Where's The Payoff?

ROI on supply-chain software has been a long time coming, but it's now in sight

February 17, 2003; By Beth Bacheldor InformationWeek; http://www.informationweek.com/story/IWK20030213S0024

Everyone's heard the big success stories. Dell (Dell) Computer and Wal-Mart, for example, have squeezed millions of dollars out of their supply chains by bringing innovation to those business processes. But not every company has the IT resources to devote to large-scale, enterprisewide supply-chain implementations. Those who've taken things a little slower have had to wait longer for the big payoff--but it's coming.

Fleming Companies Inc. has been hit hard by the tough economy. The grocery wholesaler, distributor, and retailer reported an $83.7 million loss last year. Things aren't expected to get easier, especially since Fleming this month ended its supply relationship with one of its biggest customers, Kmart Corp., which is in Chapter 11. But IT investments Fleming made in supply-chain software, which began nearly three years ago and were substantially completed in the third quarter last year, could brighten the picture, cutting millions of dollars out of the company's inventory and transportation costs and bringing in new revenue sources.

"Losses would have been even greater if we hadn't implemented the software," says Tre Ventling, Fleming's transportation systems manager.

Fleming isn't the only company that's finally seeing impressive returns from supply-chain software. Amid one of the worst periods in the history of the semiconductor industry, On Semiconductor Corp. says it expects to reap $20 million in overall value thanks to the supply-chain software it's using. Knowles Electronics LLC, a maker of hearing-aid and acoustic technology, has shaved as much as $10 million in inventory costs.

Fleming's losses could have been worse without supply-chain software, Ventling says.

Supply-chain software, such as order-management, inventory-management, demand-planning, and logistics applications, has been around since the late '90s. But according to Forrester Research, in a recent survey of 22 business executives at large manufacturing and distribution companies, only 41% have realized a noticeably positive return on investment from their supply-chain management systems.

AMR Research reports that about 65% of large companies have implemented supply-chain software, but probably less than a fifth of those find that the software makes a huge difference to their businesses. "When you start poking around, a company buys the software and is using it in just a few places," says John Bermudez, senior VP of research at AMR Research. "It hasn't penetrated the company." That's changing, as software vendors, feeling the pressure of a slow economy, work more closely with customers to ensure successful implementations, Bermudez says.

Tightening supply-chain links paid off for On Semiconductor, which last spring completed its initial deployment of software from i2 Technologies Inc., begun in 2000. "With what some are calling the mother of all downturns in the semiconductor industry, we're being pressed to do everything we can on every front," says John Mallon, director of supply-chain management services.

That includes expanding the company's supply-chain implementation to encompass i2's Factory Planner in its wafer fabrication plants and assembly sites, and Demand Planner, Master Planner, and Demand Fulfillment at its headquarters.

On Semiconductor can instantly acknowledge the receipt of an order 95% of the time. This time last year, that same process took 24 to 48 hours 75% of the time. It also can deliver real-time quotes, which has enabled the company to book an incremental $1 million in revenue per quarter in the last two quarters.

A significant portion of TaylorMade-Adidas Golf's $554 million in revenue through the third quarter of 2002 would have been at great risk if the company hadn't made collaboration a top priority and begun a multiyear i2 deployment when it faced an unexpected situation. Six months ago, the golf-equipment manufacturer started shipping a driver that promised longer, more accurate drives. The catch? The club was built based on an expected change in the United States Golf Association's rule book. Two months later, the USGA decided it wouldn't allow these new types of clubs to be used. TaylorMade needed to work quickly to remedy the situation.

Thanks to the i2 supply-chain software TaylorMade uses to support its global operations, the manufacturer stopped production, swapped distribution lines so that clubs already produced went to distribution facilities for international markets (where USGA regulations don't hold sway), redesigned the club, and began making it--all within 12 days.

"Without the software, we wouldn't have been able to pull that off so quickly," says Rob McClellan, director of global supply-chain management and eServices for TaylorMade, a subsidiary of Adidas-Salomon AG. The company readjusted its production plans using tools such as i2's Supply Chain Management suite, which includes capabilities for master and inventory planning, and then automatically kicked that information out to suppliers to get things on track again.

The company expects to get additional value out of its system when it implements i2's Demand Chain Management suite this quarter. It will integrate the software with i2's Supply Chain Management suite to provide an end-to-end view of its operations. When it launches a Web site for retailers to book orders later this quarter, the company will "be able to make a commitment--a promise--on the availability of a product ordered," McClellan says. "Rather than saying, 'It looks like we'll have it to you in two weeks,' we can say, 'it will be ready on the 12th, and we'll ship it on the 17th.'"

Supply-chain projects aren't cheap. Large U.S. companies spend an average of $6.8 million per project, according to Forrester.

But the benefits are compelling. So far, Knowles Electronics has spent $8 million to $10 million on its supply-chain implementation, which includes software, hardware, and consulting. The price is worth it, says Randy Kjell, Knowles' senior director of information systems. "We're in position to start moving our supply-chain visibility beyond Knowles" to suppliers, he says. Before 2001, the company had no uniform supply-chain system and handled many orders by sending faxes or E-mails to its sourcing partners in China and its manufacturing centers in Malaysia.

"Everything was a guess, and there were a lot of arbitrary dates set," Kjell says. "If the customer needed something ASAP, the rep would tell the customer he'd call back. Then the rep would make a series of phone calls to find out when the product could be available."

After reviewing vendors, Knowles went with Oracle (NSDQ: ORCL)'s E-Business Suite. Knowles put together a team of about 15 employees and 10 to 15 Oracle consultants who created a global design and ran a series of pilots. In June 2001, Knowles turned the switch on a live implementation that included financials, order management, and inventory systems at a London distribution center.

Now Knowles can instantly tell where an order is and check on inventory. The company's internal supply chain is so automated that it could quickly pick up and move production from one part of the world to another.

The software has helped Knowles maintain high levels of customer service, Kjell says. That's because customers can find out exactly when a product will be ready--vital information because many of them have reduced inventory levels to just a few weeks. "If we don't get product to them, we shut down their production lines," Kjell says.

Despite the hard-knocks economy, Fleming, Knowles, On Semiconductor, and TaylorMade continue to increase investments in supply-chain software. For a few years now, Fleming has been deploying Manugistics Group Inc.'s supply-chain and transportation management software and JDA Software Group Inc.'s E3 forecasting-procurement tools to increase visibility of the goods that move into its 24 distribution centers.

Now it's upgrading the Manugistics software, which will simplify communication between the two vendors' software packages to more tightly link processes in the transportation and procurement departments. Fleming just wrapped up installation of Manugistics transpor-tation-routing software to manage deliveries of goods to more than 20,000 customers. Up next: ongoing rollout of EXE Technologies Inc. warehouse-management software to all of Fleming's distribution centers and enhanced visibility into its supply chain so customers can check the status of their orders.

A tough economy won't deter Fleming. If anything, it's only spurring the company on. Says Ventling, "With our successful experience thus far, there's no reason to think that we won't realize greater benefits almost immediately."

 

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