Lack of IT investment puts supply chains under strain

The parlous state of the EU's economy has led many businesses to cut back on supply chain investment. But are such cost-saving measures are storing up trouble for the future?

The parlous state of the EU's economy has led many businesses to cut back on supply chain investment. But as Derek du Preez reports, such cost-saving measures are storing up trouble for the future

A recent IDC study, entitled In Pursuit of Operational Excellence, highlighted that supply chain management (SCM) is a growing concern for manufacturing enterprises, with nearly 50 per cent of more than 350 respondents indicating that its complexity is expected to grow over the next three years.

SCM is the coordination of materials, information and finances as they flow from supplier, to manufacturer, to retailer, to consumer. Applications can be used, through ERP systems and other large-scale software integrations, to monitor these flows, with the aim of reducing inventory and ensuring products and information are at the right place, at the right time, at the lowest possible cost.

However, with the European economy still in the doldrums, with GDP expected to grow only 0.6 per cent in 2012 compared with forecast US growth of 1.9 per cent, do companies still have the resources to address supply chain complexity? And if they don't, what will the long-term implications be?

The consensus among industry experts is that enterprises in Europe are no longer implementing costly software to tackle their supply chain challenges, because the return on investment is too long and savings will only be seen over a number of years.

Intermec, a company that specialises in supply chain hardware and software offerings, held its annual partner summit in Greece in the New Year, where its CEO, Pat Byrne, highlighted that enterprises in Europe are only investing in supply chain projects that see returns within one year of investment.

"Our customers are only willing to invest now if the return is short term, because they need to cut costs and create efficiency now. They are not willing to invest if the return is three years from now. However, if they can make the return in six to 12 months, then they will look at it," said Byrne at the event.

"These short-term returns tend to be seen where a company is replacing paper processes within their supply chain for electronic ones. This allows them to quickly get rid of a whole set of people and processes, saving costs quickly," he added.

Mike Darby, a supply chain expert at consultancy firm Deloitte, shares Byrne's view, arguing that "the days of throwing £10m at an SAP implementation and hoping the benefits will increase sometime down the line has very much gone".

He says that in his experience, most companies are looking to get more out of their current systems, rather than invest in new software deployments.

"I don't see many companies embarking on big ERP enterprise solutions. However, companies that have already implemented an SAP or Oracle system in the past, but haven't necessarily taken full advantage of all the modules and functions available to them, may decide a smaller investment to improve upon what they have already got is feasible," he says.

Lack of IT investment puts supply chains under strain

The parlous state of the EU's economy has led many businesses to cut back on supply chain investment. But are such cost-saving measures are storing up trouble for the future?

President and principal analyst at Cambashi, Julie Fraser, agrees that supply chain investment in Europe largely involves companies with existing supply chain infrastructure adding advanced applications on top of what they already have. She cites inventory optimisation as a key area of investment in Europe at the moment. Inventory management tools are designed to show where materials or products are within the supply chain. Fraser says firms are now optimising these tools so that they can predict levels of demand.

"Inventory optimisation uses stochastics to model the probability of something happening, then creates a range of out-comes, and then at each level in your supply chain maps out how much inven-tory you are likely to need based on that range of possible outcomes," says Fraser.

"When the economy is bad, the last thing you want is a bunch of inventory sitting around, it's not efficient and it's costly," she adds.

"This allows companies to hit required service level agreements for their customers efficiently. These models take into account how accurate you need to be. So, if you are dealing with big retailers they may require a 98 per cent service level, but some small customers may be less demanding, and would be happy with an 85 per cent service level.

"So, the level of inventory is going to vary and you can, in places, lower those levels if you are serving less sensitive customers. It's not just about understanding demand levels, but also the parameters of that demand, and inventory optimisation gives enterprises a detailed view that is difficult to achieve with basic systems."

Like Intermec's Byrne, Fraser believes companies are looking for quick returns on investments, but adds that companies without a basic infrastructure in place are just not investing at all, as they feel they cannot spare both the time or money. These firms, she says, are likely to lose out to the competition over the next three years.

"If you aren't investing you take a huge risk of becoming completely uncompetitive. You have got companies in the market who have got all the basic stuff and are now adding advanced applications on top to make their company more effective, which will allow them to carry less inventory and serve customers well," says Fraser.

"A lot of firms could either go under or be acquired if they fail to remain competitive. This is going to happen in the short term, rather than the long term," she adds.

Lack of IT investment puts supply chains under strain

The parlous state of the EU's economy has led many businesses to cut back on supply chain investment. But are such cost-saving measures are storing up trouble for the future?

However, acquisitions and consolidation in the market can also drive investment in SCM in Europe, according to Pieter Leijten, vice president of supply chain management in Europe at enterprise software company Infor.

"A downturn in the economy provides opportunities to pick up acquisitions that are not doing well on their own, but may do well as part of a group," says Leijten.

"We are currently working with several clients that have made acquisitions and now need to create a pan-European supply chain structure, or sales and operations planning business process, across all the acquired entities," he adds.

"A lot of money has been spent acquiring these companies, and so the next task buyers want to do is create value in the combined entity and make the whole thing work together smoothly. This will drive SCM investment."

Harshal Gore, professional services manager at independent supply chain consultancy GS1 UK, believes many B2C companies need to rebalance their SCM investment strategies to ensure their supply channels can support their increasingly sophisticated retail operations.

"Customers are demanding a lot from retailers at the moment. They want to be able to buy goods through multiple channels - online, mobile and in store. From my experience, there is a lot of innovative stuff going on in this space, and companies are investing in new systems and new processes to support a multi-channel approach for consumers," says Gore.

"However, this is a huge risk that companies could create a disconnect between their B2C and B2B channels. To support these new, innovative front-end systems for consumers, companies need to still get the basic B2B channels right and be sure they have the right product data, the correct invoicing and accurate inventory," he adds.

"If companies don't invest in their backend too there could be a lot of plasters in place holding it together."

Managing a company's supply chain effectively can reduce inventory costs, increase efficiency, reduce time to market and improve relationships with suppliers. However, according to experts, the economic downturn has driven companies to make incremental investments on top of what infrastructure they already have and only if this brings short-term returns.

Deloitte's Darby believes this emphasis on quick wins rather than long-term benefits brings significant risk.

"The short-term risk of not investing in the basic SCM structures could mean that you are suddenly out of the game, because your competition might be making those investments. Your competitors will be able to beat you on time to market and on cost," says Darby.

"However, there is also a long-term risk of not investing in SCM. Those companies that make investments in the downturn will be best placed for growth, and as we move out of the downturn, they will gain market share and win over customers. Those who don't face losing out."