Service Lifecycle Management - Tapping into the Value of the Product Aftermarket

What is Service Lifecycle Management?

Service Lifecycle Management (SLM) is a business initiative focused on servicing a company's products, and the customers that bought them, after the product has been sold. Simply put, SLM focuses on making more money from the product after the initial sale. But it is more than that; it is also a way to become a strategic part of the customer's business after the sale is completed.

General Electric (NYSE:GE) is an excellent example of a company that has focused on aftermarket opportunities, going so far as to call themselves a "services" company as opposed to a "products" company. General Electric is widely reported to have significantly increased both their total revenue and their profitability by focusing on services opportunities in addition to developing world-class products. While General Electric may not have called their strategy "Service Lifecycle Management", they have certainly proven the value of serving the product aftermarket. SLM is an initiative that impacts the product lifecycle, which has some asking whether it is a part of Product Lifecycle Management (PLM). The broad definition of Product Lifecycle Management (PLM) describes it as a business initiative that addresses the full lifecycle of a product, from initial concept through retirement, in order to gain maximum value out of the product. The value being offered from most of the current PLM solutions, however, is gained primarily through improvements in the development and introduction of new products and product enhancements and centralized management of product data. While there are tremendous benefits available from improvements to the new product development (NPD) processes and product data management (PDM), there are important, additional benefits that lie throughout the product lifecycle. SLM is a complementary, yet separate, initiative aimed at the benefits that lie beyond the product sale, in the product aftermarket.

Many industry analysts include SLM as a part of Customer Relationship Management (CRM), although implementation of an SLM strategy does not require a broader CRM solution. There is some logic to this, because SLM shares many of the same goals of CRM, including increased customer revenue and improved customer satisfaction. Regardless of where SLM is categorized, there is growing interest in SLM because of the tangible benefits available from increasing revenue opportunities, decreasing internal service costs, and improving customer satisfaction.

Tapping the Value of the Aftermarket

Many manufacturers and distributors are beginning to recognize that there are significant revenue and customer satisfaction opportunities available after their product has been sold, in the "aftermarket". The aftermarket has been a lower priority for many, particularly for manufacturers, who have historically viewed themselves purely as product companies. This sole focus on developing and selling products as their key to success ignores the fact that the cost of maintaining some products can easily be 4 to 5 times the cost of purchasing the product - or more. This additional revenue has often been left to third party companies.

The value of the aftermarket is highly dependent on the type of product and the industry. In industries that sell capital equipment such as medical devices, telecommunications, instrumentation, IT hardware and other complex equipment, companies are starting to significantly increase their focus on services revenue. For some companies this is a strategic move to grow the top line, while others are looking to replace revenue from slower product sales in the current economic conditions.

Better Service, Lower Cost

Another benefit of SLM is the automation and optimization of the service processes in the field. Resource utilization and efficiency can be increased through effective call scheduling, allowing more service to be performed with fewer technicians. Companies have found the value of completing service calls on the first visit by deploying the right technician, with the right service parts and the right skills at the right time.

In addition to reducing service costs in the field, SLM can also impact the help desk processes in order to allow for more efficient call centers. Service requests can come from many places in addition to a problem report from a customer. These service requests must be routed to the right company representative and then efficiently dispatched for service.

Maybe most importantly, SLM can integrate the service-oriented business processes that span from the time of the service request through to satisfaction of the need and billing or warranty. Still better, SLM may be able to predict the need for service in advance and avoid an unplanned service call with a planned preventative maintenance call, lowering costs and increasing customer satisfaction.

Become the "Trusted Advisor"

Another benefit of being a larger part of the customer's product lifecycle is that when the product is due for replacement, the service company is often in the best position to influence the buying decision for the replacement. In fact, who outside the customer is better positioned to know about the potential replacement of a product than the service technician? This is also true for the purchase of related or complementary products.

If the company can leverage the service relationship properly, they can increase product sales to existing customers in addition to increasing the amount of service revenue earned after the sale. By investing in keeping the customer well serviced, not only can the company generate more service revenue but it can also extend its relationship with the customer to that of "trusted advisor". Trusted advisor status can lead to increased customer loyalty and also increased sales and service opportunities beyond the current products.

SLM Needs

SLM, like any other business initiative that involves new business processes, is best implemented alongside strong enterprise applications. There are many software vendors that offer products that support SLM, or Service Process Management (SPM) as some call it. What are the features required from an enterprise solution to support an SLM initiative? The two primary capabilities required are "Call Center" and "Field Service" applications. These two categories of software provide support for capturing, or generating, the initial service request and managing it through completion all the way to the back office. In order to manage the total lifecycle of the service requirement in a continuous business process, integration between the Call Center and Field Services capabilities is essential.

Call Center applications must manage the demand for service through completion in order to satisfy the needs of the customer and the manufacturer or distributor. The initial service request may come from a number of different sources, all of which must be captured and processed through the call center. In addition to telephone, self-service, or e-mail requests, an increasing number of products are being embedded with self-monitoring capabilities that can evaluate the health of the product and self-report on service needs.

In addition to reported problems, effective service management requires that service problems and preventative maintenance calls be proactively generated by the SLM applications. As the service request is reviewed, company representatives must have the ability to review all past service requests as well as all relevant contracts, service level agreements (SLA) and warranties in order to determine customer entitlements and the best course of action.

Once the service request has been reviewed and targeted for service, Field Service applications must be able to ensure that the optimal resources are deployed to provide the service. Once dispatched, the technicians or service representatives should have ready access to company knowledge on the product they are servicing, the customer, the maintenance history and configuration of the product in order to complete the service with the first call. In addition to the knowledge required, the technician should be armed with the appropriate parts and tools for the job parts that may have been planned for months in advance. Service representatives should then have the ability to close the loop on the service call and provide the appropriate time and materials information back to the office in order to generate appropriate billing and update warranties and service level agreements.

When evaluating an SLM solution, look for depth and experience in automating the service management functions and relevant experience in your industry. For more detail on the application requirements for SLM, please see The CRM Selection Challenge


SOURCE:
http://www.technologyevaluation.com/research/articles/service-lifecycle-management-tapping-into-the-value-of-the-product-aftermarket-16979/

The Strategic Importance of Asset Management Part Three: A New Framework

A New Framework for Asset Management

As the level of understanding of these areas begins to rise, so too do the expectations that managers and companies will be able to meet modern requirements.

In the past, maintenance strategy has frequently been treated in a highly reactive manner. Maintenance regimes are often created in response to machine breakdowns or incidents. Often, in the aftermath of disasters, there are public statements made demanding, or promising, "more intensive maintenance."

While the intention is laudable, the result of such reactive actions is often either non-effective or counter productive. Either way it is too late to stop the original incident from having occurred.

Managing assets needs to be done in a truly proactive approach, one that ties the management of physical assets to the corporate objectives.

A modern approach to asset management can be visualized as a series of dominoes. Each domino needs the momentum from the previous area, and then proceeds to pass this momentum to the next domino in the line. Starting at any point other than the beginning will leave some dominoes standing.

Modern asset management can be seen in the same way. Each of the dominoes represents one of the decision-making areas that are required to adequately manage assets.

The initial momentum to begin the sequence comes from the vision of a future state. This needs to clearly represent the corporate objectives and goals, and expressing how asset management can play a part in achieving these goals.

This energy is then carried forward to impact on the remaining areas of decision-making. As with the dominoes, a decision to begin in the middle of this chain reaction will omit areas important to the end result.


This is Part Three of a three-part note.

Part One discussed changing attitudes.

Part Two covered the implications for asset management.

The Corporate Viewpoint

Perhaps more than any other management initiative, asset management is heavily driven by the corporate requirements and objectives. Yet it is often overlooked or summed up in global statements regarding "improved efficiency" or "improved quality."

One of the more recent tools in a manager's arsenal is the balanced scorecard. This proven tool has been used successfully throughout the world as a means of communicating corporate strategy, and converting strategy into results. However specific asset management goals and causality links are rarely included in corporate scorecards. Including asset management at this level of corporate objective setting, sets two powerful dynamics in motion. Firstly, it raises the level of understanding, throughout the company, of this area and its importance. Secondly, it provides guidelines for future decisions that will need to be taken regarding the following steps in the chain reaction.

Developing Maintenance Strategy

The corporate objectives, once clearly defined and linked to asset management, act as "requirements" in the creation of the strategy regimes.

An example of this can be found in the linking of corporate objectives regarding quality to asset performance. Determining exactly what the future acceptable level of poor quality will be immediately provides a guide for the performance standards required of the assets in the production lines.

These then need to be considered along with all other requirements that the company may have of its assets. There are a large number of areas that contribute to the company's requirements of its assets, and all of these need to be considered in the resulting analysis.

