"X" marks the spot for buried treasure, and I’ve been trying to find "X" since I was a youngster. No, I haven’t been walking around in a pirate hat with a map in one hand and a metal detector in the other. But I have had a piece of paper in one hand and a pen in the other – or since the mid-90s, a mouse and keyboard.

When I say, I’m trying to find "X," I’m really looking for the contingency factors in budgets and schedules that account for the unknown. And, of course, "X’ is always present in the IT world. From concept design thru detailed specifications, it is a way dealing with what we don’t know in our plans.

For example, early in my career many eons ago, my job was to provide initial estimate modification costs to support sales interactions for a CMMS vendor. Generally, the information I received to create the estimate came from a sales guy who provided a high-level description of a potential client’s need, usually based on a 10-minute conversation with the prospect.

At the time, my contingency approach was to estimate the development hours based on the stated need. I then doubled this estimate and applied a 20% bump on top of this total. While I was occasionally on target, some of my estimates eventually turned out too low – understandable since I really didn’t have detailed requirements.

My approach may seem quaint in retrospect, but luckily, I wasn’t responsible for the economic impact of my estimates on making the sale. Someone else would decide on the price quoted to the prospect.

Since those times so long ago, I have had to account for contingency on a wide variety of projects. I’ve also seen how numerous IT departments deal with the issue. Some employ a very structured approach concerning contingency, starting with a 50% plus or minus factor during initial concept design and driving down to 10% plus or minus, with detailed technical specifications. However, many still end up overrunning their budget plus contingency on supply chain projects.

This isn’t too surprising on supply chain execution system projects in which considerable process re-engineering occurs. The complexity inherent in these projects is fertile ground for unknowns. But there are other factors that present challenges when accounting for contingencies in these types of projects.

First, we have a vested interest in the resulting number, as approval of a project or modification is dependent on costs. Most folks believe they approach the process honestly. But the process tends to make optimists out of us.

Next, whenever a contingency number is placed on the table, there is an inevitable drive to reduce it. As we do our necessary homework, it is hard not to say that we have significantly reduced the unknowns. Contingencies can end up in the crosshairs when trying to make a business case work.

Finally, many approach contingency as accounting only for unknown requirements and hidden development complexity. But people aren’t perfect, and they tend to make mistakes. These mistakes can go beyond programming bugs touching all aspects of a project.

So how much contingency is enough? I’m not suggesting a double-the-number-plus-20% approach. But we need to step back and look at how honest we are with our processes. We need to evaluate the contingency factors that we use and resist the pressures to eviscerate them as we finalize our budgets and specifications. We need to learn to appreciate that we don’t know what we don’t know.

Do you have a better approach? How do you find "X"?

-- Tom

Photo credit: ShadBolling

On my way into the office this morning, I stopped at my local convenience store for a cup of coffee. During the past year, I stopped going to the "premium" coffee shops as a way to save money. Charging more than $2 for coffee should be a crime anyway. And I’m not talking about buying the sissy coffee type either; I’m talking just plain old coffee – black.

I’ve heard people say, "You could save a lot more money by making it yourself at home." It’s probably true, but that is beside the point. Buying it at the store is convenient (hence the term convenience store) and fast, and they actually have pretty darn good coffee.

Anyway, I know how much a 16 oz. cup costs at this place since I buy it there almost every day. So, this morning I grabbed the exact amount – 65 cents – from my change jar on the way out the door. I made the pit stop, went in and poured the coffee, and while I was standing in line, I reached into my pocket – two quarters, one nickel, and no dime – no dime in any pocket. So I put the change back in my pocket and pulled out a buck.

On the drive in, as I sipped my coffee, I thought that my premium coffee "boycott" and needing 10 cents more was very analogous to what has happened in most businesses and distribution operations over the past year or so.

Organizations have been forced to look at their budgets, cut out the premium stuff (as I did with my coffee), reduce waste, and trim costs wherever they can. And even now, they are still trying to find that last "10 cents."

