Technology Outlook: 2010 and Beyond An Interview with Steve Banker

A: Definitely. In fact, some of these constraints were starting to emerge even before the downturn. So in mature application areas like warehouse management, it's becoming much more difficult to drive new functionality. Demand management is another area.

Remember that ten years ago i2 made supply chain management software a very hot area and there was an explosion in the number of vendor companies. Since then, it's mostly become a mature market with a lot of consolidation and few best-of-breeds remaining. While historically you might have seen 12, 13 or 14 percent of revenues invested in R&D, today it's down to 7 or 8 percent. So even before we had this financial downturn we were seeing less investment in R&D and fewer exciting things coming out of supply chain. That doesn't mean there is nothing new or exciting out there.

Q: What are the glimmers of hope in the supply chain technology space?

A: We do see growth in some interesting niche markets. For instance, there's a technology called demand signal depositories. It's still a small market, under $100 million, but a promising one. Basically, this is a shelf-level collaboration solution between consumer goods manufacturers and the retailers. The consumer goods folks pull in the POS data and other downstream data in a manner that minimizes the bullwhip effect. Historically, if you're a consumer goods manufacturer, you captured shipments to the retailers' DC. But did not capture what actually happened in the stores. And this lack of downstream visibility is what created the bullwhip effect.

Now if you can actually capture that POS data, you can capture what is the in-store inventory and what shipments are going from the DC to the store. With this information, you can do responsive replenishment where you hit your service levels with lower inventory targets, you can do better demand forecasting. And this, in turn, allows for better transportation plans and better warehouse capacity decisions as well.

Demand signal depositories represent one of the few solutions that actually does all these things. Right now, it's an emerging market, as I said somewhat smaller than $100 million. But it's poised to grow very fast over the next three or four years, whereas almost all other supply chain markets, year-over-year revenues are going to be down—and some down substantially.

Q: Any potential impediments to the growth of this technology?

A: One problem is that these demand signal depositories have huge amounts of data that has to be cleaned. And it's not just supply chain data. It is used by account sales teams, merchandisers, marketing teams working on promotion, and so on. So one of the big questions is how do we get these diverse business groups to approach demand signal repositories in a unified way.

Q: Sounds like there are still a few kinks to be worked out in the technology.

A: Yes, there are some big hurdles still to be overcome. But in my mind it became a market finally worth studying when Oracle entered it in 2009. Teradata also has been doing a lot of custom work in this area. In fact, there are indications that they want to enter this market with an off-the-shelf product. So the big boys are paying attention to this, they're investing in it, and that made it something worth paying attention to.

Q: Are there other technologies you see poised for similar kind of growth?

A: In the warehouse technology space, I'm fascinated by robotic forms of material handling that are far more flexible than anything we've had in the past. Broadly speaking, they have capabilities to move around, operate a mechanical limb, sense and manipulate their environment, and exhibit intelligent behavior. I believe that by 2025 these technologies will have completely transformed warehousing. The question is between now and then, when will that explosive growth begin?  Warehouse managers tend to be very conservative. It's a market poised to explode. But will it explode next year?  Two years from now?  Five years from now?  It is very difficult to predict.

Q: Could you tell us more about these flexible robotic forms.

A: Let me start by giving an example. Let's say I'm considering building a heavily automated warehouse with miles of conveyors and sortation equipment. As part of the analysis, I would identify how many orders I plan to ship in the coming year,  the size of the orders, the order profiles, and if they're going to change. I'm doing a lot of orders in a one-foot square box that could soon go up to a three-foot square box. So I have to make a multi-year judgment before I buy this “heavy” material handling system, recognizing that the payback may be four or five years out. Now that's a long payback. But if you measure yourself on a cost-per-case shipped basis, for example, you can often realize a better total ROI with heavy material handling than you could with less automated forms of material handling.

Q: What's the problem with the heavy equipment then?

A: The problem is that you're making assumptions about the future that have to be right for four or five years. So for the first year or two, you may be under-utilizing the material handling equipment purchased. Then for a couple of years, you might have excellent utilization. After that, you may not be able to keep up with the volume and end up with a lot of expensive work arounds. So you may end up never realizing the payback on the original acquisition.

Q: What's the comparative advantage of flexible material handling, then?

A: With flexible robotics handling solutions, you can get close to the kind of throughputs you're getting with heavy materials handling automation but with much less risk. So if business conditions dictate that it no longer makes sense to operate a particular warehouse or DC, you can close the facility more quickly and at much less cost. You don't have to worry about the disposition of all the heavy equipment; you basically just pick up these robots and take them to another facility, just as you would with forklifts. So what I'm seeing is much higher productivity at much lower risk because of the flexibility of these robotics solutions.

