Does Your Supply Chain
Management System
Deliver The Goods?
A Case Study
Kenton Walker
University of Wyoming
[email protected]
This case describes the outcomes of a post-implementation review of a supply chain
management (SCM) project at a large North American manufacturing company.
Approximately 15 months after go live, and led by members of the internal audit
department, management formed an evaluation team including business process
representatives, systems implementation team members, and system users. Their
purpose was to conduct a project post-audit to document lessons learned from the
project so that company management would know the outcomes of the project. The
assessment exercise consisted of reviewing business process changes, conducting a
financial analysis of project outcomes, and documenting lessons learned from this
project so that future project teams could use this experience. The outcome served to
confirm that management made the correct decision to undertake the project and
provided a number of valuable lessons.
Introduction
Systems development projects can be critical to
organizations looking to increase efficiency and gain
competitive advantage. However, such projects have a
poor track record of meeting key objectives (McQuay,
2005). All too commonly a project team may spend
months or years working toward a fixed “go live” date to
implement a new supply chain management (SCM)
system only to find that when the date arrives not all
goes as planned. The system is functional, but as a
result of managing the project to a fixed implementation
date, compromises and tradeoffs translated into
reduced functionality. In addition, the business case
undoubtedly
promised
improved
operational
performance to justify the costs and risks of the new
system and these are now in question.
The big question for management is, “were the promised
cost reductions, increased cycle times, and inventory
savings realized”? Fortunately, research shows that, in
general, manufacturing companies implementing new
supply chain management (SCM) systems can expect to
increase gross margins, inventory turnover, market
share, return on sales, and reduce selling and
administrative costs (Dehning et al., 2007). Other
research shows that public companies that announced
implementations
of
these
systems
reported
improvement in measures of return on assets, return on
sales, and profitability (Hendricks et al., 2007). However,
implementing SCM does not guarantee benefits. The
trick is not only to get the system in place but to make
sure the company achieves the benefits.
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An International Journal
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Many projects fail to deliver promised benefits because
management did not conduct adequate project postmortems, audit system usage, examine information
flows, and revisit the project's justification (Puterbaugh,
2003). Senior managers should rely on structured
processes and internal auditors to provide an
independent assessment of project outcomes.
While much literature addresses the expected benefits
of SCM systems, few actually study whether the benefits
were achieved or not. This paper reports on the process
and outcomes of the post-audit of a SCM project at a
large manufacturing company. The company, with sales
of approximately $5 billion, was the third-largest in its
industry and sold its products to a distributor network
of over 500 outlets. Approximately 15 months after go
live and led by members of the internal audit
department, an evaluation team was formed including
business
process
representatives,
systems
implementation team members, and system users. Their
purpose was to conduct a project post-audit including
documenting lessons learned from the project so that
company management could know the process changes
and financial impacts of the project and future project
teams could easily benefit from this experience. The
following sections describe the motivations for the
project, an overview of the company's SCM
environment, changes to important business processes,
lessons learned, and outcomes of the business
realization plan.
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Does Your Supply Chain Management System Deliver The Goods? A Case Study
Project Motivations
The company had three principal motivations for
undertaking this project. First, customers rated the
company far below its competitors concerning
performance of product ordering activities - the
company was clearly not “best in class.” Second, the
company was spending costly overhead dollars to
maintain and operate systems and processes that did
not meet current needs. As a result, the company was
foregoing significant profit improvement opportunities.
Finally, vendor support for a number of legacy systems
was soon to expire and the company needed new
systems to support a $5 billion company.
The key issue was clearly to improve the product
ordering system. The company and its customers
needed to lower inventories and improve product
quality. Lower inventories could lead to huge one-time
savings. An integrated information technology
infrastructure would provide enormous improvements
from a customer perspective.
Overview of the Company's SCM Environment
The company produces a seasonal, make-to-order
product in a three-member distribution system
environment. The company sells to a distribution
network that in turn sells to retail outlets. Lead time for
delivery of the company's perishable product ranges
between two and three months. The length of time
between
materials
entering
production
and
order/delivery makes production planning very
important in order to avoid excess production (that will
be destroyed) and product shortages (resulting in lost
sales). The company purchases product raw materials
but produces its own packaging materials.
