Getting value from IT investments: to get a solid ROI from IT, define your company's strategic business objectives and processes, then focus on connectivity to critical customers and suppliers.

Information technology (IT) has transformed the way manufacturing is conducted, monitored, and optimized. Still, calculating the return on investment (ROI) for IT continues to be a struggle. The fundamental principle behind determining an IT ROI is that the "value of information" can be extrapolated to dollars of business benefit. This value differs depending on the level (plant, enterprise, or external connectivity) at which companies are investing in IT. Another barrier to determining IT ROI is that many companies lack true knowledge of their manufacturing and business processes and cannot determine the impact of new or more reliable information.

PLANT LEVEL SYSTEMS

For IT investments close to the manufacturing process, IT ROI calculations are more concrete than for enterprise, supply chain, or Internet space investments. However, given the maturity of process control systems (PCS) and manufacturing execution systems (MES) within most manufacturing companies, the return on these IT investments are less significant. They are usually tied to reductions in head count through automation of manual tasks.

Most often, these projects are justified based on improvements to the reliability, quantity, or quality of data being sent to higher level IT systems. For example, a warehouse management system (WMS) or a bar code reading system installed at the plant should improve efficiency, but its real business value is ensuring the proper material is shipped to the customer and that accurate invoices are sent promptly.

Plant level systems' value derives from their ability to determine, monitor, and control processes. Advanced planning and scheduling (APS) is the biggest remaining opportunity tot most manufacturers. The ability to send reliable information on cost, quality, and customer (or supplier) specifications to and from higher-level enterprise or supply chain IT systems determines their future value.

ENTERPRISE LEVEL SYSTEMS

Many manufacturers are still reeling from implementing large enterprise resource planning (ERP) projects designed to integrate business functions. The ongoing maintenance expense, rigidity, and lack of flexible external connectivity inherent within most ERP systems have led some companies to question their value. Most suppliers have stopped using the ERP moniker to describe their products because of the backlash.

Enterprise integrating application (EIA) may be a better label for these systems. The need for such applications remains, particularly within mid-tier manufacturing firms. Some companies have internally developed IT business systems and use the "If it ain't broke ..." mindset to justify the status quo. However, their custom-designed nature may limit expansion or migration to newer technology. The robustness and external connectivity of these "homegrown" or "legacy" systems will determine their future value.

IT maintenance costs of legacy systems can be high. Companies should ask themselves, "Are we a manufacturing company or an IT development company?" As a result, some companies have begun outsourcing IT or even spinning off functional IT elements as subsidiaries.

Enterprise systems' key value is measured by their ability to seamlessly integrate business functions with manufacturing or market planning needs. The manufacturing planning and customer (or supplier) elements require critical data exchange to ensure efficient order fulfillment. The market planning, logistics and customer-supplier interaction elements are where reliable, timely data exchange with external connectivity or supply chain systems is most important.

EXTERNAL CONNECTIVITY AND SUPPLY CHAIN SYSTEMS

Collaboration with external companies and greater connectivity to trading partners are the best opportunities for manufacturers to improve profitability. Increased profitability comes from cutting non-value adding costs in the supply chain, inventory reductions throughout the supply chain, and elimination of the "information chase."

The utopia of complete collaborative planning, forecasting and replenishment (CPFR) throughout the supply chain is a worthy goal. However, most companies should first focus on the business "nuts and bolts" of order, shipments, quality, and invoice visibility. Improved visibility comes only front having this data accessible from a single system. This results in better decision making and eliminates searching for data in disparate systems. It also provides the information needed for more advanced business models, such as vendor-managed inventory (VMI), logistics optimization and eventually CPFR.

There are many ways to develop external connectivity to your IT system. Key areas to consider include:

DATA SECURITY. Exchange only the data needed; more security is always better.

COSTS. Initial implementation, on-going, and maintenance.

FLEXIBILITY. What impact will it have on your business processes and data?

PARTNERS. Impact on relationships with business partners and their processes and data.

ADAPTABILITY. Ability to integrate new technology.

IT PHILOSOPHY. Do you want data on internal servers only or is secure external storage okay?

Some external connectivity solutions require additional internal IT investment.

ROI. What is the ROI and how fast is it achieved?

INTERNAL VS. EXTERNAL

Internally-implemented supply chain solutions and enterprise portals (connectivity corporate web sites) have the benefit of more control but the disadvantages of high maintenance costs, large scale implementation costs, and being "one to many" connections.

The Internet exchange or industry consortium exchange models have the advantage of connecting "many to many" and being adaptable to new technologies. Data security must be examined closely, but in most cases is satisfactory.

The biggest drawback of the external supply chain solution is the impact on your business processes and data. Public exchanges for business-to-consumer (B2C) models, such as eBay and Amazon.com, have been more successful because they do not require standards for the exchange of information. In business-to-business (B2B) models, identical items from various suppliers have many different names and data structures. To date, B2B exchanges have shown value for consumer or stock keeping unit (SKU)-type items.

The rigid standards of an exchange model also create a high barrier to entry for trading partners (especially small to mid-size companies) because they require changing product-naming conventions. The effort to create rigid Internet standards has been likened to electronic data interchange (EDI) standards creation and adoption. Today, there are scores of EDI standards and adoption projects that are still not complete.

EMERGING OPTION

Private trading exchanges (PTX) have emerged as an external connectivity approach that eliminates the middleman. These sites can carry the corporate brands of each participating company and require a one-time integration for all trading partners. The PTX approach also uses an application service provider (ASP) model, avoiding the high cost of internal software implementation and maintenance. They offer many-to-many connectivity, are adaptable to new technology, and have satisfactory security.

This model can help companies get value from external connectivity quickly and cost effectively. Integration time and costs for a PTX are determined by a company's IT readiness. Companies converting to PTX should determine if the solution can:

* Connect to all trading partners regardless of IT platform

* Accept and present data to all partners in their own form and product naming convention 

* Operate without rigid data exchange standards

* Be quickly integrated into existing IT systems

* Enhance the value and performance of existing systems.

SOUND BUSINESS PLANNING

Getting value from IT investments requires sound business planning. First, define your company's strategic business objectives and processes. If your internal plant and enterprise level IT systems are adequate, focus on connectivity to critical customers and suppliers.

The key is understanding what you want to achieve with IT systems. Determine what information must be exchanged between the levels to satisfy customer requirements, improve decision-making, and enhance collaboration between trading partners. To quickly capture IT ROI, select solution providers that know your industry business practices, can quickly implement their solutions, and whose solution helps you build relationships with your trading partners.

About the author: Ted McDermott is a member of the TAPPI Editorial Board and an e-business/technology analyst and consultant based in Palatine, Illinois. He can be reached at [phone], or by email at [e-mail].