It is hard to believe that the middle of May has arrived already.  There are only a few weeks remaining before schools let out for summer vacation.  In the coming weeks, many universities and high schools throughout the US will celebrate graduation or commencement exercises.   I was in a greeting card store two weeks ago buying Mother’s Day cards and I noticed a large rack of Graduation cards on display.  What do you buy someone these days as a graduation gift?  I’m in my thirties, but have admittedly lost touch with the Facebook generation of students that are graduating this year.  I suppose most people send a check or a gift card.  You can buy gift cards just about anywhere nowadays…except for greeting card stores.  Strangely, I have yet to see a display of gift cards adjacent to a greeting cards display in any store format.  I am certainly no expert on consumer merchandising strategies but it would seem like a logical pairing to me.  But one of the places you can now find a wide variety of gift cards at is grocery stores.   In December, I published an entry titled Gift Cards and the New Retail-to-Retail Channel in which I explored the fast growing practice of selling other retailer’s branded gift cards in stores.   I continue to be fascinated by the genius behind the gift card phenomenon in the US retail sector.  In addition, to the concept of retailers using other retailers as a channel, there are a few additional facets of the gift card business model that strike me as particularly compelling:

#1 – Near-Zero Product Development 

Brand owners in consumer product segments ranging from apparel and footwear to food and beverage will each spend billions of dollars this year trying to devise the next hot product.   The costs to perform R&D, marketing and distribution are significant for each new SKU added to retail shelves.  However, with gift cards retailers have found a way to build a new multi-billion dollar category without any product development at all.  A Tower Group study reported that US gift card spending in 2007 reached almost $100B.  This new revenue stream was created simply by re-packaging retailer’s existing product lines.

#2 – Inventory-Less Retail 

Gift cards have an almost “inventory-less” property to them.   While the cards do occupy shelf space, the carrying costs and impact on working capital is almost negligible.  The plastic cards have no value to the consumer until they are activated.   Furthermore, funds are not exchanged with the 4PLs who distribute the cards or the retail brand owner on the card until after the sale occurs. 

One could argue that retailer’s inventories are indirectly affected by gift cards.  Upon redemption of the card, the consumer will expect a rich selection of merchandise to choose from in the store.  However, the impacts on future inventories are transferred to another retailer when gift cards for other retail brands are sold.

#3 – Revenue potential per square foot 

There is an opportunity cost associated with displaying gift cards in premium locations such as end-caps or near check-out.  If gift card sales are low then the retailer loses the revenue opportunity that could be realized by placing alternative products in these high traffic areas.  However, gift cards offer revenue potential with a density few other products can match.  A $25 or $50 gift card sells for 10X more than a typical consumer goods package that would be put in the same location.  What else can a grocery retailer sell for $50 or $100 each that takes up only 2”x3” on a shelf and can be stacked 10 deep?  

On-line merchants need not make tradeoffs between shelf space for gift cards and other merchandise.  E-commerce sites have the flexibility to add more pages to accommodate gift certificates.  Some don’t even have to manage an inventory of cards.  For example, some retailers are allowing consumers to print their own gift certificate directly from a web site.  Others such as Amazon.com have been distributing electronic gift certificates with a specialized activation codes for years. 

#4 – Simplified supply chain dynamics 

From a supply chain perspective gift cards are a relatively simple product to stock, track and manage:

• Gift cards are not perishable so there are no worries about being over-stock.  There are no sensitivities to transporting or storing the cards.
• Cards are not activated until check out so there is little concern about shrinkage from backroom, warehouse or transportation staff.
• Gift cards are rarely returned.  The flexibility offered almost eliminates the possibility of returns as an option in all but extreme circumstances.

