Last week I spent three days in London conducting a series of meetings with customers, partners, analysts and local media.  These trips are always insightful for me, but last week was a particularly interesting time to be in London.  First, the French President Nicolas Sarkozy and his new wife Carla Bruni Sarkozy were visiting the UK, which generated a lot of attention in the local press.  Second, there was a significant disappointment over the problems at Heathrow’s new Terminal 5.  On the opening day of the new terminal, the baggage handling system failed leaving thousands of passengers without luggage and resulting in the cancellation of dozens of flights.  Fortunately, I was not flying British Airways so I was not impacted.

The third reason I found this trip more interesting than others was the sense of urgency amongst everyone I met with.  Everyone was rushing to finalize activities before the end of first quarter.  This year’s first quarter is an important economic event to be sure.  Not only will it be the first financial period for 2008, but the quarterly earnings will provide insights into how widespread and deep the recession has become.  Of course, every CEO wants to be able to downplay the impact of the recession on their financial results during the upcoming quarterly earnings call.  So there is added pressure on both sales and finance organizations to ensure that they reach their forecasted goals. 

End of Quarter Stress 

End of quarter stress is not unusual for leaders in sales and finance, but it is becoming increasingly challenging for IT operations personnel as well.  I was speaking to a customer in the manufacturing sector last week.  He was explaining how critical their IT infrastructure is for their quarter-end operations.  The last three weeks of the quarter are extremely hectic for these types of manufacturers who are trying to outdo the previous quarter’s revenue results.  Sales, order processing and warehousing operations are often operating 24 hours a day including Saturday and Sundays.  Frequently, it all comes down to the last day of the quarter.   Products that ship as late as one minute before midnight can still qualify for booking in the quarterly sales reports. IT systems must be able to keep pace with the performance requirements of demanding end-users during this stressful period.  And they absolutely cannot have downtime – either scheduled or unscheduled.  Order processing, warehouse management and transportation management are critical for manufacturers.   It is no surprise that ERP applications must deliver 100% uptime to support business operations.  However, I doubt many realize how mission critical B2B (EDI and XML) connectivity is for quarter-end activities.  An interruption in electronic document flow with business partners can bring a company’s supply chain to a halt – much like the failure of a baggage handling system at Heathrow’s Terminal 5.  As supply chains become increasingly digitally integrated more and more buyer-to-supplier communications are being sent electronically.  A loss of connectivity even for a matter of a few hours can jeopardize a company’s ability to meet its quarterly financial targets.  A loss of data, specifically new orders, could be catastrophic.

The Impact of IT Failures 

The root cause of the meltdown at Heathrow was that the baggage handlers IDs were not recognized by computers.  As a result not only were airport personnel not able to log in to the bagging handling system, but they also could not navigate physically around the airport in and out of secured areas.  Eventually the system became overloaded and checking of baggage was suspended.  Delays unloading and loading of baggage postponed and even cancelled some flights.  Spanish owned BAA (British Airports Authority) had invested over £4B and 20 years of planning to construct the new concourse.  And the bagging handlers and computer applications had undergone 18 months of extensive testing, which proves that even the most well designed and planned systems can fail under peak loads.

What would happen if B2B (EDI and XML) connectivity at a multi-billion dollar manufacturer were lost on the last day of the quarter?  Electronic purchase orders from large customers and distributors would not be able to be received.  Even orders placed prior to the outage could not be confirmed electronically.  Third party logistics providers could not be notified of shipments that were ready for pickup.  In effect, the company’s supply chain would be significantly handicapped.  Of course, orders could be taken over the phone and then processed manually.  However, this would likely be a nuisance to high volume buyers accustomed to utilizing highly automated ordering processes in their procurement systems.  Theoretically, electronic documents would not be lost as a result of an interruption to B2B communications.  Most B2B transactions are asynchronous.  As a result, purchase orders, confirmations and shipping instructions would be held in a queue until the connectivity was re-established.  But depending upon the length of outage and the time period it occurred, the backlog may not be recoverable.  Suppose an outage occurred from 1PM to 5PM on March 31^st.  Sales, warehouse and transportation personnel would probably not be able to process the backlog of orders even if they worked until midnight.

