April 24, 2015
technology review | Supply Chain Software

Where's the payback in software?

Where's the payback in software?

The pitch is that supply chain software will slash costs and take performance to new levels. But our exclusive survey finds that nearly half of software users have not gotten the expected return on their investment.

By James A. Cooke

One out of every two supply chain software deployments is falling short when it comes to delivering the expected return on the investment. That was the surprising finding of this year's survey on supply chain software and how logistics professionals are using it. Designed as a follow-up to a study conducted last year, this year's research looked specifically at which applications are most popular, what kind of payback they're providing, and the challenges users face to successful deployment.

To conduct the study, DC Velocity teamed up with Boston-based Nucleus Research to survey readers of DCV and its sister publication, CSCMP's Supply Chain Quarterly, on their use of supply chain applications. Two hundred and fifteen usable responses were received from readers of the two magazines; those responses formed the basis for the findings reported here. As for the type of business they worked for, the survey respondents covered the gamut, with 29 percent hailing from manufacturing, 21 percent from third-party logistics services, and 18 percent from the wholesale distribution side. Another 14 percent worked in retail, 6 percent in transportation, and the remaining 12 percent in "other" industries. Respondents came from organizations of all sizes, with roughly a third working for companies with annual revenues of under $100 million, a third for companies with revenues between $100 million and $1 billion, and a third for corporations with revenues over $1 billion.

Exhibit 1
Among readers of DCV and SCQ, warehouse management systems remain the most widely used type of supply chain application.

Exhibit 2
When it comes to analytics in the supply chain, most users are looking for insights into how to manage their inventory more efficiently.

Exhibit 3
Lack of resources poses the biggest hurdle to readers' adoption of analytics in their supply chain operations.

WMS ON TOP AGAIN
So what software tools are readers using? As was the case in last year's survey, warehouse management systems (WMS) topped the list, with 57 percent of respondents using this type of solution. Given that so many of DC Velocity's readers are involved in running distribution centers, this came as little surprise. However, the survey did indicate some disparity in WMS adoption rates among companies of various sizes. For instance, 82 percent of respondents from companies with annual sales between $1 billion and $5 billion were using a WMS, compared with only 47 percent of respondents from companies with less than $100 million in revenues. This may indicate that small companies still have a hard time justifying the software's expense.

Next on the list of most widely used applications was enterprise resource planning (ERP) software—again no surprise given that most organizations use ERP programs as the system of record for financial transactions. Tied for third place were transportation management software (TMS) and business analytics solutions. (For the full list, see Exhibit 1.)

The study also found that different types of businesses favored different types of software. For example, manufacturers were the top users of WMS and warehouse control systems (WCS) as well as control towers and solutions for demand planning, supply planning, and analytics. Companies in the wholesale distribution sector were the primary users of inventory optimization software, while third-party logistics service providers (3PLs) were the biggest users of TMS and yard management software. Interestingly, labor management software usage was evenly split among manufacturers, retailers, and 3PLs, indicating that all three groups are seeking to optimize DC work force performance. Finally, in a bit of a surprise, slightly more manufacturers than retailers said they had deployed distributed order management systems (DOMs). DOMs, which are designed to help users determine the optimal location from which to fill a particular order (i.e., from store inventory vs. DC stock), are generally regarded as a tool to be used by retailers engaged in omnichannel commerce.

Asked about their recent software purchasing activity, 23 percent of survey takers said their company had invested in software in the past year. As for which applications they had bought, WMS again came in first, accounting for 21 percent of new purchases. TMS came in second (10 percent), followed by business analytics (9 percent).

THE PAYBACK CHALLENGE
Since a software purchase can run into the thousands of dollars, it's hardly surprising that companies would be looking for a quick payback on their investment. But what constitutes a quick payback? As the survey made clear, expectations vary all over the map. At one end of the spectrum were companies that expected payback within three months (5 percent); at the other were businesses that expected payback within three years (24 percent). The remainder expected a return in one year (31 percent), two years (28 percent), or six months (12 percent).

In regard to actual payback, many respondents expressed disappointment with their software implementations. Only 48 percent reported that they had realized the expected payback from a software investment, while 18 percent said they had not. Another 34 percent were uncertain as to whether the software had met the company's expectations for return on investment (ROI).

