Balancing Effectiveness with IT Spending

Balancing Effectiveness with IT Spending

As you begin the budgeting process for technology spending in 2009, two case histories dramatically demonstrate ways that sound financial analysis can play a critical role in assessing whether your current IT operation fully serves your distribution and warehousing needs, or whether it needs to be substantially replaced.

One company was dissatisfied with the timeliness and quality of information produced by their IT systems. They needed higher quality information delivered in a more timely fashion in order to accelerate movement through the supply chain. Therefore, they were prepared to spend nearly $20 million to purchase and implement a new systems solution.

However, after analyzing the situation, it became apparent that the quality and timeliness issues could be resolved by installing a relatively minor system upgrade and providing employee training on the untapped capabilities of the current system. The company met their objectives for less than $1 million.

Company mergers present great opportunities as different IT environments come together. Two multibillion-dollar organizations recently merged. They needed to define a strategy for their new IT environment, whether it was combining systems, selecting one over the other or choosing a new system entirely.

Some key steps were performed before the technologies of the combined new company were deployed: Personnel studied synergies, efficiencies and revisions of third-party contracts. The company then selected one of the existing platforms and consolidated its IT operations and systems. The results were savings in excess of $400 million in consolidated IT costs, a sum far in excess of the estimate communicated by the CFO to analysts reviewing the company.

As we examine the future of warehousing and distribution, those two examples remind us that new systems and technologies may be an appropriate answer to performance problems. However, a deeper analysis must take place to assess whether any IT system may indeed be capable of supplying the required information to drive effective supply chain management. It is also clear that implementation of new technologies cannot overcome basic process flaws in operations or within the IT system itself.

Determining if and how your current enterprise resource planning system can further enable your supply chain is a critical assessment. By its very nature, your ERP system supports most of the business system and the data needed for a variety of business functions such as manufacturing, supply chain management, financial information, project management, human resources and customer relationship management.

Ideally, the data for the various business functions are integrated. In practice, an ERP system may comprise a set of discrete applications, each maintaining a discrete data store within one physical database. However, integration is essential so information can pass between systems.

Otherwise, "islands of automation" may result and prevent the effective use of data throughout all intended internal and external supply chains. Consequently, companies looking to reduce or maintain IT costs must assess the overall effectiveness and efficiency of their current IT operations.

Two key steps in this assessment include identification of non-value added activities and current capabilities not being effectively utilized. As demonstrated in the earlier examples, IT operations are often ripe for elimination of non-value added activities and reduction of costs. In addition, an assessment of systems capabilities, while not easy, can yield impressive benefits and avoid the significant costs of new systems.

Successful companies assess whether their IT system needs "open heart surgery" or just a second opinion before any drastic measures are taken. The point here is clear: While a smooth running supply chain is generally highly dependent on technology support, don't assume that a wholesale replacement of your existing suite of software is the appropriate solution.

Another wise use of your IT dollars may be with developing or emerging technologies. Radio-frequency identification and GPS systems show tremendous promise as the cost of chips and readers continues to decline. Increasingly, some portion of IT functionality is devoted to planning, tracking and coordination in the absence of real-time information about goods in transit. Real-time information streamlines inventory, improves asset utilization and eliminates the need for the associated work and the cost of not knowing where in the supply chain the inventory resides at any point in time.

In summary, let your technology decisions today be the enabler of your supply chain effectiveness tomorrow. Whether your business is manufacturing, distributing or warehousing, allow thoughtful and thorough analysis to support your IT and operational strategies and not be the strategy that drives it.

Gruenes is national distribution practice leader in Grant Thornton's Dallas office. Bailey is a west region advisory services practice leader in Grant Thornton's Irvine, Calif., office.