Providing strategic advice and market insights for optimizing manufacturing relationships and achieving profitable environmental strategies to clients in the Americas, EMEA, and Asia since 1987.By Jonathan Gilbert, TFI Logistics Consultant
Cloud computing and virtualization technologies are hot on Wall Street, and gaining ground on Main Street. But what are the supply-chain implications of these trends? And what could they mean for your company?
It’s easy to understand why these concepts are so appealing. Eliminating local infrastructure yields significant savings in capital investment, and reduces the need to maintain and manage physical on-site computing resources. A recent Gartner forecast predicted a growth rate of 16.2% in sales of enterprise “software as a service” applications during 2011.
The first impact of Cloud computing on the supply chain is that the Cloud’s efficiencies reduce the physical goods required. It enables resource sharing across customers; using capacity more effectively because shared resources can more efficiently handle peaks. On-premise hardware by contrast, is composed of fixed resources built to accommodate an individual customer’s peak demand.
Another impact is reduced shipping of hardware: In 2010, the US imported over $55 billion in computer hardware worldwide, with $39 billion from China, and $11 billion from Mexico. Cloud computing has the potential to partially eliminate or at least greatly change the product mix of these imports. Think of the cost savings that accrue from not building and shipping all of this hardware. At an estimated 4% of sales, logistics costs for these items represent $2.2 billion in annual expenditures. Reducing the overall need for new computers by 30% would save nearly $700 million annually in logistics costs alone.
Beyond the supply chain, Cloud computing has another important benefit. Power consumption is greatly reduced compared to on-site models. Chris Thorman, writing for Software Advice, estimated that moving to software as a service could reduce power consumption by as much as 93%.
The lesson in all of this is that value delivery is not the same as product delivery. In fact, delivery as a service can actually be a far better value proposition for your customers.
The era of the physical product may be on the wane. What might the future look like? We are already seeing it in consumer products. A great example is the impact smart phone adoption has had on sales of GPS devices. Rather than buying hardware loaded with specialized databases and software, consumers are opting for smart phone-based navigation today. Mapping data resides on servers, and is downloaded to the phone as needed. Garmin, the recognized leader in GPS navigation, has responded by introducing iPhone and Android apps in response to plummeting sales of dedicated GPS devices.
What does this mean for your company?
– How much of the cost of your product is related to hardware? Software?
– Are there alternative ways to deliver value to your customers that don’t require hardware?
– Are you considering these options in your new product development plans?
– Finally, if you switched to service-based model from the current hardware-based model, what would your new business look like?
We’re interested in hearing from you. Please post a comment.
The cloud has many advantages as you indicate but there are a number of problems as well. Check out these recent posts:
http://bits.blogs.nytimes.com/2011/04/21/amazon-cloud-failure-takes-down-web-sites/
and
http://eu.techcrunch.com/2011/04/21/amazon-ec2-goes-down-taking-with-it-reddit-foursquare-and-quora/
In my previous life (I am now retired) as a computer systems consultant, I spent a good deal of time discussing “high availability” computing with many of my clients. Areas of focus included “What is the total cost of downtime to your company?” The discussion started off with “How many people in order-entry are unable to take orders and are not keeping the pipeline full?” “What about the people on the loading dock who can’t ship product?” The warehouse that can’t pick orders?” “The customers who switch to your competitors when they can’t place an order?” (This last one was most important to those in the produce business and in particular ordering very perishable mushrooms.) The list could go on.
Then the discussion evolved into good (and tested) backup/recovery plans in place, data redundancy and fail-over systems. And now, in the case of cloud computing, hackers and security are a big issue.
The debate will continue in the future as it has in the past.
Thanks for the weekly articles. Very thought provoking.
Joe
Paying for offsite storage solutions needs to be carefully contrasted with the cost of onsite storage solutions. With 1 TB going for under $99.00 now, each desktop computer can have it’s own built-in backup for a very low amortized cost of less than $8.25 per month. This is more than competitive with the costs I’ve been quoted for cloud based storage for each desktop station. The reliability of these is more than adequate for backing up work each evening. More important is the security implications. In the past year, more than 10 significant losses of information have occurred through remote hacks from various companies and universities; TJ Maxx, Ohio State University, Sony, etc. To be sure, our spam and virus software requires us to be connected in a psuedo cloud based type of structure. But other than that, we’ve found it’s much safer to limit access to employees to go on the web. There are dedicated search computers available that do allow downloading to Stick drives and the subsequent anti-virus / security scrubbing checks. Renting cloud based software solutions for other applications may be suitable for some companies, perhaps those that are heavily into media type solutions, with constantly changing software but it is rather pricey for Technical Engineering companies such as mine. The main security issue is running your applications onsite and not depending on web access or the potential for data corruption with the additional intermediary servers in place. For us, using the cloud like this doesn’t make sense. Our technical and test specific application software has already been purchased and doesn’t require constant upgrades each year or month – something the software providers seem to have forgotten these days, where beta software seems to be the norm and good solid performing software with superior customer support is only included for the first week of ownership – if at that. Why is it they are always anxious to sell you after the sale support and upgrades? More often than not, it’s because they haven’t taken the time to develop solid, robust, and superior software in the first place.
Joe -
Thank you for your feedback!
I completely agree that reliability can be a concern with cloud services. Local server and individual desktop computer reliability can also be a challenge, especially in very small organizations.
Of companies that have payrolls, firms with 19 or fewer employees employ about 18% of the US workforce. (US Census 2008)
For those types of environments, and maybe even for firms of up to 99 employees, 35% of the workforce, cloud is likely to be more reliable than local management of assets.
For the very largest companies, the cloud computing advantage of resource sharing is mitigated to some extent, as there are enough users in the individual firm to create sharing opportunities internally.
Regarding vulnerabilities, smaller organizations also find themselves less able to defend against hacker attacks, and often lack the resources needed to operate best-in-class IT infrastructure. I do agree that the huge troves of information held at single large targets, like Google and Amazon data centers, are very appealing hacker targets.
As with any other IT initiatives, good management policies, careful assessment of risk, and proactive security are crucial to the success of cloud services.
More on good cloud management policies here:
http://www.pcworld.com/businesscenter/article/226199/amazon_ec2_outage_shows_risks_of_cloud.html
Jon
The security of data and system uptime requirements are greatly glorified by IT and Business folks. Analysis of data and context are required to understand any data in a company. Therefore, security should be applied as more of a focused exercise then as a generality by most of the current organizations. The same thing can be said about the uptime of the Systems, for the stand alone environment.
Another desire by all businesses to be 100% available is a sales hype – many of you will come hard on me by saying so. How many companies infrastructure can truly claim this with their own-systems? Frankly, even though many big companies are global, they are more local in product sales and services. Cloud provides even better global availability of systems then owned Hardware houses.
Having said that, Cloud is an opportunity for all organizations to start thinking and evaluating the change that will have an impact on their businesses. Companies should actively start modifying their business practices and procedures, if they are looking to succeed in the market place. Cloud is like a new highway and its impact will be as substantial as that of Internet on business.