As for the reasons behind the disappointment, one common complaint was that the vendor had oversold the software's potential for improving performance. Wrote one reader about a WMS deployment: "Support and maintenance continued to bleed cash as the products overpromised and underperformed." Another reader reported that a WMS deployment had resulted in "cost overruns, project delays, a large number of defects, and overall poor performance." Yet another complained that "too many modifications were needed, which all were à la carte and cost extra $$."

One option for companies looking to minimize software implementation costs is to take the cloud-based route—a model in which the application is hosted by the vendor (or a third party) on an off-site server and delivered via the Internet. Among other advantages, this allows the user to avoid a hefty upfront capital outlay for software licenses as well as ongoing expenses for upgrades and maintenance. Plus, the user can configure the cloud application to its business needs instead of having to pay a programmer for custom coding.

And in fact, one-third of the survey respondents have done just that, opting to use cloud-based versions of at least some of their applications (TMS and business intelligence programs being the most popular cloud-based choices). When asked whether this had shortened the payback period, more than half the cloud-based software users—53 percent, to be exact—replied that it had.

ANALYTICS USE HINDERED BY RESOURCES
In the past year, there's been considerable buzz about the potential of business analytics, or business intelligence, software tools, which help users gain insights into their operations and parlay those insights into process improvements. To find out how far readers had progressed in adopting these tools, our survey asked about their use of four specific types of analytics: descriptive (which detail what happened in the past and why), predictive (which foretell what might happen in a supply chain), prescriptive (which recommend courses of action), and big data analysis (which entails sifting through reams of information for operational insights).

Despite the hype, only 41 percent of survey respondents said they were using business intelligence tools right now. Of the respondents in that subgroup, just over half (51 percent) are using descriptive analytics, 43 percent predictive analytics, and 17 percent prescriptive analytics. Thirty-three percent said they were engaging in big data analysis.

As for where they're applying these tools, the majority of analytics users—65 percent—pointed to inventory management. Clearly, companies are struggling with the classic inventory challenge—determining how low they can go with respect to stock levels without sacrificing service. The second most common area was warehousing, cited by 56 percent. With more demands being placed on retailers and manufacturers, especially in the area of omnichannel commerce, analytics can provide insights into how businesses can rev up throughput in their DCs. (See Exhibit 2 for the complete list.)

The flip side, of course, is that the majority of respondents—59 percent—are not using analytics at all. When asked why they weren't, 39 percent of the non-users cited a lack of staff resources. Another 19 percent said they saw no value in it. (See Exhibit 3.) That stands in sharp contrast to the findings of last year's survey, when "No perceived value" was the top reason given for not making use of analytics. If the lack of resources has indeed become the biggest obstacle to the use of analytics, software vendors clearly have to do more to convince potential clients that it's a worthwhile expenditure of time and money.

Given the perennial issue of resources, it's not surprising that the biggest companies were the most likely to be using business analytics. And indeed the top-tier companies—those with more than $5 billion in annual revenues—had the highest adoption rate, at 65 percent. The next tier down—companies with revenues between $1 billion and $5 billion—had the second highest adoption rate, at 54 percent. It should be noted that business intelligence is a cutting-edge technology that often requires the help of outside experts to mine the data for operational insights. It would stand to reason that bigger, better-capitalized companies would be in a better position to take advantage of business intelligence.

FINDING VALUE
Finally, the survey asked readers to name the biggest obstacle they faced to successful software deployment. First on the list was systems integration, cited by 31 percent. Next came company culture (defined as employee acceptance and support), cited by 21 percent. Rounding out the list were lack of information technology (IT) resources (19 percent), lack of good user training (10 percent), and absence of upper management support for software deployments (9 percent).

All this suggests that when it comes to future supply chain software implementations, logistics managers may want to consider going to the cloud. Not only are cloud-based applications likely to provide a quicker return on investment than traditional versions do, but they tend to be user-friendlier as well. And more importantly, perhaps, they offer users a way around such common hurdles as systems integration and lack of IT support.

About the Author

James A. Cooke
James Cooke is a principal analyst with Nucleus Research in Boston, covering supply chain planning software. He was previously the editor of CSCMP’s Supply Chain Quarterly and a staff writer for DC Velocity.

More articles by James A. Cooke

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