Placing Bets, Dark Rooms and Your Supply Chain

When planning for a project, regardless of business domain, best practice suggests that there needs to be a supporting business case. Makes sense — every project is, after all, essentially a bet. Meaning, a company’s leadership team is placing a wager that an investment in a project will pay off, and that the project yields positive value in return.

When thought of in conjunction with a specific project, it’s easy to imagine this. You can envision the math: “if we invest $1m in this project, we’re 85% likely to receive $6m in return. It’s a go!” But, the more difficult part is knowing where to place your bets. Which project? When?

Earlier this year I worked with a large multi-national enterprise in the hi-tech space. They have a really complicated supply chain, in fact several supply chains. This company sensed that it had an issue with freight audit and payment, and that they were over-paying on invoices because they did not have the right processes in place to capture incorrect invoices from their partners. The project team pulled together a business case, and a plan to install and launch a technology-based solution to solve it. At that level it makes total sense: automate the process and receive value.

But, how did they decide to invest in that particular project, as compared to other supply chain-related projects? To be sure, I didn’t get a front-row seat to that conversation, but I suspect that it was based in part on intuition, a gut feel. We have a sub-optimal freight audit process, and we can see the dollars so let’s do it. There could be other projects out there that have value as well, but we’re not sure what they are worth, and in fact there are some opportunities that we don’t even know about yet. That’s where visibility comes in. That is why visibility should come first.

In this scenario, what if there was another opportunity sitting right next to the freight audit project? Like another process area that also required $1m in investment to fix, but yielded a 2x return at a higher confidence level? Wow, all of a sudden the original project looks like a mis-informed bet, an incorrectly placed investment. So, how do leading companies avoid this issue when it comes to the supply chain? They turn on the lights first, and see what’s going on and then they place their bets.

Here is an analogy I’ve been using for this situation. Imagine a room, one that has furniture and art inside of it. You’re mission is to re-arrange the room and the placement of these objects to optimize and improve the flow of traffic, and their ability to better appreciate the art. But, the lights are out — it’s dark.

Option 1: walk into the dark room, where you can’t see anything and start blindly re-arranging the furniture.

Option 2: walk into the dark room, turn on the lights so you can see everything, make an assessment of the most logical moves and then begin to re-arrange the furniture.

Most people would, logically, select option 2. That’s like a no-brainer. But why don’t enterprises do that with their supply chains?

They should. Visibility first, automation second.

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2 Responses to Placing Bets, Dark Rooms and Your Supply Chain

  1. I think if you can quantify “hard” money from the project, it’s the way to go. Sometimes ROI of some project is low but the initiative is strategically important, management may give green light.

  2. [...] an article, John Atherton, VP of Strategic Consulting at GT Nexus, stresses that executives need to turn on the lights and focus on visibility if they want to make sound investments in the supply chain that yield the [...]

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