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Assuring the Value of SCM IT investments

Per-Magnus Karlsson, Supply Chain Expert at McKinsey & Company and Michael Randolph, Associate Principal at McKinsey & Company
Per-Magnus Karlsson, Supply Chain Expert at McKinsey & Company

Per-Magnus Karlsson, Supply Chain Expert at McKinsey & Company

In their efforts to manage increasingly global and complex manufacturing and distribution networks, and to respond faster to volatile demand, leading product companies have made significant investments in supply chain management (SCM) IT systems. While these efforts have enabled an unprecedented level of

supply chain transparency and data integration, they have not always resulted in tangible operational performance improvements or bottom-line impact. Our research on the costs and outcomes of more than 3,000IT projects shows that they often take longer than expected to implement, cost more and deliver less value(Exhibit A). Understandably, senior executives are pushing hard to capture higher, and faster, returns from their investments. We have identified four success factors shared by organizations that have successfully delivered SCM IT solutions.

 Exhibit A: Large IT projects often fail to meet their cost, schedule or value objectives A relentless focus on business value

Top performing projects are built on a clear view of the initiative’s business value, not just its technical content. For example, the goal of an SCM project might be to improve inventory turns by 25percent, reducing supply chain costs by 10percent. Once this vision is in place, the organization needs a common incentive structure and shared objectives to ensure internal stakeholders (like leaders in relevant functions and business units) and external stakeholders (like vendors, partners and regulators) understand– and own–their part in its delivery.

Building the right business processes and capabilities

Successful SCM IT projects require strong organizations to deliver them. That strength starts with a project team with the necessary skills, experience and expertise, but the business itself also needs robust cross-functional processes, and the right capabilities. The end-to-end optimization enabled by an integrated planning solution requires a corresponding organization to implement those plans. If decision-making along the supply chain is siloed in various sales, production and supply management functions, then execution on the ground rarely succeeds in capturing the potential of the original integrated plan.

"To make SCM IT deliver real business value, companies must focus as much on stakeholders, capabilities and processes as on the software itself"

Capability requirements can change significantly too. Modern SCM solutions can halve a company’s required planning capacity, for example, but the planners that remain must have a deep understanding of both their functional area and the supporting IT solution. Typical introductory training in key user concepts is not sufficient. Advanced SCM planners should not shy away from becoming system experts—and they must get support from their management to do so. Learning can be accelerated through participation in groups that bring together advanced users from different industries to share experiences and best practices. This effort is rewarding: Once a company has seen a true expert seamlessly conduct the mighty supply chain orchestra from a planning application, it will be reluctant to return to its old ways.Michael Randolph, Associate Principal at McKinsey & Company

Tuning and improving the system after launch

Much of the real implementation work only starts when a new system is used in real day-to-day work. Many projects would benefit if more of their budget were allocated to tuning activities for the live system. Common improvement areas include:

Planning stability. Many Advanced Planning Systems (APS) suffer from major instability in the results they produce. Plans are optimized, but every planning run produces a new optimum, sometimes as a result of minimal changes to input variables. Stakeholders along the supply chain quickly come to distrust such volatile plans, and start to ignore them. Dozens of parameters need to be understood and controlled in order to drive stability, from consumption forecast rules to averaging periods and supply freezing horizons.

Differentiation. “One size fits all” planning approaches need further segmentation. It is important to understand where the opportunities to extract incremental value from the supply chain lie, and focus solution design and change management efforts on these areas. Examples include differentiating between automatically and manually planned products/ locations or replacing complex integrated planning logic with simpler pull loops where appropriate. Doing this makes results more transparent and traceable for the supply chain planner, which helps increase acceptance of the SCM software solution.

Data Accuracy. To deliver their full potential, integrated planning applications require a high level of data quality. Too often, however, safety stock parameters, planning lead times or planned capacities deviate from reality soon after system implementation. These parameters must be understood in detail (and not only by the implementation consultant), actual values must be monitored and an appropriate organization is required to take care of planning data. A good practice is to track and publish the accuracy of parameters to create transparency and to make individuals accountable for their accuracy.

Adopting complementary solutions where they matter

No single IT solution off-the-shelf can offer best practice processes, or the best possible results for every company in every industry sector. While extensive custom development is not a replacement for the organizational changes, capability building and system tuning described above, it is our experience that a truly useful SCM IT backbone usually requires smart, custom-developed planning functions and selective use of best-of-breed software solutions, all tightly integrated into the main system. In this respect, supply chain planning differs from other, more transactional functions of ERP systems, where rigorous standardization is often key to success. Companies should take care, however, to limit the adoption of complimentary solutions to areas that truly drive incremental business value.

Advanced IT systems can help product companies meet many of their current and emerging supply chain challenges, but getting full value from such systems requires a comprehensive “Value Assurance” approach. Successful companies don’t just focus on the technology and business process elements of the solution, they pay as much attention to aligning all stakeholders on its value to the business, and on building the team and capabilities required to successfully and sustainably capture that value.

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