Q: Let's talk a little bit about software as a service, or SaaS? Where do you see SaaS now in terms of its development and its adoption? 

A: Software as a Service is well entrenched in TMS, though as I mentioned earlier we expect that market to shrink. But even as that market shrinks, the SaaS option—which is about one third of the TMS market—should grow by about 10 percent. To date, SaaS has had a very small presence in other supply chain areas, and what growth there was has been gradual. It really works best in network-type solutions, which is why it works so well in transportation management. It can also work well for achieving extended supply chain visibility, such as tracking what different carriers are doing with your shipments. Each carrier may use a slightly different form of EDI. So if a network provider builds an engine to clean up those messages, everyone using that network benefits. Network solutions are really naturals for Software as a Service.

Q: Any other technologies that haven't been fully developed or leveraged yet? 

A: I don't know to what extent it's considered it to be a supply chain application, but GPS seems to be an under-leveraged technology. For example, if I've got a private fleet, I want to track the fleet, I want to do fleet maintenance, I want to do better scheduling. GPS is going to make all of those activities work better. And GPS is basically a Software as a Service market. So that's an area that has potential for the future, though not something probably most people would call traditional supply chain.

Q: Another term that keeps popping up is “cloud computing.” Is this just another name for Software as a Service?

A: Cloud computing and Software as a Service exist on a continuum. With cloud computing, you're talking about something you can get over the internet. It's not an IT infrastructure or application that resides behind your firewall or on your personal computer. Think of GoogleApps. So instead of having my own word processing application on my PC, I can go to Google's Word Application, which is an internet application. But cloud computing also involves IT infrastructure. So instead of buying my own databases, I may want to go over to the internet and store something on a database somebody else owns.

From a supply chain perspective, supply chain managers don't care so much about IT infrastructure. However, they are greatly interested in supply chain applications that can be bought over the internet and that do not reside behind a firewall.

So in my mind, cloud computing and SaaS are not the same thing. Cloud computing can be free or it can be something you pay for. SaaS is something that you always pay for, as in the TMS applications. In addition, cloud computing is bigger than just an application. It goes into IT infrastructure as well.

Q: Do you see the opportunities for cloud computing increasing in the supply chain space?

A: With the Google model, you're provided with an application for free, but you have to look at the ads. The question is, could you do that with supply chain applications?  Maybe a warehouse management application that's free that would be supported by related advertising. I haven't seen it yet, but it's possible.

Q: We haven't talked yet about RFID (Radio Frequency Identification Technology). Where are we now with that technology and where are we headed? 

A: I've often been wrong in my technology predictions in the past, but with RFID I was spot on. When Wal-Mart was talking about their RFID initiative a few years ago, I went out and called 20 of the top 100 suppliers who were going to be affected. Based on those conversations, there was nobody in the analyst community who was more pessimistic about the future of RFID than I was. These suppliers just didn't see how they could ever get payback from the Wal-Mart style of RFID. And the truth is that style of compliance is shrinking. So some of these suppliers that used to be putting tags on maybe 20 different SKUs are now down to five. Wal-Mart is not willing to admit it's a failure yet, but it is.

Q: Did any positives come from the Wal-Mart mandate?

A: It did give visibility to RFID and encouraged the use of the technology for asset management, which is a closed-loop application. There's one interesting application from a company called Checkpoint Systems. When you go into a high-end apparel store at the mall, you often see these Checkpoint security tags on the expensive clothing with the high margins. When you check out, they remove the tags so that you don't set off the alarm upon exiting the store.

Well, Checkpoint Systems bought one of the RFID companies. So now with a lot of the apparel coming from China, for example, the RFID technology is being incorporated on the security tag at the source. So the retailer and anyone else with access can get the kind of end-to-end RFID visibility that was originally Wal-Mart's vision. It makes great sense in this supply chain because they're already putting the security device on anyway and these are high margin products.

Q: Shifting gears a bit, what does the future hold for ERP systems?

A: The key interaction between ERP and the supply chain will be around business intelligence—in particular, scorecarding and dashboards. There's been an interesting development here. The big ERP guys bought the big business intelligence companies, and these BI companies all had something called corporate performance management (CPM) solutions that are used for budgeting and financial forecasting. Historically, supply chain people have done budgeting once a year—a detailed and painstaking exercise. But with CPM,  it became easier to do rolling budgets. So instead of doing one budget that goes out 12 months, they can do a lighter budget exercise every three months, for example. In many cases, they might have a 24-month rolling quarterly budget process going on.

Once you get down to a three-month financial planning process and you have a sales and operations planning (S&OP) process going on a monthly basis that also considers finances, you start to see the S&OP process merging with this rolling budgeting process. So that's one area where ERP technology is really having some impact on supply chain processes at some companies.

