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  Feb. 16 , 2006 - Supply Chain Digest Newsletter
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First Thoughts by Dan Gilmore, Editor

Supply Chain Software TCO

As many of you know, last year we produced a report on ERP versus “best-of-breed” software. That debate continues in the market and within individual companies, and we encourage anyone interested in this subject to download one or both reports to see our survey results and recommendations. You will find some good stuff in these reports.


During our research, a number of things became clear. One of them was that very few companies were really doing a great job of estimating the total cost of ownership of potential software solutions over some reasonable time horizon (3-7 years).


I’m not sure why that is. Maybe it’s just hard. Maybe companies assume that after the upfront costs that the TCO across solutions is about the same.


I believe TCO is a concept that originated with the analyst firm Gartner, at least in the software arena. If they didn’t invent it, they at least significantly raised industry awareness of the principles in a series of research notes in the mid-1990s.


TCO is important for a number of reasons. First, it’s necessary to well understand the costs over time to compare against the benefits over the same time-frame. Like many things in life, the upfront costs are often dwarfed by the long-term operating costs, and too many companies focus only on the upfront portion.


Second, the TCO can vary substantially across solution vendor alternatives. Just for example, I’ve heard both ERP and best-of-breed supply chain software vendors passionately claim they have lower TCO for their solutions than the other side.


I don’t know who is right (more later), but I do know it’s important to look at these costs in detail. Even if you are just considering best-of-breed for a given solution, the TCO can be very different depending on the solution, its technology, upgrade policies, maintenance and support programs, third-party software used, etc.


To help in that effort, SCDigest technology editor Mark Fralick and I (with formatting help from staffer Connie Venema) have put together a TCO model in spreadsheet form for Warehouse Management Systems (WMS TCO), complimentary for SCDigest  subscribers. Download here. We chose WMS because in many respects warehouse management systems are the most complex TCO’s to calculate among individual supply chain applications, given there’s often a lot of different hardware involved (e.g., RF devices, voice, printers, etc.), many “add-on” modules being offered beyond the core WMS, different vendor approaches to packaging software and services, and in many cases a lot of modifications to the base package.


We’re confident this tool – which combines up front costs with the present value of on-going costs to calculate a total present value of the TCO of a given WMS solution, can be a big help to anyone considering warehouse management software. We’ll be producing TCO calculators in other application areas soon.


The model is detailed, because we think that’s the right approach, but you can take some short cuts. We also try to call out areas where we think there won’t be much difference between vendors (but which are nonetheless important for calculating project ROI) and where there can be important differences in costs between alternatives.


We’d welcome any suggestions for improvement. Feel free to email us with your suggestions, compliments or critiques.


Like many things, TCO calculation can be easily manipulated, depending on how you handle assumptions. As we noted in the ERP versus best-of-breeds reports, when calculating TCO “critical assumptions will have to be made, often based not only on facts but also in part on educated guess work. SCDigest believes it is critical to have all the assumptions about costs and returns clearly stated and understood by the project team and upper management.”


We also recommend sharing these projections about TCO (and ROI) with vendor candidates. Why? Both to test assumptions and estimates, and also because each vendor may have ideas about how to lower costs. They may not be that anxious to do so unless you ask with this kind of model in hand.


We hope you find it helpful (download here), and would welcome your thoughts on total cost of ownership calculation generally, and our new tool specifically.


Is TCO an important factor to consider for WMS and other supply chain software? Why or why not? Do you think most companies do a good job of considering this?

Let us know your thoughts.

Dan Gilmore

New SCDigest Research Report:

High Volume, Multi-Modal Shipping - What Executives Need to Know

An increasing number of companies must ship across multiple modes, including growing parcel volumes.

We provide insight into how to reduce costs and improve performance.

Click here to download the report.

Report made possible in part by:Irista - An HK Systems Company


The 2006 Supply Chain Risk Map

Guest Speaker:

Bryan Squibb

Manager, Trade Credit Group


Play Viewpoint nowPlay Now
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Building a Performance-Focused Workforce
The RFID-Enabled WMS
Supplier-Cost Management
How to Select aWMS and TMS

February 15 , 2006
Lean Guru James Womack Analyzes What Ails GM, Ford

They are "are clueless how to work with suppliers," he says.


February 15 , 2006

The DoD’s Quadrennial Defense Review Looks to Visibility, Cost-Benefit Management, Non-Military Best Practice and RFID to Help Move Logistics to the 21st Century

RFID gets a paragraph - and that says a lot, says the DoD's Alan Estevez

February 14 , 2006

What’s the Real Size of the RFID Market? Look at Public Company Numbers

Most public RFID-related companies haven't seen much growth yet despite what the analyst reports say. Is 2007 the year?



Q.  If you can only have one distribution center, where do you put it to minimize total lead times to customers (based on U.S population spread)?

A. Click to find the answer below

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Feedback is coming in at a rate greater than we can publish it - thanks for your response.

Though we had literally thousands of downloads of our report on "The Greatest Supply Chain Disasters Ever," feedback was modest. (Click here for column and download.) It did include one great phone call discussion and email from a current VP of logistics who suggested KMart's supply chain failures (and corresponding Wal-Mart rise) should have made the list. My response was that we were looking at more specific, discrete events, rather than a long-term failure. But his letter is our feedback of the week, along with a few others on this topic. We'd still love to hear your thoughts on our piece - what should we add to the list?


Keep the dialog going! Give us your thoughts on this week's Supply Chain topics. As always, we’ll keep your name anonymous if required.

Feedback of the week - on worst ever SCM disasters

I would consider the downfall of KMart as one of the major Supply Chain disasters. While they concentrated on the punishment of Suppliers for unrealistic delivery standards, Wal-Mart was working with Suppliers to establish improved delivery techniques with a positive attitude toward minimizing stock-outs.


Several years before the collapse of K Mart, my wife told me on a Saturday morning shopping trip that she loved the look and feel of the K Mart store better than Wal-Mart, but, she was never satisfied due to stock-outs. Obviously, KMart closed down the neatest stores, as, Wal-Mart expanded its Supply Chain.


VP Logistics

Name withheld by request

(he’s still doing business with KMart!)

More worst ever SCM disasters :

Great stuff!  …Entertaining and thought provoking - Enough said.


Lawrence Dean Shemesh


OPSdesign Consulting

The most painful disasters are those that hit you directly or with which you are most familiar.  It is interesting that five of your eleven “worst ever disasters” were associated with new systems implementation (ERP, order entry, planning).  A client of mine, who was in an order entry / fulfillment meltdown situation, comment about their new ERP/order management system; “we are just trying to automate what we had”.   Lesson: If the foundation of your “new supply chain system” is based on poor business processes or practices, the new system may cripple your operation.         


Richard A. Carman

Dechert-Hampe Consulting

I would include a little know department of defense fiasco, called DMMIS.  It was an 8 year, $800 million customization of an MRPII in the 1990's.  The software was so heavily modified, it never worked.  Project was quietly killed in the mid 1990's, and quickly replace by another (name not known) system and subsequent implementation disaster...same problem, DOD folks had to customize everything because they couldn't accept working like the private sector.


Brian Dreckshage
Senior Managing Consultant


Q.  If you can only have one distribution center, where do you put it to minimize total lead times to customers (based on U.S population spread)?

A. Bloomington, IN

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