When there is a clear definition of what it is that companies need from their asset base it will allow them to
a)
understand if their assets are able to achieve these objectives in the first place, and
b)
determine the maintenance strategies required to ensure that they do, or
c)
determine what enhancement actions are required to meet corporate requirements Working through these two steps not only forces a radical change in the manner in which companies view their assets, it also leads to a radical change in the way that the assets are managed and that decisions are taken in this area.

Applying Maintenance Strategy

As work on maintenance strategy gets underway, work can begin on the steps relating to the application of maintenance strategy. This means taking the strategies and determining what are the supporting business needs and processes that will be required to execute them.

As the strategies are developed, information regarding the clear requirements of the materials and human resources functions will begin to emerge.

This gives a company the ability to totally plan and control the maintenance efforts and spending, from the strategies through to the materials and human resources dimensions, all aligned with the true asset requirements.

Similarly, as these fundamental issues are addressed, there begins to be an understanding of what the business processes need to be. Quite often this can mean a radical change to existing processes.

These can range from processes governing acquisition, installation and enhancements, through to the operational processes. In some cases it may require different maintenance scheduling frequencies, in others it may require whole new skill bases to be developed or it may lead to changes in the ways that we plan, perform, and record work that are done.

In stark contrast to conventional thinking in field of asset management systems, it becomes clear that business processes do not drive "requirements". In fact business processes, and the systems that are used to manage them, are driven by asset requirements.

This is one of the key misconceptions to have emerged regarding enterprise asset management in recent years.

Administering Maintenance Strategy

With the asset requirements, supporting business needs, and work processes defined, attention can now turn to the use of an existing or future computerized maintenance management system(1).

It sometimes becomes clear that the systems in place are either inadequate for managing the asset portfolio or that they are being used in a manner that does not align with the newly defined business processes.

This is often a startling revelation to companies expecting to be able to merely "roll out the maintenance modules" of their existing ERP that was bought for financial or other business reasons.

This can often be a rude awakening when the amounts of money that are sometimes involved are taken into account.

Conclusions

There can be no doubt that the perceived importance of physical asset management has risen substantially during 2003. There can also be no doubt that this trend will continue into the future as it has done over the past three decades.

It is beginning to become more widely understood that asset management is a complex and specialized area. One which can be a source of strategic advantages, but also one in which the implications of misjudgement can be extremely serious. Not only from a financial perspective but also in many areas of corporate activity. In order to exploit the advantages available in asset management, and ensure their responsible stewardship, management will need to be based around three basic tenets:

1. Using the correct people;

2. With the correct knowledge;

3. To make decisions in the correct way.


Bibliography
Maintenance—A New Paradigm, John Moubray, available from www.aladon.com

(1)Often referred to as a computerized maintenance management system (CMMS), or enterprise resource planning (ERP) system, or enterprise asset management (EAM) system.

The case Against Streamlined RCM, John Moubray, available from www.aladon.com
Reliability-centred Maintenance report Dolby Access Press






SOURCE:
http://www.technologyevaluation.com/research/articles/the-strategic-importance-of-asset-management-part-three-a-new-framework-17140/

Emptoris "Procures" Zeborg's Spend Management Expertise Part Two: Market Impact

Market Impact

Emptoris, Inc., a privately-held provider of e-sourcing solutions that support the strategic sourcing needs of global 5000 companies, early in 2003 announced the completion of financing from new and existing investors totaling $20.5 million. Menlo Ventures led the third funding round, with participation from new investor HarbourVest Partners and all existing investors, including NETinvest, from the previous two funding rounds. Emptoris then pledged to use the funds to finance further expansion of the company in a number of areas, including sales, marketing, product development, and penetration into new global markets.

Then, in September, Emptoris announced the acquisition of Zeborg, one of the world's leading spend analytics firms. As a result of the acquisition, Emptoris, with more than 50 global 5000 customers and notable sourcing applications and services, believes it is now positioned as the leading strategic sourcing software provider in the procurement and sourcing applications market. In addition to acquiring Zeborg's software and services offerings, Emptoris will inherit the company's sales team as well as global 1000 clients from a wide range of industries, including 7 of the world's largest banking and financial services companies. Zeborg's customers include American Express, Cigna, Fleet Boston Financial Corporation, KeySpan, and Owens Corning. Zeborg has reportedly processed over $480 billion in corporate spend data and over 350 million transactions from over 100 data systems. On the other hand, Emptoris customers include Boeing, GlaxoSmithKline, Motorola, and Samsung America.

It would not be a colossal discovery to realize that difficult economic times with flat and often crippling revenues have particularly forced enterprises to reduce costs in ways other than the "tried-and-true" massive layoffs. Purchasing departments, which have long been regarded as "necessary-evil pen-pushers," have recently come as possibly the first to mind as the bottom line improvement opportunity makers through ensuring sourcing and procurement of all materials (indirect and direct) and services for the organization in a more strategic, streamlined, efficient, and cost-effective way.

Owing to ever increasing deployment of outsourcing, virtual manufacturing, contract manufacturing, vendor managed inventory (VMI) and many other modern manufacturing concepts due to increased global competition and the need for enterprises to focus on their core competencies, enterprises are often spending even over 50 percent of their revenue on procured goods and services. Thus, suppliers' bases have been an ever-increasing factor to every organization's performance. Moreover, suppliers being manufacturers themselves, should be leveraged as a valuable source of expertise instead of being treated as a mere external cost center (if the user companies could even glean that knowledge at all), capable of helping their customers deliver more innovative products faster and at better quality levels, and not necessarily only at lower prices. In other words, the competition has shifted from being between individual companies to being between companies and their value chains.

However, so far the communication between manufacturers and their suppliers has been mainly transactional and at arm's length in nature. As a result, few companies can openly claim to manage their suppliers closely and efficiently, and hence deliberately or not, many continue to put up with being inexplicably overcharged for orders or with accepting late shipments. The situation gets even worse when the enterprises have to discern how much they spend, with whom, on what items, and when.

SRM describes an emerging category of software to manage these evolving relationships between manufacturers and suppliers. Given the relative nascence of the SRM movement, it often means different things to different people. For a detailed discussion of SRM see "The Hidden Gems of the Enterprise Application Space."

The processes that make up SRM depend on a hybrid of technologies and require a significant implementation, data cleansing and migration, and integration effort at most organizations. Still, two underlying results that an effective SRM project should achieve would be 1) the automation of the processes by which a company buys supplies, which can range in sophistication from automated generation of requests for proposals (RFPs) to more holistic order management systems, and 2) to provide the analysis that enables buyers to assess historical supplier data and base subsequent purchasing decisions on the results.

As recap, SRM allows companies to integrate with their most important suppliers to streamline order management, replenishment, and fulfillment, inventory management, and engineering change management (ECM). The key words pervading so far have been sourcing, spend management and contract management. Namely, the core procurement process has become fairly mature and most enterprise application packages provide solid support for the purchasing process.

This is Part Two of a three-part note.

Part One detailed the event.

Part Three will present challenges and make user recommendations.

Strategic Sourcing

To provide a more distinct value proposition, vendors are providing value-added functionality that helps with tasks outside the procurement cycle. The most significant one is strategic sourcing, which, through rating and ranking criteria, a purchasing officer chooses the optimal set of suppliers, with which to negotiate a contract. It enables enterprises to evaluate potential mixes of materials and services and determine appropriate suppliers and terms and conditions to balance cost, quality and risk. The applications can capture supplier information and serve as a medium for collaboration between buyer and supplier on the requirements of the purchasing organization. Generally, the term strategic sourcing denotes many steps that precede the signing of a contract, including spend analysis, identifying potential suppliers, RFQ and contract negotiation, and monitoring and improving suppliers (which logically may happen both before and after the contract signing).

As companies continue to strive to reduce the internal costs of their products and services, more pressure is on the procurement group to source from the right supplier that can deliver as needed, at the right price, but also subject to many other measures some of which can be of a non-quantitative nature, such as product availability, specifications, freight expenses, warranty, terms of contract, distribution partners, and what not. The sourcing equation can become even more complex when federal and state government regulations and corporate mandates such as sourcing from minority-owned businesses are brought into play as thresholds that cannot be circumvented.

Spend management comes in the form of software and services. It allows organizations to gain control of the entire purchasing cycle, since the organizations deploying spend management across their e-purchasing operations should have a much better idea of how their money is being spent. Moreover, they must ascertain how much money is spent and where, before they can identify opportunities to improve sourcing via, e.g., negotiations with the supplier to produce a mutually beneficial contract. Spend management also requires rigid principles and governance to enforce compliance, which means establishing methods of monitoring spending against the budget and providing appropriate alerting and escalation processes for dealing with spending that exceeds budget levels.

Contract management is another key component of enterprise spend management, since contracts are the point around which much of a company's dealings with its suppliers' pivots. Buyers and suppliers can spend an inordinate amount of time figuring out details about obligations and remuneration, incentives, and contingencies. However, for companies handling several dozens of contracts, ensuring that suppliers adhere to contract details is often too cumbersome to be executed. Most enterprises do not have formal systems in place to manage contracts, and thus financial or purchasing executives often do not have visibility into contracts because they are kept in multiple different storage systems or even, as hardly accessible hard copies.

