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 Huge Competitive Lever'

A successful supply chain is a huge competitive lever, however, as Steve Matthesen, vice president and global leader for supply chain at BCG points out, "The whole supply chain management job is not an easy one."

As businesses globalize, and the number of trading partners expands, the job has become exponentially more complicated and requires higher levels of executive sponsorship to be truly effective. Many of the most intractable problems in a supply chain originate with broken business processes, and unless senior executives are involved with fixing these processes, the supply chain struggles regardless of the technology.

As pointed out in Avoiding the Cost of Inefficiency: Coordination and Collaboration in Supply Chain Management, an article by supply chain experts from Wharton and The Boston Consulting Group, “In many cases, the underlying cause of the inefficiency lies in decisions made outside the supply chain organization, but the consequences tend to show up there.”

In the same article Mattheson points out that "if you have the right process, procedures, knowledge and strategy there, you can make it work. You might never get to nirvana, but you can be smoothly functioning. And the part to me that is very interesting is that if you get this to work right, it is a huge competitive lever. Your competitors will see that you have an advantage, but it's hard for them to replicate it. They will pick up on a few things, but they simply won't get there."

It is important for executives to understand that solving supply chain problems is not easy. It will require time, sustained effort, and investment. Most importantly it will require collaboration across the enterprise. But, when you get it moving in the right direction, you will have a competitive advantage that others will have difficulty replicating.

Supply Chain Enterprise Systems: The Silver Bullet?

For those stepping into the world of supply chain software for the first time (or even the umpteenth time), it can be a bewildering experience. The supply chain software industry is hugely fragmented with solutions ranging from legacy transactional-based solutions to others that are focused on decision-support. Some more recent solutions, such as Supply Chain Synchronization, are emerging that unify transactions with planning, and these types of solutions appear to represent a significant breakthrough from the limited capabilities of older, siloed systems. It is interesting to note that a study by the Georgia Institute of Technology analyzed the impact on corporate performance of ERP, CRM, and SCM enterprise systems. It found that only the SCM (Supply Chain Management) solutions “positively affect shareholder value and operating performance.” So, the effort is worth it.

Supply Chain Enterprise Systems: The Silver Bullet? is an article by supply chain experts from Wharton and The Boston Consulting Group. It is a part of their special Creating the Optimal Supply Chain report.

The article opens with the following explanation: “Virtually nonexistent a decade and a half ago, supply chain enterprise systems affect numerous processes, ranging from scheduling orders, managing production, controlling inventory and purchasing to sales support and customer relations management. These systems are represented by a seemingly endless alphabet soup of technology acronyms, such as ERP, SCM, CRM, and RFID. Supply chain enterprise application vendors … have worked to create technological and software solutions that are designed to help improve not only supply chain performance but also corporate financial returns and customer satisfaction.

“While there's no doubt that technology has moved front-and-center in today's supply chain, the application of technology has emerged as a leading ‘pain point’ in the field of supply chain management. According to supply chain experts from the Boston Consulting Group (BCG) and Wharton, applying enterprise systems technology to supply chains is often a difficult undertaking with an uncertain outcome; in reports and cases cited by both BCG and Wharton, companies that have implemented supply chain technologies often fail to leverage the new systems for a competitive advantage.

“A recent study from the Georgia Institute of Technology analyzed the impact on corporate performance of three commonly used technological enterprise systems: Enterprise Resource Planning (ERP) systems, which integrate data required to manage a business and automate all of the transactions needed to support an entire enterprise; Supply Chain Management (SCM) systems, implemented as ‘add-ons’ to existing systems that ‘look beyond enterprise transactions and out into the supply chain to provide supply-chain-wide planning and execution support;’ and Customer Relationship Management (CRM) systems, which ‘help track and manage customer information and relationships with the goal of increasing customer loyalty and retention.’ The authors found that with the exception of SCM systems, the enterprise systems simply do not ‘positively affect shareholder value and operating performance.’

“For application of supply chain technology to be successful, the experts agree that certain elements need to be in place: namely, a clearly defined need based on supply chain strategy, as well as clear expectations about what such technologies can and cannot do for a company.”

The article continues with sections on “Support for the ‘3Bs’”, “Technology in the Future”, “Garbage In, Garbage Out”, “Touchstone to Technology Success: Know your Supply Chain and more”.

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