#5 – Easy Upsell Possibilities 

Gift cards also drive demand for a new category of products – gift card accessories.  Buyers of gift cards often feel guilty about taking the easy way out.  As a result, they want to buy an accessory to “dress up” the gift card so the purchase appears more thoughtful.  So they buy accessories such as boxes to store and present the card in are very popular.  Gift card accessories can be a high margin business.  For example, retailers can charge $5 for a box that probably costs $0.15.  More creative schemes for gift card packaging continue to be introduced.  Consumer electronics retailers have special CD jewel boxes that consumers can buy to present gift cards for music lovers.  Apparel retailer American Eagle has introduced a card that allowed purchasers to record their own digital audio greeting on the card.

Steve Keifer

© Copyright 2008 GXS, Inc.  All Rights Reserved. 

Last weekend we had some friends over to visit our house and rather than cooking we decided to place an order for pizza delivery from Dominos.  Ordering a pizza today is amazingly convenient.  We didn’t even have to pick up the phone.  Instead we placed the pizza delivery order online using the Dominos web site and a credit card.  The fact that you can order a pizza online should probably come as little surprise in today’s increasingly Internet-centric world.  What did surprise me, however, was the new Domino’s Pizza Tracker site that provides you a step-by-step update on the status of your order.  Using the phone number that you used to place the order you can login to a graphical interface that monitors the progress of your delivery.  The web site also displays the street address of your delivery, the complete contents of your purchase and the exact time of your order.   The tracker shows five different steps throughout the food preparation and delivery process:

1. Order placement
2. Food preparation
3. Baking
4. Boxing and packaging
5. Delivery en route

My tracker even told me the name of the driver who was coming to our house!  All that was missing was a link the to the driver’s MySpace page so you could learn more about he or she before they arrived….

Dominos launched this new tracker service on January 30^th.   I am not sure exactly how it works, but the system somehow ties the local operations systems in each store to the B2C web site on a real time basis. One thing I will bet on is that it doesn’t use RFID.

The tracker site is one of the more customer friendly web experiences that I have seen in recent years.  In fact, there is even a survey that consumers can fill out after the delivery to comment on their experience.  So as I ate my pizza I started thinking about the idea of providing customers real time visibility into the status of their orders.  And I began to relate this to some of the customer visits I have conducted recently with multi-national corporations in the automotive, high tech and retail industries.  One thing that I am consistently surprised by is how little visibility many of the largest companies have to inventory moving through their supply chains.  Most of the order management portals large manufacturers provide their customers don’t come anywhere close to the supply chain visibility that Dominos offers its consumers.  So I ask you - if the average Dominos franchise with an employee base of 10 and annual revenues of $580K can notify me of the exact time that a pizza is boxed and taken out the door for delivery, why can’t a multi-billion dollar manufacturer of airplane parts be able to tell their customers when a $50M shipment of goods has arrived at a port and cleared US customs?

The good news is that many manufacturing leaders seem to be recognizing the challenges associated with lack of supply chain visibility.  At GXS, we have seen a recent surge in interest amongst large manufacturers seeking to provide their key distributors and customers with better visibility to outbound shipments.  The highest concentration of demand seems to be with industrial goods manufacturers who are seeking better quality data on ocean freight traversing long distance trans-Pacific routes.   Consumer products companies are slightly ahead of their peers in the automotive, high tech, aerospace and industrial machinery sectors when it comes to supply chain visibility.  In the industrial sector, it is not uncommon to find that neither buyer nor supplier has visibility to the location and status of shipments of goods once they leave the manufacturing plant.  Interestingly, this situation applies even to high value goods including consumer electronics such as high definition plasma televisions, kitchen appliances such as refrigerators and computing equipment such as robotic tape backup libraries.  Not only are these expensive goods targets for theft and counterfeiting, but many of them can be easily damaged without proper handling.  Due to the value of the goods, suppliers often purchase cargo insurance to protect against these types of threats.  Also due to the value of the goods, many suppliers seek out third party financing for their inventory in transit.  The financing frees up working capital that would otherwise be tied up in long distance supply chains. 

