This is a crucial question a business seeks to answer when considering investing in supply chain visibility solutions. Supply Chain Visibility (SCV) investments carry the exact same risks as any corporate investment. Return on investment (ROI) is among the most widely used metrics to assess the efficiency and success of an investment by comparing potential returns to the initial cost associated with those investments.

This article will discuss ROI in supply chain visibility and its significance. We’ll also discuss its importance and advantages and how to compute it for your supply chain visibility investments.

What is ROI in Supply Chain Visibility Investments?

Return on investment, or ROI, evaluates the value a business receives through a supply chain visibility solution. Calculating ROI helps companies determine whether investments in such solutions are worth the initial investment and how to prioritize.

ROI in supply chain visibility considers most of the business’s ROI variables (savings, efficiency improvements, inventory optimization, etc.). Businesses can quantitatively evaluate the advantages of these variables versus costs to assess the efforts.

ROI, for instance, may assess the ROI of predictive analytics, real-time inventory monitoring, and demand sensing. These might seem like costly solutions, but considering the long-run benefits — including reduced stockouts, enhanced logistics, and consumer retention — they are investments worth making for any business.

Why is ROI Important for SCV Investments?

*How to Assess the ROI of Supply Chain Visibility Investments*

ROI plays an essential part in supply chain visibility investments because it:

Helps in Prioritizing Investments: ROI determines which SCV systems deliver the greatest financial and operational return, allowing for better investment.
Reduces the Risk of Failure: By calculating possible returns, businesses can determine the relative risks and rewards of an investment relative to its cost and be certain they’re making the correct choice.
Helps in Performance Evaluation: ROI helps organizations assess current SCV programs and offers optimization possibilities.
Creates the Base for Strategic Planning: With ROI as a guidepost, businesses may align SCV investments with bigger company goals, like client satisfaction or sustainability objectives.

How ROI Improves Supply Chain Visibility Decisions

ROI is not just a financial metric; it is a strategic tool that allows businesses to:

Analyze Benefits Beyond Costs: ROI goes beyond the initial costs of SCV investments to assess long-term advantages, such as reduced maintenance costs, increased operational efficiency, or improved supplier relationships. Understanding the timing of cash flows is crucial in evaluating these long-term advantages and in eventually increasing net income.
Optimize Current Systems: By examining the ROI of current SCV programs, companies can identify weaknesses and improve results.
Help Make Data-Driven Decisions: ROI makes SCV strategies quantitatively evaluable, lessening intuition or guesswork.

For example, when adding a new planning tool, ROI can be analyzed by analyzing how it could impact inventory control, order accuracy, and customer satisfaction. Similarly, ROI can be evaluated by purchasing brand-new warehouse management solutions or moving from an on-premise transportation management system to a cloud platform.

7 Steps to Maximize ROI in Supply Chain Visibility Investments

Supply chain visibility provides visibility into your whole operation — from purchasing to shipping. This transparency induces better decision-making and improves risk management, cost reduction, and customer satisfaction.

Imagine monitoring a shipment in real time — exactly where it is, what manufacturer is causing delays, or how production impacts stock levels. This understanding lets you move quickly to mitigate expensive disruptions and build client trust. However, to justify investments in SCV tools, businesses need to quantify these benefits effectively, often using metrics like annualized ROI to account for the time value of money.

Step 1: Define the Objectives of Your SCV Investment

The first step in assessing ROI is to outline your objectives clearly for each particular investment. What do you hope to achieve with better visibility? Common goals include:

Cost Optimizations: Finding opportunities for cost improvements under different levers like logistics optimization, inventory holding, or production costs.
Improving Efficiency: Streamlining workflows and reducing manual interventions with better visibility into the operations.
Improving Customer Satisfaction: Meeting or exceeding customer expectations by adhering to delivery commitments and increasing transparency.
Risks Management: Identifying and addressing potential disruptions proactively.

By defining specific goals, you’ll have a baseline against which to measure the success of your SCV initiatives.