Companies need contract management solutions that can reach across those repositories to help managers gain a comprehensive understanding of the trade agreements under which the enterprise operates. The lack of visibility and control will often cause an enterprise to fail to extract full value from the contract and the relationship with the supplier.

To that end Emptoris's acquisition of Zeborg is both a wise offensive and defensive move, since it combines the resources of two companies that should focus on arguably growing e-sourcing/spend management opportunities. The companies have quite complementary product offerings, industries of focus, and excellent customer references. The merger has some merits similar to the also recent merger of indirect e-procurement counterparts Perfect Commerce and eScout.

Emptoris's Contribution

As mentioned earlier, Emptoris's legacy and core competence lies within the manufacturing organizations and complex decision support for sourcing large numbers of complex direct line items, and in subsequent deriving of awards and allocation strategies. The Emptoris Sourcing Portfolio is a suite of eleven Web-based modules that support the broad sourcing process, from identifying demand to creating contracts, thereby enabling enterprises to identify and prioritize sourcing savings opportunities, negotiate significant cost savings, and track contract compliance and supplier performance. It is a modular solution, enabling users to select the modules they need, and start where it makes the most sense for them, whether it is to address more spend categories on-line, identify greater savings in each spend category, automate more of the sourcing process, incorporate suppliers into the extended enterprise, or leverage best practice processes and content. The modules and some description of how they work follows:

1. The Item Master module is self-explanatory and it serves the purpose of defining categories and organizing them into an n-tier hierarchy to mirror the taxonomy of goods and services sourced.

2. The Supplier Qualification module is where sourcing typically starts, with assessing suppliers' capabilities. To that end, users can create questionnaires and scorecards within this module to assess and document a supplier's quality rating, financial stability, and domain-specific certifications.

3. The Demand Aggregation module, once users have determined which suppliers they are interested in dealing with, helps them gather and summarize their requirements across departments and divisions. This exercise can be challenging, considering the fact that these groups may source requirements independently because they are on different enterprise systems or located in different geographic regions. The module tackles it by aggregating all the requirements while maintaining links back to the specifics provided by each original requestor. For example, a corporation can source centrally but ask its suppliers to drop ship their products to its various plants, and even though it may bid out the requirements based on aggregated demand, it should know and can communicate to the suppliers how the demand is divided up among the plants.

4. The Request for Quote (RFQ) module allows users to expose their requirements to the suppliers and solicit bids, by supporting a number of different types of negotiation processes, including sealed bids, reverse auctions, and supplier qualification. The module also provides the capability to create RFP templates, so that users can address certain industry-specific requirements through structured data elements, which can be reused in any other template within the suite through the above-mentioned Smart Data feature. For example, if one wants to create an RFP template for the mining business, he/she can structure it so that suppliers must submit information on shipping costs, tariffs, and lot quality. Once those data elements are in the RFP template, that information will be available as structured data for leverage later in negotiations and analyses.

One of Emptoris's differentiators would be enabling a TCO-based multi-attribute approach, as suppliers are not just bidding on the price, but on many more pertinent criteria. The module also includes a workflow engine to support the organizational hierarchy present in most large companies, as it can specify who is responsible for each category and sub-category, as well as to document who has the right to create, open, close, and approve a negotiation. Once the RFP is populated and it has been decided how to run the event, and all the required sign-offs are obtained, the solution allows suppliers to respond to this information in a possibly unique way, leveraging what Emptoris calls an extended enterprise philosophy, which aims at identifying suppliers' strengths and figuring out how to leverage them. Namely, instead of treating the requirements as fixed, suppliers are encouraged to recommend changes that might result in lower prices. They might suggest that, for example, the customer moves the due dates, allows multiple shipments (back orders), or buys an additional item from them to get a lower price (volume-based or bundled discounts). Many buyers would like to know about these opportunities, given that suppliers can often lower their costs when they are given some flexibility and wiggle space.

5. The Decision Support module, which leverages scenarios to help users determine the lowest cost of ownership alternative that accomplishes the specified goals. For example, users should hedge their risks by giving one supplier a certain percentage or dollar amount of the business to meet a contractual obligation, or they may want to spread out their orders among several suppliers. They will not consider just price, but will also factor in variables such as quality, suppliers' viability, customer service, and reliability within the scenario. The software, through scientific decision-making optimization, will identify, line-by-line, based on the scenario, the sourcing plan that will result in the lowest cost of ownership. The "what if" scenario simulations are broad, and every time the optimization engine runs again. Each time, the module explains what the contributing factors are for a particular scenario, so that users know what the critical constraints are (e.g., they may get a better price if they relax the due date). The software aim is at helping users understand their trade-offs, which might be a valuable piece of information.

6. The Standard and Advanced Reverse Auction module enables real time online competitive bidding.

7. The Contract Management module is a summation of the terms and conditions that were analyzed in the Decision Support module. The rules engine prompts users to address important issues in their contract, such as compliancy, and there is an editing tool so that users can fine-tune the final document. For example, the contract may call for a quarterly review of the elements it was based upon (e.g., price, on-time delivery, etc.). If any of these has changed, the module can be configured to send an e-mail, trigger a penalty or bonus, or initiate a renegotiation, which can be defined upfront, in the business rules engine.

8. The Supplier Assessment module is a tool to periodically evaluate existing suppliers. It supports lean manufacturing, ISO 9000, and Malcom-Baldridge specifications.

9. The Executive Dashboard module provides information on how much users spend where, by category, user, or by department. It pulls data from the sourcing events that users run, and it contains an on-line analytical processing (OLAP) tool that can report on data from the spend analysis database. While the users can use spend analysis as the first step to identify which categories to tackle, the module is more aiming at measuring contract compliancy.

10. The Project Management module sits on top of all the other modules. It provides the capability to manage categories by project, and a resource for best practices, by category. The module may tell users what they need to do and how to do it for peculiar materials. For example, it might advise users what suppliers they may want to consider and what the nuances of the category are, which creates significant efficiencies within the sourcing organization because it can tell a buyer who has never managed certain categories what to do and what to expect.

11. The Software Development Kit (SDK) module enables organizations to set up data imports and exports to an ERP or other operational system. It provides significant access to all data elements in and out of Emptoris's system through high-level, UDDI and XML-based API calls. The solution does not provide nor does it require real time integration by the nature of transactions.






SOURCE:
http://www.technologyevaluation.com/research/articles/emptoris-procures-zeborg-s-spend-management-expertise-part-two-market-impact-17113/

Situational Analysis Enterprises have long realized the importance of improving profits by curbing upstream supply chain costs, as evidenced by an in

Executive Summary

Growing competitive pressures compel strategies and tactics that yield efficiency and efficacy within virtual supply chains. This is especially true for middle tier suppliers. For example, distributors are finding that they need managers who are not only good expediters and know their products, but who also understand how to use decision support tools to make their work more effective. Advances in information technology now make it more feasible for distributors to adopt these tools such as supply chain management software. This paper examines the steel service center segment of the wholesale distribution industry as a case in point of the challenges facing distributors and the relief offered through supply chain software.

This is Part Two of a three-part note. Part One defined the Challenge faced by wholesale distributors. This part discusses the Critical Objectives in meeting this challenge. Part Three covers meeting the objectives with Supply Chain Management Software.

The Critical Objectives

As anyone in the wholesale distribution business knows, there are some objectives that are critical to removing time and money from operations and enhancing competitive advantage. They include:

* Optimizing inventory investment

* Ensuring service

* Sourcing effectively

* Maximizing return on assets

The structure of the steel industry provides a detailed perspective for examining the special attention that distributors must pay to these objectives. While steel service centers face some specific concerns, many of the challenges pervade the distribution business in general.

Optimizing Inventory Investment

A small proportion of the inventory will have some consistency in demand, but for the bulk of the SKU's, demand will often be lumpy or intermittent. Not all steel of a given dimension will have the same quality or properties. For example, hardness, tensile strength, and surface quality may all vary. Inventory supplies for various end uses must have the appropriate properties associated with quality. The inventory is heavy and expensive to transport, so movement should be minimized. Not only must steel service centers manage unprocessed steel (plate, coil, bar, etc.), but OEM's are increasingly asking their steel service centers to hold processed materials (slit coil, cut-to-length, plasma cut patterns, etc.) for just-in-time delivery as well, increasing pressure on margins and taxing their ability to manage inventory.

Ensuring Service

Achieving the key milestone of quality service remains a non-trivial problem. Simply increasing overall inventory levels is not only unprofitable, but also ineffectual. The right inventory of the appropriate quality needs to move to the right place, at the right time, and at the right cost. This means that raw material purchases must be carefully timed and allocated to the service center locations. Processing schedules must be reliable and flexible. Finished goods inventories must be managed for extremely short delivery lead times and for exacting quality standards. Outbound trucks have to be scheduled precisely, loaded efficiently and routed optimally. Naturally, all shipments should be closely tracked.