I wonder how many companies and vendors will experience an outage in their B2B applications during this quarter’s final day…or how many are expecting to fulfill orders based upon incoming parts shipped via BA’s Cargo service…

Steve Keifer

© Copyright 2007 GXS, Inc.  All Rights Reserved.

Consumer Software Deployment Models 

In my last post (http://blogs.gxs.com/keifers/2008/03/23/office-2007-rollout-postponement/), I began a comparison of the software deployment model used by corporations and consumers.  While most corporations of any significant size (50 employees or larger) utilize a completely electronic process to distribute software centrally over the local area network, most consumers use a very physical process to purchase and install software for their home PCs.   When new products such as Office 2007, Windows Vista, Adobe Acrobat 8.0 and TurboTax 2007 are released, most consumers visit a retailer such as Best Buy, Wal-Mart, Tesco or Amazon.com to purchase the actual physical box with the DVD in it.  

It is hard to believe with how digital we have become that this is still the process for software distribution in the consumer sector.  And it causes its fair share of challenges – not just for consumers who purchase the software, but for the retailers, distributors and publishers who have to manage the supply chain for the physical media.  Consider a product such as Windows Vista, which was formally launched a little over a year ago.  We tend to refer to Vista as one product, but it actually ships in five different versions – Ultimate, Home Premium, Home Basic, Business and Enterprise.

The Software Supply Chain Challenge 

As a result, retailers who sell Microsoft’s operating system must ensure that an adequate stock of all five versions of the product is available for consumers to purchase.  Some software publishers sell discounted “Upgrade” versions of the product to users who have already licensed a prior version of the product.  Both the upgrade and new user versions of each SKU must be carried by retailers.  The supply chain issues are compounded for multi-national retailers selling into a diverse group of countries.  The instruction manuals and other enclosures such as advertisements, warranties, authenticity certificates and technical support references must be in the local language of the country where the product is sold.  Some software publishers avoid the challenge of packaging country-specific contents, by shipping multi-lingual materials in all boxes.  The external packaging of the software, however, is usually country specific with pricing in local currency and labeling in local language.  In summary, not only must different functional versions of the product be managed, but publishers must distribute country specific versions of each SKU as well. 

Shortcomings of Traditional Supply Chain Models 

How do software vendors manage the supply chain complexities associated with retail product distribution?   A traditional “push” supply chain model would utilize a centralized manufacturing facility.  Publishers would attempt to forecast demand for product sales by SKU and by country weeks in advance.   Physical media enclosed in country and retailer specific packaging would be staged at distribution centers around the world to respond to fluctuations in demand.   If only it were this simple.  There are a few challenges with the traditional supply chain model:

• Forecasting Sales – With a push model, software publishers must forecast sales weeks in advance.  These predictions are most complex for new product introductions of major software packages as a high percentage of the retail sales occur in the first few months after launch.  Retailers and software publishers are challenged to estimate post-launch sales as they have no historical demand pattern to build forecast models.  This is not unlike the challenge with DVD new product launches (http://blogs.gxs.com/keifers/2007/12/04/24-hours-to-prevent-lost-sales-holiday-edinomics-part-1/).  Products with seasonal demand such as tax applications also present forecasting challenges.  Income tax packages enjoy peak sales during the few months of the year prior to filing deadlines.  Forecasting errors can be costly leading to either having too much or too few of the right SKUs to satisfy consumer demand. 
• Security and Feature Upgrades – One of the keys to a successful launch is ensuring the consumer can easily install and operate the software without the need to access technical support.  While software publishers go to great lengths to perform a rigorous testing process on new packages before launch, it would be cost prohibitive to test every permutation of hardware and software.  As a result, the time frame shortly after launch results in a high volume of end-user generated bug fixes and product enhancements.  Additionally, the first 30 days after launch is the period in which the highest number of security vulnerabilities in source code are exposed.  It is in the software publisher’s best interests to quickly deploy bug fixes to as many end-user desktops as possible to mitigate risk of a security breech or hardware incompatibility.  Of course, upgrading software code that has already been burned to a DVD inside a shrink-wrapped box is a bit challenging.
• Inventory and Supply Chain Costs – What supply chain costs you might ask?  If additional copies of a SKU are needed, can’t they be duplicated onto media at an almost negligible cost?  While the physical media, cardboard packaging and instruction cards may be low costs, the supply chain expenses can add up quickly.   For each box of software there are inventory carrying costs, transportation expenses and shrinkage losses which must be considered.  Additionally, software products have a short time to obsolescence, particularly immediately following a launch as bug fixes and feature enhancements may be introduced daily.

