Needs and Objectives
UMPC Presbyterian has partnered with Pensiamo to optimize its supply chain to improve management of its inventory of drugs, over-the counter medications. Pensiamo will achieve this by alerting employees of shortages, hypothesizing a solution to shortages, purchasing alternative products or sourcing from other locations to speed up the process and increase performance, and increasing efficiency (logitity.com). As Pensiamo is a newly founded entity to fulfil this purpose, we assume that Pensiamo possesses the resources to implement the new software. IBM Watson analytics will enable UPMC Presbyterian to optimize its entire supply chain, by understanding the cause of fluctuation in inventory in the supply chain, calculating the ideal stocking location and size of inventory, basing inventory policies on proven data, and performing what-if analyses to predict cost and service impacts of alternative scenarios using the features and capacity of Watson Analytics: natural language dialogue, automated predictive analytics, and prompt analysis. Though these analyses can be implemented to benefit the entire supply chain, for our current purposes we will hone in specifically on managing the inventory of over-the-counter medications at UPMC Presbyterian Hospital. By narrowing our scope down to one product, we will be highlighting one of Watson Analytics’ strengths, the ability to drill down into specific details in the data and make relevant comparisons (Mukherjee, 2016).
The cost projections are based on information gathered through pricing information comparison from SAP HANA, a main competitor, IBM Watson analytics, available pricing through their website, and also on average current rates for database and application market. To greatly reduce costs of hardware and software maintenance and upgrades, we will subscribe to the IBM Watson cloud-based solution rather than purchase the software package. Gallaugher (2015) lays out criteria for the decision of whether to make, rent or buy software. The primary criteria of relevance here are as follows. First, as regards the “make” option - developing equivalent software on our own is not necessary when a highly complex and well-designed program such as Watson Analytics already exists. There is no need to divert precious resources towards trying to develop software on our own to perform the same functions. Second, we do not foresee unacceptable security risks or breaching compliance with regulations. We can omit specific information identifying customers when submitting inventory use data to Watson Analytics. Third, we trust that the vendor (IBM) is reputable and on sound financial footing. Finally, we predict cost savings and increases in efficiency due to using Watson analytics over the cloud. Cloud technology enables any computer application to be delivered over a network or the Internet, substantially reducing the need for local software or processing power (McKinsey Global Institute, 2013). IT resources such as computation and storage are made available on an as-needed basis—when extra capacity is needed it is seamlessly added, Up-front investment in new hardware or programming is greatly diminished, while computation and storage capacity can be easily added by IBM Watson.
McCarthy (2014) points out that fewer than 20% of organizations in his research can actually demonstrate any proven causal link between the metrics they measure and the outcomes they intend to drive. Use of Watson Analytics can help us to actually establish the causal link between a) measuring our strategy for managing over the counter medication inventory and b) cost savings.
Pensiamo has currently 150 employees, and we hypothesize that 25 out the 150 employees will need access and subscription to the software. As they have worked in supply chain before, we assume that they possess some technical skills that will reduce the need of numerous hours of training. However, Training will be provided if requested. Support and ongoing maintenance is 22% based on industry average (Forrester Consulting, 2014). The professional subscription cost $80/user/month, and we assume that Pensiamo current hardware and software systems are up to date to support IBM Watson Analytics. There are no additional fees as subscription includes license.
Variable Costs: Configuration, training, testing, integration, customization, additional storage
The variables costs of subscribing to IBM Watson analytics includes implementation expenses such as: configuration, training, testing, integration, customization (storage, additional users) as needed. Initial subscription will include no customization. These costs are considered variable costs because they depend on the number of hours needed by Pensiamo Staff to master the new software. Thus, they will increase or decrease depending on the number of hours of work and training needed based on a predetermined rate per hour.
Fixed costs: Subscription fee, ongoing support, data security
Considering that obtaining IBM Watson involves a subscribing fee per user monthly, we consider subscription fees to be fixed unless the number of users is changed.
Subscription fee is $80/ per user/month. Pensiamo will be buy annual subscription ($24,000). 100 GB storage included in the professional package.
Ongoing support is fixed.We will consider the ratio of 1:5 of software costs to service costs, 22% industry average (Forrester Consulting, 2014) of the number of subscription ($5,280).
These are considered fixed as they are not based on the number or the number of hours of work performed.
Upfront and recurring costs
All the initials expenses incurred at implementation are upfront costs such as configuration, training, testing, and integration. These costs are included in the initial subscription to IBM Watson Analytics. Training will be recurring only if needed and requested by Pensiamo. Also, all of the fixed costs will be recurrent and will change only if the number of users is changed.
Miscellaneous costs:
Miscellaneous costs will be those incurred for additional storage, system upgrade, customization additional training and consulting if needed.
Additional storage is priced at $50/GB
COST ANALYSIS
Fixed Costs/recurring
|
Per User/month
|
# of Employees
|
Total
|
*Subscription
|
$80
|
25
|
$2,000
|
**/Recurring (ongoing support)
|
17.6
|
25
|
440
|
Grand Total
|
$2,440
|
*Includes software licensing, initial setup & training, data security, & 100 GB data storage.
**Recurring variable costs are approximately 22% based on industry average.
***We predict an average decrease of 1.5% each year for the next five years in maintenance and service. Though some costs might rise on an intermittent basis, such as the possible need to add more Gigabytes of storage in the cloud, overall costs should go down due to having developed a set of established routines and processes. In the first year, there will be some period of research and adjustment to fine-tuning the system in order to determine the best procedures to streamline and optimize the flow of inventory (over the counter medications). Some ongoing research and development will continue, but will not be as intensive as the first year. We will have developed a core of employees who are well trained and expert at using the system, and even though some training in new methods is expected due to employee turnover, etc., these developments will not be on the same level as the initial period of establishing the core of expert employees.
TOTAL COST OF OWNERSHIP FOR Next 5 Years
Year
|
1
|
2
|
3
|
4
|
5
|
Software
|
$24,000
|
24,000
|
24,000
|
24,000
|
24,000
|
Maintenance
|
5,281
|
5,202
|
5,125
|
5,049
|
4,975
|
Total cost
|
$29,281
|
$29,202
|
$29,125
|
$29,049
|
$28,975
|
References
Gallaugher, J. (2015). Information systems: A manager’s guide to harnessing technology. Washington, DC: Flat World Knowledge, Inc.
Logility. (2016). Achieving a new level of forecasting accuracy. Retrieved from
McCarthy, B. (2014, Dec. 4). Prepare your organization to capitalize on predictive analytics. Harvard Business School Webinar retrieved from https://hbr.org/2014/12/prepare-your-organization-to-capitalize-on-predictive-analytics.
McKinsey Global Institute (2013, May). Disruptive technologies: Advances that will transform life, business, and the global economy. Retrieved from file:///C:/Users/martapelusi/Downloads/MGI_Disruptive_technologies_Executive_summary_May2013.pdf
Mukherjee, S. (2016, Sept. 1). Analyze supplier delays. Retrieved from https://www.ibm.com/communities/analytics/watson-analytics-blog/analyze-supplier-delays/
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