Sourcing Effectively

Careful planning must coordinate purchases with mill rolling schedules while synchronizing supplies with projected demand. Challenges exist here because mill schedules are inflexible and result in relatively infrequent delivery opportunities. As a result, service centers will often need to hold significant levels of inventory. Mill purchases may need to be supplemented with opportunistic purchases from other service centers. Achieving the right blend of procurement opportunities is crucial to profitability and a very significant challenge.

Achieving Return on Assets

Very expensive, precision equipment is required to handle and process steel. While machines often have some overlapping capabilities, different machines that perform the same function cannot necessarily process the same order. Machinery with more exact tolerances must be used for certain end applications. Also, similar machines often have different processing rates. These factors must be considered when planning long term capacity. If too little capacity exists, then the service center may not be able to respond quickly to changes in demand. If too much exists, then the investment is not producing sufficient return.

Equipment considerations must be carefully, but quickly, evaluated when scheduling operations. Setups should be considered. While separate setup stations are sometimes used to build the setup for the next run, setup time may still be reduced through sequencing jobs in a manner that simultaneously considers tradeoffs among total setup time, demand priority, order due date, penalties for being late, and inventory risk.

This concludes Part Two of a three-part note. Part One discussed the Challenges faced by wholesale distribution. Part Three will cover meeting the objectives with Supply Chain Management Software.




SOURCE:
http://www.technologyevaluation.com/research/articles/does-supply-chain-management-software-make-sense-in-wholesale-distribution-part-2-the-critical-objectives-16468/

The Case for Pricing Management

Situational Analysis

Enterprises have long realized the importance of improving profits by curbing upstream supply chain costs, as evidenced by an increasing strategic approach to sourcing, e-procurement, and contract or spend management over the last several years (see The Hidden Gems of the Enterprise Application Space). However, this broad strategic approach, including education and discipline, has not been applied on the sales side. The kind of thoughtfulness recently seen amongst well-informed and disciplined buyers and purchasing managers has been lacking when it comes to deploying information technology (IT) systems for analyzing pricing processes, pricing optimization, sales force education, and price enforcement in the downstream components of the value chain. Another major deficiency is the dearth of software providers for the management needs of the entire price lifecycle, from price setting, price optimization, and price policy management, to deal execution monitoring, analytics, and reporting.

Justifying the "why" of pricing and profit optimization is fairly easy, since the objective is to increase profits and margins, and hardly anyone could disagree with that objective (see Profit Optimization—Can We Possibly Argue with the Objective?). But the "how" of the optimization is not easy. Although a simple analysis of the profit increase equation may prescribe raising prices, cutting expenses, or simply selling more—and all of these seemingly simple solutions are right in principle—the real problem is far more complex. For example, if one raises prices, will the customers continue to buy, or will they rebel?

On the other hand, if one cuts expenses drastically, will the product quality suffer as a result of resentful, underpaid, overloaded workers, or equally resentful (beaten up) suppliers delivering cheaper but inferior products? Will this drive customers away? Will the consequent warrantee cost increase to the extent that expenses actually rise instead? Moreover, at many companies, there is little cost-cutting maneuver space within operations, given that most enterprises have been watching their procurement costs closely, and evaluating their trading partners. The option of selling more is not simple either, because no one can control customer needs: one cannot know for sure that they will buy more. Some indications show that volumes would have to rise about 19 percent to offset the profit impact of a 5 percent price cut, and such demand sensitivity to price cuts is quite rare. And even if customers do buy more, the question then becomes, can this upsurge in demand even be delivered?

Thus, it appears that raising prices justifiably is the most effective way for enterprises to increase (or maintain) profits in times of both economic boom and slump. While this holds true for most environments, it is particularly true in the razor-thin-margin retail and commodity manufacturing establishments, where prices and availability are the only levers of competitive differentiation. Savvy and dynamically optimized pricing can then mean the difference between survival and failure. The Power of Pricing, the well-known 2003 McKinsey & Co. report, showed that a price rise of 1 percent, at constant volumes of sale and costs, should generate an 8 percent increase in operating profits, which is 50 percent greater than the impact of a decrease of 1 percent in variable costs (materials and direct labor costs), and more than 300 percent greater than the impact of a 1 percent increase in sales volume, even if one ignores the fact that increased production typically increases costs.

It is often not even necessary to raise prices, but rather to make sure that the customer is charged the theoretically right price (or something close to it) at the end of the day. Corporate nominal list price information might be visible in back-office systems, but the trick is to incorporate real-time, transaction specific, on- and off-invoice price adjustments (such as rebates and promotions, consignment costs, cooperative advertising, end-customer discounts, chargebacks, payment terms or cash discounts, online order discounts, performance penalties, receivables carrying costs, slotting allowance, stocking allowance, freight charges, or volume incentives). The real art is in discerning the actual price each customer has been charged per transaction, after accounting for actual deductions, many of which come only after the fact, from the nominal price. Related to this is the notion of the "pocket price waterfall" to display how much actual revenue the enterprises really keep in their pockets from each of their customer transactions, which thereby helps them diagnose and capture pricing opportunities.

This is Part One of a multi-part note.

Looking for the Pricing Rationale

Yet the majority of sales and marketing executives typically still cannot provide short and snappy rationales for where their list and actual product prices come from. Typically, we hear "that is what the market demands." Or else a convoluted business process is described, that at best involves educated pricing analysts who perform detailed financial, or competitive analyses (using variables such as demand, buyer type and preferences, and sales channel characteristics), or any other spreadsheet-based evaluation to conjure up a pricing list, which is then shared with salespeople. This is really when the fun begins, since salespeople will often ignore these lists anyway, and offer products at the price that—according to the salesperson's hunch—customers will pay.

Sales folk only want to sell something after all, given that commissions (sales incentives) are typically not based on profit margins, but rather on volume. In fact, the company may (unwittingly) be losing money on some of these orders. To close a sale, sales personnel typically leverage discounts off the nominal price lists, in order to please their "very important" customers. Thus, often the actual sales prices are a matter of maverick sales practices, horse-trading approaches (meaning shrewd bargaining with reciprocal concessions), or decisions based on the emotion of the moment, all with the handy excuse of appeasing important customers. Typically, it is more productive to the salesperson's personal objectives (higher total commissions) to cut prices than to justify the standard price.

But maybe maverick sales folk are not entirely to blame, given that their superiors themselves let their companies waste millions of dollars in profit and revenue, simply because they cannot really diagnose (or acknowledge) price management problems. Many companies have an unjustifiably optimistic and somewhat imprudent assessment of their price management capabilities, despite their inability to explain their pricing rationale. Also, managers watching over pricing often focus on invoice prices, which are readily available, but revenue leaks (e.g., price waterfalls, such as cash discounts for prompt payments; cooperative advertising allowances; volume-based rebates; promotional programs; freight expenses; and special handling) are spotted with difficulty, as they are unfortunately not detailed on invoices.

Furthermore, these pocket prices are adequate measures of price performance only for the companies that sell commodity products and services with little variation in the cost of selling and delivering them to different customers. However, it is well-known that in order to differentiate themselves, many companies today are offering customized products, often by bundling them with specific personalized services to please the customer. In this case, one has to use the pocket margin to reflect the variable costs of each order, by additionally subtracting from the pocket price any direct product costs, and costs incurred specifically by serving the customer in question. This would help enterprises identify which customers are more profitable (and worth nurturing), and which should conversely be approached more aggressively, even at the risk of losing their (nonprofitable) business. Lately, for instance, in the specialty chemicals segment, tighter markets and rising costs for raw material and energy have given sellers the leverage to raise prices. More producers now say that they are willing to lose those customers with low or negative margins.

Many specialty chemicals producers have been focusing lately on improving selling prices (rather than gaining market share at loss-leader prices). There is also a growing trend towards structuring contracts to include value-adding items, such as incurred research and development (R&D) and technical services for a certain customer.

Any company's price management state of affairs should not be ascertained through mere intuition, but rather through a sound metric system and assessment of current pricing practices and their visibility throughout the trading network. Once the pricing flows are well understood, potential improvements are often easy to spot, since these processes were devised before sophisticated pricing software applications were available to guide and support the pricing process. The trick is to identify a source of profit margin leakage that has long gone undetected, as salespeople typically do not comprehend how the terms of sale can affect profitability (for example, offering a pricey overnight delivery on small orders to appease some customer will likely reduce, if not annul, the margin of the individual order). Thus, as discipline, understanding, and visibility are added to pricing processes, one might want to consider changing sales commission structures from gross (top-line) revenue targets to margin-based (bottom-line) sales incentives.