Postponement

Using a technique called postponement, software suppliers can alleviate many of the demand forecasting and supply chain management challenges experience in the push model.  A new breed of specialized logistics firms is emerging that offer light manufacturing and configuration services.  These firms leverage a network of warehouses and manufacturing facilities located close to the end-consumer in major metropolitan areas throughout the world.  The postponement specialists can therefore efficiently perform late stage product configuration on behalf of software publishers.  

Here is how the process would work for an application such as Microsoft’s Office 2007.  Retailers and the software publisher would establish weekly sales forecasts by analyzing various demand signals.  The forecasts are communicated daily to the third party postponement provider, who is responsible for demand fulfillment.  The postponement specialists will then perform a “light manufacturing” process to create the appropriate number of software packages for shipment to the retailers.  The process involves duplicating the appropriate version of the software with the latest bug fixes onto the physical media and then “stuffing” the country-specific packages with the localized instruction manuals and enclosures.  Using a postponement approach, the software publisher can respond quickly to changing demand patterns while minimizing supply chain and inventory costs.  Although, I have used Microsoft as a hypothetical example above, the process could apply to any software publisher.

A New View of the High Tech Supply Chain 

Postponement specialists also can configure hardware.  In fact, the majority of the volume for these late-stage product completion firms is consumer hardware devices such as mobile phones, personal computers, laser printers, digital cameras and digital audio players.  This is not surprising, since typically, discussions on challenges in the high tech supply chain focus on hardware products.  Rarely do you see the software supply chain discussed in industry forums.  But I am quickly learning that the supply chain for software products can be equally, if not more complex, than the hardware value chain.

By the way, I did eventually figure out the mystery behind my disappearing scroll bar.  After 30 minutes I of searching through Microsoft Word “Help,” I switched over to Google and found the answer in a total of 3 mouse clicks…

Steve Keifer

© Copyright 2007 GXS, Inc.  All Rights Reserved

GXS has been in the process of rolling out Microsoft’s Office 2007 to our employee base over the past few months.  I am one of the few employees who are lucky enough to have been handicapped with this upgrade for about six months now.  The user interface for Office 2007 is substantially different than previous versions of Office such as 2003.   The most significant change is to the menu commands which use ribbon bars rather than the traditional “File”, “Edit”, etc. pull down menus.   As a result new users spend the first few days with Office 2007 struggling to perform basic tasks as they fumble through the new menu structure. 

The upgrade to Office 2007 is ironic in many respects.  For years users have complained that new versions of Microsoft Office provide few, if any, new features of practical value.  This cannot be said for 2007, which offers a number of powerful capabilities.  So in some respects – we got what we asked for.  The trick is mastering the power of the new user interface. My conclusion after six months as an Office 2007 user is that the challenges are not with the actual applications.  Word, Excel, Outlook and particularly PowerPoint have a lot of new powerful features available.  The real problem with the latest version of Office is the “Help,” which is absolutely useless with basic issues such as trying to find out how to add a header.  For example, the scroll bar disappeared in my Microsoft Word application a few weeks back.  Since then I have been trying to figure out how to get it to reappear.  Searching for the term “Scroll Bar” using the “Help” feature returns lots of fascinating, but completely unhelpful results such as:“Why can’t I include a POSTNET bar code or FIM-A code on envelopes or labels?”

Last week I had the privilege of delivering a presentation at the CFO Rising conference in Orlando, Florida on the topic of Supply Chain Finance.  I was fortunate to be presenting jointly with Neal Harm who is the Chief Administrative Officer of BB&T’s Commercial Finance group.  BB&T was a key exhibitor at the show, promoting their new integrated financial supply chain product - Supply Chain 360 (http://www.bbt.com/bbt/business/products/supplychainsolutions/supplychain360.html).  Working with the BB&T team on their product launch activities has been a rewarding experience for me as I have found their Commercial Finance team to have some of the most visionary thinking in the industry.  We were fortunate to draw a crowd of over 40 CFOs and senior level finance executives, who were all very actively interested in this hot topic.

