C l o u d - B a s e d S u p p l y C h a i n s : T r a n s f o rming M a n u f a c t u r ing Performance

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1 M A R K E T S P O T L I G H T C l o u d - B a s e d S u p p l y C h a i n s : T r a n s f o rming M a n u f a c t u r ing Performance October 2012 Adapted from Business Strategy: Supply Chain in the Cloud Visibility, Flexibility, and Agility to Drive Business Performance by Simon Ellis, Catherine White, and Kimberly Knickle, IDC #MI Sponsored by NetSuite Cloud computing is poised to transform the way supply chain organizations consume and use IT services. IDC Manufacturing Insights research shows that nearly half of all manufacturers are either implementing or thinking about implementing cloud computing over the next one to three years. At first, all of this may seem like hype, but in reality, cloud offers the potential not only to transform how supply chain organizations procure IT capabilities but also to fundamentally change how they manage business processes. This will not be a "flip the switch and it's done" change, but it is happening, and faster than we anticipated even a year ago. Manufacturing Supply Chain Challenges In the past, total cost of ownership (TCO) has dominated the conversation as the primary benefit or reason to move to using the cloud; and for many organizations, reduced cost has been a powerful incentive to move to cloud-based IT. At the same time, some organizations have struggled with changing the traditional IT model based solely on cost, even as they face budget cuts and productivity gain requirements. But for the most part, this is now a moot point. While the cost of cloud services (and "as a service" offerings) typically is lower, this isn't the only compelling reason to use them. As alluded to in the title, a transformation is occurring in business and how manufacturing businesses are run partly due to the cloud and the avenues it opens for those businesses. At the same time, the manufacturing business is complex and is becoming more and more so as customer demand diversifies and supply globalizes. As a result, the requirements on supply chain organizations are intensifying, exposing the following challenges to "traditional" approaches: Collaboration challenges with partners, customers, and consumers An inability to easily and quickly acquire new capabilities Data quality too many versions of "the truth" Extended, distributed supply networks and fulfillment partners driving IT system and business process incompatibility Lack of access to systems and information, particularly for remote or field workers These challenges have proven to be persistent and are increasingly problematic as companies' supply chains grow in complexity. While cloud does not magically solve these problems, the opportunity exists to think about them in a new way. IDC 1391

2 The Current Reality and the Future Cloud is among the most discussed new technologies, and the current reality is that slightly over 20% of manufacturing companies are already running cloud services. For the purposes of this paper and subsequent discussions, we are defining cloud computing as an approach for enabling on-demand network access to a shared pool of configurable computing resources (e.g., networks, servers, storage, applications, and services) that can be rapidly provisioned and released as demand requirements dictate. Cloud computing includes as subsets software as a service, platform as a service, and infrastructure as a service; in some instances, it may also include analytics as a service. Table 1 illustrates the cloud adoption plans of companies in a selected number of industry value chains. Adoption is clearly gaining momentum. When evaluating a new application or IT tool, fully 75% of these same companies ask for a cloud alternative in their request for information (RFI). This finding certainly suggests that we will continue to see strong growth in the adoption of cloud capabilities; as a result, IDC projects that cloud services spending will exceed $36 billion in 2012, growing at four times the industry rate. Further, 80% of new applications will be targeted for the cloud and 2.5% of existing legacy applications will move to the cloud. T A B L E 1 C l o u d A d o p t i o n b y S e l e c t e d V a l u e C h a i n S e g m e n t ( % o f R e s p o n d e n t s ) Total Discrete Manufacturing Process Manufacturing Retail Wholesale Evaluating the cloud approach for a specific workload or service Have already deployed and are using cloud service(s) Generally educating ourselves about the cloud model Implementing/contracting for a cloud service Planning to implement/acquire cloud service(s) within the next one to two years Not implementing n = Source: IDC's Cloud Survey, 2011 In surveys that IDC Manufacturing Insights has conducted over the past year, and in conversations with manufacturers, we see the following responses regularly: TCO remains the most visible benefit. Adoption of enterprise-level tools is increasing. Enterprise-level applications delivered as a service appeal to many small and midsize manufacturing companies IDC

