgets are a prime target.
- Rather than implement across-the-board cuts, managers should take a more integrated view of how IT is used throughout the business.
- Targeted IT investments can make operations more efficient and increase revenues, delivering returns larger than simple cost-cutting measures typically do.

“Economies around the world are slowing down, and companies are looking for ways to trim spending and improve the bottom line. Although information technology often represents a small fraction of the corporate cost base, senior executives inevitably turn their attention to IT budgets for substantial contributions. Yet in some instances, IT investments deliver more value to a company’s top and bottom lines—by creating new efficiencies and increasing revenues—than any savings gained from traditional IT cost cutting.

“…When business and IT executives jointly take an end-to-end look at business processes, the resulting investments can have up to ten times the impact of traditional IT cost reduction efforts. The trick is to scan for opportunities—such as improving the customer experience, reducing revenue leakage, and improving operating leverage.”

The article authors: James Kaplan, a principal in McKinsey’s New York office, leads the technology infrastructure practice for McKinsey's global IT group. Johnson Sikes is a consultant in the New York office. Roger Roberts, a principal in the Silicon Valley office, leads the firm’s IT strategy practice.

The complete article can be read here.

Evavi Fabric delivers the flexibility required for dynamic supply chains

During the past several weeks I've had the opportunity to take a deep dive with one of our clients into Evavi Fabric™. This client has been evaluating the difference between rigid packaged applications and custom software development to meet some supply chain needs.

Fabric is the planning and execution platform that the technology team at Evavi developed to power every Evavi solution. It includes common data models to enable the highest levels of synchronization and optimization across an extended supply chain.

Supply chain-centric businesses often need to support customer-specific processes that can not be supported by cookie-cutter ‘standard’ software applications. The attempts to customize one-size-fits-all solutions often result in ballooning IT spend, long implementation cycles, and costly maintenance.

Evavi Fabric™ is at the leading edge of a new approach to solve these problems, and the ideal platform for building synchronized supply chain applications. Fabric™ is a multi-company, multi-tenant SOA-based platform that leverages extensible business models and is packaged with proven reusable patterns and software components essential for today’s supply chain applications. Core components include: configurable business process engine, dynamic rules engine, personalization-ready portal, framework for user-level and data-level security, meta-tags, bookmarks, pro-active alerts, data synchronization components, and more.

Fabric™ enables Evavi to help clients realize measurable value and implement solutions the right way – collaboratively define requirements that precisely meet the clients’ needs; translate and render these requirements using Evavi Fabric™ solution patterns; and use a spiral tailoring approach to
configure the required functionality. This ensures that the production solution precisely meets the needs of the client, while the underlying technology helps protect their ongoing investment and reduces the total cost of ownership.

Driving down total cost of ownership while increasing flexibility

Many times traditional supply chain solutions are obsolete on the day they go-live because the deployed solutions are built on rigid technology platforms resulting in functionality that is frozen in time. The reality is that in the supply chain space collaborative business processes must regularly and rapidly adapt to meet changing demands of trading partners.

For true cost competitiveness, the supply chain space requires software that is inherently flexible and configurable and can accommodate the dynamically changing needs of markets, trading partners and the extended enterprise – as opposed to traditional ERP applications that are rigidly packaged to support one-size-fit-all practices, primarily function within the four walls of an enterprise, and do not need to be regularly modified to accommodate needs dictated by others.

Many companies have found that packaged solutions are simply too rigid to either accommodate what is unique about their supply chain or too inflexible to rapidly model changes required by trading partners. As such, they have often built their own systems – an approach that is often costly, time-consuming, and risky. For several years now software companies specializing in supply chain solutions have been trying to find the right balance between out-of-the-box functionality and a custom development.

To meet the unique needs of the supply chain space, my partners at Evavi have developed solution patterns within Evavi Fabric™. These solution patterns let companies rapidly deploy the underlying essential functionality required by most enterprises while allowing for the precise tailoring of the final solution in a cost-effective manner all within the core Evavi Fabric. This approach reduces costs and protects the investments of our clients.

The Future of Enterprise Software

Wharton management professor Saikat Chaudhuri recently interviewed president and CEO of SAP Americas Bill McDermott for his views on where enterprise software is heading.

One clear theme emerged: that while legacy enterprise solutions were often helpful executing transactions, amassing lots of information, and then providing basic access to it, the future belongs to solutions that enable users to use the information effectively by synchronizing the execution of transactions with decision support (at Evavi we call this intelligent transactions, and is why our common platform embeds exception and alert management and performance measurement natively into every solution). The enablement of this capability helps companies to close the gap between planning and execution.

McDermott, obviously, believes that SAP will be the winner in this space. He states that "the number-one competitive advantage for SAP over a company like Oracle is integration. Companies like Oracle have to interface things and deal with very complex implementations because none of that has been engineered by design, and there may be different pieces of different acquisitions all in the same solution, and customers really have to navigate through that. It's very costly to do that for the customer. It's very risky to do that for the customer... Oracle, as an example, has acquired all their growth. Unfortunately for the customer, none of that has been integrated on a common platform."

While the importance of a common platform should not be underestimated, even more important is that enterprise solutions must also have common data models in order to achieve the fullest level of business process synchronization. This is one of the areas that all of the legacy software vendors will have difficulty matching the capabilities of the new enterprise software companies that are innovating in this area. The cost to deploy, run, and maintain these new solutions is much, much less than the legacy solutions.

The 'Right' Supply Chain

When people ask us why we started Evavi, one of the things my partners and I point to is the increasing complexity of supply chains and the inability of legacy software solutions to keep up with the pace of change. One of the main stumbling blocks to effective supply chain management has been the historic disconnect between planning and execution. When these functions are disconnected, as they are in legacy solutions, the supply chain is exposed to unnecessary risks caused by lack of visibility, lack of synchronization, and lack of optimization.

In regard to the difficulty of integrating processes and aligning incentives, the article Avoiding the Cost of Inefficiency: Coordination and Collaboration in Supply Chain Management quotes Marin Gjaja of BCG: "My suspicion is that the complexity of product-based companies where supply chain is relevant is expanding at a faster rate than information technology can keep up with. By that, I mean that the number of products and different options and customers is expanding -- say it's 100 products times 100 customers times 100 different ways of getting there. You can see that you get this multiplied effect of complexity. The tools you have to deal with it can only evolve so quickly. It will always be a very difficult challenge -- it's one of those perennial issues in management, one of those evergreen topics that you just have to stay one step ahead of."

My partners, who include the founding technologists at i2, started Evavi for this very reason. They were frustrated by the requirement to pull legacy code forward while the pace at which Internet-native technologies were maturing was exploding. They realized that these new technologies would fundamentally change the way supply chain processes would be modeled, and that the best way to influence the future was to help create it from a fresh code base capable of operating in real-time across the extended enterprise.

Our Supply Chain Synchronization suite is helping to deliver on what BCG’s Matthesen believes is the optimum answer solution: "to design a supply chain that is based on a sound strategy, ensure all parts of your supply chain -- both internally and externally -- have access to good and consistent data, and empower people to make decisions quickly. Build a supply chain that is comfortable with uncertainty and quick to react by taking down the barriers that prevent success."