Companies currently spend about 5-6% of their revenues on IT. Many of these companies are now struggling to align their IT to support the business strategy, provide a competitive advantage, and serve as a platform for growth. Exploding number of choices and growing complexity of technology assets making these companies victims of their rapidly obsolescing computing infrastructure. Once these assets offered these companies the competitive advantage and served as barriers to entry but now these IT assets are becoming liability. Supply chain meets the cloud to boost the visibility of collaboration processes with and between third-parties such as suppliers, partners, and customers. If companies fail to deconstruct their IT infrastructure and embrace cloud, somebody will do and make them irrelevant.
CORE AND CONTEXT
The bulk of the economic value of organizations is processed through business and consumer supply chains of products and services across manufacturing and services industries. No matter whether it is retail, healthcare, banking, real estate, manufacturing, insurance, communications or others, there are significant gaps in the point-to-point business processes across business’ operations resulting from underlying Infostructure complexity. These enterprises are trapped with their internal IT (Context) focus and are ignoring the importance of the information and interactions across their supply chains (Core). For many companies this has resulted in loss of profitability and in some cases the elimination of products and services all together.
Professor Hau Lee, well known expert in Supply Chain Management said,
“Companies are great not because they were focused on cost or flexibility or speed but because they have the ability to manage transitions – changing market conditions, evolving technology, different requirements as a product moves through its life cycle. Companies also need to be able to handle one more transition: Crisis Management. Successful companies have been able to grab market share out of crises, which often requires them to work effectively across functional boundaries”.
As the recessionary economic and business climate becomes more challenging for organizations, there are many competing priorities and fewer resources to maintain and manage existing operations. Still, with a once in a generation slowdown, it is also an opportune time to re-evaluate where automation and collaboration of these processes can make significant improvement now and in the upturn. It will not be sufficient to just be internally focused on your segment of the supply chain.
SERVICES IN CLOUD: ARCHITECTURAL TRANSFORMATION
Cloud computing is a new deployment and operational model for making IT management simpler and more responsive to the needs of the dynamic business. Cloud architecture decouples the IT infrastructure from the business services. Cloud computing not only enables rapid innovation, flexibility, and support of core business functions but also enables design, development and delivery of new applications by highly efficient virtualized compute resources that can be rapidly scaled up and down in a flexible yet secure way to deliver a high quality of service.
In the pre-information era, suppliers and manufacturers have market power because they have information about a product or a service that the customer does not and can not have. But, now customer has all the information. Whoever has the information has the power. Power is now shifting to the customer. This means that the supplier, manufacturer will soon cease to be a seller and instead become a buyer for a customer. This is already happening. Peter Drucker put it succinctly in his article, HBR Sep-Oct 1997, “Looking Ahead: Implications of the Present“:
“Increasingly, a winning strategy will require information about events and conditions outside the institution: non-customers, technologies other than those currently used by the company and its present competitors, markets not currently served, and so on. Only with this information can a business decide how to allocate its knowledge resources in order to produce the highest yield. Only with such information can a business also prepare for new changes and challenges arising from sudden shifts in the world economy and in the nature and content of knowledge itself. The development of rigorous methods for gathering and analyzing outside information will increasingly become a major challenge for businesses and for information experts.”
Technology is a critical part of supply chain management because companies need to bring together disparate strands of information to be able to understand and assess situations. They also must have analytical services to be able to quickly and consistently decide on the best course of action. A large number of the larger vendors offer some or all of the pieces needed to support more effective supply chain execution — supply chain management and ERP software for collecting data, data warehouses for staging data, and business intelligence software for creating and managing the reporting, scorecard, and dashboard elements. However, they may not be bringing all of the data together in a way that makes it useful, timely, and actionable. To do so, significant integration and customization are needed, which is very time consuming as well as expensive undertaking. Justifying the long development cycles and huge R&D budgets makes these projects not attractive to the business leaders.
