(CAMPBELL, CALIF, 29 JULY, 2010) The tough times that have plagued the global economy have hit consumer goods companies and their supply chains particularly hard. While today’s economy shows signs of recovery, companies involved in manufacturing, distribution, and product design and development understand that they are not yet out of the woods.
Yet the dramatic economic downturn and resistant shopper are not the greatest risk to these businesses. Instead, loss of strategic vision and leadership within these firms pose a much greater threat. Without this vision, reactionary decision-making, cloaked as expense reduction, can eliminate or defer investment that will help the organization emerge from economic storm stronger, leaner and better.
On the other hand, smart companies that invest in the right kind of technology will gain a huge competitive edge. Product lifecycle management (PLM) technology is one that experts widely agree is a “right” kind of technology. By integrating PLM processes and functionality, companies involved in product design and development can manage increasingly complex business processes much more efficiently across a global network.
Why cost-cutting doesn’t work
Invariably, management’s first reaction in a downturn is to cut costs, eliminate projects, and slow the flow of cash out the door. But evidence shows that during down cycles, cost-cutting alone will not help an organization gain or maintain leadership – or even assure survival.
In fact, cutting technology investments can hinder rather than help the organization, particularly during a downturn. According to the McKinsey Quarterly 1, “Turning off technology investments during a downturn is counterproductive. When business picks up, you may lack critical capabilities…many technology investments can improve profitability in the short to medium term.”
The payback period cited is critical. McKinsey specifically points out the benefit of investments that result in short-term payoffs. If the right technology investments can contribute to profitability and help a company survive or thrive in the midst of the downturn, think what they can do in economic recovery.
According to McKinsey, the impact on earnings of any particular cost cut is 0.5 times that amount over a 6-18 month period. Investing that same amount in technology to streamline and optimize supply chain processes impacts earnings three to five times the invested amount over the same time.
Creating 5X investment
For example, assume a company with $200 million in revenue cuts $500,000 from its IT budget. According to the McKinsey findings, the impact on earnings is $500,000 x 0.5, or $250,000. If that company instead invests the $500,000 in a PLM solution to improve supply chain processes, the earnings contribution through improved efficiencies, enhanced business processes and margin improvements will be $1.5-2.5 million (three to five times the invested amount).
In another case, assume a company with $1 billion revenue cuts $2.5 million from its IT budget, resulting in a positive impact on earnings of $1.25 million. If that company invests the $2.5 million in a PLM system to improve supply chain processes, the impact on earnings can reach $12.5 million.
Aim high: What to expect
In the end, technology investment is all about the bottom line. The right PLM solution will deliver tangible business results – in the short and long term.
• Improved product success: The ability for everyone in the supply chain to work from the same set of accurate information means product development teams will collaborate better and direct efforts toward products with the greatest potential for success.
• Ability to meet market windows: The right PLM solution can drive development schedules, ensure each stakeholder is aware of deadlines and responsibilities, track task execution and completion, streamline and automate processes, and manage supplier on-time delivery.
• Strengthened product quality: PLM integrates all aspects of product development, ensures product integrity through version control, minimizes errors and reduces quality failures.
• Reduced costs: PLM helps reduce inventories, improve efficiencies, control product and sourcing costs, and avoid product over-development and early product-drop decisions.
• Gain in global flexibility: The ability to take advantage of a global manufacturing and supply chain is a key competitive advantage today. PLM’s global flexibility lets companies switch gears quickly to maintain a manageable supply chain.
• Minimized risk: The right PLM solution aligns suppliers with business objectives, and delivers visibility and insight across the supply chain to assure that suppliers are in compliance.
• Increased earnings mean significant returns on technology investment.
The instinctive or reactionary manager reaches to cut deeply when times are tough. Yet thought leaders concur that difficult times present dramatic opportunities to hold, and even grow, market share. Investing in technology solutions such as PLM, which implement rapidly and enable operational performance improvement, requires vision, leadership and courage. Does your business have what it takes?
1 James Kaplan, Roger Roberts and Johnson Sikes, “Managing IT in a Downturn: Beyond Cost Cutting,” McKinsey on Business Technology, Fall 2008.
Written by Chris Groves, president and CEO of Centric Software, Inc.,