Investing in Supply Chain Initiatives

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.

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