The Foundation for Identifying ROI for Global Supply Chain Initiatives
November 20, 2018
by Rahul Mital, project and supply chain management specialist
An impact analysis assessment is a process used to determine the potential profit that companies can expect from global logistics and supply chain management and other initiatives. The assessment looks at potential return on investment (ROI), and therefore is one of the most critical factors to consider when deciding whether to move ahead with a project. If tying up resources including materials, machine time and labor yields only a negligible profit margin or, worse yet, a loss, then what is the point? Yet many large companies that could benefit from this assessment do not conduct one.
Generating the highest ROI by first undertaking an impact analysis is ideal for global planning inventory and supply chain functions. It sounds like an obvious conclusion. When conducting an impact analysis, remember it should be considered as overhead but not as a major burden. As a general rule, it should not constitute more than three to five percent of the calculated cost benefit or the profit forecasted, assuming the project is approved and completed.
There are a variety of costs associated with proposed logistics and supply chain projects. Some might be one-time expenses while others are ongoing in nature. Both these factors need to be identified, considered and evaluated before deciding whether or not to move forward with logistics and supply chain management projects. Here are some of the analytics companies need to collect in order to turn raw data into useful business intelligence (BI) for calculating ROI:
- The number of employees involved, labor rates and estimated man hours
- The reliance on outside consulting fees if required
- The training costs (ongoing and one-time expenses):
- The hardware, software and other supplies needed. Fortunately, the supply chain analytics software packages needed to help determine loss or gain (like Tableau) do not require heavy customization. Choosing the wrong software package to match a company’s specific needs can be a six-figure (or better) mistake.
Taking all of these factors into account, ROI can be expressed in a formula:
(Benefits-Costs) ÷ Costs = ROI
The impact analysis of calculating ROI should entail about 20-25 percent of the time and money spent in the project proposal phase. This percentage is not the same as the overall three to five percent listed previously. That earlier number represents the suggested final percentage as a portion of overhead, if a project moves forward and comes to fruition. It may be well spent if the final verdict determines that a project should not go forward.
The glass half full
When making “go or no-go” decisions, subtract the costs from any benefits derived to determine what a proposal could bring to the bottom line. Considerations include:
- A cost reduction or cost avoidance factor. Can a hard cost be removed from a process? If so, are there embedded cost savings as a result? Assigning the costs related to a project will help identify problem areas to address, modify and correct.
- An opportunity to sell excess inventory. This could result from productivity gains, but it needs to be measured accurately. Selling excess inventory can help fund a new project proposal in a sense, whether it is moved to another company department or location, or to an outside customer. In large companies, having excess inventory that runs well into the millions of dollars is not uncommon. There are different reasons for this including the result of unrealistic forecasts, human error or a market crash for a particular commodity (the oil and gas industry saw the latter in 2015-2016).
- Customer satisfaction. If a new project (like an easier to use ordering and shipping system) is on the right track, a higher level of customer satisfaction is one byproduct. If this satisfaction increases, will there be more orders and a stronger bottom line that can be turned into a dollar figure?
- Process improvement or simplification. If process improvement or simplification is built in, it not only means increased productivity, but also might result in decreased ongoing training and retraining costs, less tooling, fewer process steps and a leaner process. This can also result in long-term infrastructure improvement. These points are also known as “soft savings” that often don’t show up directly on a financial statement – but finding ways to quantify those savings can help better define the ROI expected.
The decision to proceed
Some major projects may take a year or more to study upfront, while others can take just a few months, depending on the size and scope. Regardless of the duration, use an impact analysis process to visualize the big picture.
Start by setting goals or the financial targets that are desired to achieve the ROI required. Look at all the variables. The “hard savings” uncovered directly impact a company’s financial statement, while soft savings can help change an organization’s culture. For example, the process can make a company and each department more data-driven and increase the confidence in making accurate and financially sound decisions.
Determining the maximum ROI from global inventory and supply chain logistics related to any proposed project is well worth the time, effort and cost. A thorough benefit-cost analysis upfront can help tweak the ROI or stop a project dead in its tracks if it is revealed not to be feasible. Compare costs to the expected output impact. Use the data to drive the final decision: will the initiative produce the expected operational and profit results?
About the Author:
Rahul Mital is a project and supply chain management specialist currently working in the oil and gas industry along the Texas Gulf Coast. He also has a background as a solutions architect and is well versed in Oracle applications. For comments or questions, please send email to: firstname.lastname@example.org.