Case 27. Transitioning the Supply Network of Chennai Engineering Ltd to Cloud Computing¹

¹ The views expressed here are of individual capacity and to be used strictly for academic discussions only. The facts, figures, and financials are illustrative and not factual or observed in any company. Neither the author nor the company is responsible for any commercial decision based on this case material.

N. Chandrasekaran^†

^† Take Solutions, Ltd. & Loyola Institute for Business Administration, Chennai, India; [email protected]

The power sector is ranked sixth among the leading players of the Indian economy. The sector has attracted $4.6 billion in foreign direct investment between 2000 and 2012. The power ministry is believed to have set a target for adding 76,000 MW of electricity capacity in the 12th Five-Year Plan (2012–17) and 93,000 MW in the 13^th Five-Year Plan (2017–22).

There are innumerable challenges that result from the gaps that exist between what is planned versus what the power sector has been able to deliver. One of the reasons for the gaps is delay in the execution of BOP jobs, which is primarily due to the absence of competent BOP players that can execute the job within stipulated time and cost.

Suresh suggested that Ravi and Deepa must explore and submit a plan on how to approach getting CEL’s IT and its supplier network on cloud-based IT, especially for supply chain management. He wanted a road map and asked them to clearly articulate the benefits for CEL and its suppliers and how the solution could improve overall supply chain goals of cost efficiency and responsiveness. Deepa and Ravi responded that they would present to him in a week’s time after exploring the details.

1. An end-to-end cloud service offering can be designed using a combination of any of the four layers consisting of Software as a Service (SaaS), Platform as a Service (PaasP, Infrastructure as a Service (IaaS), and Desktop as a Service (DaaS), which is the cloud clients.

2. Cloud could be deployed through

a. Public cloud, where storage and other resources are made available to the general public by a service provider. Generally, public cloud service providers such as Amazon Web Services (AWS), Microsoft, and Google own and operate the infrastructure and offer access only via the Internet.

b. Community cloud, which shares infrastructure between several organizations from a specific community with common concerns (security, compliance, jurisdiction, etc.). This can be managed internally or by a third party and hosted internally or externally. The costs are spread over fewer users than with a public cloud.

c. Private cloud is cloud infrastructure operated solely for a single organization, whether managed internally or by a third party and hosted internally or externally. Undertaking a private cloud project requires a significant level and degree of engagement to virtualize the business environment. Private clouds have attracted criticism because users still have to buy, build, and manage them and thus do not benefit from less hands-on management.

d. Hybrid cloud is a composition of two or more clouds (private, community, or public) that remain unique entities but are bound together, offering the benefits of multiple deployment models. Hybrid clouds provide the flexibility of in-house applications with the fault tolerance and scalability of cloud-based services.

3. An IDC study commissioned by AWS found that the five-year total cost of ownership (TCO) of developing, deploying, and managing critical applications on AWS represented a 70% savings compared with deploying the same resources on-premises or in hosted environments. IDC findings show that the average five-year ROI of using AWS is 626%. Furthermore, over a five-year period, each company saw cumulative savings of $2.5 million per application. And TCS savings included savings in development and deployment costs, which were reduced by 80%. In addition, application-management costs were reduced by 52%, infrastructure support costs were cut by 56%, and organizations were able to replace $1.6 million in infrastructure costs with $302,000 in AWS costs. The IDC study also showed that benefits increased over time. The study found a definite correlation between the length of time customers have been using AWS services and their returns. At 36 months, the organizations are realizing $3.50 in benefits for every $1 invested in AWS. At 60 months, they are realizing $8.40 for every $1 invested.

4. When calculating ROI in a cloud offering, one must note that the IT capacity and IT utilization would have a significant impact on infrastructure. IT capacity is measured by storage, CPU cycles, and network bandwidth or workload memory capacity as indicators of performance. IT utilization is measured by uptime availability and volume of usage as indicators of activity and usability. Other benefits that determine ROI on cloud offerings include the following.

a. The speed and rate of change: Cost reduction and cost of adoption/de-adoption is faster in the cloud. Cloud computing creates cost benefits by reducing delays in decision costs by adopting prebuilt services and a faster rate of transition to new capabilities. This is a common goal for business improvement programs that are lacking resources and skills and that are time-sensitive.

b. Total cost of ownership optimization: Users can select, design, configure, and run infrastructure and applications that are best suited for business needs.

c. Rapid provisioning: Resources are scaled up and down to follow business activity as it expands and grows. They are redirected.

d. Increased margin and cost control: Revenue growth and cost control opportunities allow companies to pursue new customers and markets for business growth and service improvement.

e. Dynamic usage: Elastic provisioning and service management targets real end users and real business needs for functionality as the scope of users and services evolve seeking new solutions.

f. Enhanced capacity utilization: IT avoids over- and under-provisioning of IT services to improve smarter business services. Capacity additions can be staggered and spread among users.

g. Access to business skills and capability improvements: Cloud computing enables access to new skills and solutions through cloud sourcing on-demand solutions.

These measures define a new set of business indicators that can be used to create a “score card” of an organization’s current and future operational business and IT service needs related to cloud computing potential.