Q: Even in a no-growth environment, many of our readers will likely be tasked with putting together the business case to get funding for technology projects. Any tips you can offer them in putting together an effective business case?

A: Supply chain people are well equipped to make the business case if they think in terms of how bringing in a new technology would facilitate process change and how process change could lead to cost savings. The tough part here is quantifying how changes in processes or the use of new technologies will increase service levels. Then translating how that increase in service levels will lead to us selling more stuff—and selling more stuff profitably. That is very difficult for supply chain guys to put a believable number on. So that really has to be a collaborative exercise that involves the CFO and the sales and marketing folks as well.

I think the chief supply chain officer's key relationship is really with the CFO. If you make the CFO your ally, then that CIO relationship seems to work a lot better.

Q: What about that relationship between the supply chain and the CIO and IT folks?

A: We industry analysts often get involved in meetings or conference calls where a company is thinking about investing in a particular technology. Typically, you have the CIO and members of the IT team and the supply chain people in attendance. It's not unusual to find the IT folks arguing that the company should invest in SAP or Oracle or some other ERP system because it's got a lower total cost of ownership. The supply chain group, on the other hand, wants to invest in best-of-breed solutions because they don't really have to pay the maintenance costs; the IT department does. The supply chain folks think that more functionality will allow them to better reduce various types of supply chain costs. One way to make this discussion more logical and balanced is to say, okay, supply chain group, we're going to charge you for maintenance associated with these best-of-breed applications. And if you really believe that maintenance costs with these solution still results in a better ROI, then more power to you—but you're going to be charged for it.

Q: Based on your experiences, do you think that the supply chain and IT people have a collaborative relationship in most organizations? Or is it still mostly about silos and turf protection?

A: In most cases, the relationship still feels adversarial to me. In many cases, it doesn't even seem as if they're on the same team. Day-to-day it's probably a lot more collegial than that, but the differences tend to reveal themselves when it comes to making the big investment decisions.

Q: Let's say you're able to make a technology investment and you get the application up and running. What are some of the key metrics that you need? 

A: I think it's less about metrics than it is about capturing the ROI data. To illustrate, I visit companies all the time who tell me they have implemented this particular type of supply chain technology. I ask them to tell me about the payback and the ROI, and in which financial buckets the benefits fall. You spent a million dollars on a WMS, how much did you save in better productivity on the warehouse floor? How much from making fewer shipment mistakes? How much in other areas? Typically, they are able to give you a “gut feel” on how they did in a particular bucket, for example labor productivity. But many cannot really get specific—they're not able to say, we are shipping 30 percent more cases with three fewer people. Only about 10 or 20 percent of companies that I've talked to really do a thorough follow-up analysis on the real ROI.

So actually the “metrics” you're using are the same numbers that you used to justify the project. We said we would save $200,000 by using fewer workers in the warehouse in the first year after implementation. Did we actually achieve that? Did we achieve even more than that in that savings bucket? You're going to be implementing other technologies. So that process of looking at what you thought you were going to get in terms of ROI, looking at what you really got, and understanding why or why not you didn't get as much as you hoped for, helps you in the future when you are trying to justify other investments in technology.

Q: So data capture is critical. Is it difficult to do?

A: When you put together your business plan for a new technology investment, which let's say will cost $10 million, you state that you expect to save $20 million in inventory over five years—this much in year one, this much in year two, and so on. Also, I expect that I'm going to need three less people on my demand forecasting team so I'll save their salaries. So when you put together the business plan you know where you think those cost savings are and you know the time frame of achieving them. Now you just have to capture that data on an ongoing basis. It's not that hard, but very few companies do it.

Q: Our readers are always seeking out websites, publications, individuals, and so on in an effort to become more knowledgeable about technology. Any advice on how can they develop their knowledge in order to become more confident in their decision-making capabilities?

A: Historically, one avenue has been to invest in industry analyst groups like ARC or AMR Research or Gartner. Using this option, they got good advice on technology but didn't have to devote the resources to following developments full time. Basically, they pay experts to pay attention to what was going on.

With the proposed acquisition of AMR Research by Gartner, we're starting to see some consolidation in the industry analyst space just as we've seen in the vendor space. Basically the analyst game is changing. Here at ARC, for example, we've started experimenting with putting some of the content that used to only go out to clients, making it public. Right now we're publishing something called Logistic Viewpoints in which some of the content is very similar to what people would have had to pay for in the past. My point is that I think that the analyst firms overall may be rethinking the amount and types of information they are willing to make available to the public.

Q: Any other good sources of information on supply chain technology?

A: Meetings of professional associations like CSCMP and WERC often contain a lot of good information. I think attendance at these kinds of events is particularly beneficial for individuals who are relatively new to the supply chain field. Going to these meetings, getting involved in industry groups, hearing what other users are doing…that's really the best way to learn.

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