The value proposition for this promising technology is reverberating across supply chains.

Gartner is now projecting a $150.1 billion cloud computing world market by 2013. This is encouraged in part by recessionary strategies that have enabled companies to move forward in IT without incurring capital expenses over the past few years-and why not? The fact is that IT’s work never stops, even in recession. One way to get around the capital spending freezes on new hardware and software is to reallocate expenses to the operating expense side of the budget, where you can build a better business case with the CFO by saying that you only need to pay for what you use in the cloud computing “rental” model, or that you can actually reduce staff maintenance on-premise labor costs on IT assets by moving them to the cloud. These strategies are working-and they will continue to fuel cloud expansion.

Nevertheless, cloud computing is far from being a mature market where everyone knows what to expect. Part of the problem is that there is no single definition of “cloud computing” in the industry. Some companies see cloud as “software as a service (SaaS),” where the goal is to outsource certain pieces of software to a cloud provider. Others see cloud as a temporary and on-demand commodity hardware or software rental during periods of high computing demand, or as a facile way to integrate both external business processes and Internet-driven functions that outperform the costs and timeframes of doing the same things with existing internal systems. Because there is no absolute definition of “cloud” yet, it is difficult to estimate the final set of benefits, costs savings, and service levels cloud delivers. To be fair, it is also too early to assess many of these without a long enough record of cloud deployment to work with. These circumstances make it hard to be a cloud “weatherperson,” but here are several trends that have emerged in 2010, and are likely to continue:

•    Small- and mid-sized businesses are jumping on cloud. Their goal is to eliminate as much internal IT as possible so as to focus on their core businesses.

•    Large enterprises are reluctant to go full-bore into cloud. The concerns are several. They include many enterprises already having significant infrastructure investments (and comfort levels) with on-premise equipment; concerns about the agility for application customization, development and security in the cloud; and worries about cloud providers being able to live up to their service level agreements.

•    Return on investment (ROI) answers aren’t in yet. While small- and mid-sized companies project savings from moving to the cloud, the only savings that is immediately apparent to most companies is that they have been able to successfully manage their budgets through lean times by engaging cloud services instead of buying new hardware and software for their data centers. The cloud ROI benefits for large enterprises are even murkier. “Frankly, we don’t see cloud computing as a way to reduce our IT infrastructure costs,” says one global enterprise CIO.

The dynamics of cloud computing in the supply chain industry offers its own twist. Large retailers and manufacturers still want to retain years of intellectual property and budgetary investment that they have in internal ERP (enterprise resource planning) systems, but like their small- and mid-sized business counterparts, they are realizing that they need a more agile solution for vendor negotiations, management, and visibility in a supply chain that now involves thousands of suppliers in every corner of the globe. No matter how tightly integrated and well-oiled your internal solution might be, there simply isn’t an easy way to certify and onboard a new supplier. Meanwhile, a number of cloud services providers have already mastered this process, and can manage the onboarding of new suppliers in a framework of one to several weeks. Tapping into the Internet and other global communications networks, these same cloud services providers can bring together point-to-point information on shipping, inventory locations, quality assurance et cetera, and then tie all of this data together into suites of analytics reports that allow companies to not only gauge order progress, but use smart analytics tools to assess the effectiveness of new but unknown suppliers that they are considering adding to their supply chains.

“These reports allow companies to look at supplier information in new ways,” says Karin Bursa, Vice President of Marketing at Logility (www.logility.com), a supply chain solutions company. “For instance, companies can study supplier variability in areas like the percentage of orders that are on time, or the number of shipments that are complete.”

With cloud computing already demonstrating that it can successfully eliminate or mitigate many common supply chain issues, the questions now facing most organizations are how to best implement it, and what to realistically expect from it.




 

The best fit for cloud

There are places in the supply chain where cloud solutions are an optimal fit-and areas where internal processes still excel. By far, the greatest market and operational influence on supply chain companies today is globalization of both markets and suppliers. This is in sharp contrast to the thinking that existed even ten years ago, when the focus of corporate information supply chain systems was firmly rooted in internal systems. In that world, if you wanted to onboard a supplier, you underwent extensive certification with that supplier through a proprietary EDI (electronic data interchange) system and it took months for your IT department to complete the certification.

