April 14, 2015

4 Kinds of Business Cases You Need to Know

Avatar Arjen Heeres
business man playing chess

‘So what’s the business case?’

It’s a reasonable enough question, but it’s also one that hides some interesting assumptions.

Some use it as a probe: They’re looking for insights into the returns they can expect from a supply chain planning platform.

Others seem to think that if a business case can’t be quantified precisely, it doesn’t really exist.

Who’s right?

Well, it all depends on which business case you’re thinking of. In my experience, there are at least four.

How important is this fact? I’d say it’s crucial.

Knowing which type of business case you’re examining, sets you up with the right expectations. While the demand for precision may seem reassuringly rigorous, it can also be short sighted. In the realm of supply chain planning platforms, benefits that can be quantified precisely are often less significant and strategic than those that can only be estimated.

To get a feel for this truth, let’s look at the four kinds of benefits a business can expect from a supply chain planning platform.

Level 1 business case

The benefits here are straightforward and easy to calculate. For example:

– If the new planning platform is replacing existing systems, how much will you save in terms of the total cost of ownership?

– If having an integrated planning system means that planners no longer spend time collecting data, how many planner-hours will be saved?

Level 1 savings tend to be trivial and unpersuasive. A planning platform isn’t something you buy because the total cost of ownership of your existing system is slightly higher than the new one. More of this later.

Level 2 business case

This is about the planning process itself. A large logistics company operating throughout Europe could easily have fifty to eighty planners. A manufacturing company with multiple facilities might have a couple of hundred people who spend a large part of their day creating and monitoring plans.

The question here is, ‘Will the planning platform make my planners more productive?’ For example, can the same work now be done by sixty rather than eighty planners? Will you be able to grow the business by, say, 25% without hiring more planners?’ If so, you can easily calculate what the savings will be.

These savings can be substantial. Often they’re large enough to justify an implementation. Even so, it’s important to remember that they’re just a fraction of what you should be looking for from a supply chain planning platform.

Level 3 business case

Here’s where a supply chain planning platform creates real business value. (And why the Level 1 focus on total cost of ownership missed the point.)

Most of the companies I work with are interested in Level 3 benefits. They want to achieve more with the same resources and improve their KPIs. For example, they might need to boost utilization rates, transform their delivery performance, and reduce inventories.

An intelligent supply chain planning platform can enable all this.

Level 3 benefits are more difficult to estimate accurately than the payoffs at Levels 1 and 2. Even so, you can – and should – expect to see a pilot or proof of concept that indicates the gains you can expect.

Does it matter that this will be an indication rather than a definite figure? Not at all. Level 3 benefits tend to be huge and unmistakable. An effective proof of concept will leave you in no doubt about what you stand to gain.

Level 4 business case

Level 3 was about doing the same things more efficiently. It’s the reason most businesses invest in supply chain planning software.

Level 4 is more strategic. It’s about using supply chain planning and optimization to rapidly configure and reconfigure resources. This kind of agility opens up new ways of connecting with customers. It’s a competitive differentiator that enables you to enter and conquer markets with new services, service levels and products.

An express company could choose to offer narrower time windows and charge customers a premium for this. A logistics service provider might begin offering vendor managed inventory services. A manufacture might decide to broaden its product portfolio or serve customers that require shorter lead times.

Of course these changes will require more than an intelligent planning platform. We’re talking about a strategic turnaround that will also involve new processes and sales strategies.

Quantifying the financial returns of such a move isn’t easy. In many cases, the decision boils down to a strategic choice. Do you want to enter new markets? And if so, do you have the agility to compete successfully?

Of course making a business case is important. But it’s also important to recognize that the most significant gains – the kind with the potential to transform the future of your business – will be the hardest to pin down precisely.

So here’s something you can say to the next person who uses ‘So what’s the business case?’ to shoot down a potentially profitable innovation: Companies that demand Level 1 or Level 2 precision when evaluating Level 3 or Level 4 benefits are going to miss significant savings and new revenue streams that could transform their competitiveness.

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