Ravi stated that although the cloud has a numerous benefits, there are certain challenges for an ecosystem when it is to be implemented. Deepa suggested that the challenges can be reviewed after they discuss current IT applications in their supply chain domain and then look at the feasibility of supply chain business process application in the cloud.

• The power project promoter identifies the project scope and engages an EPC contractor for the project, either internally or from the market.

• The EPC contractor places power island equipment orders based on the engineering services recommendation.

• The power island scope also provides scope for BOP. There would be a few vendors who would be handling BOP along with CEL.

• CEL will work with power island suppliers for information exchange and supply its plant as directed and approved by the EPC contractor.

• BOP will have its own manufacturing units and will work with a number of fabrication and other ancillary support units for completing the project items and supplying to sites where its supply chain depends on sequencing and completion by other players.

• BOP will have a number of material and services suppliers who could be also operating with competition as well as with power island equipment suppliers.

• Information exchange and completion of project components on time is critical. Typically, these projects have huge penalties for delays and failures.

In 2008, Deepa was convinced that there are a number of important supply chain management issues. CEL incurs a supply chain cost of about 12% of its cost of goods sold. The supply chain suffers from a number of problems, including (1) long procurement cycle times, (2) material delivery delays from suppliers leading to penalty costs for the supplier and for the system as the subsequent material could be ready but is held up in the system, (3) late payments to suppliers, (4) unfavorable measures for Days Purchases Outstanding, (5) manual processing of transactions on both sides, (5) lack of end-to-end control and visibility, and (6) high cost of processing transactions.

Exhibit 27-1. Supply chain network of power equipment plant.

Benefits of the supplier integration included (1) reduction in procurement cycle time by an average of 12 days; (2) RFQs converted into purchase orders and issued on the same day for many jobs; (3) AP invoices matching reduced by 50%, which made vendors happy; (4) elimination of redundant processes and data entry, improving process efficiency; (5) only exceptions in procurement processes handled via email alerts, and phone follow-up reduced by 90%; (6) delays reduced significantly and resolved with the project sponsor.

Overall, supply chain costs fell by 8%. The number of follow-up meetings and activities was reduced, producing a further hidden cost savings. The supply chain cost savings of approximately Rs. 20 cores paid back the investment in less than six months. Deepa believed that the year-to-year maintenance expenses of Rs. 2 cores were insignificant for this size of operation.

However, Ravi had a different perspective. He was of the view that all savings could not be directly attributed to technology investment. He also felt that although Rs. 8 crores was the cost of the IT project, there were a number of management change costs that could be estimated to be as high as Rs. 20 crores. The discussions did not end there. Every function and its activities were to be streamlined and claim the benefit of change. The challenge was not just estimating benefits from business efficiencies, but something beyond.

Nevertheless, they both agreed that the supply chain business process automation has facilitated (1) increased revenue for CEL and suppliers as the transparency helps to eliminate redundancies and blocking of capacity, (2) improved financial flows that help suppliers commit to work schedules, (3) improved supply chain risk management that increases the chances of no penalty payments, and (4) increased business for suppliers as the network is exposed to better information about their respective offerings and capabilities.

Ravi also concurred that there were additional benefits when they implemented the sourcing procurement suite. These included (1) no platform investment cost for additional participants, (2) minimal business process change enforced, (3) minimal internal resource requirements for changeover, and (4) ease of training and adoption.

1. If the suppliers have to pay per use for subscription, how much could they afford?

2. After the switch to cloud-based solutions, if they are also working with other vendors and power island players, how would they handle the technology of different customers? There could be a lot of cluster-driven benefits. How could one push this cluster ahead of others in technology adoption?

Ferguson, Donald F. and Ethan Hadar, “Optimizing the IT business supply chain utilizing cloud computing,” http://www.isaca.org/Groups/Professional-English/cloud-computing/GroupDocuments/Optimizing%20The%20IT%20Business%20Supply%20Chain%20Using%20Cloud%20Computing.pdf

http://mobile.eweek.com/c/a/Cloud-Computing/Amazon-Web-Services-Use-Yields-626-ROI-More-IDC-748758/

http://www.networkworld.com/news/2012/080612-cloud-roi-261431.html

https://www.roccloud.com/roi

www.takesolutions.com

Energy Statistics 2012, Central Statistical Office, NSO, www.mospi.gov.in

The author acknowledges the support of Mr. S. Sridharan, Mr. Ramesh G, and Mr. Sai Sridhar H for their comments.

Notes: The Remarks column displays both the value and number of component suppliers. Also, it should be noted that there could be parallel projects and supplier-customer relationships running simultaneously. More importantly, for each order, a number of discussions, amendments, and transactions guidance occurs. Whenever there is a variance, it is followed with a number of touch points. Since these are engineered-to-order or make-to-order kinds of projects, the transaction touch points become critical.

Appendix 27-2: Trends in Installed Generating Capacity of Electricity Nonutilities in India from 1970–71 to 2010–11

CAGR: Compound Annual Growth Rate = [(Current Value / Base Value)^(1 / (number of years – 1))]×100

Source: Central Electric Authority.

Appendix 27-3: Business Process of CEL Sourcing

Exhibit 27-2. Before SCM Suite implementation.

Exhibit 27-3. After SCM Suite implementation.