Why such a crowd?  Because, supply chain finance promises to enable radical new efficiencies for managing working capital in the value chain.  Supply Chain Finance is a multi-faceted concept.  Some of these concepts can be leveraged today while others are more visionary at this point.  Without question the most widely embraced aspect of supply chain finance today is the idea of post-export supplier financing.   The term is intimidating to those not familiar with trade finance, but the principles are actually quite simple and familiar to anyone who has used a credit card. 

Comparison to the Credit Card 

We are all familiar with how a credit card model works, but I will recap a few of the more relevant points that help to illustrate the analogy to supplier finance.  Let’s suppose that you are a sports fan that has decided to invest in a high definition plasma television to enhance your viewing experience.  Perhaps, if you are in the US you may wish to buy a new HDTV in time for this month’s NCAA basketball tournament.  So after evaluating the various brands and product options you make a visit to your favorite consumer electronics retailer to purchase the TV.  The easiest way to purchase a high value item such as a TV is probably not to carry cash, but instead to use a credit card.  Using a credit card, you can purchase the HDTV on credit, taking possession immediately without having to present any cash to the merchant (electronics retailer).  The merchant assumes little risk as the bank who issued you the credit card guarantees payment in all but a few scenarios.  And the merchant is paid quickly.   Within just a few days of uploading their point-of-sale transactions to their bank, the merchant is reimbursed for the value of your purchase.  However, you (the consumer) do not have to remit any payment for at least 30 days when your next monthly statement arrives.  At this point you can decide to pay the balance in for your monthly purchases (including the TV) full or defer payment until later.  Or you might pay only a percentage, financing the remainder of the balance. 

The credit card model has become the most popular means of retail payment due the benefits it offers to both consumers and merchants.  Consumers can purchase goods and services on credit, deferring payment until a later date that enables them to optimize their cash flows.   The merchant offers a simple, hassle-free approach for consumers to make payment, but also benefits from the relatively fast inward cash flows that the credit card system offers.  Both the issuing bank and the merchant’s bank also benefit by charging a processing fee to the merchant for facilitating the settlement process.  The issuing bank that provides the consumer the credit card also enjoys significant upside, in that, the consumer may elect to defer payment of the balance.  The issuing bank then enjoys an additional income stream as interest accrues on the consumer’s balance.

Supply Chain Finance – A Credit Card for International Trade 

Supply Chain Finance operates under similar principles as the credit card model except that the transaction is business-to-business rather than business-to-consumer.  Suppose, for example, a large UK-based department store is purchasing a line of apparel products from a third party contract manufacturer in Vietnam.  After reviewing samples and finalizing on a sales forecast, the retailer places a bulk order for the clothing with the manufacturer.  The manufacturer acquires the fabric materials, performs the sewing process and then ships the product to the retailer’s distribution center outside of London.   Concurrently, an invoice is sent from the manufacturer to the retailer’s accounts payable department.   The retailer performs a series of validations and matches on the invoice to ensure consistency with the quantities, colors and sizes specified on the original purchase order.  The invoice is then approved to pay.  In a traditional buyer-supplier relationship, the retailer may withhold payment of the invoice until its maturity which could be another 30 or 60 days after receipt of the goods.  Why?  Because, most buyers prefer to hold onto their cash as long as possible so that they can put it to use in other ways.  However, in the supply chain finance model, a different sequence of events occurs – very similar to the consumer credit card example described earlier. 

In the supply chain finance model the retailer will instead notify the bank of their intention to pay the supplier at term.  The bank will then approach the supplier asking if they would like to be paid immediately.  Most suppliers, especially smaller ones in emerging markets such as Vietnam, are cash constrained.  As a result, the early payment option is appealing to them.  Upon confirmation from the supplier, the bank immediately transfers the appropriate funds to the supplier’s account.  The supplier has now collected its revenues from the products it manufactured.  And the bank has assumed responsibility for collecting the payment from the retailer.  30 or 60 days pass until the date the original invoice is due is reached.  Now the bank will collect the appropriate funds from the retailer.  At this point, the retailer may elect to settle the transaction in full with the bank.  Or they may request to extend the payable to a future date based upon their cash flow situation. 