Major components of the SCM process include order
management, plant scheduling, and sales and
operations planning. Internal participants in the system
must cooperate closely to ensure customer satisfaction
and control costs. The customer service organization
(part of order management) supports the supply chain
and operations groups. Customer service works with
product distributors to establish suitable inventory
levels throughout the year, product substitution rules,
rules for rush orders, and handling of out-of-stock
situations. Product delivery to distributors occurs via
rail or truck.
Business Process Changes
The assessment team identified and evaluated specific
business processes that changed with the new system in
order to achieve the benefits targeted by the company.
These included the customer ordering system, peak
inventory build, plant run strategy, distribution center
inventory management strategy, information technology
infrastructure, sales volume forecasting, planning and
optimization, and the roles and accountability of
personnel. A principal objective of implementing the
new SCM system was to integrate and streamline
business processes. As a result, a review of the changes
to business processes and their outcomes was an
important element of the post-audit exercise.
Figure 1 illustrates the past and present processes for
customer orders. Basically, the old ordering system
required customers to send the company a forecast for
their orders a few weeks in advance, the company would
determine what they could make and ship, then the
company turned that information into an order. In effect,
the company shipped an order based on what the
Figure 1
Customer Ordering Processes
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Does Your Supply Chain Management System Deliver The Goods? A Case Study
company could deliver rather than on what the
customer requested. Along the way, the company made
substitutions to the order to fill out the load. The
company redesigned the ordering process to permit
customers to order what they wanted and receive
delivery of the same order. The customers also got
“visibility” concerning their loads, i.e. what was
shipped, when the order left the company, and when it
would arrive.
Sales of the company's products are seasonal. As a
result, customers build inventory in advance of the peak
sales periods. Figure 2 illustrates the previous and new
peak inventory build processes. Peak inventory builds
under the revised process affect only the 100 largest
customers, versus all customers in the old process.
Previously, there was approximately 19 days of
inventory (DOI) with the customer and 10 DOI with the
company. The value of this inventory amounted to
about $122 million with customers and $24 million at the
company. Under the new process, DOI at the company
and customers is 16 and 8.5 days, respectively, and the
corresponding values declined to $100 million and $21
million.
The third process changed by the new SCM system was
the plant run strategy. Historically, the company
employed what they referred to as a periodic strategy.
This process considered sales volume, product quality,
and delivery dates for determining production. The new
strategy is a run frequency strategy. In this approach,
sales volume, quality, minimum run economies, dollar
cost of changeovers, and dollars in inventory are
considered. The company's previous tools and
processes dictated use of one strategy across all plants.
The new run strategy is plant and geography specific
and tied to companion inventory strategies with links to
suppliers.
The company's distribution center inventory management
strategy changed with the new SCM system. Figure 3
illustrates the change in approach. The future strategy
derives target level inventories in concert with
production strategies. The addition of new tools enables
Figure 2
Peak Inventory Build Processes
Figure 3
Distribution Center (DC) Management Strategies
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Does Your Supply Chain Management System Deliver The Goods? A Case Study
Figure 4
Information Technology Strategy Impact
Figure 5
New Forecasting Process
simplified methods to reduce inventory quantities and
streamline shipments. The strategy also disconnected
inventory management from customer forecasts and
connects to customer orders.
The information technology strategy was greatly
simplified. The company currently operates seven
hardware platforms and over 70 software applications.
The new strategy relies on SAP plus a few other
applications. Figure 4 illustrates the results of the new
strategy by major business process.
In the past, the company prepared three sales volume
forecasts; one each by sales, production operations, and
finance. The processes were time consuming,
complicated, and highly political. These characteristics
eventually impacted the customer ordering process
causing all manner of “games” in forecasting, e.g. over
forecasting by the customers to get desired products
when they knew the company was going to cut their
order, carrying excessive inventory (keeping cash tied
up), high finished goods write-offs (the products have a
fixed shelf life), and expedited shipping at higher costs.
The new process, depicted in Figure 5, produces only
one forecast resulting in several improvements over the
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An International Journal
Vol. 11 - N°2 - 2010
old system. Under the new process, only one number
drives sales, production, and financial planning. In
addition, the new process incorporates ranges of
demand (how high or low) to establish parameters for
contingency planning. The process also explicitly
considers products that are capacity constrained or
highly volatile.