Step 2: Identify Key ROI Metrics

To calculate ROI, you need measurable metrics that align with your objectives. Here are some key metrics to track:

On-Time-In-Full (OTIF): A higher OTIF indicates improved reliability in fulfilling customer orders. Better execution leads to lower costs and better customer satisfaction. A thumb rule here is that for every 3% increase in OTIF, the top line improves by 1%.
Inventory Turnover: Better visibility often leads to optimized inventory levels, which turn inventory faster, reduce holding costs, and free up cash flow.
Lead Time Reduction: Improved SCV helps identify bottlenecks and streamline processes, leading to shorter lead times.
Cost Savings: This could include reduced expedited shipping costs, fewer stockouts, or minimized waste.
Supply Chain Resilience: The ability to recover quickly from disruptions and ensure business continuity.
Net Present Value (NPV): This metric accounts for the time value of money by discounting future cash flows to present value.

These metrics provide tangible evidence of the benefits of SCV solutions.

Step 3: Quantify Tangible Benefits

While some benefits of SCV are qualitative, others can be directly translated into monetary value. Let’s break down some examples:

Reduced Stockouts and Overstock Costs: Calculate the cost of missed sales due to stockouts and compare it with the investment cost savings from better inventory alignment.

Optimized Transportation Costs: Real-time tracking enables dynamic route adjustments, reducing fuel and freight costs.

Lower Operational Costs: Automated processes reduce the need for manual interventions, saving labor costs.

Decreased Risk Mitigation Costs: Early identification of risks, such as supplier delays or weather disruptions, prevents costly repercussions.

Step 4: Factor in Intangible Benefits

While harder to quantify, intangible benefits are equally important outcomes of the SCV solutions. These include:

Better Decision-Making: Leaders make much better, quicker & data-driven strategic choices.
Stronger Collaboration: Supply Chain Visibility improves communications and collaboration between internal teams, suppliers, manufacturers, and customers.
Stronger Brand: Honest promises produce a reputation for reliability, which eventually attracts a lot more business.

Companies can evaluate these intangible outcomes using customer satisfaction surveys, Net Promoter Scores (NPS), or worker productivity.

Step 5: Calculate the Total Cost of Ownership (TCO)

To calculate ROI, you must first understand the total cost of ownership for your SCV investment. TCO includes multiple components like:

Upfront Costs: These are the initial costs the company must assume, hardware, including software, and setup expenses.
Ongoing Costs: These would usually be the maintenance or license expenses of the system.
Hidden Costs: This can be the most risky component of evaluating ROI. Hidden costs not captured in the plan, such as system downtime during implementation or extra resources required for data management, can change ROI outcomes.

Unlike conventional financial accounts, TCO includes hidden costs that can significantly impact ROI outcomes.

Subtracting TCO from the potential benefits will give you a clearer picture of your ROI.

Step 6: Use a Simple ROI Calculation Formula

The ROI formula is straightforward:

ROI (%) = (Net Benefits−TCO) / TCO × 100

For instance, in case your SCV system saved $500,000 annually of costs and your TCO was $200,000, your ROI would be:

ROI (%) = ($500,000−$200,000) / $200,000 × 100 = 150%

Accurately calculating the ROI figure requires including all associated costs and potential benefits.

This indicates a significant return on investment. Some companies also try to look at the IRR or XIRR along with ROI, which factors in the time value of the money. That is another factor in getting close to the realistic outcomes and benefits of implementing supply chain visibility solutions.

Step 7: Monitor and Optimize Post-Implementation

Achieving ROI is not a one-time task; it requires ongoing monitoring and adjustments. Here’s how to ensure sustained success:

Track Performance Continuously: Use dashboards to monitor metrics like OTD, inventory levels, and cost savings.
Seek Feedback: Gather input from stakeholders to identify areas for improvement.
Iterate and Improve: Use data insights to refine your processes and make your SCV system even more effective.

Holocene Helps Build Supply Chain Visibility With Remarkable ROI

The ROI of supply chain visibility investments must be assessed to justify and optimize the efforts. Companies can recognize and experience higher returns by establishing goals, measuring key metrics, and leveraging modern solutions.

Holocene develops custom supply chain visibility solutions that will provide measurable outcomes. With our tools and expertise, we assist businesses:

Minimize operational inefficiencies
Gain real-time insights to drive much better choices
Increase consumer loyalty and satisfaction
Reduce risks with predictive analytics

Our team partners with you to define the best metrics, calculate ROI, and ensure that your SCV system provides value forever.

Would you like to unleash the potential of supply chain visibility?

Contact Holocene today to discuss how we can help you develop impactful solutions.

‍