So the point here is that we have multi-million dollar shipments of industrial goods insured and financed by third parties and no one other than the transportation provider holding the actual inventory seems to know the location at any point in time.  Should industrial manufacturers hire pizza delivery persons to help them?  That is probably unnecessary.  But they should consider investing further in transportation management applications, particularly in logistics visibility suites that offer customers insights into the status of inbound freight.  I have written a few recent posts about the value of transportation management suites and some of the new software-as-a-service deployment models which are emerging that outline these concepts in further detail…

• Is Your TMS Application Costing You an Arm and a Leg? 
• SaaS – A Less Crude Approach to TMS

Steve Keifer

© Copyright 2008 GXS, Inc.  All Rights Reserved.

In my last post, I made the argument that ERP applications are not designed to support the growing levels of outsourcing in today’s manufacturing ecosystem.  I think what is needed is an “ERP Firewall” for manufacturers to protect their enterprise systems from bad data.  Let me explain this ERP Firewall concept further:

ERP Firewall Defined 

ERP Firewall -         

noun

1.       fire•wall \’fī(-ə)r,wȯl\: an application which permits, denies or takes correction action to electronic data interchanges between an enterprises’ applications and its external business partners systems based upon a configurable set of rules or criteria. 

Restated, an ERP Firewall ensures that bad data from external business partners doesn’t enter your ERP system polluting the quality of information in your enterprise applications.  Much like a normal firewall, an ERP firewall examines all incoming and outgoing data against a pre-configured rule set.  A traditional firewall rule might be to block all incoming clear text FTP traffic on port 21.  Similarly, an ERP firewall rule might be to block all documents which are not in the manufacturer’s list of standardized e-commerce processes.  For example, the firewall might block all ANSI X12 EDI formats which are not 810, 820, 850, 856 or 997 (or EDIFACT formats INVOIC, PAYMUL, ORDERS, DESADV, CONTRL).  As a result, a document such as a 214 or 824 which is not the expected input for any ERP module does not even pass the firewall.    Another example of a rule set might be to route any 810/INVOIC documents without a street address, general ledger code or appropriate tax identifier to an exception queue for manual resolution by the supplier.

Firewall Severity Classes and Actions 

There are four typical actions that an ERP firewall might take based upon its configured rule set.  The action taken will, of course, depend upon the scenario encountered:

1.       Fatal – In this scenario, the electronic document is beyond repair.  Not only will the document fail during later processing, but it could result in financial losses to the company or its trading partners if not stopped.  As a result, the firewall should reject the electronic document entirely by sending a failure notification back to the originator.

2.       Error – The electronic document has a critical error that will fail upon attempted processing.  In this scenario, the error can be remedied, but only with the manual intervention of an end-user at the originating company.  For such scenarios, the firewall should hold the electronic document in an exception queue for the originator to review and repair.

3.       Warning – The electronic document has a minor data quality error that will not disrupt processing, but should be corrected, if possible, in future scenarios.  The firewall will pass the document through to the ERP, but also log the data quality issues in a report.  The logged warnings should be trended for frequency and root cause.  The most common occurrences should be identified and remedied through collaboration with the originating trading partner.

4.       Auto-Fix – In this scenario, the original document has an error that can be automatically corrected by the firewall.  This is the real power of the ERP firewall.   In many cases, bad data can be corrected automatically before reaching the ERP.  For example, missing fields may be looked up in a table, database or via an application web services call.  The original document is then augmented or enriched with the new fields then forwarded for processing.  What other types of auto-fix functionality might exist?  Documents can be split and routed to different ERP systems.  Conversely, outputs from multiple ERPs might be merged into a single document.  A fourth function is data filtering, in which, unnecessary data can be stripped out of incoming or outgoing documents to simplify subsequent processing at the destination.

Manufacturers are investing tens of millions to consolidate, standardize, upgrade and extend their ERP applications to optimize value from their ERP applications.  However, these efforts are undermined and compromised when bad data from business partners corrupts and pollutes the ERP.  An ERP firewall, which can be implemented at a small fraction of the annual maintenance royalty you pay your software vendor, can reduce bad data by up to 50% with just a few simple rule sets.