Inadequacy of Traditional ERP Systems

Financial and cost accounting applications report and analyze history, but neither suggest alternatives nor understand the complex relationships. To deal with complex relationships like overhead, traditional cost accounting makes simplifying assumptions (for example, that overhead is proportional to labor, or that all products get the same dollar amount or percentage of overhead per unit). Furthermore, for their analysis, accounting and costing traditionally use financial periods that are far from the real-time (or close to it) information required for profit optimization calculation.

In other words, accounting takes an accounting view of the world, while profit optimization and pricing management take an operational view. Consequently, the first software category will not help users optimize their win/loss analysis to discern how they should price better so as to close more deals, or let them realize where in the product structure (bill of material [BOM] and routing operations) the margin is leaking from.

However, price management applications certainly require correct cost information as an input, and the more accurate the costing information, the better the resulting pricing decision. Insight into costs allows companies to identify where exactly the line lies between profit and loss, rather than (typically) shooting in the dark. Once this profit point is understood, price can become a weapon for achieving various competitive goals (such as pricing clueless competitors out of the market, or intentionally selling at a loss-leader price to penetrate the market). For example, a dairy knows that school milk programs lead to a preference for their brand in the supermarket. Therefore, pricing school milk programs at a break-even point means not losing money, if the supermarket market share increases. The trick is to know the price point that matches the break-even point, which requires a full understanding of cost, and therefore of price.

Price optimization and demand management should have a bidirectional relationship. On one hand, actual customer demand must be an important input into the pricing process, which should be cognizant of the market success of all brands and products. Leveraging techniques such as advanced demand forecasting and a sales and operations planning (S&OP) process should help companies better understand the actual market demand for their products and services. On the other hand, it is only logical that price be the defining factor in molding demand for any product.

Thus, specialist software applications should take specific market conditions and customer buying behaviors into account, to create optimized prices across the various environments of price list developments, bid development, and promotional discounting. After all, profit optimization applications have long been leveraged by hospitality establishments (airlines and hotels), where the key variables for profit control are the load factor (the occupancy of seats or rooms), and the average revenue per seat or room. These variables are continually monitored, with price being continually modified (certainly more dynamically for airlines than for some hotels) to meet the objective of the maximum profit for a particular time bracket or flight.

As for the other segments, buyers and sales representatives have traditionally bargained, and will continue to do so almost everywhere, while manufacturers will always scrutinize competitors' catalogs and negotiate through distributors for a given deal with a given customer. Pricing proposals often offer discounts for larger bundles of goods and excess inventory and, conversely, charge a premium for items and services in short supply.

However, new analytical software tools have recently emerged to combine and condense this wealth of information. In theory, they give the salesperson a more definitive "yes or no" answer fairly quickly when it comes to offering specific pricing, while also giving management a higher-level view of business efficiency and profit/loss drivers. Thus, in many environments besides airlines and hotels, it might be smarter, quicker, and more useful for the IT system to calculate pricing based on systematic analysis rather than on human emotions (but of course people can be involved occasionally, to override this analysis for strategic reasons).

As for the retail sector, demand-shaping markdowns and promotions have long been in use, even in many corner shops (to say nothing of large retailers), but the time has come for owners to move away from rule-of-thumb or hunch-based discounting, and to use analytics and business rules to automate and report point of sale (POS) decision making.

And yet, there has not been a real boom in the pricing optimization market—despite a salient need—and real deployments are lagging behind market interest (if only in terms of the putative interest of prospective users). The reasons are multiple. First of all, even the companies that have successfully implemented pricing solutions, and reaped tangible benefits, have been secretive about leveraging these, both for competitive reasons and for fear of alienating (or even angering) customers who might feel gouged. And secondly, there are questions about product maturity, data availability, the risk involved, cultural conflicts, and so on.

The fragmentation of the market, with a slew of point solutions targeting only certain industries, is not helping either. Cumbersome ERP price list and discount management functionality has further clouded the space, and has led multiple vendors to focus on different niche areas or industries, with hardly any single vendor delivering an integrated, business process oriented, pricing solution (which would cover all the price lifecycle bases of optimization, execution, and enforcement of prices).

Also not helping is the need for up-front business process improvement, and change management education in this domain. More companies should spend significant time before investing in pricing technologies. This, together with the need for immaculate history data (which has to be tested thoroughly), is only bloating investment price tags, and deterring risk-averse purse string holders, leaving them to work indefinitely from dreadful spreadsheets and silos of data.




SOURCE:
http://www.technologyevaluation.com/research/articles/the-case-for-pricing-management-18480/

CIO Horror Stories and What They Mean For Vendors

Introduction

Customers and vendors do not always see eye to eye. This article illustrates three cases where vendors did the opposite of selling; they pushed the companies away. With each horror story, we are certain that the vendors in question have a very different story; however, it would be wise of vendors to examine the practices that drove the business away. The role of management is to see that rules are followed, but also to understand the need for exceptions.

One chief information officer (CIO) told us his personal horror stories about how he had been treated by vendors. This CIO wanted to spend money, but the vendors apparently did not want his money. The vendors did the opposite of selling; they pushed this company and the CIO away.

Our CIO has had that title for over ten years. Today, the company has $2 billion (USD) in revenue, with operations in 22 countries. Headquarters (HQ) is located in a major metropolitan area where they have no significant information technology (IT). Their processing power is at four distributed data centers located in the US (three) and Europe (one). Before consolidation in the late nineties, they had twenty-seven smaller datacenters supporting country or regional operations.

You're a Class C Customer

When the company had twenty-seven data centers, they had twenty-seven copies of the same hardware. Our CIO was paying $1.8 million (USD) annually in hardware maintenance. When a worldwide IT meeting was held at HQ, the hardware vendor was invited to present its new announcements to the worldwide IT management group.

The hardware vendor would not attend the meeting. The sales rep told our CIO, "You're a class C customer; we do not have the time for you." The message was clear: "You do not count."

Why would a sales rep tell a customer that, even if it were true? Clearly, the pressure was on to service the class A customers better, and that meant spending less, or maybe no time with the class C customers. Is it wrong to treat different customers differently? Of course not, many companies do it. What was wrong is that the sales rep insulted our CIO and his company by telling him he was class C. The sales rep told our CIO that he did not count.

How does the sales rep expect the customer to see a vendor who tells them "You do not count"? What customer loyalty or even communication can be expected?

Now the data centers have been combined to just four. How many copies of this vendor's hardware are installed? None! The CIO says, "We decided to go with a vendor who thought we were more important."

Our Legal Team Is Here To Help You

Our CIO selected a service provider for a $2.4 million (USD) integration project. Starting with the service supplier's standard contract, our CIO had a list of sixteen issues that needed to be addressed. After eight months, the contract still had not been agreed upon. Our CIO thought that the service provider was very inflexible, concerned only with its rules and not the customer's needs.

Out of frustration, our CIO started working with another services supplier and had a contract signed eight business days later. Our CIO claims that most of his sixteen issues from the first supplier's contract were standard terms in the second supplier's contract and he got what he wanted in all but one area.

What happened with the first service provider? The service provider's lawyers took over the relationship. They were more intent on protecting the service provider than satisfying the customer's needs. Of course, any company needs to protect itself. A balance must be struck between protection and business objectives. In this case, the balance needed to be struck relative to the supplier's needs and the customer's needs. This legal department can be called the "Revenue Prevention Department."

Show Me the Money, This Year and In My Territory

Like many companies, this company had different databases worldwide. Our CIO decided to standardize on one database and, over time, move all applications to that database. In his words, "We wanted to set a standard today and move to that standard over the next few years. We understood that it meant little short term dollars for the vendor but what we considered significant dollars over the medium to long term."

He invited several major database providers to attempt to convince them that that vendor's database was the right choice for the standard.

One vendor refused to visit the company, sending sales materials instead. The rep's reason was "no revenue this year." The rep even told our CIO that was the reason, with a comment, "You have to be realistic, I cannot afford to spend time on you unless you have money to spend this year."

A second vendor sent in what was clearly a trainee. Although the trainee tried hard, he was not up to the task. When asked why only the trainee was assigned, the sales manager replied, "90 percent of the revenue from this project falls outside my territory."

Should the CIO be concerned about when his money will be spent or whose sales territory it will be spent in? Of course not; he is the customer. Naturally, the vendor's sales management must make trade-offs between short and long term revenue, and their sales quota and the good of the company. But customers must be served if objectives are to be met.




SOURCE:
http://www.technologyevaluation.com/research/articles/cio-horror-stories-and-what-they-mean-for-vendors-18611/

Let the (Excess) Inventory Flow!

