IT on demand

Logistics and supply chain operations are notoriously dependent on IT, but equally there are few supply chain managers who would claim to be convinced that they are receiving value for money. Either logistics applications are force-fit to the artificial confines of an all-embracing ERP system, which costs a packet, takes months or more likely years to install, and requires constant internal and external support to implement the smallest change; or the supply chain is run on a mishmash of ‘best of breed’ applications with clunky or non-existent interfaces, and where support is at best problematic because the software vendors may no longer exist.

There is another approach, which a recent survey by Aberdeen Group suggests is now sufficiently established and respectable to have reached the ‘tipping point’ – there are enough current and prospective users to evidence the viability of the approach and to encourage others to follow.

The approach goes under many names: ‘on demand’, ‘software as a service’, ‘externally hosted applications’, for example, and isn’t exactly new – indeed it harks back to the early days of business computing and the use of external bureau services to process data. But the modern form is much more sophisticated and offers clear benefits in terms of implementation speed, ease of maintenance and upgrade, and return on investment.

Actually, ‘on demand’ services come in several flavours now, offering a different range of advantages for differently circumstanced firms, and companies contemplating this route towards improved supply chain IT performance need to be aware of the distinctions.

Creating ‘community benefits’
The ‘multi-tenant’ model is where several or many companies share the same externally hosted software and hardware (albeit with their own choice of configuration settings, access procedures etc). The cost of software, hardware, development and upgrade are thus shared across many firms, it is easy for the host to apply an upgrade to the whole community, and the possibility exists of creating ‘community benefits’, from benchmarking to group buying power or backhaul matching.

In a ‘multi-instance shared service’, each client company has their own version of the software but shares common services. This reduces the ‘community benefits’ available, but does make it easier to accommodate unique requirements, and means that a client can choose not to migrate to the latest version of the software. It is also easier to bring the operation back in-house if required.

The Application Service Provider (ASP) model sees the software vendor or more likely a specialist hosting company providing hardware and software as a unique service to each customer. This of course negates the possibility of cost sharing, but does offer the usual benefits of outsourcing: transferring the risks and management responsibilities. A ‘utility ASP’ sees the hosting company maintaining and running applications unique to each client, but on hardware shared across the customer base.

Finally, there is a hybrid approach where a firm may retain its own inhouse operations for primary supply chain applications but can rent in supplementary functionality on an ‘as required’ basis.

In fact, the Aberdeen report suggests that most companies, whatever their starting point, are taking a hybrid approach – using ‘on demand’ to extend or selectively replace existing supply chain IT investment. This is particularly true of externally-facing applications. The most popular uses of ‘on demand’ are in transport management, supply chain visibility, collaborative forecasting, inventory management and demand-supply synchronisation: it is no coincidence that these are areas where ‘community benefits’ can be important but the costs of getting every supply network member onto the same version of the same software (and keeping them there!) don’t bear thinking about.

Avoiding commitment
The benefits of ‘software as a service’ can be considerable, but vary enormously from case to case. Some firms see ‘on demand’ very much as an interim solution: for example as a way to begin integrating the results of a merger or acquisition without committing to a major IT investment, or as a way of meeting a new situation when it is not clear if the requirement is permanent.

Necessarily some of the attraction is financial: capital costs can be shared across many players, as are the costs of maintenance and upgrade. Indeed, it becomes possible largely to eliminate the ‘capital’ part of the SCM IT budget. That has attractions in itself and, because the customer is paying on a subscription or ‘pay as you go’ basis, it becomes much easier to allocate logistics IT costs to specific activities.

It might be thought that on demand applications pose a threat to the established ERP vendors, but in practice this is unlikely: instead we can expect in the very near future that SAP and the rest will move into this space either directly or through endorsement of approved hosts and applications. Indeed, this is already happening.

Key points

On demand or ‘software as a service’ is already an established model in other business functions and is rapidly growing as a route for, especially outward facing, supply chain applications

It may offer short or long term strategies and solutions for a whole supply chain operation or more commonly for selected elements

Financial benefits include reduction in capital requirement and alignment of expenditure with revenues. Other benefits may include reduced IT staff requirements, transfer of risk and management responsibility, and the ability to create and maintain uniformity across a family of supply chain players without excessive cost