Steve Keifer

© Copyright 2008 GXS, Inc.  All Rights Reserved.

This week is the annual SAP Sapphire conference in Orlando, Florida.  I didn’t make it to the show this year, but I thought I would offer some insights on ERP and its increasingly interdependent relationship with B2B e-commerce.   The ERP vendors have spent much of the past few years focused on rewriting their applications to support a services oriented architecture approach.  SAP has its Netweaver initiative and Oracle has Fusion.  However, one area I think the ERP vendors have underestimated is the need to redesign their applications to support the extensive level of outsourcing that is becoming predominant amongst their customer base.

The Outsourced Supply Chain

In today’s manufacturing market, outsourcing is becoming more the norm than the exception.  Companies have become more and more specialized within their value chains.  OEMs that traditionally have been manufacturing-oriented are increasingly outsourcing many of their supply chain functions to third parties (contract manufacturers, freight forwarders and third party logistics providers).  Back office functions such as accounts payable, human resources and IT management are being sourced as well to specialized BPO firms.  The overall result of this outsourcing phenomenon is that manufacturers are more dependent than ever on business partners to perform daily operations.  It also means that enterprise IT systems are more dependent than ever on moving data to and from business partner IT applications.  In order to gain visibility to outsourced, external processes, manufacturers must be able to synchronize data in real time with their business partners.  For many manufacturers who outsource critical manufacturing, logistics, distribution and service functions, a growing percentage of the data housed in corporate ERP systems actually originates outside the enterprise.

50% of ERP Data Originates Outside the Enterprise 

I was talking to a customer the other day who told me that over 50% of the data in their ERP system comes from trading partners.  This comment puts in perspective the critical role that B2B integration technologies play in enabling ERP.  It also underscores the need to ensure that bad data isn’t flowing in from external interfaces and thereby corrupting information quality.  Much has been written about the challenges with maintaining what is called “Master Data” for products, customers, employees, assets and suppliers in the past few years.  But I am not referring to bad address information for consumers who move around every few years (i.e. customer master data).  I am referring to non-master, transactional data related to a specific order.  The order data originates from large customer accounts as well as contract manufacturers, third party logistics providers, banking institutions and business process outsourcers.

ERP Needs a Firewall to Protect it from Bad Data 

Who cares about bad data in an ERP?  Both line of business managers and IT personnel should be concerned about the consequences of this growing problem.  Bad data pollutes a manufacturer’s ERP system.  The result is a loss of productivity.  But to be more specific, data quality errors result in three negative impacts to a manufacturing organization:

1.       Longer time to process – Time sensitive processes may be delayed while accounting, warehouse and customer service personnel research and resolve data issues.  For example, if an invoice is posted to an accounts payable system without a general ledger number to apply the cost against, then an accounting clerk must phone the supplier or internal buyer to capture the appropriate data.  If a purchase order is pushed to an order management system with an invalid part number or SKU then the sales organization must contact the customer to discuss an appropriate substitution. 

2.       Higher cost to process – Personnel must spend time and effort manually correcting data in the ERP application or fixing problems resulting from the processing of the bad data.  Higher volumes of manual processing unnecessarily inflate costs and erode margins.  For example, in the retail industry studies have determined that over 60% of invoices have data errors.  And each error costs between $40 and $400 to correct.

3.       More mistakes during processing – The probability of an error increases exponentially as soon as manual processing begins.  By comparison, however, human intervention could be relatively inexpensive when compared with scenarios in which bad data goes undetected.  What are the costs of missing a contract commitment with one of your top 5 accounts?  Or of fulfilling an order incorrectly with the wrong parts shipped to the wrong location? Such data quality errors might seem like insignificant problems when viewed at a microscopic level for each individual order.  However, the costs of increased Days Sales Outstanding from invoice processing delays and customer penalties from failed order fulfillment commitments can quickly compound to have a macroeconomic impact on financial performance.