P.J. Jakovljevic

The conundrum of inventory management and the notion of inventory as a "necessary evil" (or the "asset versus liability" dilemma) have long been haunting and bedazzling operations and financial and accounting managers. It is a well-known fact that managing inventory risk is about managing the cost of maintaining unnecessarily high levels of inventory against the risk of running out of stock at a crucial moment of truth (MOT) when a customer actually wants something. In a variety of aspects, inventory management is at the heart of the supply chain management (SCM) realm. Supply chain organizations are responsible for all the processes from sales and operations planning (S&OP) to customer fulfillment, inventory optimization, and new product delivery and introduction (NPDI)—all of which involve the planning and movement of inventory. Profit margins are also directly proportional to operational excellence in each of the above processes.

While cherished by material management folks as supply chain "grease," inventory is not that beloved by financial managers. For one, owing to dreaded inventory costs, start with carrying costs. APICS Dictionary (formerly standing for American Production and Inventory Control Society, but recently renamed the Association for Operations Management) defines carrying cost as follows:

The cost of holding inventory, usually defined as a percentage of the dollar value of inventory per unit of time (generally one year). Carrying cost depends mainly on the cost of capital invested as well as such costs of maintaining the inventory as taxes (based on the value of inventory on hand at a particular time) and insurance, obsolescence, spoilage, and space occupied. Such costs vary from 10 percent to 35 percent annually, depending on type of industry. Carrying cost is ultimately a policy variable reflecting the opportunity cost of alternative uses for funds invested in inventory.

The topic here is not traditional inventory optimization. That issue has already been tackled in previous articles (see Inventory Planning & Optimization: Extending Your ERP System and Lucrative but "Risky" Aftermarket Business—Service and Replacement Parts SCM). It enables clients to reduce investment in stock while at the same time maintain or improve customer service levels. Given that most inventory optimization techniques work on the premise of stock items being in their prime time, the focus here rather is on the tricky effect of product life cycles on inventory.

The motto "time is money" certainly holds true when it comes to inventory valuation. Well, maybe in a reverse (negative) manner, because typically neglected in the continuous battle for executives' focus and priority is the management of at-risk, aging inventory—be it excess active, obsolete, returns, or refurbished inventory. Some refer to these items as "slobs," which stands for "slow moving and obsolete" ones. In other words, most companies in the sectors of high-tech, consumer electronics, retail, and consumer packaged goods (CPG) are focused on new product introductions. Given that everybody is most excited in the early stages of product life cycles (that is, devising and delivering the brand new, "coolest" products), much less attention is paid to the languishing, "totally so not cool" older product lines, with millions of accompanying inventory asset recovery dollars slipping away annually as a consequence.

The S&OP process is chartered with aggregating demand from all sources, translating that demand into a production plan, and ensuring that the sellable product is in the right place at the right time for the duration of its active life (see Sales and Operations Planning Part One: Identifying and Forecasting Demand). In this process too, little time is afforded to the continuous assessment and disposition of excess active inventory, which comes from the ever-quicker pace of new product introduction that drives constant product turnover. Further, the rate of customer returns—reportedly up to 20 percent in consumer electronics—results in returned and refurbished inventory. Industry estimates of inventory excess in the high-tech sector alone reportedly approaches $2 billion (USD) annually, whereby most companies, in the best case scenario, are liquidating that excess "asset" at 20 percent of its original cost. Therefore, possibly the most hated notion for any financial manager is the one of inventory write-off, a deduction of inventory dollars from the financial statement because the inventory is of less value. An inventory write-off may be necessary because the value of the physical inventory is less than its book value or because the items in inventory are no longer usable.

Sure, one has to reckon with inventory shrinkage or losses of inventory resulting from scrap, deterioration (owing to product spoilage or damaged packaging, for example), pilferage, etc., which is one of the considerations included in the above definition of inventory carrying cost. However, what can be particularly annoying and hurtful is the notion of slow-moving items, or those inventory items with a low turnover. Inventory items falling in this category have relatively low rates of usage compared to the normal amount of inventory carried, and eventually become completely obsolete inventory. That is to say, the items have met the obsolescence criteria established by the organization. An example of obsolete inventory would be inventory that has been superseded by a new model or otherwise made obsolescent, and thus will never be used or sold at full value. While on the one hand disposing of such inventory may reduce a company's profit, on the other hand, a company that defers the liquidation process to a once every several months, crisis-like dumping is virtually throwing money away.






SOURCE:
http://www.technologyevaluation.com/research/articles/let-the-excess-inventory-flow-18882/

Transportation Management Systems: The Glue of the Supply Chain

Supply chains are becoming increasingly complex, and as manufacturers create a “value chain” that spans many countries, transportation of final goods or raw materials is a critical component to their business. If goods do not arrive at their destination on time, the manufacturing process will come to a halt and links within the supply chain will break, causing problems for other entities down the chain.

Along with this, the import and export of products is increasing, leading to greater movement of goods through distribution centers (DCs) and to a higher volume of products that need to be moved.

And then there is the issue of how companies deal with ever-increasing fuel costs.

It’s hard to imagine how companies can deal with the difficulties described above, but transportation management systems (TMSs) can do plenty to help manage the complexities of manufacturing today.

A Solution for the Complexities of Manufacturing

Given the growing need to move products inland and the increase in fuel prices, TMS software is a vital tool for today’s logistics industry, and the need for this enterprise application will only increase in the next five years.

As manufacturers’ supply chains continue to expand, developing networks and using different modes of transportation (truck, rail, air, and boat) can be quite a challenge. Networks and the use of these transportation modes need to be optimized. Otherwise, the following basic questions will be exceedingly difficult to answer, leading to serious visibility problems for the manufacturer:

* Where are the goods now?
* When and where are the goods to be shipped?
* What mode(s) of transport should be used to ship the goods?

So, what exactly is a TMS?

A TMS is designed to manage the different modes of transportation used to move products, whether finished or semi-finished. Transportation modes consist of ground, air, rail, and sea transport. A TMS determines the optimal path to transport products based on distance, location, and route.

The Anatomy of a TMS

A TMS’s basic functionality is comprised of the following:

Lane set-up: This has to do with multimode types of transportation. If moving a certain product requires three types of transportation methods (for example, rail, truck, then rail again), the system will be able to schedule all three of these means of transport.

Geographic set-up: This will link geographic locations together, as well as set up the service levels between different parties along the logistics chain.

Carrier and contract details: Whether the company using a TMS solution is outsourcing some of its transportation needs or managing transportation methods itself, the system will research the best rate of each carrier (transportation or logistics company), and select the carrier with the best price. Sometimes however, if a carrier has received three strikes against it (for example) for not delivering product on time, the system will not consider it an option, even if it offers the best price; the TMS solution will select another carrier that will fit the needs of the client, even if it’s more pricey to deliver. As well, sometimes the carrier with the best price is not in the appropriate range of location; thus, the TMS will not select it.

Transportation network optimization: This is one of the most critical components of a TMS. The TMS will define the following three aspects, each of which helps to manage the manufacturer’s “private fleet” (its fleet of transportation vehicles):

1. Strategic and master route design: This gives managers in charge of delivery the ability to decide the optimal route the driver of each vehicle can take, allowing expedient delivery of the product.
2. Territory design: This allows manufacturers to establish a standard route for regular, recurrent deliveries.
3. Routing and scheduling: This gives manufacturers the ability to optimize the schedules of all the modes of transportation it needs to use, as well as define the best routes possible. If a route is unavailable, the system, using global positioning system (GPS) technology, can determine another route.

A TMS can also offer advanced functionality, which does even more than the above. For example, a logistics company or a third party logistics (3PL) provider may have some stock to move out; the company loads the stock onto a truck and sends it off. This simple process may be good enough, but optimization has not been achieved at this point.

A TMS with advanced functionality is able to perform the following:

Cubing: This enables logistics managers to 1) maximize the amount of pallets or boxes that can be put into an enclosed space, be it a truck or an airplane, and 2) take into consideration heavy and light items. The data that is pulled from the warehouse management system (WMS) or enterprise resource planning (ERP) system gives managers the information on which pallets to load at the bottom so as not to damage any inventory.

These two capabilities allow logistics managers to assess how to save on fuel costs. The manager can compare if a load is better sent as one full truckload (i.e., at the maximum weight) with a discount, or sent as two less-than-truckload (LTL) shipments, which would save on fuel costs because the loads are lighter and require less fuel.

Advanced scheduling: Cubing ties into advanced scheduling and routing optimization. Advanced scheduling will take into account the above variables, and set out a path for the driver to take to deliver shipments 1) on time, and 2) in sequence, allowing the strategic placement of goods onto the vehicle.

Consolidation: This enables logistics providers to combine multiple loads, whether they come from one location or from multiple locations. It works with what is known as cross-docking and multi-stop pickups. If a logistics company wants to either cross-dock (the process where a shipment is unloaded at one DC and redistributed to other locations, whether retail locations, manufacturers, or other DCs), the system will figure out which items to consolidate with what load, and optimize the routing and cubing at the same time.

With the above functionality, each module within the TMS can be combined with any permutation so that different pickup and delivery models can be designed by the logistics company, and can be incorporated into the TMS. From this, the organization is able to optimize logistics processes, which are often very complex.

