The Probability of Supply Chain ROI Must Be Considered

As per this recent editorial by Dan Gilmore over on Supply Chain Digest, you can’t overlook the probability of success when considering the ROI of a supply chain project. A 10X ROI isn’t a 10X ROI until the returns and identified and realized. If the new system doesn’t work, or the assessment doesn’t turn up the expected savings, then there is no ROI. And the chances of this happening are dependent upon the probability of success.

Therefore, before you give a project a green light, you need to understand the probability of success. Because a 10X ROI probably isn’t worth pursuing if there’s only a 20% chance of success, especially when you’re sitting on a 5X ROI project that has a 90% chance of success. If you have a lot of options, a good rule of thumb for zeroing in the ones that should be given the most consideration is to multiply the probability of success by the expected ROI and focus on those with the modified ROI. For example, given the above two scenarios, the first one has a modified ROI of 2X (since only one in five similar efforts would succeed) and the second has a modified ROI of 4.5X ROI (since nine in ten similar efforts are expected to succeed).

The reality is that there are probably a dozen high-probability ROI projects you can do right now, no use expending your resources on the wrong one.

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