Why Firewall your ERP? 

Why aren’t ERP applications designed to capture these types of business process and data quality errors?   Actually, SAP and Oracle do provide extensive business logic and data integrity checks within their applications.  When an end user keys in data to a graphical interface the native ERP business logic will detect a wide variety of errors.  However, when the data flows through a B2B gateway and is subsequently uploaded into the ERP database there is very little data checking that occurs. What can manufacturers running ERP do to prevent bad data from corrupting their enterprise applications?  One option would be to hire a systems integrator to develop custom code to enforce data integrity standards for B2B imports and exports.  Additionally, a new set of user interfaces would be required to manage exceptions identified by the data checks.  Any customizations to ERP applications come with a significant overhead.   With each new release of the vendor’s software, the customer must perform extensive regression testing and often software updates.  I think a better option is to deploy an application at the edge of the enterprise that inspects incoming and outgoing documents from trading partners for data integrity issues.  Such an application would effectively be acting as an “ERP Firewall” for bad data.  The firewall would inspect the contents of EDI, XML and other files in a Demilitarized Zone for quality of content.  Bad data would be rejected to the sender or held in a queue for exception processing.  Good data would be passed straight through to the ERP for immediate processing. 

“May Contain Nuts” – No Longer Acceptable 

Today’s consumer is also more health-focused and socially conscious than ever.  And these educated consumers are demanding more information about products before they make purchasing decisions.  Consider the case of food.  Today’s health-conscious consumer wants to understand not just the brand, price and size of each SKU, but they also want to know:  

• Is it organic?  Have the ingredients been genetically engineered? 
• Is it locally grown?  If not, has it been imported from another country?  
• Is it carbon neutral?  Were environmentally friendly or recyclable packaging materials used?
• Is it fresh?  How long before its predicted expiration time frame?
• Is it safe for me?  Does it contain ingredients from common allergens such as nuts or shellfish?       
• Is it heart healthy?  How much cholesterol or sodium is included?
• Is it dietary?  How many grams of fat and carbohydrates are contained?
• Is it diabetic friendly?  How much sugar is contained? 

This growing selectivity of consumers is changing the landscape of food products forever.  The result is a proliferation of SKUs catered towards a range of different consumer segments based upon social responsibility (environmentalists, locavores, naturalists) and upon health characteristics (diabetes, food allergies or heart disease).  The grocery sector is migrating from the mass-market of the twentieth century towards a long tail of highly, specialized niche markets.  Retailers and brand owners must now market towards these new niche segments or risk extinction.  The challenge for category captains and retail merchandisers is being able to define an assortment that meets the specialized demands of today’s consumers.  Food manufacturers and retailers have responded by introducing new SKUs (e.g. diabetic -friendly, heart-healthy), redesigning store layouts (e.g. organics section, local produce aisle) and more detailed labeling (e.g. transfat content, allergen notices).  But further challenges exist, ones that can be directly solved through broader adoption of data synchronization.

100 Mile Diet National Bestseller in the US 

Information Hungry Consumers and Shifting Buying Behaviors 

Consumers are demanding more detailed information to make purchasing decisions.  In fact, studies by leading retailers have shown that the degree of product information available for a particular SKU will influence not only which brand consumers will purchase, but also which retailer they buy from.  Having detailed item attribute information represented on a product label or store shelf display is beneficial to consumers walking through a store, but is insufficient to satisfy the full needs of today’s multi-channel shopper.  What about the consumers who research recipes on a brand-owner’s web site or purchase groceries on-line for home delivery?  These shoppers expect complete item attribute data to be displayed at all steps of the decision making process.  The steps include not only the physical product labels but also home delivery storefronts, brand owner sites, in-store kiosks and newspaper advertisements.

