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July 26, 2002

Down, But Not Out

SCM solutions are alive and kicking, and sorting through the many old and new choices is a difficult task

by Ram Reddy

Continued from Page 1

These differences, combined with the difficulty in implementing integrated suites with big footprints, have led to the growth of niche SCM technologies. The origins of these new SCM technologies are grounded in industry-specific best practices from the areas of sourcing, manufacturing, and distribution. These niche SCM technologies have considerable credibility packaged with their solutions. They can point to existing companies within their industry that are using the best practices embedded in their solutions to extract efficiencies and reduce costs.

Compelling and demonstrable business value within a narrow, functional area has been the niche technologies' selling point. Given that their genesis is in "productizing" their internal best practices, these companies haven't invested huge sums of money in product development compared to integrated SCM application vendors. The product license costs are much smaller than the integrated suite.

In addition to brick-and-mortar companies developing these small-footprint, affordable SCM technologies are the alumni of the SCM technology pioneer companies. Just as Microsoft alumni founded technology companies focused on one area — such as audio, video, or application development tools — SCM technology vendor alumni are developing similar niche solutions.

The SCM discipline is vast and its practice differs significantly from industry to industry. The growth of niche SCM technology solutions has created a dilemma for corporations in technology acquisition decisions. How do they sift through these SCM technologies that claim to solve their problems rapidly? I recommend treating these technology solutions strictly from a return on investment (ROI) perspective.

So Many Choices, So Little Time

If you're considering a niche SCM technology, perform an ROI analysis — based both on vendor supplied data and calling reference accounts. No set process or methodology will lead to the right decision. It's a judgment call made by management after reviewing the ROI criteria for a particular technology. What will improve an otherwise purely subjective decision is the amount of due diligence performed by the IT and business functions in verifying the ROI criteria — internally and externally. Similar exercises are conducted for integrated SCM suites as well. However, given the footprint of these integrated suites, measuring ROI after implementation is difficult, considering the number of departments and functions involved. If the technology vendor is unable to provide a reference account from an industry similar to yours, move on. You don't want to be a beta customer to see if the SCM niche solution can work in your industry.

However, if the niche SCM technology vendor does provide "referenceable" industry accounts or, better yet, points to its parent company, which has used the solution successfully, consider acquiring its technology based on the integration framework. Niche technologies that can integrate with existing applications within a company using loosely coupled integration mechanisms, such as XML or electronic data interchange, are preferred over those calling for application-to-application integration. Given the rapid innovation in SCM disciplines, cheaper, better, and faster SCM technology alternatives will continue to emerge periodically. Implementing loosely coupled SCM technologies lets your company transition to the latest and greatest technology at any point in time — dictated by your company's ROI criteria.

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It's About the Business Model

The underlying reason for the continued investment in SCM technologies (setting aside the Sept. 11th factor) is that it addresses basic business model issues. Sales revenue minus cost of goods sold and minus selling and general administrative expenses equals profit. No amount of innovative technologies can change this fundamental relationship. After the heady Internet era, technology vendors, corporations, and venture capital firms are refocusing on this inescapable truth. SCM niche technologies that reduce cost of goods sold or selling and general administrative expenses are still favored — especially in times where increasing sales revenue is difficult. A new breed of SCM technology vendors that are turning their best practices from a SCM discipline into a software product are gaining ground over pure technology vendors. No matter who wins, customers of these SCM technology vendors will find quicker and cheaper solutions in realizing benefits from their SCM solutions.

Ram Reddy [ramreddy@tacticagroup.com] is the author of Supply Chains to Virtual Integration (McGraw-Hill, 2001). He is the president of Tactica Consulting Group (www.tacticagroup.com), a technology and business strategy consulting company.