CSCMP's Supply Chain Quarterly
October 20, 2018

Invest for success

Better allocation of supply chain technology investments helps companies reach higher stages of supply chain maturity—and, in turn, achieve stronger overall business performance.

For the past 10 years, Gartner has conducted a study of supply chain management technology users' wants and needs. For that study, we ask end users to comment on their priorities, challenges, and investment strategies related to those technologies. The 473 respondents who completed the 2017 survey were qualified according to industry as well as their personal involvement in decisions regarding supply chain management processes, strategy, and supporting technology. A key component of the study is to evaluate how various factors like information technology (IT) investments influence supply chain maturity.

A notable takeaway from this year's study is that better allocating supply chain IT investments appears to be a key contributor to improving supply chain maturity. This matters because Gartner's research has consistently found a strong correlation between a company's supply chain maturity and its overall business performance. Nearly 90 percent of organizations at the highest (Stages 4 and 5) supply chain maturity levels are above-average performers or leaders in their industry while, regrettably, over 40 percent of companies at the lowest (Stage 1) supply chain maturity level are below average.

Article Figures
[Figure 1] SCM IT budget allocation by supply chain maturity
[Figure 1] SCM IT budget allocation by supply chain maturity Enlarge this image

Measuring maturity and IT spending
The relationship between supply chain maturity and investments in supply chain IT was revealed by examining respondents' answers in the context of both Gartner's supply chain maturity model and the "Run, Grow, Transform" framework Gartner uses to categorize IT spending.

The supply chain maturity model defines five stages for supply chain capability: React, Anticipate, Integrate, Collaborate, and Orchestrate. To reach the highest level of maturity, companies must sequentially progress through each stage:

  • Stage 1 (React) supply chains are revenue-focused and have a "firefighting" operational culture and a fragmented approach to product supply and delivery. Supporting technology is lacking and/or fragmented, and individual business units rely on a mix of legacy systems, third-party software, and spreadsheets to support supply chain functions.
  • Stage 2 (Anticipate) supply chains begin building more cohesive organizations with greater emphasis on standardizing processes and reducing costs. They focus supply chain IT investments on specific operating functions, although these remain disconnected due to the lack of an integrated supply chain strategy.
  • Stage 3 (Integrate) supply chains seek to efficiently deliver outcomes across the value chain by crafting a holistic design of supply chain processes that span functional boundaries. The supply chain organization's expanded scope of control includes planning and execution functions as well as, at minimum, a center of excellence to support strategy, design, and performance improvement.
  • Stage 4 (Collaborate) supply chains strive to better align with and deliver customer-defined value through a market-based orientation and "outside-in" supply chain design. Companies develop cost-to-serve insights and begin working with selected customers and strategic suppliers to develop and optimize multienterprise business processes.
  • Stage 5 (Orchestrate) maturity is likely relevant for only those few companies that have the market-leadership position, vision, and capability to go beyond one-to-one collaborative relationships. Success requires cultural values and governance that balance operational excellence with innovation and multienterprise value creation through partner ecosystem orchestration.

In the "Run, Grow, Transform" framework, run-the-business IT initiatives address essential, generally undifferentiated business processes. These typically focus on operational processes, maintaining the status quo, reducing costs, and improving accuracy or control. In supply chain IT this can include things like infrastructure costs, application maintenance, and basic support services. Grow-the-business initiatives aim to improve operations and performance within current business models. They often are measured in financial terms, such as revenue and earnings, or in operational terms, such as cycle times, customer retention, or quality. A key aspect of a grow-the-business discussion is that the value comes from directly affecting existing business processes. In supply chain IT this can include things like implementing new or upgrading existing applications.

Transform-the-business initiatives blaze new trails, supporting, for example, new markets, new products, new processes, and new business models. Transformational change affects entire ecosystems, including a company's employees, partners, markets, and customers, and can in some cases fundamentally alter the trajectory of markets. In supply chain IT, transform-the-business initiatives are strategically inspired, and thus usually are driven from the top down. It is often hard to identify and quantify specific value from transform-the-business initiatives due to business unknowns.

Transform-the-business investments improve maturity
Gartner's study found that Stage 1 maturity companies allocate 67 percent of their supply chain IT budgets to basic, run-the business services, 25 percent to grow-the-business initiatives, and less than 10 percent to transformational investments. In contrast, the highest-state maturity organizations (Stages 4 and 5) are far more balanced; only 40 percent of their budgets are aimed at run-the-business services, while 26 percent is allocated to transformational investments—over three times the 8 percent allocated to transformational initiatives by Stage 1 maturity companies. (See Figure 1.)

As the above descriptions of the five maturity stages suggest, supply chain technology is integral to companies' ability to "anticipate, integrate, collaborate, and orchestrate" their internal and external supply chains. That is supported by the study's findings, which indicate that for supply chain organizations to reach higher stages of maturity they must focus more attention on how they apportion their IT investments.

Any effort to develop a strategy for IT investments with an eye toward advancing supply chain maturity must begin with laying a solid foundation by building a cohesive system of record that becomes the transactional backbone for the enterprise. To achieve Stage 2 maturity, supply chain organizations then need to consolidate transactional systems of record while also investing in stand-alone point solutions for functional standardization and scalability. Stage 3 maturity requires organizations to use design modeling and analysis to evaluate supply lead times, cost to deliver, and inventory positioning in support of resilience, efficiency, and agility. They must also target investments to develop platforms that help them synchronize processes across individual functional domains regardless of reporting relationships and span of control.

Finally, to reach Stage 4 and Stage 5 maturity, organizations must accelerate the convergence of planning and execution to enhance visibility, collaboration, and agility across a networked supply chain by emphasizing technology investments that enable multienterprise process orchestration within and across partner ecosystems. In particular, Stage 5 organizations achieve competitive advantage by making technology investments that are built upon a stable system-of-record foundation, enhanced with high-value-added systems that enable differentiation and innovation.

As previously noted, a major benefit of achieving higher levels of supply chain maturity is that it directly correlates with stronger corporate performance. That's reason enough to invest in technology that will support and enable advances in maturity. But there's an additional benefit to be had: Gartner's research finds that for companies to improve their overall business performance they must reallocate supply chain IT investments, with a strong emphasis on earmarking more capital for growth-oriented and transformational IT initiatives.

C. Dwight Klappich is a research vice president at the research and advisory firm Gartner Inc.

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