Ocado - Popular British On-Line Shopping Web Site

Merchandise Managers Growing Appetite for Product Data 

Merchandisers must have ready access to detailed product attribute information as well.  For each SKU, there is an average of 200 data attributes that can be used to describe it - everything from brand name and packaging dimensions to ingredients and recycling instructions.  If you multiple the attributes per SKU by the number of products in the marketplace, you begin to appreciate the magnitude of the challenge.   Yes, the item attributes are displayed on the product label, but most merchandisers do not keep an inventory of products in their offices.  Nor do the retailers have the time or resources to search through file cabinets full of supplier product specification sheets or to navigate supplier web sites to find the information required.  Item attribute details must exist in merchandising systems in order for retail personnel to make decisions about which products to stock.  Highly automated, data synchronization processes are the only means of achieving any type of scale for managing product data. 

Retailers versus Suppliers – The Power Struggle 

Many of us who monitor and study the retail industry often debate whether the retailers or the consumer products companies have more power and influence over the supply chain.  Fifty years ago, the industry was dominated by large national brands which shaped consumer demand and drove retailer behavior.  Today, global retailers with multi-national footprints and large private label assortments have amassed considerable leverage over their suppliers.   But I believe that question of whether the retailer or supplier has more influence in the supply chain is becoming increasingly less relevant.  In today’s retail value chain it is the consumer that holds the greatest power.   And we see evidence of this phenomenon in IT investments.  Retailers continue to be more focused on customer-facing, store operations functions than internal-oriented, back office processes.  I believe the growing hunger of consumers for rich item data to perform purchasing decisions will shift data sync from a back office, cost reduction technique to a customer-facing differentiation strategy.  And this shift will ultimately be the catalyst that drives demand for data synchronization in the retail sector.

Steve Keifer

© Copyright 2008 GXS, Inc.  All Rights Reserved.

Earth Day and the Green Movement 

We will celebrate Earth Day later this week.  Unfortunately, I wasn’t able to enjoy much of the outside world today as we have been inundated with thunderstorms here in Washington DC.  Nothing like a good dose of acid rain to remind you of the need to proactively attack the environmental problems we are facing.  The customer service manager at the car dealership I purchased my last vehicle from told me that the Washington DC area suffers from some of the worst acid rain in the world.  I believe everything she said was truthful and in no way influenced by the desire to sell me an exterior paint sealant package…

Source: US Environmental Protection Agency 

Nonetheless there has been a tremendous groundswell of environmentalism sweeping the globe in the past 24 months.  What is fascinating to me is that the environmental problems such as the global warming and ozone depletion have been documented and publicized for over three decades.  Why in 2006 did we see such a surge in environmental responsibility around the world?  From my perspective, it was really the consumer population, not big business or national government, which is responsible for driving the change.  These days consumers are really the driving forces behind more and more policy initiatives particularly the recent wave of corporate social responsibility sweeping the Western hemisphere.  The green movement led me to start thinking about the challenges facing some of the supply chain initiatives being pursued around the world.  There are a number of noteworthy supply chain initiatives with strong business benefits that have yet to achieve significant adoption.  Some were created years ago, but still struggle to gain visibility and investment from corporate leaders.  Data synchronization is one that comes to mind.

Data Sync Movement 

For almost ten years now there has been a movement in the retail industry to standardize the process for exchanging product data between retailers and their suppliers.  Recent efforts have focused on utilizing XML and Internet based standards for product catalog exchange.  There are older EDI standards such as the ANSI X12 832 document and the EDIFACT PRICAT document, which provide a simple, cost-effective process for exchanging item and price information.  But like any process associated with EDI, these standards were deemed inadequate and the search for a new data sync standards framework was initiated.  Unfortunately, despite hundreds of millions of dollars in invested capital and hundreds of thousands of invested manhours, the industry still struggles with a lack of adoption.  Even in the most highly penetrated countries such as the UK and Australia, data sync adoption levels are between 10-20% of the overall retail community. 