The company's planning and optimization process
previously consisted of only high- and low-level plans,
i.e. the company could produce a summary, sales and
production forecast or forecasts of the finest details. In
addition, the company possessed a limited capacity to
perform scenario plans connected with equally limited
financial impacts. The new process added the capability
to generate mid-level plans consisting of discrete
regional and customized volume plans. In addition,
multiple scenarios and contingency plans are now
possible. Finally, all plans include full cost information.
The new system served to improve significantly the
company's process to define the roles and
accountabilities of employees. Previously, the process
was narrow and task-oriented. The new procedure is
process focused. One example concerns the roles of
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Does Your Supply Chain Management System Deliver The Goods? A Case Study
customer service employees. Previous to the process
changes, there were seven job classifications covering
26 individuals in this group. Now there is one job
description for fourteen individuals. The company
implemented the new approach to evaluating employee
positions in a number of other areas, resulting in cost
savings and more efficient operations.
Lessons Learned
Project management organized the effort to identify and
document important lessons learned from this project
around seven key areas; project outcomes, project
management, business processes, organization, change
management, leadership, and technology. The team
used these categories because the project
implementation team identified them at the outset of the
project as key areas of attention during the course of the
implementation process.
Project outcomes. The principal project outcome was to
integrate the company's business processes to a greater
extent than ever before. Customer ordering was greatly
improved. The go live and integration with the financial
system went well and inventory visibility was never lost.
The company was able to close an entire data center at
substantial savings. On the down side, the team felt they
could have done a better job of getting project metrics
right, and once set, manage them consistently across
the organization. They also needed to be clearer in
communicating the ROI target and what needed to
happen to the business processes to make it possible.
Finally, a phased approach to implementing such a large
project would lessen the project risk.
Project management “hits” included early abandonment
of a plan to have multiple team leaders, good project
management organization structure, and delaying the go
live by three months. In addition, project management
benefited from commitments from the software vendor
as a result of important performance guarantees. The
“misses” were the large project scope, failure to use a
phased approach, lack of contingency planning for
unexpected events, and giving the project manager
sufficient authority across the team. The post-audit
team noted that the implementation team's
documentation of lessons learned contained some
omissions that resulted in considerable work to
complete.
Business processes. Process owners and information
technology are more knowledgeable about the
company's end-to-end processes than ever before.
Documentation of processes is now very good. Areas for
improvement in performance of the implementation
team included:
• place more emphasis on the future state of processes
before the system was selected and designed,
• get more individuals involved who understand the
business end-to-end, especially in a project of this
scope,
• know customers impacts up front,
• ensure clarity of handoffs, and
• develop more user-friendly process maps.
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Organization. The consensus of the group was that the
people were very dedicated and willing to “do whatever
it took” to keep the project moving forward. Assigning
implementation team members to more than one
process was very effective in reducing execution issues
and improving overall process integration. However,
there were a number of shortcomings in this area.
• Project management did not have the best people (in
terms of skills, experience, business knowledge, style,
and that had a big-picture focus) in all instances.
• The project needed more leadership from top-level
management within the organization. Some of these
individuals needed to reduce their day-to-day
responsibilities for such a large-scale initiative.
• The culture of the organization did not support project
team members in reporting “bad news” in a timely
manner.
• There was not a plan for how employees would
accomplish work within the new processes. In
addition, there were a number of instances where
senior management resisted realignment of
organization structures to provide for smooth
functioning of new processes.
• Decision making within the implementation team was
often slow. The team sometimes expended too much
effort to arrive at suboptimal consensus. Future teams
need to identify ways to speed-up decision making and
align the organization around their decisions.
• The success of a project organization should not rely
on heroic efforts. This project team needed more
structure, processes, standards, and accountability to
deliver predictable results without “superhuman”
effort.
• Project management should not make major
organizational changes close to go live. There were a
few instances where this occurred.
• The Human Resources function needs to be more
involved in assisting with employee performance
management, compensation, and reward systems to
promote team member buy-in. In addition, HR should
help find ways to support organizational entities that
loose members to the implementation team.
This project facilitated change management and helped
the organization to see the need for more integration
and alignment. Communication improved throughout
the company, the company learned a lot about its
people, and it will be a lot smarter about managing the
business going forward. The Business Integration group
served an important role. Training went well. On the
negative side, there was not a formal mechanism to gain
feedback from across the organization. The consensus
of the evaluation team was that the implementation
team should develop a better change plan to communicate
bad news/failures to top executives for action. System
training is not the same as business knowledge transfer.