Let us compare the retailer B2B example to the earlier B2C HDTV purchase example.  In both scenarios, the suppliers (the apparel manufacturer and the electronics retailer) are compensated shortly after delivery of the goods.  In both scenarios, the buyer (the department store chain and the sports enthusiast consumer) has the option to settle their transaction balance within the original purchase terms or to extend terms with an interest-based financing approach.  In both scenarios, the banking system provides short term financing to bridge the time-span between when the buyer takes possession of the goods and the buyer makes payment.  The most important concept is the value created to all three parties in the transaction.  The timing of the supplier’s inbound cash flow is accelerated.  The timing of the buyer’s outbound cash flow is maintained or extended.  The financial institution generates income from the processing and financing of the transaction.

Given the analogy above, you might ask why the credit card companies are not participating in the supply chain finance market today.  The answer is that they plan to.  Facilitating B2B payment transactions and short term financing arrangements are a natural extension of the value proposition and capabilities credit card processing networks offer today.  Of course, the funding sources for the short term financing will be the actual banks.  There is an interesting study in contrasts when one compares the situation in the banking sector to the major credit card brands.  MasterCard and Discover have both enjoyed tremendous success with their IPOs.  The Visa public offering scheduled for this week promises to be one of the largest in history.  By contrast, the banks are struggling to keep afloat as the credit crisis continues to worsen.  With the collapse of Bear Stearns over the weekend and the recent turmoil in the financial markets, one might question whether adequate liquidity and credit facilities will exist to support supply chain finance…

Steve Keifer 

© Copyright 2007 GXS, Inc.  All Rights Reserved.

One of the industry associations GXS has been working with recently is the Global Supply Chain Forum sponsored by Stanford University.  The forum is comprised of representatives from many of the world’s largest manufacturing companies as well as some of Stanford’s leading faculty such as supply chain thought leader Dr. Hau Lee.  Dr. Lee has introduced a number of revolutionary ideas over the past few years, but there is one particular insight that stands out in my mind:

“Instead of company to company competition, we are now in an era of supply chain to supply chain competition.”

This is a concept that I think becomes more and more critical every day that goes by.  To illustrate my point, let us examine the high tech industry as an example.   More specifically, consider the sub-sector of high tech that manufactures computers and related peripherals.  This is a relatively young sector that was first started back in the 1960s and 1970s.  However, during its short history the supply chain model has undergone a radical transformation. 

Mainframe Value Chain 

When the first mainframes were introduced a single vendor often functioned as the sole source for all computing needs.  OEMs such as IBM and Honeywell manufactured not only the finished mainframe product, but most of the components as well including the memory, storage (DASD) and processors.  The operating system, database and even some applications were developed by the same vendor who manufactured the hardware.  If the mainframe broke or needed an upgrade, the hardware OEM provided the repair and service. 

2008 PC Value Chain 

Contrast the mainframe model to the complex, multi-tiered value chain in today’s computer industry.  I work on an “IBM Thinkpad.”  However, while the logo on my laptop says IBM, the manufacturer of the machine is actually a Chinese company – Lenovo.  Although Lenovo is the OEM, it only contributes a small fraction of the content of the laptop.  The components inside the laptop are sourced from third party suppliers (Kingston for memory; Seagate for storage; Intel for microprocessors).  Also noteworthy is the fact that Lenovo does not typically sell the machine directly to end users.  My laptop was purchased through our company’s preferred distributor – CDW.  The software on the machine is made by another group of specialized companies.  Microsoft publishes the Windows operating system and Office application suite.  Other software vendors such as Adobe, Symantec and Apple provide other applications such as document viewing, desktop security and digital music.  And when my laptop breaks, who do I call?  Not Lenovo, but a 3^rd party such as a high tech distributor, 3^rd party logistics provider or a contract manufacturer for warranty support and repair. 

