Note: The following posting can also be viewed and commented upon within the Kinaxis Supply Chain Expert Community.
Dan Gilmore, editor of Supply Chain Digest recently wrote a column about the concept of the probability of supply chain ROI. In a nutshell, Dan’s friend, Doug Hubbard has come up with a concept to calculate project ROI, not as just a single number, but rather a range of potential outcomes that can be communicated to management. Dan’s premise, in his column, is that the way most of us have thought about calculating ROI on major supply chain process or technology enablement projects as a finite number is simply all wrong. Our community, in essence, should be communicating ROI as a probability curve demonstrating a probable range of outcomes.
In all deference to Dan and his friend Doug, sounds great in theory, but not so sure about the practicality. How many of us have had to deal with hard-headed CFO’s or CEO’s in clearly articulating the benefits of a major supply chain initiative, particularly if it involves a rather large investment in enterprise software? Placing one’s reputation or management bonus on the line relative to achieving an ROI metric is daunting, and the process tends to drive to specificity really fast, I wonder how these same executives would respond to a “range of ROI’s”. CFO’s seek clarity in numbers and results, not probabilities. No doubt, incidents of investing fairly large sums of money in multi-year ERP or enterprise software implementation initiatives have soured the CFO view of ‘range of probabilities on return’.
A better and less painful approach, I feel, is to partition projects in measurable, specific phases, where project scope and outcomes become much more measurable. The end-goal can remain a long-term transformation of a supply chain or supplier management processes, but phasing the implementation into a series of measurable, self-funding, pay-as-you-go savings provides far more credibility in the merits of a project. In my consulting and briefings, I continue to observe that more companies and organizations, even those who are implementing components of supply chain functionality within a broad ERP backbone, have found that limiting scope of implementation to what can reasonably be managed in 6-12 week results has been far more credible, especially in today’s uncertain business environments.
The management adage of results speak louder than words are as true today as they always were. Managing scope and implementation to a definitive, measurable time period where project savings have to fund subsequent phases are a much more creditable approach when justifying ROI with senior management. Even when CEO’s become more confident with the need to invest in renewed supply chain capabilities, they have now discovered that self-funding projects provide far more meaningful results for the business. This also helps to explain why technology that has faster implementation and savings phases has become more attractive in various industry settings today.