Instead, end-to-end education for system process owners
and system users by the team before and after the system
goes live. More emphasis needs to be placed on change
readiness prior to go live and “how to” training for
understanding impacts of integration.
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Does Your Supply Chain Management System Deliver The Goods? A Case Study
Leadership was successful in clearly outlining the core
implementation team's responsibilities and aligning
their work to support a process perspective. Roles and
project metrics were clear. The project steering
committee was engaged and supportive. However,
senior management should fill process owner roles with
higher level individuals possessing a strategic
perspective and the authority to change processes. The
process owners need to be leading cross-organizational
efforts instead of IT. This means they need to build the
program management capability to do so. Leadership
roles (and role clarity) and success metrics work should
occur at the beginning of the project.
Technology. The standard SAP implementation went well
as did a new radio frequency system (the team was not
able to evaluate these benefits). The technical
infrastructure was solid and IT leadership was strong
during go live. The project would benefit if the software
vendor and consulting partner have “skin in the game.”
End-to-end testing was lacking. Custom code caused
problems and delays. User acceptance testing needs to
be stronger. The evaluation team felt that a more
thorough business process planning, design, and
mapping would benefit the system design and selection
process.
The conclusion to this portion of the exercise was a list
of suggested priorities for the company when it engaged
in the next major systems project. These priorities
included: 1) institutionalize learning from past systems
projects to future projects, 2) ensure adequate end-toend testing, 3) make sure to get the right people
involved, and 4) thoroughly address change
management issues. In addition, the group
recommended development of action plans that should
accompany each “lesson learned” in all future systems
projects: 1) identify actions to accompany each lesson,
2) assign a point of contact to each lesson, i.e. a person
with the right knowledge and skills to address any issue
that may arise, and 3) each point of contact should have
at least three roles; to review each lesson with a crossfunctional team, work with the team to create and
execute gap closure action items, and update senior
staff on progress.
Outcomes of the Benefits Realization Plan
The project implementation team developed a benefits
realization plan at the outset of the project. The
categories of benefits appear in Table 1. The business
case for the project included an investment of
approximately $26 million over three years, and the
company actually spent this amount. The evaluation
Table 1
Benefits Realization Plan
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Does Your Supply Chain Management System Deliver The Goods? A Case Study
team calculated one-time savings at $22.3 million and
ongoing savings at $6.83 million per year. Details of the
projected and realized one-time and ongoing savings
appear in Table 2. The actual internal rate of return on
the project was 29%. Sensitivity analysis showed each $1
million of ongoing cost savings impacted the IRR by 4%
and each $1 million of one-time savings 2%. Each $1
million of capital also affected the IRR by 2%. Following
is a discussion of some of the major benefits realized in
selected categories.
Among the revenue enhancement opportunities realized
with the new system, the company increased
responsiveness to short-term demand changes. Since
the new system was implemented the percentage of
change orders successfully filled rose from 19% to 68%.
The company implemented discrete, regional, and
customized pricing strategies for specific product
categories and markets that increased revenue by
approximately $1.72 million during the previous 12
months. Included in this figure are the results of
customized customer credit strategies that vary by
customer, by order further benefited the company to the
tune of $0.45 million. Part of this capability overcomes
the prior situation where orders could be loaded then
blocked for credit.
Inventory management improvements allowed the
company to reduce its inventory by $4.2 million. In
addition, customers were able to reduce inventory by an
average of 3.1 days in the first year resulting in a cash
savings of $19 million. This permits customer/partners
to invest further in their businesses with existing assets.
Inventory turns increased and quality improved in
addition to less handling expenses, damage, and
obsolescence. The initial project evaluations did not
include customer cash savings in the project ROI for the
company.
From a plant operations perspective, product
movement into and out of inventory is more accurate
and faster. Plant production is more level and there is
less unproductive labor. Additional benefits accrued
from fewer unplanned production line changeovers. The
plant warehouse operation is not so complex enabling
additional production growth with the same assets.
These benefits totaled $1.6 million.
Demand fulfillment operations experienced a significant
reduction in inbound and outbound expedited orders.
Better management of returnable containers yielded a
one-time savings of approximately $2.0 million.
General and administrative costs dropped as a result of
personnel reductions in billing and accounting. Other
headcount reductions occurred in several support
functions as a result of reduced duplication of reporting.
New reports provided for sound recommendations to
reduce SKUs, create new SKUs, prioritize alternatives,
and increased ability to control costs.
