To achieve business goals, companies have all kinds of projects in perpetual motion. Even with numerous ongoing initiatives, decision-makers are constantly evaluating new proposals to determine which should be pursued and funded. Typically, projects are evaluated based on specific approval criteria such as return on investment (ROI) and the associated payback period. However, this often creates a situation in which the projects — having been approved on individual business cases — fail to significantly advance the organization’s strategic focus. This is especially true for supply chain projects, which often do not receive much C-suite attention.
Finance professionals have long used portfolio management to ensure that financial investments are aligned with overall strategies and objectives. This practice also includes portfolio optimization, which helps identify the best possible mix to optimize performance. Supply chain professionals would be wise to apply a similar concept — along with key insights from the Supply Chain Operations Reference (SCOR) model — to determine if they have the most effective project portfolios for their supply chains.
The Project Management Institute reports that portfolio management increases project success in the three key dimensions of time, budget and goal attainment by 30 percent, 28 percent and 21 percent, respectively. Further, in her book “An Introduction to Project Management,” Kathy Schwalbe describes a project portfolio manager at Schlumberger who saved her company $3 million in one year by using portfolio optimization tools to manage 120 information technology projects. In the process, 80 percent of overlapping initiatives were merged, and endeavors that had the same goals as existing projects were canceled altogether. And Craig Symons, former vice president and principal analyst at Forrester Research, writes in “The ROI of Project Portfolio Management Tools” that investing in a comprehensive project portfolio management tool is likely to provide an ROI of more than 250 percent.
Setting up the project portfolio
The dynamic nature of supply chain management makes project selection complex and analytically intensive. Some projects substantially improve the performance of only one metric, while others support several metrics but not as effectively. Supply chain professionals are further challenged because making a positive impact on some parts of the network can have adverse outcomes on others. Because an organization might pursue several projects of varying size and scope, minimum thresholds for cost, duration and overall benefits need to be assured for a project to be included in the portfolio.
The SCOR model is a process reference framework from the Association for Supply Chain Management that supports supply chain planning, design and execution. It combines a set of best practices with a standardized scope of operations. The scope defines six key supply chain activities: plan, source, make, deliver, return and enable. SCOR measures a supply chain through the core performance attributes of reliability, responsiveness, agility, costs and asset management efficiency.
The following five-step process enables an organization to assess the alignment of its supply chain project portfolio with the help of the SCOR model. Included with it is an example of a company’s use of this process to determine whether to pursue three significant projects: P1, P2 and P3. P1, which carried a calculated value of $1 million on a stand-alone basis, involved automation of a distribution center with new material-
handling equipment. Its business case focused on cost savings resulting from enhanced productivity, more reliability, reduced order-fulfilment times and greater ability to adapt to change. P2 centered around the implementation of an e-procurement, cloud-based application to enable improved on-contract spending, additional expenditure savings, increased compliance and heightened agility. The project carried a calculated value of $600,000 on a stand-alone basis. P3 encompassed the consolidation, reorganization and relocation of four customer support centers. This project was expected to reduce ongoing support costs while providing more responsive service and the ability to scale in the future. It carried a calculated value of $200,000 in stand-alone value.
Step 1: Establish the relative weights of importance for each of the core performance attributes based on supply chain objectives. This involves applying a decision-making tool called an analytic hierarchy process (AHP) to obtain priority weights. AHP makes pairwise comparisons of the core performance attributes to enable objectivity through subjective ratings. Applying the AHP scoring algorithm to these pairwise comparisons results in a relative weight for each criterion.
In a portfolio context, the decision-making team will conduct pairwise comparisons of the core performance attributes on a scale of 1 to 9, with 1 being equally preferred, 5 being strongly preferred, and 9 being extremely preferred. If a pairwise comparison of attribute X to attribute Y is 7, for example, the pairwise comparison of Y compared to X is one-seventh, per AHP rules. The result of all comparisons will be the relative weights of the core performance attributes.
Table 1 shows the results of the pairwise comparisons for the five selected attributes: reliability, responsiveness, agility, costs and asset management efficiency for the example portfolio. Next, the decision-making team used this information to calculate the priority weights for each of the core performance attributes. They weighted reliability at 6.33 percent, responsiveness at 43.31 percent, agility at 16.06 percent, costs at 30.13 percent and asset management effectiveness at 4.18 percent.
Step 2: Determine the percent contribution of a project to each of the core performance attributes based on project benefits outlined in the business case. For example, an
e-procurement project with a business case that is 75 percent focused on reducing supply chain costs would receive a weight of 75 percent for the cost attribute. If the same project’s business case is 20 percent targeting agility goals, it gets an agility attribute weight of 20 percent.
Table 2 lists the percent contributions for P1, P2 and P3 to each of the five core performance attributes.
Step 3: Compute a SCOR-adjusted value for each project. The contribution of a project to the SCOR core performance attributes, as determined in step 2, is multiplied with the priority weights from step 1. This product is then multiplied by the stand-alone value of the project to find the SCOR-adjusted value for each project.
For example, the SCOR-adjusted value for reliability in P1 was calculated as 20 percent (core performance attribution contribution weight) x 6.33% (priority weight) x $1,000,000 (project value) for a SCOR-adjusted value of $12,700. The full results are reported in Table 3.
Step 4: Ascertain the SCOR strategy alignment. Add the SCOR-adjusted values for all of the projects in the portfolio to determine the portfolio SCOR-adjusted values. Then, divide that by the total nominal value of the portfolio — in other words, the sum of all project values — to find the portfolio’s SCOR strategy alignment value. A well-aligned portfolio should result in a SCOR strategy alignment value of more than 20 percent.
In the example, the SCOR-adjusted values for the three projects were added to reach a SCOR-adjusted project portfolio value of $513,000. Given that the total value of the three projects is $1.8 million, the portfolio’s SCOR strategy alignment is $513,000/$1,800,000, or about 28.5 percent. This low alignment is due to the fact that the projects delivered high benefits for the costs attribute but fewer benefits for responsiveness and agility, the other attributes in the top three priorities. Furthermore, responsiveness, which was a higher priority than costs, received less benefit than the costs attribute.
Step 5: Plan for improving the portfolio’s SCOR strategy alignment. Use the results from step 4 to make more thoughtful decisions about which projects to pursue. Place greater emphasis on initiatives that focus on improving the core performance attributes. Based on the example results, senior management at this company focused on funding projects in areas such as network optimization and improvement of transportation management that enhanced supply chain responsiveness.
The major advantages of the project portfolio optimization framework are the simplification of, and systematic approach to, the project selection process. Additionally, when a project is completed and removed from the portfolio, the core performance attribute weights can be reassessed based on the current state and focus of the supply chain. The framework also allows for scalability and can include resource allocation based on SCOR alignment.
Supply chain projects are vital to any company’s success. To drive profitable growth, it is imperative that executives align these projects with the business strategy and be agile in execution. A project portfolio optimization effort is a proven strategy.
Gurram Gopal, Ph.D., is a professor in the Department of Industrial Technology and Management at the Illinois Institute of Technology. He has published more than 50 papers and articles and presents at academic conferences around the world. Gopal may be contacted at firstname.lastname@example.org.
Fabian Moreno is a technical project manager at Dalet Digital Media Systems. He is also a technology professional with international experience in software, data analytics and project management. Moreno may be contacted at email@example.com.