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.

Smart IT investments to manage inventory and manage logistics to generate revenue gains

Effectively managing inventory and managing logistics through smart IT investments are two of the areas that McKinsey identifies as generating "short- and medium-term revenue and efficiency gains that greatly exceed the savings from traditional cost-cutting efforts. The key is to have business and IT executives jointly take an end-to-end look at business processes and scan for opportunities such as improving the customer experience, reducing revenue leakage, and improving operating leverage.

The exhibit below illustrates the two fundamental ways for technology investments to have a substantial impact: developing new insights (for example, by comparing best practices across regions) or optimizing processes and systems, often with targeted work-arounds that generate value disproportionately."

 

McKinsey's February 2009 Chart Focus Newsletter.

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.

Data centers: How to cut carbon emissions and costs

Green has become the new mantra for many businesses. For those in the IT business it is an area that can burnish a company's reputation and reduce operating costs so that more is available for strategic IT projects.

As William Forrest, James M. Kaplan, and Noah Kindler point out in their recent McKinsey Quarterly article: "The demand for data center capacity worldwide has led to a sharp rise in IT costs and a steady increase in carbon emissions. A new efficiency metric provides companies with a clear yardstick for measuring progress.

The modern corporation runs on data. Data centers house the thousands of servers that power applications, provide information, and automate a range of processes. There has been no letup in the demand for data center capacity, and the power consumed as thousands of servers churn away is responsible for rising operating costs and steady growth in worldwide greenhouse gases.

Our work suggests that companies can double the energy efficiency of their data centers through more disciplined management, reducing both costs and greenhouse gas emissions. In particular, companies need to manage technology assets more aggressively so existing servers can work at much higher utilization levels; they also need to improve forecasting of how business demand drives application, server, and data center–facility capacity so they can curb unnecessary capital and operating spending.

Data center efficiency is a strategic issue. Building and operating these centers consumes ever-larger portions of corporate IT budgets, leaving less available for high-priority technology projects. ..."

Read the entire article here.

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.

How to Tap IT's Hidden Potential

I was doing some research for a client and was referring back to an article from earlier this year. The article, How to Tap IT's Hidden Potential, does a nice job of summarizing some of the key issues that CXOs need to grasp with regard to IT and how it must be a central part of their strategy. It is critical that IT become an integral part of the executive dialogue so that it can be fully leveraged to remove artificial boundaries between business functions, and deliver value that moves the enterprise ahead of its competition.

Professor Amit Basu of the Cox School of Business at SMU lists five primary reasons for the existence of a “glass wall” between IT and the rest of an enterprise:

1) Mind-set differences between management staff and IT staff
2) Language differences
3) Social influences
4) Flaws in IT governance (defined as the specification and control of IT decision rights)
5) The difficulty of managing rapidly changing technology.

The following excerpt summarizes some of the key ideas for tearing down the glass wall:

“Costly Neglect: Most top executives fail to recognize the value of information technology. They think of IT as a basic utility, or as an expensive headache that they'd rather not deal with. They don't see its potential to transform a business and boost profits.

“The Separation: The reason for this is the wall that separates IT from the rest of the business at most companies. The wall is the result of differences in mind-set and language between management staff and IT staff, social influences, flaws in IT governance, and the difficulty of managing rapidly changing technology.

“Breaking Through: There are several steps that can be taken to shatter the wall so that IT's full value to a company can be realized. These include a commitment from top executives to effective IT management, the hiring of an IT leader who sees the big picture, better communication within the company, changes in management training, and a new approach to IT planning and spending.”

Here are a few more important excerpts from the article:

“[T]op executives at most companies fail to recognize the value of IT. It can help a company transform data from its operations, its business partners and its markets into useful competitive information. It can be the source of profitable innovations in the way a company interacts with its customers and suppliers. But there is still a tendency to think of IT as a basic utility, like plumbing or telephone service.

“In many industries, IT consumes a significant amount of capital expenditures and gross revenue. Though recent research has shown that managing IT well can significantly increase a firm's profits and deliver substantially higher returns on IT investments, its potential is overlooked, and even its workaday application is often mismanaged.

“The result isn't just missed opportunities -- it's also wasted money. Analysts estimate that hundreds of billions of dollars are blown every year on IT projects that fail to achieve the desired goals. “The reason for all this is the metaphorical glass wall that separates the IT group from the rest of the business at most companies. The wall prevents IT from being part of the discussion at the highest levels of company planning, robbing a firm of its full potential.

“Success in the digital economy of the 21st century demands a strategic role for IT. And for that to happen, the glass wall between IT and the rest of a company has to be shattered. There are several steps that can be taken to achieve this. But to implement them most effectively, it is important to first understand the origins of the wall and what sustains it. …

“The reality today, though, is that CEOs can't ignore IT and expect to succeed. Technology has accelerated the pace of change in business, making it crucial for companies to detect, assess and respond to every opportunity and every threat as quickly and as effectively as possible. And that kind of agility can only be achieved by fully embracing the operational and strategic importance of IT.

“CEOs who use obsolete metrics such as head count or benchmarking the competition to decide on the role and evaluate the performance of IT in their companies run the risk of being blindsided by competitors who take full advantage of IT innovations. Furthermore, IT is key to a company's ability to satisfy regulations such as the Sarbanes-Oxley Act on corporate governance, the Health Insurance Portability and Accountability Act and legislation in various states on the privacy of customer information.

“We believe that the following seven steps will help shatter the glass wall between IT and the rest of a company so that the information-technology function can be fully integrated into the company's business culture. This will clear the way for the realization of IT's greatest value.

1) Begin with IT literacy -- and commitment -- at the top
2) Hire an IT leader who sees the big picture
3) Create demand for IT solutions
4) Make sure nothing gets lost in translation
5) Rationalize IT spending
6) Create an IT portfolio by evaluating risks and returns”

You can read the entire 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.

Interview with Gary Reiner, CIO, General Electric

I just finished reading an interview with Gary Reiner, General Electric’s CIO, in the current edition of Fortune magazine. Three points stood out to me:

1) In addition to his responsibility overseeing information technology, as CIO he is also responsible for Lean Six Sigma and the company’s $55 billion of annual sourcing. As Reiner states, “Good sourcing is information.” When we work with clients on supply chain synchronization, we often find loose coupling between IT and sourcing. Evidently this is something that GE has addressed very directly to good affect.

2) By working with the GE Money business, Reiner was able to reduce from 63 days to 1 day the time it took implement private-label finance programs for retailers. The marketing campaign for this business became, “Enroll today. Transact tomorrow.” Sales quickly doubled. This resonates with me because one of our clients has been able to reduce by a similar magnitude the time it takes to onboard new clients by utilizing our Synchronized Demand Fulfillment solution. “Enroll today. Transact tomorrow” is a powerful message if you can deliver it.

3) Reiner emphasized “more of our businesses are actually selling software as a product.” This is a big differentiator, but the transition to this model can be very difficult for companies. Not only does it require robust and flexible IT solutions, it also requires transformation of business processes to support a service model. To succeed, it also requires the training of the sales team to sell services instead of widgets.

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.