Paul Saffo summarized the state of machines, complexity of tools, and exploding information in his HBR article, “Are You Machine Wise?(HBR, 1997)”
“As our tools become ever more complex and interconnected and more central to the conduct of business, their benefits also become harder to recognize. Furthermore, executives need to know and understand the logic of the work done by machines—and, above all else, the limits beyond which those tools cannot be pushed. Meanwhile, the volume of information continues to expand exponentially, generated by machines conversing with other machines on our behalf. Every business activity leaves behind a wake of information, from data spinning off production-line process controllers to transaction records generated over retail-credit-card networks. And the growing centrality of the Internet for business purposes will only add to the flood.”
CLOUDABILITY OF ERP/SCM SERVICES
It has taken good 10 years for companies to embrace enterprise resource planning and supply chain management. This is primarily due to high implementation and licensing costs of the software. In my view, the adoption of cloud computing services in a supply chain and enterprise resource planning many be faster than the former uptake patterns of on-premise enterprise resource planning software. More and more companies are already collaborating with their suppliers, vendors, and partners using the Internet or VANs. It doesn’t make any economic sense to own and operate their own internal data centers to run these applications.
In the same way that ERP/SCM applications have not been employed to automate 100% of enterprises’ business processes, organizations are likely to use a hybrid approach, public and private cloud services where appropriate. Initially, lower-level cloud-based services such as accessing compute power or storage capacity over the internet (infrastructure as a service) and exploiting platform as a service for use in tactical and emerging applications. Software as a service models will be embraced for standardized application areas such as finance, payroll, logistics, human resources (context) that do not provide organizations with competitive advantage.
These companies may also pursue the concept of “private” cloud computing to create their own “private cloud” datacenters. Individual business units (or partners) then pay the IT department for using industrialized or standardized services in line with agreed charge-back mechanisms. This approach is less threatening than a wholesale move to the public cloud, but should make it easier to plan the gradual migration to cloud services.
Joe Wienman enumerated number of use cases for enterprise adoption of Cloud Computing. Joe Wienman wrote,
“Cloud services are definitely of use for extranet communities…we are seeing it in a variety of areas in AT&T’s businesses. For example, AT&T’s Sterling Commerce unit is a “cloud provider” for supply chain visibility and optimization, and our AT&T Telepresence Solution provides benefits through extranet connectivity, where there is a network effect. And, with networking costs and transaction costs coming down, and enabling technologies such as RFID, sensor networks, electronic product codes, etc., supply chains will continue to benefit from neutral and authoritative cloud services, e.g., chain of custody for tagged pharmaceuticals. And, when two giants are part of the supply chain, e.g., a large retailer and a large consumer packaged goods manufacturer, where should the data reside? If it’s at the retailer, then the manufacturer can access it, but needs to build separate interfaces for other retailers, etc., so the order(n) vs. order(n squared) economics come into play, driving functionality into the cloud.”
CLOUD AND BUSINESS IMPLICATIONS
Economies of Scale: Cloud redefines economies of scale, allowing small companies to enjoy the low unit cost for scaling out their computing infrastructure – traditionally companies with huge data centers only been able to offer rich information to their customers.
Compressed Transaction Costs: Transaction costs along the supply chains are getting lower and they continue to decline sharply. Lower transaction costs are allowing companies to significantly enhance the richness of the information combined with interactivity(soon may be augmented realty), that would have been too costly to capture and process in absence of Cloud like models.
Your Success Depends on Quality of Decisions You Make:A real-time enterprise derives competitive advantage from responding to changing business conditions and opportunities faster than the competition. Often, decision-making depends on computing, e.g., business intelligence, risk analysis, portfolio optimization and so forth. Gartner Research introduced Corporation Performance Management(CPM) in 2001 which describes all of the processes, measures, metrics, key performance indicators(KPIs), Key Risk Indicators(KRIs), and systems needed to measure and manage the performance and risk of an organization. Many companies from the Global 3500 and major public sector organizations have embraced the vision of CPM. In spite of its wide adoption across various industry and establishment of sector for itself, CPM failed to deliver on its promise and business practitioners downsized the scope to risk management tool due to the complexity and time it takes to implementation of human intensive data collection and analysis process.
Since an ideal cloud provides effectively unbounded on-demand scalability, for the same cost, a business can accelerate its decision-making combining human and machine intelligence. We see CPM re-emerging as a real-time decision support system. So far, few organizations have figured out how to turn the oceans of data available to them into islands of insight about their best opportunities for growth. Therein lies largely untapped potential for companies to accelerate their growth and separate from the competition (Cloudonomics Law #7).