With today’s global markets and suppliers expanding exponentially, there isn’t time to create an internal IT solution for every external business circumstance or supplier, even if you are a large enterprise with the internal resources. Enterprises have also recognized that their internal systems are ill positioned to address the external business processes that are springing up outside of corporate walls. This is a great space for cloud services providers to fill, and they are doing that well.

In the supply chain, the greatest benefit large enterprises are seeking from the cloud is the ability to onboard new suppliers in a matter of weeks-not months. Cloud service providers already have databases that include 80 percent of the global supplier base. This advantage is not lost on enterprise IT, nor is it lost on corporate supply chain executives. This gives enterprises better time to market with the least expensive but highest quality goods, because they no longer have to divert time and effort into painful supplier certifications. Cloud-based supplier networks go even further because they can provide analytics reports on supplier performance on topics like quality of goods and timeliness of shipments, and they can track and analyze logistics. Prior to these cloud-based solutions, there was little besides word of mouth that could inform an enterprise about the quality and timeliness records of new suppliers they were considering engaging.

For small- and medium-sized businesses (SMBs), cloud-based solutions provide supply chain answers above and beyond the supplier onboarding and logistics that enterprises seek. The value of cloud for SMBs can be extended to other external business processes that are not well incorporated into existing internal systems. One of these areas is transportation and shipping logistics. Other external business processes that are troublesome internally but well addressed by cloud-based solutions are sales, contract negotiations, and even payment arrangements for supplier order settlement.

“Here in the U.S., there are a number of tools that can be developed that give you visibility of your suppliers,” says CEO Josh Green of Panjiva (www.panjiva.com). “Unfortunately, when you are dealing with foreign suppliers, visibility is uneven at best.”

Green says that there are two “soft spots” that companies experience in the area of supplier visibility. The first is the ability to really confirm whether reports on order progress (and other order-related information) coming from suppliers is accurate. The second is obtaining visibility of the third tier of the supply chain-in other words, the suppliers that your suppliers are engaging for your orders. As a supply chain services provider, Panjiva focuses on creating greater visibility for companies in these areas that include reports on both performance and financial standing of suppliers around the world. 

“As international trade has taken off, the information needed to make informed decisions has not,” says Green. “This is a focus area for us.”

So while international trade has made supply chains longer and more complex, cloud solutions have to some degree allowed small- and mid-sized companies to help level the playing field as they compete with large enterprises that already have highly evolved systems. Cloud computing solutions can address the ebbs and flows of consumer demand with “pay as you go” models that keep SMBs in the game. And, with cloud services providers serving as the custodians for critical supply chain systems, SMBs can also keep internal IT staffs lean. CFOs like this because they don’t want the burden of carrying extra headcount, software, and hardware licensing costs and depreciation during periods of low sales.

Given all this, there are still areas where internal systems offer superior supply chain solutions. Many large enterprises already have substantial investments in infrastructures that are optimally fitted for their businesses. These classic ERP systems continue to deliver best-of-class services in internal systems areas such as accounting, purchasing, and manufacturing. Most of these systems have also been optimally integrated in ways that would be difficult-and expensive-for comparable cloud-based solutions to emulate.




 

Saving money and delivering results

Some obvious questions from executives exploring cloud computing is ‘Where and how does cloud save money?’ and ‘What are the best benefits it delivers to the business?’

The more accurate question, though, is whether turning to cloud services will ultimately save organizations money. Most CIOs do not believe that it will in the long run-but they also understand the foibles of human nature. They know from past experience that once you introduce a solution into an organization and the solution works, it is hard to reverse course. Thus far, cloud services are succeeding in delivering key benefits to the supply chain. Cloud services provide agility and management capabilities for suppliers. Cloud solutions provide oversight of supply chain performance with the help of automation, and they report on logistics and order tracking in ways that eliminate internal coordination and effort. In the cloud environment, organizations are finding it easier to optimize their supply chain workflows-and cloud offers price entry points that even a smaller SMB can consider.