Conclusions and Implications for Management
This company formed a post-audit team consisting of
internal auditors, project team members, and a cross
section of business process owners and system users to
Table 2
One-time and Ongoing Project Savings (amounts in millions)
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Does Your Supply Chain Management System Deliver The Goods? A Case Study
conduct a review of SCM system outcomes. The
assessment exercise consisted of reviewing business
process changes, conducting a financial analysis of
project outcomes, and documenting lessons learned
from this project so that future project teams could use
this experience. The outcome served to confirm that
management made the correct decision to undertake
the project.
Senior management placed members of the company's
internal audit department in charge of the postimplementation evaluation team for two primary
reasons. First, they were independent of the project, so
management believed they would receive an unbiased
assessment of the systems contributions to company
performance. Second, as a result of their responsibilities
and experiences with the company, they were among
the most knowledgeable individuals about company
systems and operations. Internal audits of processes
and
information
systems
aid
new
system
implementation efforts (Sharif et al., 2007). This
combination of expertise resulted in a report to senior
management in this organization that confirmed the
quality of their decision to implement a new SCM system
and provided valuable lessons that will be useful to
future systems implementation teams.
While a large body of literature in SCM systems
discusses their benefits, few discuss whether
organizations actually achieve the benefits or not. The
experiences reported in this case illustrate the benefits
of a carefully organized SCM project, including a postaudit review to determine if the system delivered the
promised outcomes. There are several important
lessons contained in this case study that may assist
management of firms wishing to implement new SCM
systems.
• Leadership - Top management must be committed and
involved. Team responsibilities are clearly stated.
• Project management - Establish a project organization
structure and implementation schedule consistent
with the scope of the project and to promote good
decision-making processes. Put your best people on
the project team. Document benefits of the project.
Don't rush the implementation. Identify a good set of
project metrics to improve project management.
Communicate clearly and often.
• Business process - Identify characteristics of new
processes at an early stage. Involve lots of employees
who understand the business. Know the customer's
needs.
• Technology - Make your technology vendors and
consultants partners in the project. Include end-to-end
testing that insures user satisfaction. Minimize custom
coding.
• Post-implementation Review - Appoint unbiased
individuals knowledgeable about systems and
processes to lead this effort. Speak extensively with
users and customers. Document lessons learned for
application to future projects.
attributes much this success to the new SCM system.
The post-implementation review confirmed that the
system is indeed “delivering the goods” and will
continue to do so for years to come.
References
Dehning, B., Richardson, V., and Zmud, R. (2007), “The financial
performance effects of IT-based supply chain management
systems in manufacturing firms”, Journal of Operations
Management, Vol. 25 No. 4, pp. 806-824.
Hendricks, K., Singhal, V., and Stratman, J. (2007), “The impact
of enterprise systems on corporate performance: a study of
ERP, SCM, and CRM system implementations”, Journal of
Operations Management, Vol. 25 No. 1, pp. 65-82.
McQuay, Paul (2005), “Systems development audits”, Internal
Auditor, Vol. 62 No. 6, pp. 58-62.
Puterbaugh, J. (2003), “It may take a project post-mortem to
make sure that you system implementation date is
'go
live'
and
not
'drop
dead'”,
available
at
http://multichannelmerchant.com/opsandfulfillment/ship/fulfil
lment_project_postmortem/index.html (accessed 10 July
2008).
Sharif, A., Irani, A., and Lloyd, D. (2007), “Information
technology and performance management for build-to-order
supply chains”, International Journal of Operations & Production
Management, Vol. 27 No. 11, pp. 1235-1253.
About the author
Kenton Walker is Professor of Accounting at the University of Wyoming.
Kenton has published in a number of accounting journals including
Industrial Management & Data Systems, Journal of Management
Accounting Research, Business Process Management Journal, Management
Accounting, and Managerial Auditing Journal. Kenton was principal
consultant for Deloitte & Touche in New Zealand with major clients in
government, healthcare, manufacturing, and power generation.
Previously, he worked 10 years for the Adolph Coors Company in
Golden, Colorado serving in several financial and information systems
capacities. Kenton earned his undergraduate and master's degrees in
accounting from the University of Wisconsin-Whitewater. His Ph.D. is
from Texas A&M University.
Today, this company continues to prosper despite the
economic downturn of the past two years. Management
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