How a TMS Can Help Manufacturers: An Example

Let’s look at a concrete example to see how a TMS can help organizations optimize their entire value chain. Because the manufacturing environment is now global, this example will involve China, Canada, and Spain as parts of a manufacturer’s complete value chain. Consider the following scenario:

A manufacturer of cellular telephones has one DC in China, another DC in Vancouver, two manufacturing plants in China, one retail location in Vancouver, and another retail outlet in Spain. Thus, this manufacturer’s supply chain is highly complex for many of its suppliers and distributors to navigate. Figure 1 depicts the process, or flow, for moving product throughout this supply chain.

Figure 1. A value chain model.

Because products must be moved across many countries and via several transportation systems, three scenarios are possible:

1. The manufacturer will send the cell phones directly from the DC in China to the retail location in Spain. In this case, planes and trucks (air and ground methods) will be the chosen modes of transportation.
2. The manufacturer will have the cell phones moved through the DC in China to Canada (either by ocean or air), transported to the DC in Vancouver, and on to the retail location.
3. The cell phones are moved from China to the DC in Canada, but they are sent back to the China DC because of product defects. In this case, the DC in China sends the cell phones back to the manufacturer in China, which either repairs the defects or sends the phones back through its supply chain.

All three of these scenarios involve heavy TMS functionality. The scheduling and routing, cubing for the cell phone boxes, consolidation for cross-docking in different loading zones, dealing with geographic setups, and scheduling all types of transportation modes are critical to this process. If one of the DCs or manufacturing plants does not deliver its products on time, the TMS will adjust the scheduling or find an alternative route.

Because TMS solutions can optimize the loads put onto different vehicles or other modes of transportation, managers in this example can determine how much the fuel to deliver product to the different DCs will cost, and they can know when product is to be delivered and the optimal amount of goods to deliver to the appropriate location. The TMS incorporates the appropriate information into the routing optimization tool. This gives individuals within the supply chain the best information on how to save money and time by knowing what products to send and how to send them. This knowledge saves a company money on fuel and time, and ultimately increases the manufacturer’s bottom line.

The Final Word

A TMS is an indispensable enterprise application, and it will become more so over the next five years for a number of reasons. One reason is the fast pace at which countries like China continue to produce and ship goods to developed and developing nations. Another is the problem that DCs in countries like the United States and Canada are currently facing: the increasing volume of products coming into ports, necessitating these countries to build larger internal distribution networks.

TMSs will continue to help firms manage the movement of products within their own countries, as well as deal with the complexities of international business. The example above was a simple one, but the issues described are far more complicated in the real world of manufacturing. Thus, the functionality a TMS can provide logistics managers is, and will continue to be, critical to their business.





SOURCE:
http://www.technologyevaluation.com/research/articles/transportation-management-systems-the-glue-of-the-supply-chain-19579/

Q2O Systems: Solutions for Quotation Management and Pricing Configuration

Product configurators have evolved to include more sales, marketing, and financial functions (please see The Essential Components of Quote-to-order Applications. Configurators have become critical to the sell side of business-to-business (B2B) and business-to-consumer (B2C) e-business applications. To serve clients better and ensure that customers are able to purchase complex products over the Web, quote-to-order (Q2O) configurators are playing integral roles.

For more background, please see The Basics of Quote-to-order Systems and The Complexities of Quote-to-order and Possible Solutions.

The Goals: Accurate Quotes and Pricing

As the name suggests, Q2O systems revolve around quotation management—a description of the products and services that a company delivers and that are accurately priced in a way that enables customers to buy. A quote is a statement of price, terms of sale, and description of goods or services offered by a supplier to a prospective buyer. When a quote is given in response to an inquiry, the quote is usually considered an offer to sell. The ability to turn quotes into sales is what distinguishes the industry leaders from their competitors.

Although close rates on quotes range dramatically among industries, all successful quoting systems share common attributes. Namely, only quotes that comply with all pricing and other rules applicable to a particular product or service should be generated by Q2O solutions. Procedures make sure that all quotes accurately reflect the business rules with respect to the quoted product or service. The benefits of accurate quotes include a reduction in the need to inform disappointed customers that the company cannot live up to its promise (quote), and the elimination of the need for quotes to be reviewed, time and again, by internal compliance teams.

Most enterprise resource planning (ERP) systems offer quoting modules that provide both Web-based and desktop form–based user interfaces (UIs), allowing for easy creation, management, and personalization of customer quotes. Once a quote is created, a salesperson can add products (including configurable products) to the quote by searching the product inventory. When a configurable product is selected for addition to a quote, a dynamic hypertext markup language (DHTML) configurator user screen can be seamlessly invoked to provide guidance in matching the needs of the customer with the product options and ensuring more complete and accurate quotes. Upon completion of the configuration session, the configured product is added to the quote. After a quote has been converted to an order, any configurable models can be reconfigured before the order is booked into the ERP order management module.

However, due to some functional gaps, many ERP quoting modules still permit users to enter inaccurate orders into their systems. Because these ERP systems are often linked directly to manufacturing, this can result in products which either cannot or should not be assembled. Accurate quotes enable enterprises to avoid costly order rework by ensuring that only feasible orders are entered into the ERP systems. This also prevents or reduces reworks or write-offs by the sales force to compensate for cancelled or delayed orders.

All of these benefits can significantly enhance profitability and customer satisfaction. Specialized quoting and proposal solutions are thus designed to handle any sales model, whether a sales representative's model, an independent dealer's model, or a reseller's model. Specialized quoting and proposal products have to seamlessly integrate with ERP solutions to provide uninterrupted sales automation and tracking, from lead creation and distribution, to quoting and proposal generation, to order placement and post-order service.

In addition to increasing the accuracy of orders (and thereby saving money in rework and rejected orders), focused quotation management solutions' benefits and opportunities come from improving the quote-to-close ratio and from trimming off the significant amount of time required to develop quotes for manufacturers of complex products. Also, integrating quoting systems with ERP and supply chain management (SCM) systems should result in able-to-promise (ATP) and capable-to-promise (CTP) checks. These checks can be performed during a configuration session to provide an estimate of product availability based on material and resource constraints to assist a user in making buying decisions.

Last but not least, since manufacturers have complex pricing requirements, pricing configuration engines can be used to automate pricing and quoting processes. Price management tools enable the definition of complex pricing rules and allow modeling of pricing scenarios. The pricing engine executes the pricing rules to determine the price dynamically based on the supplied rule factors. These rule factors are all designed to eliminate stock-keeping unit (SKU) proliferation by bundling intelligent pricing rules. Such systems help capture and automate pricing at the point of sale, and allow users to manage sophisticated pricing logic across the enterprise to accelerate the introduction of new pricing schemes.

Advanced pricing can also be enabled to assist in implementing sophisticated pricing strategies beyond base pricing to meet rapidly changing e-business requirements. Dynamically updated list prices are provided for product models, option classes, and options during the configuration session, while selling prices and extended prices can also be provided for all selected items. Pricing systems leverage pricing data in ERP systems to deliver more sophisticated pricing information with customer- and partner-specific rules, discounts, and controlled access to pricing information. This allows companies to extend ERP pricing data throughout an enterprise e-business environment with contract-based pricing, promotional pricing, cost-plus pricing, price breaks, combination pricing, segment-based pricing, coupon management, and other needed capabilities.

At the heart of pricing configuration is a company's ability to manage pricing at three levels: the industry price level, the product and market strategy level, and the transaction level; each of these levels builds upon the other (please see The Case for Pricing Management). To that end, Q2O software suites help companies ensure that all orders conform to specific criteria. For example, if a company had a minimum gross margin requirement for a given product, the pricing solution could ensure that the features and options chosen will result in a product that meets the company's margin objectives.

Pricing configuration systems have to provide best practices to handle the execution and enforcement of pricing through each of the above-mentioned levels to maintain price integrity and margin control. Pricing configuration systems should allow for any level of pricing and presentation flexibility while permitting the enterprise control of and visibility into field quoting practices.

Potential pricing configuration benefits and opportunities originate from

* reduced unit costs (through more accurate pricing options within base product designs);
* increased accuracy of pricing, resulting in reduced billing cycle times; and
* reduced overall quoting errors, leading to more accurate quotes and increased customer satisfaction (and, eventually, an increased quantity of sales orders).

In addition to the previously mentioned distributed order management (DOM)—please see The Essential Components of Quote-to-order Applications—and asset management modules, an optional Q2O suite module is enterprise contract management software. This suite includes the ability to aggregate and analyze enterprise-wide contract information, automate and accelerate contract-related business processes, enforce contract and relationship compliance (according to the US Sarbanes-Oxley Act [SOX]; please see Important Sarbanes-Oxley Act Mandates and What They Mean for Supply Chain Management), and automate the contract process from request to signature. The addition of these capabilities creates Q2O solutions that are then able to manage the contract life cycle, from request, to signature, to execution.