Create and Stage Rich User Experiences:Using Cloud, enterprise can take advantage of Cloud to reduce the latency of critical business applications (Cloudonomics Law #8).
Availability and Reliability at Fractional Cost: The reliability of a system with n redundant components, each with reliability r, is 1-(1-r)^n. So if the reliability of a single data center is 99 percent, two data centers provide four nines (99.99 percent) and three data centers provide six nines (99.9999 percent). For enterprises to achieve this level of availability, it not only takes huge capital investment, but also drives their operational cost. Instead, enterprises can leverage Cloud to achieve extremely high reliability architecture with only a few data centers (Cloudonomics Law #9).
CLOUD AND BUSINESS CONSEQUENCES
Process Optimizations: Though Y2K provided an opportunity to replace/optimize the old transaction systems with more efficient models, many enterprises have been quick to replace them with standard software – primary goal was Y2K compatibility. Cloud provides a unique opportunity to optimize key enterprise services — business process management, end-to-end visibility of demand-supply patterns, business activity monitoring, business analytics and data warehouse.
Process Standardization: Globalization, supply chain management, and restructuring demand standardization of services with clear interfaces. Standardized services are critical for collaboration, co-ordination, and co-creation with business partners and alliances.
Shared Services: Many enterprises are today utilizing shared services like UPS/FedEx for transportations/Logistics, ADP for payroll processing. Cloud enables these enterprises to explore more opportunities for shared services enabling them to focus more on their core competencies.
Enterprise Messaging Services: Last one decade many standards for information exchange across enterprise applications have evolved like EDIFACT, cXML, Rosettanet etc. Cloud will take these building blocks to the next level by enabling the globally scalable and reliable messaging infrastructure relieving them from expensive VANs used by enterprises today. It makes sense for today’s VAN providers to provide similar services in the cloud at fractional cost.
Integration Services: Even after a decade of huge investments into Enterprise Application Integration services, still integration is the major barrier for enterprises to launch new services. My hope is that Cloud offers a platform to simplify the integration through standardization of service interfaces. Instead of investing into customization and support of these integration services, VAN service providers can offer these integration services, if still required to talk to legacy systems.
Communities of Co-Ops: Cloud enables greater number of cooperating services between the members of a business community (suppliers, partners, customers).
Labor intensive Data Warehouses to Machine Intelligence powered Knowledge Graphs: ERP, SCM, and CRM process measurement generates an unprecedented flood data. Enterprise value is buried in this data. Most of the enterprises can’t afford to have their own IT infrastructure to make meaning out of this data. Cloud enables enterprises to turn their labor and resource intensive Data Warehouses to real-time knowledge graphs powered by Machine Intelligence and Algorithms to provide services to enrich and contextualize this data. Cloud provides an opportunity to bring scale and access required to deliver machine intelligence to the enterprises. This transformation would also help enterprises to effectively implement corporate performance and risk intelligence applications powered by machine intelligence and algorithms. Welcome to algorithms driven corporate governance and decision making!
The economic downturn and globalization is changing the way enterprises operate. Changes are becoming increasingly more radical. Enterprises are being broken down into components and reassembled along different lines. The feeling of uncertainty has never been great as it is now. Cloud computing going to play a critical role in simplifying the operations of Supply Chain networks and communities by taking advantage of cost structures and cloudonomics offered by the Cloud. Cloud makes new business solutions possible. This might means new or improved products and services, additional sales channels, more optimal means of procurement, new ways of customer, supplier collaboration, more effective management, and new information services.
I had the good fortune to be in a good place at the right time and to learn from others who willingly shared their experiences. I am most grateful to the many people who have offered me a helping hand, encouragement, and inspiration along the way. I would also like to acknowledge the years of wisdom many of you has shared with me on cloud computing, issues, benefits, and challenges. My sincere appreciation goes to Joe Weinman for his helpful insight and perspectives on Cloudonomics and Supply Chain. He has generously allowed me to use his ideas and spared his valuable time to review this post and provided me his valuable feedback. I have incorporated number of his Cloudonomics laws and some of our email conversations into this article.