Catalysts for Data Sync

Extensive business benefit studies have been conducted for data synchronization by the Grocery Manufacturers of America (GMA), Kurt Salmon Associates (KSA), AT Kearney, Accenture and other highly respected thought leaders.  Benefits such as accelerated new product introductions, fewer expected invoice deductions and higher perfect order fulfillment rates have been well established and quantified.  Furthermore, there have been several market forces in the recent years, which were believed to be catalysts that would drive data sync to a critical inflection point yielding mass adoption:

·  Standards efforts were unified at a global level by the GS1 organization which created a global product registry and Global Data Synchronization Network.

·  RFID technology, which depends upon clean and accurate product data, was mandated by large channel masters such as Wal-Mart and the US Department of Defense.

·  IBM, Oracle and SAP - three of the largest software vendors– have developed or acquired master data management suites, which require synchronization to populate product data repositories.

·  Several of the largest data pool providers have merged or consolidated including UCCnet and Transora, SINFOS and Agentrics as well as UDEX and GXS.

However, none of these catalysts has resulted in substantially higher adoption rates amongst retailers.  I believe that, much like in the environmental movement, it will be consumers and not businesses that will ultimately drive demand for data synchronization.  Retailers will be driven to data synchronization, not by back office efficiencies in accounting or receiving, but instead by the need to differentiate themselves to an increasingly information-driven consumer population.  More on this topic to follow shortly in an upcoming post…

Steve Keifer

© Copyright 2008 GXS, Inc.  All Rights Reserved.

Earlier this week American Airlines cancelled approximately half of its scheduled flights due to concerns over a potential wiring issue in MD-80 passenger jets.  Over 1000 flights were cancelled on Wednesday and nearly 500 were grounded on Tuesday.  It has been a tough year for the airlines.  Not only are jet fuel prices rising rapidly which is driving carriers such as Aloha and ATA out of business, but operations disruptions are dealing further blows to the bottom line.  A few weeks ago I was in London during the week that Heathrow Airport’s long anticipated Terminal #5 was scheduled to open.  As you have no doubt heard a series of operations failures handicapped the new terminal and its major tenant, British Airways, for much of its opening week.  Fortunately, I have not been directly impacted by any of the operations disruptions or flight cancellations as my travel patterns tend to steer me towards flying United, Delta or US Air.  But even those of us who haven’t been stranded at an airport yet, may be impacted more than we realize.

Airline Disruptions Upset Travelers, but also Slow Supply Chains 

Many of you know may know that American is the largest passenger airline in the world.  But you may not know that American is also one of the largest air freight carriers in the world providing a range of transportation services to shippers.  American’s Cargo operations has the capacity to move 100 million lbs of cargo weekly including everything from small parcel packages to heavyweight bulk pieces up to 300 lbs.  Thousands of businesses rely on commercial airline cargo services to provide expedited delivery of freight to locations worldwide. Freight forwarders are some of the largest customers of airline cargo operations.  Forwarders will purchase capacity from commercial airliners on behalf of their end customers to route international cargo between origin and destination.  So the point is that when an airline cancels flights, it not only has to inconvenience the passengers, but it also must reroute time-critical cargo shipments.   Even though the wide body aircraft such as Boeing 777 and Airbus 340 which carry much of the international cargo were not affected by the FAA inspection mandates, the smaller connector flights which route the cargo to its final destination were affected.  Many businesses depend upon air freight transportation as a critical conduit for their supply chains.  As a result, cancellations and disruptions to air travel impact the bottom line of the airlines as well as the profitability of their business customers.

Growing Transportation Challenges in the Supply Chain 

It seems that transportation challenges are becoming more and more significant issues for supply chain managers in 2008.  Not only must you factor in weather and traffic, but there are an increasing range of political and economic factors that must be considered.  The environment is an increasingly sensitive topic as more corporations are seeking to become carbon neutral.  Transportation processes are receiving a high degree of focus in these corporate social responsibility initiatives.  In January, I wrote about several transportation related issues discussed at the National Retail Federation Show.  These included the growing problem of port congestion and potential labor strikes in the Western US hubs of Long Beach and Los Angeles.   Recently, however there seem to be two new transportation related challenges disrupting supply chains: 1) airline operations disruptions and 2) the falling US dollar.  Having discussed the former, let’s now explore the latter.

