When brewer Scottish & Newcastle reported a fall in pre-tax profits recently, it wasn’t that drinkers were spurning its products – profits on beer were healthy. Instead, the company blamed the profit slide on the cost of reorganising its supply chain.
Scottish & Newcastle is not alone in feeling the impact of its supply chain investments on its bottom line. In recent times household names such as Nike and Laura Ashley have cited problems with their supply chain systems in particular, as a reason for missing financial targets.
So, with the supply chain so important to corporate health one would expect that supply chain IT systems, so fundamental to cutting costs and improving efficiencies in this area, would be getting extra boardroom attention. After all when Imation, the spinoff from 3M which makes floppy disks and disk drives, installed a demand management and fulfilment system the company claimed it slashed the time it held inventory by a half and reduced supply chain costs by 16 per cent in Europe. But companies such as Imation are in the minority, it seems. A report by Cranfield University School of Management called ‘The Blind Leading the Blind’ found that senior managers made such a hash of IT investments that their efforts affected company profits. Around half of those polled said that projects failed to deliver the expected reductions in cost and improved efficiency and a third admitted the quality of IT investment was poor.
Value for money
The upshot is that in many companies IT is not seen as giving value for money. High technology industry hubris has been partly to blame. Inflated claims and an emphasis on technology fixes have turned off many boards of directors. The year 2000 bug which triggered huge investments in IT made IT suspect when the threat failed to materialise.
Inside companies, IT specialists are regarded as having too much power and seen as not paying enough attention to lining up IT plans with overall company strategy. More significantly, IT suppliers have been criticised for being too intent on selling their own solutions and adding to the cost and complexity of building supply chains by not doing enough to develop standards that would enable customers to link systems together more easily. Integration issues are only now being addressed by standards such as XML and web services.
Users too have played their part in making it difficult to gain value from IT investments. Companies have been too concerned to have systems that fit existing business processes exactly and too prone to changing their minds along the way. They have also tended to regard supply chain planning as a separate exercise from supply chain execution with the result that it has been difficult to manage supply chains effectively.
When it comes to calculating return on investment, all too often targets are unrealistic. That was the conclusion of a recent investigation into the use of customer relationship management systems conducted by BearingPoint (formerly KPMG Consulting). The consultancy found that only six per cent of companies it spoke to had set specific return on investment objectives early on in the life of their projects.
Forecasting the return on IT investment has always been more alchemy than science. However, the days when companies could get by on back of the envelope calculations to support IT decisions are long gone. Returns don’t necessarily depend on high levels of investment. In the manufacturing sector, nearly as many companies report modest levels of IT investment in the supply chain over the last 12 months as report high levels, according to ‘The Manufacturer’ magazine, suggesting that large scale IT investment in the supply chain is not vital to making significant gains.
Although nearly three quarters of companies described previous IT supply chain investment projects as quite successful, only 12 per cent said that they are very successful. While six out of 10 companies interviewed were quite likely to invest in IT to facilitate supply chain improvement, the remainder were not convinced of the value of further outlay on supply chain automation.
There may be good reasons why many companies appear to have taken the pledge on supply chain systems, but as Scottish & Newcastle would surely tell you, they are good for your health when taken in moderation.