To avoid possible confusion, Q2O systems are also called interactive selling systems (ISSs) by Gartner, and they are defined as the integration of a marketing encyclopedia system, sales configuration system, proposal generation system, and order management system under a common UI. ISSs are used to streamline and enhance the selling process. With an ISS, a salesperson can sit with the customer and pull up data to prove product value, configure a quote, and create a proposal, and then turn the proposal into an order and book it.

In summary, Q2O software bundles enable salespeople to suggest solutions based on a buyer's needs, configure proposed solutions based on a buyer's requests, and provide accurate quotes for complex products and services. These solutions also enable enterprises to extend their business rules to the sales channel by restricting the sales force from presenting quotes that do not fall within enterprise parameters. These enterprise parameters can run the spectrum, from manufacturability of a product to the required margins on any given product or service. Q2O products must allow these business rules to be easily modified, and then provide almost instant dissemination of the updated rules throughout the organization.

Different Q2O Strokes for Different Manufacturing Folks

Although Q2O systems, and especially configurators (as the pivotal modules), seem ideal for complex products and services that include many options and accessories (that are oftentimes mutually exclusive), they are still not universally applicable to all manufacturing environments. As seen in Product Configurators Pave the Way for Mass Customization, early configurators used a programming paradigm, known widely as the production rules, to provide dynamic and runtime decision-making that is essential for obtaining a valid configuration. These tools use a uniform mechanism for representing both domain knowledge and control strategy, and embed the knowledge about a single entity over several rules. This makes the knowledge maintenance task for large rule-based systems extremely difficult.

To overcome the drawbacks associated with rule-based systems, a generic, domain-independent model for configuration tasks was suggested in the form of a constraint satisfaction problem (CSP). The configuration problem is defined by a finite set of variables, with each variable taking only certain values from a domain of finite sets of possible values, guided by constraints that restrict the variable combinations and the variable values allowed in such combinations. The configuration task is designed to find a domain value for each variable in such a way that all the constraints are satisfied.

To illustrate the applicability of rules and constraints, the product configuration strategies within various manufacturing environments need to be looked at. The next step, in terms of complexity, after make-to-stock (MTS)—where product configuration is not needed by default—would be an assemble-to-order (ATO) production environment. An ATO product environment is one where a good or service can be assembled after receiving a customer's order. The key components (bulk, semi-finished, intermediate, subassembled, fabricated, purchased, packed, and so on) used in the assembly or finishing process are planned, and they are usually stocked in anticipation of a customer order. Therefore, receipt of an order initiates assembly of the customized product. This product configuration strategy, which focuses on taking manufactured components or subassemblies and creating a finished product, is useful when a large number of end products can be assembled from common components.

ATO product configuration strategies are often rule-based and define the interrelationships and compatibilities among components, subassemblies, and parts of a product. ATO is thus best suited for volume purchases, where quotes should be automatically generated and a quote engine is an option selector. An example of an ATO strategy is the definition of components in a laptop computer, where the product is assembled from a series of stock components. In other words, the ATO strategy is found most often in high tech and electronics. These industries provide high-volume, low-margin products that require minimal assembly, while new product introduction strategies have to consider rapidly declining pricing.

Furniture, retail (including do-it-yourself [DIY]) stores, packaging, printing, health care, and insurance are other areas where an ATO configuration strategy is used. The early product configurators, which could cater to ATO environments, were internally oriented (within the enterprise's four walls). They were typically an extension of the ERP system, with simple bill of material (BOM) selection rules, and their output was typically a proprietary BOM.

In configure-to-order (CTO) environments, manufacturers of complex products are using this product configuration strategy to customize their products to an exacting set of specifications from their manufacturing customers. CTO products are comprised of both standard and custom components, with the majority being customized to the needs of the customer. Industries relying on CTO require intelligent product constraints within product configurators. Guided selling strategies for these products might not work because it is not that easy to define a data model and an underlying constraint engine. Vertical industries that rely on CTO include telecommunications, heavy industrial equipment, turbine and pump production, elevators and escalators, and complex cabling systems.

Further, make-to-order (MTO) and built-to-order (BTO) are production environments where goods or services can be made after receipt of a customer's order. The final product is usually a combination of standard and custom-designed items to meet the special needs of the customer. Manufacturers that have an MTO strategy customize smaller portions of the larger customized product, with the majority of the products' content being based on MTS or standardized products. When options or accessories are stocked before customer orders arrive, the term ATO is frequently applicable as well.

Examples of MTO strategies include auto manufacturers that offer several options on engines and interiors. High tech, automotive, medical, and financial services are several other verticals where this strategy can be useful. Product interrelationships and model BOMs are created automatically for prospective customers, and guided selling makes the most sense here as a lead generation tool. MTO environments can take advantage of pervasive integration with SCM, customer relationship management (CRM), and ERP systems when best practices have been attained across all departments. These environments might also be suitable for online and indirect channels, although, to get the most from this strategy, extensive product training within the channel is required.

The last, and most complex system (from mass produced, to configured, to one-off products) is engineer-to-order (ETO) environments. Here, products require unique engineering design, significant customization, or newly purchased materials. Each customer order results in a unique set of part numbers, BOMs, and routings (please see ERP Systems and the ETO Manufacturing Market). Thus, where the majority of product components are specifically created to a customer's unique requirements, it is referred to as an ETO strategy.

Complex ETO manufacturers produce products that are of high variation, have complex features and options, and vary in end user configuration. Products manufactured as a result of an ETO strategy are defined with highly specific engineering documents, and often require that the sales configurators delivering quotes from these products have the ability to generate multilevel computer-aided design (CAD) drawings and specifications.

Products that are manufactured using an ETO process include aircraft; aerospace and defense (A&D) products; power generators; heating, ventilation and air-conditioning (HVAC) equipment; specialty-use engines; and manufacturing equipment that is purposely built to support a specific manufacturing process. Sophisticated customer interactions (such as order and contract definition, and management applications) are required, while customer service needs are also oriented toward hands-on contract management and cost reporting.

Frequent changes force contract supplier's engineers and original equipment manufacturer's (OEM's) engineers to be in constant, collaborative communication throughout the design and production cycle of the unit. One of the traditional manual functions in a supplier organization has been the sell side request for quotation (RFQ) management. This function usually revolves around a few key experts that have direct knowledge of the product or who can manually pull together the diverse sources of information into a unified document, including quotes, pricing, detailed product information, data sheets, and CAD drawings. These manufacturers invest a significant amount of money in product design and have lengthy sales and manufacturing business processes. This often requires collaboration between the customers, salespeople, and critical back-office experts, making the integration of CAD applications and product data management (PDM) workflows essential.

Developing a contract proposal requires many levels of checking and rechecking customer process requirements and facility capabilities, as well as preliminary design work and sourcing of specific components or materials. The process typically goes through many revisions every time the customer uncovers a new requirement or constraint. The labor-intensive nature of this process has often resulted in lengthy estimating cycles, which have in turn often translated into lost business opportunities. Even more than in CTO setups, guided selling strategies for highly customized products are often inappropriate because there is no reliable data model and underlying constraint engine.

Less complex MTO configuration strategies typically use a set of predefined component types while taking into account a set of well-defined restrictions on how the component types can be combined. Interactive guided selling systems that are externally focused, stand-alone, or interfaced to ERP systems can help here. These systems typically have separate engines for engineering BOM (leveraging selection rules) and sales BOM (leveraging constraint rules), with some wizard-based capability to create and maintain rules. The typical output from these systems is quotes, orders, and BOMs, with a data-level integration with other systems.

The ETO configuration, by contrast, extends well beyond the MTO configuration. Here, each component type is also associated with a predefined set of parameters, where each parameter has a predefined set of possible values to choose from in order to satisfy all constraints among those parameters. Certainly, in almost all industrial manufacturing segments, the pressure to reduce lead times has become a constant concern. Depending on product complexity, some parts and subassemblies might be quoted immediately, while others have to be highly specified.

Configurator technology has been helping manufacturers improve their productivity by shortening lead times, eliminating the possibility of order errors, and reducing the need for training costs and expertise of the various design and service personnel. Still, while the needs of ETO organizations are different from other manufacturers, many ETO companies can benefit from the mind shift of “everything is unique” to CTO principles.

However, traditional options, such as constraint and rule-based configurators and interactive and guided selling solutions, provide no effective search solution for solving most complex ETO product configurations. In traditional sales, companies still have to rely on trained salespeople to interact with customers, address customer needs, explain product features, and ultimately complete the sale. In other words, enterprises that strive to provide solutions with high value at a low cost have been constrained by a lack of captured condensed knowledge (intellectual property).




SOURCE:
http://www.technologyevaluation.com/research/articles/q2o-systems-solutions-for-quotation-management-and-pricing-configuration-19157/