The Falling US Dollar 

What does the US dollar have to do with transportation processes and the supply chain?

There was an interesting article in Thursday’s Wall Street Journal about how manufacturers in rural regions of the Midwestern United States are encountering challenges exporting their products.  You might not be surprised to see such a headline.  For the past twenty years we have been inundated with stories of how offshore manufacturers using low cost labor are making US products uncompetitive in the world market.  However, Thursday’s Wall Street Journal story (Container Shortages put US Export Boom in a Box)  had a very different theme.  As the value of the dollar has fallen against the major currencies, prices of US manufactured goods are becoming more competitive in international markets.  As a result, US exports are beginning to grow at a pace not seen in decades.  The problem is that the US has fine-tuned its transportation infrastructure to support the highly imbalanced import flows experienced over the past few decades.  With supply chain trends beginning an unfamiliar reversal, the transportation infrastructure is struggling to keep pace.  One unexpected challenge is the shortage of shipping containers – the big, metal boxes that are used to house goods as they travel on rail cars and steamships en route to their destination.   The Journal stated:

“…Finding enough of the big metal boxes used to be a cinch, because the nation’s massive hunger for imports meant they were constantly arriving and stacking up from Long Beach, California to Long Island, NY.  Shipping companies typically scoured the country for anyone willing to fill outgoing boxes…” 

But most of these cargo containers are used to move consumer goods that are unloaded at retailer distribution centers near major metropolitan areas.  US exports tend to be agricultural products and industrial equipment produced in the rural sections of the country.  The head of container research at Drewry Shipping Consultants was quoted stating:

“There are some places, particularly in the Midwest, where there’s a complete lack of containers.” 

As a result, exporters are struggling to fully capitalize on the growing market opportunity.  There have been lost orders and shipment delays.  After all, what does a manufacturer do if they cannot find enough container boxes to ship their products to overseas destinations?  Well a more expensive, perhaps easier alternative is air freight.  That is unless it is flying BA through Heathrow or American on an MD-80 or whoever the next target of FAA inspections is….

Best Practices for Managing Supply Chain Disruptions 

So what should retailers and manufacturers do to avoid supply chain disruptions from unpredictable transportation challenges?

Risk mitigation strategies such as diversifying the transportation vendors, port facilities and trade routes utilized in your supply chain will provide some level of resiliency against unforeseen congestion and bottlenecks.  A more expensive option is to buffer additional inventories at strategic points in the supply chain.  But the truth is that no amount of planning or hedging can provide 100% avoidance of transportation related disruptions.  As a result, supply chain managers should place as much emphasis on preventative measures as they do on their ability to quickly to react to disruptions when they occur.  When an air freight shutdown or a container box shortage arises, transportation managers should be able to quickly adapt their supply chain models to route around the bottlenecks.   A key factor that will influence the agility and responsiveness to supply chain challenges is the level of information you have about your transportation processes.  Suppose you shipped an order to a customer in Western Europe earlier this week.  The goods were to be shipped air freight for arrival on Friday afternoon.  Will your shipment be impacted by the problems at Heathrow or at major American hubs?  If you don’t have good visibility to your logistics processes then you may not know who your freight forwarder contracted with for the trans-Atlantic route.

Transportation Management Applications 

The best way to take control of your logistics operations is with a Transportation Management System (TMS).  These applications can provide a centralized, enterprise-wide view of all logistics activities.  With rising fuel prices and the looming economic recession, I suspect more and more companies will be evaluating TMS deployments.  for the second half of this year.  Fortunately, a number of new software-as-a-service models are emerging that can help companies to accelerate the ROI and benefits of their TMS applications.

Steve Keifer

© Copyright 2007 GXS, Inc.  All Rights Reserved.

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?”