3 Manufacturers are gaining an appreciation for the flexibility and rapid acquisition of capabilities from cloud services. Supply chain is viewed as the business area with the most potential benefit. In large part, the responses are a mix of both past and future perspectives on the cloud and can be instructive for vendors either already competing or planning to compete in the cloud services space. Cloud Computing Brings a New Approach The typical challenges present in current supply chains and IT tool deployments allow for a few overriding themes to emerge as areas for improvement: collaboration, capability modernization, and visibility. The increasing clock speed of business is changing how manufacturers approach these challenges. Certainly, as we have said, cloud IT will not magically solve all of these issues; however, it remains our contention at IDC Manufacturing Insights that cloud brings an intriguing new approach to these challenges. Supply Chain Collaboration There are myriad reasons why manufacturing companies collaborate poorly, and it is not our intention to recite the liturgy of them here; however, in our discussions with manufacturers, two factors come up routinely as constraints to more effective collaboration: lack of common systems/processes and barriers to entry for smaller supply partners. In both cases, cloud IT is in a position to facilitate the problem by enabling a common, broadly accessible platform for both headquarters and field employees. It is also notable that where we see cloud initially adopted within the supply chain is where there is the benefit of the "network effect," in terms of either external constituents (i.e., an established community of carriers) or a common view of the business (i.e., transparency of data). Capability Modernization If there is a single term that best describes the modern supply chain environment, it is volatility. The unpredictable nature of both demand and supply is creating havoc in traditional manufacturing organizations. Forecast accuracy levels are at historic lows, and supply disruptions are on the rise. One of the more significant consequences we see resulting from these trends is the desire for businesses to have variable rather than fixed cost structures. This is manifest in terms of outsourcing but also in how companies acquire IT services. At IDC Manufacturing Insights, we think of this as IT resiliency the ability to scale easily to demand or business changes something that cloud IT can do inherently more effectively than traditional on-premise applications. However, the volatility in the external business environment also translates into volatility in IT requirements and suggests the need for more frequent modernization and/or capability enhancement. While enhancing traditional behind-the-firewall applications may be easy in some cases, it is not in most cases. Visibility Perhaps the most powerful ability that cloud can bring is in better aligning the clock speed of the business with the acquisition of IT capabilities hence improving visibility across the supply chain. It could be argued that end-to-end supply chain visibility has been somewhat pie in the sky; but in the past, visibility seemed elusive at best. Today, with the cloud and the ability to connect a vast array of suppliers, better understand inventory levels in ever-decreasing time increments (down to the minute? second?), and more quickly connect to customers, it seems approachable. The clock speed of manufacturers' business is running faster and faster, whether in the volatility of demand, the requirements for shorter lead times, or the acquisition of new capabilities. Yet the delivery of IT capabilities remains largely at the same pace, with multiyear implementations that increasingly make no sense. After all, with the volatility in the marketplace, how can you possibly anticipate where your business will be? Just as companies need 2012 IDC 3

