Justification of Network Investments

I wrote a series of articles on how to build value in supply chain networks during the month of January. When I write about network automation, I get 25% of the readership that I get when I write about talent or Sales and Operations Planning (S&OP). The reason? Sadly, just not as much interest.

In this newsletter, I share some insights on the research and writing on building value in supply chain operating networks.

Reflection

As an industry analyst for the past two decades, I have observed that companies speak of the importance of automating value networks but invest in enterprise applications. Enterprise applications, while necessary for accounting, are not the connectors for a network. The reason is that the enterprise applications are inside-out focused on enterprise flow, while a network moves insights from the network to the enterprise bi-directionally. The flows are never one-to-one. As a result, networks will never be successful based on the connectivity of multiple tiers of enterprise systems that are point-to-point.

Let's start with a definition. I define a network as the bi-directional information exchange of manufacturing, procurement, quality, and transportation flows across multiple tiers of trading partners in a many-to-many trading partner information exchange with minimal latency. A quick note: Electronic Data Interchange (EDI) does not meet this definition. EDI is not bi-directional or across multiple tiers. I think of EDI like old-fashioned mail. It is costly and must be opened by the receiver. Like mail and EDI messages, it takes hours/days to deliver.

Today, in supply chains, only 8% of multi-tier data flows through one-to-many or many-to-many networks, while 29% is based on Electronic Data Interchange (EDI). The balance moves through spreadsheets and email. As a result, there is no system of record to synchronize changes, and the data takes one to three days to move data from node to node. (Brand owner to contract manufacturer or third-party logistics provider to a retailer.) This data latency and the lack of synchronization results in network black holes. (A black hole is an astronomical term where the pull is so great that no matter escapes.) This is one of the primary issues companies need help improving network visibility.

Reducing the data latency and improving data accuracy across trading partners is critical for ESG, resilience, and risk management imperatives, but it takes work. While most supply chain leaders want to make decisions in real time, they are not aware of the data latency issues of outsourcing. In addition, today, the supply chain leader struggles with over one hundred networks that do not inter-operate. In addition, when data is moved from the network to the enterprise, there is nowhere to put it.

Sharing a Story

Five years ago, I spoke to Paul. For years, his focus was on the management of contract manufacturing. He found the switching back and forth between spreadsheets to be mind-numbing and laborious. He desperately wanted to purchase and implement a solution to move data bi-directionally between contract manufacturers, the raw material providers, and his enterprise systems as a brand owner with minimal latency and distortion. While employed, he enlisted my help to write a proposal for his boss on the value of a network. When we started the discussion, his project justification was based on reducing planners (Full-Time Equivalents (FTEs)). My advice was that this was a non-starter, and the justification would be dead on arrival. Paul's first reaction was laughter, and his second reaction was the simple question, "Why?" I answered that the relative ROI to reduce planners was a weak justification with a four-year payback. I argued that it would lose when the project was stacked against other potential options. My argument was that the investment in networks should be about eliminating black holes and making decisions at the speed of business. I asked Paul to travel back in time and put together the case based on examples from the last year within the company on:

• Quality and Supply Reliability. The latency, or delay, of quality information between a manufacturer and a brand owner is 1.5 days. I asked Paul to find internal case studies where earlier detection of supplier quality data could have prevented write-offs or recalls.
• Customer Service. For many food and beverage manufacturers, low-volume products with lumpy demand are outsourced. Many of these products are tied to growth initiatives. The data latency of supply shipment information is 1.8 days. As a result, these products fall into replenishment black holes for almost two days. I asked Paul to monitor the number of out-of-stock incidents for these products and the associated deduction charges.
• Resiliency. With the growing shortage of assets in the industry and a tightening of capacity, I asked Paul to closely evaluate the impact of a three-day wait time for capacity acceptance. This is especially relevant for new product launches and the scheduling of the second production runs.

He retired before he finished the analysis, but I would love your thoughts. Based on the research, how do you think Paul should have justified the investment in network capabilities? Most supply chain leaders struggle in the justification of network technologies. They inherently know they need them, but the justification gets muddy quickly!

I will speak on the topic at the Foundation for Strategic Sourcing and an upcoming ASCM webinar. I hope to continue the discussion there.

For additional insights:

Making A Case Study for Network Enablement

Getting Clear on Definitions

Reflections on the Network of Networks