However, in making the leap to cloud services, many companies have been sold on upfront cost savings, but have not necessarily been fully prepared for the costs and impacts of internal revisions to business processes and systems that are a natural consequence of any solution change. They have discovered that it is necessary to revisit internal policies and procedures in areas like security, authorization, and disaster recovery and business continuation. In their cost modeling of cloud services, they tend to run the numbers for cloud as they initially introduce it into their organizations-and to offset the initial cost of acquisition of cloud services against existing system licensing and asset costs they will no longer have to pay. However, to truly gauge the cost of cloud, there is an argument that cloud service numbers should really be projected and modeled for a longer period of time (say, ten years), and that they should include assumptions that the organization is likely over a ten-year period to add more services or higher levels of SLAs that will increment costs. These are the realities that are prompting some CIOs to suggest that, in the long run, cloud services are not necessarily less expensive solutions than internal systems, although they might be the best solutions for what a given business is striving to achieve in a given business scenario.

“One of the challenges with supply chain cloud services is that you can get such a huge payback in the first year, that you rest on your laurels and don’t continue to be as aggressive,” notes Logility’s Bursa.




 

What businesses need to know about cloud

The key with supply chain cloud services is to complete the due diligence and planning in your own organization before entering into a cloud solution. You need to know three things:

•    Where you want cloud computing to play a role, the return on investment that you expect from the cloud, and how you are going to manage it

•    Where you expect your organization to continue to operate its own systems

•    Which business processes and policies will be impacted by cloud, and what levels of training and preparation will be needed for staff to work well with the cloud solution

“You need to make sure that the cloud services you choose integrate effectively with your internal systems before you move forward with them…and it’s just as important that your operations people, and not just IT, take ownership during the process of adding the supply chain cloud solution,” says Bruce Mantz, Vice President of Operations at ADS Logistic Services (www.adslp.com), which delivers supply chain management solutions. “By this, I mean that people on the operations side of the organization need to get over constantly going over the ‘punch list’ of implementation issues, and move on to where they want this system to go, and what they want it to do for them in the future.”

RedPrairie’s (www.redprairie.com) Vice President of Product Strategy, Tom Kozenski, agrees. “You need a clear vision of where your business is today and where it is going to be in the future,” he says. “Don’t be comfortable with just automating today. Keep your mind open to new opportunities, and also understand upfront where you expect to derive the greatest benefits from the cloud solution and then go back to make sure that you are getting these. A big part of this is deciding at the beginning which internal supply chain systems you want to continue to own and run, and which you want to outsource.” wt



Contributing writer Mary Shacklett is founder and president of Transworld Data based in Olympia, Washington.


 

Sidebar: The View From Above the Cloud, by Lara L. Sowinski

“We’ve been in ‘cloud land’ here at GT Nexus since Day 1,” says Greg Kefer, the online trade portal’s director of corporate marketing, which makes him more than qualified to share his view from the top on why cloud is here to stay and what the future holds.

Speaking about the trade supply chain, “Cloud enables new ways of computing that were simply not possible before,” says Kefer. The level of visibility and inter-company connectedness that cloud brings has really begun to not only change the way business operates, but the way business thinks, he adds.

For starters, “It really enables the notion of agile business networks,” says Kefer, who compares cloud to Facebook, where someone can update their status and everyone in their community gets the message simultaneously.

The competitive advantage of having an agile network cannot be overstated, emphasizes Kefer. Consider a company who is sourcing in China, he begins. “Costs are starting to rise, though-transportation, labor-and you decide you want to shift to Thailand or somewhere else in Asia. With cloud you can do that pretty quickly. You can easily onboard new suppliers by simply having them register at GTNexus.com and you’re ready to roll.”

Companies are naturally pleased to find out that many suppliers and carriers may already be in the cloud community. “For us, that’s often the case,” Kefer says. “We have every ocean carrier on our network.” That’s significant when you consider that 95 percent of foreign trade (by volume) moves by ocean carriers, he notes. “We have the same thing going on with 3PLs-all the top ten 3PLs are already on the GT Nexus network.”

So what’s next for cloud? According to Kefer, we’re just beginning to see the tip of the ice burg, especially when it comes to how companies are thinking more strategically with cloud. “They’re getting comfortable with the idea that cloud gives them an informational replica of their supply chain, and they’re asking, ‘What else can I do with this?’”

Instead of having 30 days of safety stock on the books, the information and visibility afforded by cloud gives a company the confidence to reduce that dramatically. “And, that’s suddenly a lot of money that’s freed up to do other stuff,” Kefer points out.

The way in which companies are using cloud is becoming “very strategic,” he says. “They’re beginning to look at how they pay suppliers, how they staff, and they’re tapping into new opportunities that didn’t even exist before.” - Lara L. Sowinski