Best Practices Consortium Supply Chain Best Practices Consortium Supply Chain Capital Investments and Technology Executive Seminar Track 1, Session B September, 2006

Scope This session covers strategies for capital investment in supply chain operations and technology, as well as the returns companies have received from investments. Magnitude of Investments: Facilities and improvements, fixed material handling equipment, mobile material handling equipment and technology. Approvals and Evaluation Criteria: Who approves capital expenditures and what evaluation criteria are used for decisions and post-implementation audits? Technology Investment: What technologies are providing the greatest returns?

How Much Are We Investing and Where? Supply Chain Area Average $ (Millions) High $ (Millions) Facilities and Improvements 17.3 $ 300.0 Material Handling Equipment 3.0 25.0 Transportation 3.5 37.0 Technology 29.7 949.0 Magnitude of Supply Chain Capital Investment What has been the level of capital investment over the last 12 months? Over the last 12 months, we have made big investments in technology, facilities and improvements, but have invested less in fixed material handling equipment such as racks, conveyors and transportation equipment. There is a tremendous range in the level of investment that companies are making in their supply chains.

Investment Evaluation Criteria Most companies focus on return on investment (80%) for financial evaluation, but internal rate of return and payback are also in use.

Investment Approvals Supply chain management is responsible for a majority of investment decisions, even for large investments. Executive management plays a key role in approving supply chain investments in most companies, even for relatively small investment amounts.

Returns on Technology Investments The average acceptable return on investment is 15.4%. A great majority of the WMS and bar coding projects are yielding excellent returns, while RFID and security systems are not consistently providing financial results.

Your Expectations What would you like to learn from this session? Important issues? What’s working? What’s not working? What’s changing? Shared good and bad experiences? Reasonable performance expectations?

Potential Discussion Points What are the top two or three supply chain areas your company is investing in? How do you measure the success of your investment strategies? How has investment decision making changed over the last several years? Is getting capital easier or more difficult than in previous years? How much technology support is required for the investments? Which supply chain tools are providing the greatest return in your operations?

Potential Discussion Points (continued) Are you doing post-implementation audits of capital investments? How do they work? Do the results of the audits show that project results are better or worse than expected? How have supply chain technology budgets changed over the last few years? Is reduced capital investment a factor in outsourcing decisions? For distribution center outsourcing? For transportation outsourcing? How important is capital investment to achieving your cost reduction goals for the next year?

Important Takeaways While there are many supply chain capital investment takeaways in Benchmarking & Best Practices, some of the more important are: Capital investment areas – The largest area of capital investment is in supply chain technology, followed by facility and improvement projects. Smaller levels of investment are being made in new equipment. Investment evaluation criteria – A majority of companies use return on investment for decision making. The average return expected for projects to get approved is 15.4%. Investment decision makers – Supply chain management leaders are making a majority of the approval decisions, even for large investments. There is a high degree of importance for supply chain leaders to sell projects to executive management. Investment returns – Bar coding and WMS project are yielding significant returns, while RFID projects are consistently achieving the desired results.

Questions?

Benchmarking & Best Practices References Information on capital investment strategies can be found in the following references: Note: Available for downloading at www.supplychainconsortium.com