By Steve Banker, ARC Advisory Group
Most companies have a harder time justifying substantial investments in supply chain projects during a recession, particularly software solutions that have a payback period of two years or longer, which is the norm for many forms of Supply Chain Management (SCM) software.
There are forms of supply chain software that it makes particular sense to postpone. Demand Planning is one form. Demand Planning tools have a very difficult time making accurate forecasts when large exogenous events, like a deep recession, occur. It is only after several quarters of history during a recession that the forecast performance will start to improve. Historically, many companies that had planned to implement several supply chain planning modules, tended to start by implementing Demand Planning. In this environment, it may make more sense to implement Supply Planning solutions first. Highly collaborative solutions that are based on quick response, and balancing demand and supply in tighter time horizons, also become more attractive in environments like this. SAP and Kinaxis both have attractive solutions in this area.
Inventory optimization solutions make use of the demand variability to calculate min/max settings. ToolsGroup offers one of the few solutions on the market, they believe it is the only one, that is able to distinguish between negative variability (decreasing demand) and positive variability (variability increasing becasue of increasing demand). This means that as negative variability increases, they don't increase safety stocks as much as other competing solutions do.
During a recession, it makes sense to look extra closely at the ongoing financial viability of a software supplier. Except in the Transportation Management Solution (TMS) market, most supply chain software is still sold using the software license model. Software suppliers like LeanLogistics, MercuryGate, Sterling Commerce, Descartes in TMS, and Kinaxis in SCP, who have shifted to the Software-as-a-Service model, will have a much more predictable stream of revenue and may prove to have better financial viability than other best of breed suppliers. The On Demand model also has the advantage of being based on monthly fees often paid out of operating rather than capital budgets.
The “green” supply chain has been the latest fad in SCM. This has been more rhetoric than reality. However, some companies on the cutting edge have invested in strategic network design projects to understand what their carbon footprint was, as well as how more efficient transportation networks could both cut transportation costs as well as “green” their supply chain. These projects made a lot of sense when a barrel of oil cost almost $150 back in July. Now that a barrel of oil is under $60 a barrel, this is less of a driver for network design projects. Similarly, investments in TMS are not nearly as compelling as they were just a few months ago.
However, network design projects can now be driven by a different rationale. CEOs and CFOs want to come out of a recession clean – they want all the bad news behind them. During good times, companies hesitate to write off marginal and poorly performing assets. This is particularly true if it looks like hitting the financial numbers promised Wall Street will be adversely affected by the costs involved in shutting down these facilities. The recession is the perfect time to do this. Network design tools can help companies understand the impact on service levels of different potential supply chain configurations.
Supply Chain Risk Management software is one place where companies would be well advised to invest in now, rather than delay. Procurement risks increase during a recession. This is particularly true for companies that source from the Far East. This recession is driving a wave of plant closures in China. A new solution from Panjiva, right now most applicable to overseas apparel and home goods sourcing, could prevent a company not getting the goods they have ordered. Panjiva is tapping into previously unutilized customs data to show which suppliers have had greatly decreased year over year shipments of particular commodities to the US. If shipments have fallen by 70 percent, an alert goes off that suggests that the supplier may be in financial distress and that the company should, perhaps, think twice about sourcing from that supplier.