4 to be able to make quick, intelligent supply chain decisions, they need to be able to support these decisions with agile, flexible IT tools precisely the kinds of things cloud can bring to the table. The Evolution of Cloud in the Supply Chain A number of vendors that sell IT capabilities into the supply chain space have interesting cloud and/or software-as-a-service offerings. Some vendors are exclusively in the cloud; others have evolved a cloud product line as a complement to their on-premise capabilities. Further, the maturity of the cloud offerings in the supply chain space can vary wildly, from fairly standard hosting arrangements, where there is little difference from on-premise applications, and multitenancy arrangements to true networked, collaborative cloud applications. While the latter are further along the maturity curve and less common, the potential for disruptive innovation is increased. Figure 1 illustrates this notion from a supply chain perspective. F i g u r e 1 The Evolution of Cloud in the Supply Chain On-Premise Private Cloud Public Cloud Collaborative Cloud Behind firewall Dedicated instance Direct relationship EDI Dedicated instance Direct relationship Web portal Single instance Multitenant Partitioned Single instance Multitenant Networked Source: IDC Manufacturing Insights, 2012 Not all applications will benefit from or be appropriate for a collaborative cloud environment, but where the "network effect" can provide value for the supply chain (in places where multiple, common suppliers/vendors provide services to an industry), it can be quite powerful. Conclusion Whether the hype surrounding cloud computing proves fully warranted or not remains to be seen. As we have argued in this paper, the current state of cloud offers a set of intriguing capabilities that make the technology an attractive fit where business conditions favor flexibility, speed, and the desire for an extended network of partners or service providers. Cloud will not solve all of your problems; however, where failures in collaboration, IT capability modernization, or implementation speed occur, it is worth a closer look IDC

5 Our initial guidance centers on how to best evaluate the candidacy of a particular business process application for the cloud, and there is no single answer. The reality is that it depends upon a number of factors, including security, ease of use, and the degree to which the information needed by the system is predominantly internal or external. Certain application areas, such as ERP and supply chain planning, will be better suited to an on-premise or private cloud implementation versus other areas, such as sales and operations planning, SRM, and logistics and distribution, that may benefit from a public or collaborative cloud environment (refer back to Figure 1). This will change over time, as a result of both the growing "comfort" with cloud as a strategic approach and the evolving use cases that will better define differentiating value. However, the transition to cloud-based IT is clearly happening; thus, as manufacturing companies increasingly turn to cloud as a viable alternative to an on-premise installation, they should consider a few factors: Clarity around key functionality. Don't expect less from a cloud offering. Ensure that the selected application is adequately robust and scalable and satisfies your business needs. Understanding the economics. Understand how usage fees are generated and the contract length. Know if you can easily scale usage levels up and down without any assessment of penalty fees or compromises in performance. Implementation timeline. Be specific about the duration of the initial implementation process and the internal resources required and for how long. Ease of use. Know how easy the tool is to learn and use and whether it has embedded educational/tutorial functionality. Data security. Do the due diligence necessary to ensure the robustness of the security provisioning and disaster recovery capabilities. New product capabilities. Determine how new functionality is added and if it will be available to the business when you need it. This paper began with a discussion of TCO, so perhaps that's a good place to end it. IT budget pressures will continue to motivate CIOs to look in increasing numbers at cloud computing, but as we have argued, it can be so much more than that. IDC Manufacturing Insights advocates taking a total-value-of-ownership (TVO) approach to cloud offerings you will be surprised at the result! A B O U T T H I S P U B L I C A T I O N This publication was produced by IDC Manufacturing Insights Go-to-Market Services. The opinion, analysis, and research results presented herein are drawn from more detailed research and analysis independently conducted and published by IDC Manufacturing Insights, unless specific vendor sponsorship is noted. IDC Manufacturing Insights Go-to-Market Services makes IDC Manufacturing Insights content available in a wide range of formats for distribution by various companies. A license to distribute IDC Manufacturing Insights content does not imply endorsement of or opinion about the licensee. C O P Y R I G H T A N D R E S T R I C T I O N S Any IDC Manufacturing Insights information or reference to IDC Manufacturing Insights that is to be used in advertising, press releases, or promotional materials requires prior written approval from IDC Manufacturing Insights. For permission requests, contact the GMS information line at or Translation and/or localization of this document requires an additional license from IDC Manufacturing Insights. For more information on IDC Manufacturing Insights, an IDC company, visit For more information on IDC, visit or for more information on GMS, visit Global Headquarters: 5 Speen Street Framingham, MA USA P F IDC 5

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