So, how does that relate to Supply Chain Information Technology?

When supply chain systems are not configured or technologies are not used to their full potential, supply chain costs may remain inflated and service levels can be more difficult and costly to achieve.

You need to do an analysis of your organization's supply chain technologies to uncover cost reduction opportunities – both in terms of the overall supply chain performance as well as in technologies’ administrative costs.

Here are some questions you can ask of your own organization:

- How can existing systems’ functionality be better used to streamline operations?

- What performance metrics and tools best support the overall corporate objectives at the appropriate management levels for them to make better decisions?

- Are there practical opportunities to improve trading partner integration for timeliness and accuracy, thereby decreasing costs?

- Do the technologies effectively support corporate objectives for inventory levels?

- Are there opportunities to reduce technology administrative costs and overhead costs?

Today's business environment demands that companies optimize their technology investments and examine every opportunity to improve operating expenses while sustaining customer service.

You need to dig to find the hidden costs often buried in current systems’ configuration and processes.

Where is your dime coming from?

David Meyers

I was doing some catch-up reading on a plane recently and came across a thought-provoking piece by Gartner, a top industry research firm. My mind started to wander after I read and thought about the firm’s 2009 special report, Hype Cycle for Supply Chain Management.

The comment from the report that really had my mind spinning was:

"The common characteristics from the traditional focus of supply chain have been around the portfolio of business processes that make up SCM (Supply Chain Management). ... However, the key learning that has recently come out of this era of economic volatility is the increasing value of information in a supply chain context (for example, the use of Six Sigma in the supply chain has highlighted to companies the need for data to support improvement efforts, as well as the general lack of readily available relevant information)."

I think the report is trying to say that if you want to run a good supply chain, you need to design good processes, and you also need good information about what is happening. Well, of course, that makes perfect sense.

But just in case you’re not into research speak, or if you’re new to the IT and supply chain software game, let me break it down for you.

The "portfolio of business processes that make up SCM" is just a fancy way to describe the variety of methods that you allow you to do the required things to move your product and information through the various steps in the supply chain.

The reference to the "increasing value of information in a supply chain context" just means that in good times and in bad times supply chain information is important. In volatile times – up or down – it is even more important.

When I saw the comment regarding the "general lack of readily available relevant information" it made me think: Do most companies have a good supply of irrelevant data? Probably so.

And the mention of Six Sigma suggested, to me, that without it, most folks wouldn’t know they needed data to support improvement efforts. Six Sigma is definitely a great strategy and objective. But you shouldn’t have to be a black belt to employ common sense or self-defense, should you?

In reflection of Gartner’s research, I came back to a recurring theme that I’ve found in many of my projects: It’s not brain surgery or rocket science; it’s mostly basic blocking and tackling.

So, having good information is not the answer - only the beginning of the answer. To have real value, the information must be able to be applied to processes that allow us to respond and make good decisions. It is not just about information. It is about good processes and good information working together.

You might say, "Well, OK, but what are good processes and good information?"

Good Supply Chain processes (Plan-Buy-Make-Move-Store-Sell) allow you to operate with a supply chain strategy that provides for great customer satisfaction at a minimal total delivered cost.

Good information consists of accurate supply chain visibility into supply and demand and the related costs. This includes knowing the answers to the following questions:

Supply (or Inventory) Data – How much do I have on hand? How much is in transit? When will it arrive so that I can ship to my customers? What method of transportation is utilized to get it here? How much is backordered? And what is needed/planned/forecasted for future periods?

Demand (or Customer Order/Shipping) Data – What have my customers already ordered? What do I plan to ship to my customers in the future? How much of it? When should they expect to get it, and by what method of transportation?

Supply Chain Costs - What are the costs as product moves through the "Plan" to the "Sell" processes (purchase price, transportation charges, customs, duty, taxes, etc.)?

This is it, simple. Why do folks try to make this so difficult? Let me know what you think.

David

Photo credit: mansionwb