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Across the industry, there is a pervasive view that supply chain leaders defined"best practices" and over the years through continuous improvement programs drove significant balance sheet improvement for cost and inventory. There is a small problem. The facts do not support this belief. When you study the balance sheets and income statements of public companies, you quickly see that 90% of companies are stuck and going backwards at the intersection of operating margin and inventory turns. Like the tire caught in the rut in this picture, companies struggle to move forward. Why is this? There are many reasons, here we give the four we see the most often in our research.
ERP Implementations. Many supply chain leaders think that one of the benefits of the implementation of Enterprise Resource Planning (ERP) is better visibility of total costs. However, in our research, we find that 88% of companies have an ERP system, but only 29% of companies can easily get to supply chain costs. The issue is that the implementation is not delivered with this goal in mind. This should not be assumed. It is not an automatic benefit.
Figure 1. Companies That Can Easily Get to Supply Chain Cost Data
A Focus on Functional Costs. Culturally organizations focus on functional costs. There is a mistaken belief that if companies focus on the management of functional costs, then the company will excel at the management of total costs. This is not true. Total cost management requires the orchestration of costs cross-functionally--orchestrating source, make and deliver-- against a supply chain strategy. I liken it to be a decathlete. When an athlete competes in a decathalon, the focus is on winning the event and gaining the most number total points. To do this, the competitor knows that they must perform second or third in most events to win the event. This is also the case within the supply chain. When each function tries to have the "best costs", the leaders will throw the supply chain out of balance. There needs to be a focus on total costs with careful alignment of each function.
Multiple ERP Systems. The average company has 5-7 ERP systems. Rolling up the data from these multiple systems is difficult. With the extensive M&A activity within the industry, this is made more difficult.
Lack of Alignment of Continuous Improvement Programs. Within many continuous improvement programs, companies take money out of one pocket and put it into another. The number of continuous improvement programs without clarity on total costs. Without orchestration of the overall program, funds can be saved in one function and counteracted in another. The focus needs to be on the management of total costs. Most companies lack this focus.
Figure 2. A Close Look at Continuous Improvement Programs
These are my thoughts. I would love to hear from you.
Are you surprised, like I am, on the lack of visibility of total costs?
Researcher
7 年There is something here that most people don't want to face. ERP systems do not do very much to improve the condition of companies that use them. Now ERP consultants will howl and say that Gartner says this or that, but if we think about it, the major entities that support ERP support them because they drive revenues. There are really two questions. Are ERP systems good for vendors and system implementers? Yes. There they have a great ROI for vendors and implementing companies. But if we are talking about what benefits customers, there is no evidence that the ERP pathway that companies have followed has been a good idea. Deloitte or SAP could not have cared less whether ERP benefited customers, it was just a way to make money. These companies would implement underground bakeries at customers if they could make money off it. Will their customers be baking cookies underground? The right answer for these companies is "who cares." Companies buy more non-ERP software from ERP vendors degrade their other applications. This enforces a non-competitive model -- which is exactly what at least the larger ERP companies aim for. They want to sell the most software with the least competition. That is what software acquisition is always about - reducing competition. The most interesting things you can do with a company's ERP data happens when you get it out of the ERP system. So yes, as per your observations in this article, there is no reason to think that ERP systems have done anything to improve supply chain management. And considering how many resources they have consumed, and the promises made, that is a most unimpressive outcome.
Project Manager
7 年I think there are several problems which can contribute on this problem. 1. There can be some stakeholders who has low interest in having well visible total costs, because many of their problems would appear suddenly 2. During implementation the management was prioritizing different subjects and did not realize that its not an automatic benefit to have well visible costs 3. Many ERP implementing companies does not care about these things if the customer does not insist on it. That can be also caused by so big differences among the companies and their working systems and procedures 4. Someimes the customer is trying to set up everything within the system and asking to adjust it by the ERP implementator. And the customer can make mistakes there so finaly there is no possibility, or not correctly showing the total costs. The ERP system from my previous company was a disaster. I could not dream about to see total costs. And when it was showing them partialy, I realized that I do not see correct numbers, because of some calculation settings by ERP. So finaly there can be many many reasons which can cause such a terrible numbers in the statistsics.
Owner & CEO
7 年Improve the ERP system.
Purchasing and Supply-Chain Coordinator Novozymes
7 年Yes, I was with a company and they needed better ERP system but realistically it would just make things easier as long as controls are in place to maintain the system. If the system is not maintained properly due to bad practices it will only be detrimental to you in the long run. Lastly, you need to focus on what exactly is it that it is affecting your ability to keep inventory costs reduced while preventing shortages of demand. Is it actually just seeing your inventory in real time? or is it your supplier, or customers not giving necessary time or information, or transportation that is causing the problem in case of oversea shipments.
Owner / President / Founder at DCRA Inc. & DCRA Technologies
7 年In most cases when I hear a person or firm preaching best practices in supply chain I am pretty confident they are "stuck" playing checkers when the real game is Chess :) Keep up the good work Lora !