Supply-chain ROI is elusive

Report: Gaffes made stock prices fall 8.6%

Fruit of the Loom Inc. thinks it can buck a trend identified in a recent study and do supply chain right.

The Chicago-based clothing giant is launching a manufacturing data collection pilot program as the start of a supply-chain overhaul, said Brent Sealey, a senior planning manager at the company. If successful, the pilot will be the first step in a widespread effort to replace homegrown supply-chain and enterprise resource planning applications with commercial software, said Sealey. Ultimately, this should enable the company to reduce the amount of paper transactions needed, helping it optimize its supply-chain operations and improve its manufacturing processes.

But while the financial benefits of supply-chain management (SCM) improvement projects can be hard to quantify, firms are quick to feel the downside if anything goes wrong, a recent survey indicates. While many observers consider companies like Dell Computer Corp. and Cisco Systems Inc. in San Jose examples of high-tech supply-chain successes, other firms should be warned against trying to imitate them, experts said.

It's difficult to document SCM return on investment of any sort, said Vinod Singhal, associate professor of operations management at the Georgia Institute of Technology in Atlanta, who recently completed a study of 861 companies, including some that suffered highly publicized supply-chain glitches between 1989 and 1998. "Much of the evidence [for payoff] is anecdotal," Singhal said.

Only a few lucky companies can prove that they have achieved any real payoffs from their SCM efforts, said Robert Austin, an assistant professor at Harvard Business School. With so much money and time at stake, these implementations create a return-on-investment crisis, he added. "Rarely have general managers been asked to make such important high-stakes choices with so little analytical backup," he said.

But one thing is certain: Supply-chain projects are costly, time-consuming efforts—and if they go wrong, they can place a company's operations and financial viability in peril. In Singhal's study, supply-chain gaffes resulted in an average stock price plunge of 8.62%—or $120 million in capitalization per company.

In the past year, Inc. in Pasadena, Calif., Jo-Ann Stores Inc. in Hudson, Ohio, and Hershey Foods Corp. in Hershey, Pa., all faced serious inventory and supply-chain problems that slashed revenues. In each case, the problems occurred while installing SAP AG ERP software.

"All major IT projects are risky, because they involve both technological and organizational change," said Ronald Castro, director of SCM at Philippines-based Dole Asia. But these risks can be managed "by having a clear idea of where you want to go with the project, tight project management and a strong commitment to making it work," said Castro.

Dole Asia has been installing software from i2 Technologies Inc. in Dallas in an effort to create a single, coherent supply-chain system that will connect its manufacturing, logistics and sales and marketing units for pineapple harvesting and processing.

In 1997, The Boeing Co. took a $1.6 billion charge because of supply-chain bottlenecks following a surge in demand for its aircraft. Now, after revamping its supply-chain operations over the past two years, Boeing has been able to reduce parts shortages from as many as 1,400 per day to nearly zero and has been working to better align itself with its suppliers, said a spokesperson.

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An study of 861 firms over 11 years indicates any supply-chain glitch can hammer a company’s stock value.

On average, the stock tumbles 9% after a problem is announced.

Over six months, the stock can fall 20%.

On average, the market cap drops $120M per company.

Source: Georgia Institute of Technology, atlanta


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