The point here is that the computer industry has migrated from a vertically integrated model to a highly specialized, heavily outsourced model.  This type of highly outsourced model in which OEMs outsource much of the manufacturing and supply chain management to suppliers is growing more common in all discrete manufacturing sectors.  Examples can be found not only in high tech, but also aerospace, automotive, consumer products and industrial equipment.

Supply Chain versus Supply Chain 

The key take-away from the discussion above is that OEM manufacturers are increasingly dependent upon a community of outsourcing partners to achieve success.  Factors that can go wrong (and do go wrong) are, in many cases, completely out of the control of the OEM.  In these new value chain models, companies are actually not competing with other companies, but instead their supply chains are competing with other supply chains.  This crucial concept, first introduced by Dr. Lee, is critical for channel masters in today’s supply chain to understand.  However, while it may seem obvious, the majority of today’s leading retailers and manufacturers continue to structure models that prioritize the near-term financial performance of their own company above the overall long-term competitiveness of their supply chains.  The term “partner” continues to be utilized ever more frequently to describe suppliers in a value chain.  However, the approach of most channel masters remains more adversarial than collaborative.   The largest exception is, of course, the Japanese manufacturing community which has structured itself around kereitsu relationships between OEMs and key suppliers. 

Consider the following “company centric” paradigms that are becoming more commonplace in today’s supply chains.

• Performance Scorecards and Penalties – Retailers and manufacturing OEMs have instituted elaborate chargeback mechanisms that penalize suppliers for problems arising during routine order fulfillment.   Not only are these penalties designed with the goal of optimizing the buyer’s business processes, but each retailer and manufacturer has different measurement criteria.  As a result, suppliers are forced to comply with terms such as delivering during tightly monitored 2-hour receiving windows and labeling of pallets with customer-specific serialized barcodes and text.  While these processes simplify receiving for the buyer, they add cost and complexity for the supplier and friction to the overall relationship.
• Open Account – Large buyers are moving from their traditional letter of credit processes with overseas suppliers towards open account models.  The goal of the migration is to reduce banking fees for the buyer, but in many cases the side-effects to suppliers are significant.  Without a bank-guaranteed letter of credit to use as collateral for short term financing, suppliers struggle to fund raw materials purchases, manufacturing plant payrolls and other operating expenses.
• Extended Payment Terms - In an effort to hold on to cash longer, buyers are extending payment terms with suppliers to periods of 60 or 90 days.   Extended terms create a cash flow issue for suppliers who must now seek out short term loans to fund their operations.  For smaller suppliers with lower credit ratings, these expensive short term loans compromise profit margins and increase the overall cost of goods sold.
• Vendor Managed Inventory – More and more customers are looking for their suppliers (or a 3^rd party) to hold title for inventory until the point of consumption or sale to the end-customer.    Buyers prefer these types of models as they shift the inventory carrying costs to the supplier’s balance sheet along with the risk of product obsolescence and retail shrinkage.  For high volume channels, large suppliers can benefit from the added demand visibility and end-customer insights available through a VMI program.  However, for many buyer-supplier relationships the risks and costs are heavily unbalanced in favor of the customer.

What do suppliers as valued partners in the relationship receive in exchange for these terms?  Buyers will offer appealing terms to suppliers willing to engage in customer centric business processes:

• Greater share of a customer’s wallet as the supplier becomes the preferred vendor for a particular product line
  Broader scope of services that may include many value added services that increase the average revenue per unit sold

Suppliers must weigh the pros and cons of such arrangements to determine their best strategy.  Often the tradeoff is a choice between revenues and profitability. 

What are the EDInomics of supply chain to supply chain competition?   B2B integration technology can be the key to unlocking the potential of collaborative relationships in a value chain.  B2B can be used to enable a variety of strategies such as multi-echelon demand visibility, collaborative product development and third party supply chain finance.   But the technology is rendered ineffective unless the channel master in a relationship has a long-term, supply-chain wide perspective on their activities.   Unhealthy suppliers introduce performance drag, cost overhead and higher risks to the overall supply chain.  While these factors may not be visible in the buyer’s next quarterly income statement, they will most certainly define the long term success of the buyer.  After all, as Dr. Lee states “The weakest link in the supply chain defines the supply chain.”

Steve Keifer

© Copyright 2007 GXS, Inc.  All Rights Reserved.