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

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.

The EAM/ERP Market

Asset management, or enterprise asset management as it is often referred to within this industry, is one of the areas where there has been a definite decay in the decision-making process.

Although this area is by far the most expensive of the current range of solutions in asset management, it is easily the most misunderstood and counter-productive in many cases.

Prior to 2003 many maintenance systems were implemented as a result of an ERP implementation. A logical follow on to what has been considered the "main game" (often financial, supply chain, or information technology related). Decisions within this area have frequently been taken, or managed, by people with little or no true depth of knowledge in the asset management arena.

Even in organizations where the importance of asset management is understood those with a background in IT or finance, or other unrelated disciplines, are often responsible for these types of projects. As well as the decisions involved in executing the projects.

As has been explained earlier, the area of maintenance management is an area that is complex and not guided by recognized "common-sense" judgements. It is not an area that is easily nor rapidly understood by those outside of the discipline. While the use of quasi-experts may be sufficient in other areas of corporate activity, in asset management the stakes are simply too high.

Even in the most cavalier of boardrooms the corporate risk associated with this dangerous practice is becoming recognized. In the years that follow 2003, as accountability continues to be a marked factor of asset management, previous decisions will increasingly need to be revisited by those with the knowledge and depth of experience to do so.

This marks a dramatic change in the structure of this market sector. Decisions regarding selection, implementation, and post-implementation management must become more focused on the true areas of asset management.

Previously "requirements" were attached to processes currently in place, or more often a proposed future state of processes. As we move forward, this will become driven more by the requirements that companies have of their physical asset base, in order to achieve strategic advantages within their markets.

The Strategic Importance of Asset Management Part Two: Implications

The changing attitudes, understandings of physical assets, and market conditions bring a broad array of implications for those responsible for asset management. The majority of these can be explained as "new accountabilities." Many of these are accountabilities leveled at, or within, corporations themselves. However many will also be directed at the individuals taking or overseeing these decisions, often with daunting consequences for failure.

New Levels of Accountability

As previously highlighted, asset managers are beginning to find themselves increasingly called to account for the decisions that have been taken.

Decisions will increasingly be judged against:

* Higher standards for legislative and regulatory compliance

* Increased understanding of the role of assets in areas of productivity, cost, and quality

* Risk of damage to the corporate image of the company

* Failures to adequately understand production needs

* Failure to accurately determine capital planning requirements, based on current physical assets and future requirements

This leads to two conclusions. Firstly those responsible for taking decisions regarding physical assets need to have a deep understanding of all of the issues and implications of those decisions, as well as the necessary authority to act on them.

Secondly it will require the ability to adequately defend decisions taken. Not only in terms of considerations internal to the company, but also in terms of defence in the case of potential legal actions. It is this second conclusion that has the most impact for maintenance managers of the future.

The ability to state that asset management decisions are defendable is paramount. This means that they have been taken by qualified and experienced people; in a manner that is in line with internationally accepted standards on the issue; and in a manner that provably complies with the first two premises. That is to say, a manner that is totally auditable.

Although these may stretch into many areas of corporate management, there are three "in vogue" elements of today's market that are particularly of concern.

They are:

* ERP/EAM decision making and management

* Outsourcing of asset management functions

* The use of call centers as viable asset management tools

Competitive Market Forces

One of the key elements of the increasingly open global competitive environment is pressure on costs. There are pressures to increase profit margins, or in worst case scenarios retain profit margins under lowering retail prices.

As one of the largest elements of both operational and capital spending, asset management is often an obvious target for reductions in this area.

Maintenance costs are high, in some cases artificially high. Not only are they high but there is increasing pressure on maintenance costs to rise. Areas such as increased regulation, complex and automated machinery, as well as the rising costs of physical assets themselves are pushing maintenance operators to the wire. Pressures to do more are increasing while the pressure to spend less is greater than it has ever been.

One of the major factors behind this trend is that we are more dependent on machinery than at any time in the past. Where previously we would use people to do work, today we use machinery.

This conflicting situation of pressures to increase the work done combined with pressures to reduce the costs of doing that work, has been one of the principal drivers behind many of the vast range of product and service "solutions" that have appeared over the past three decades. These have generally been focused on appealing to this management concern over rising direct costs.

This situation has unfortunately led to more poor decisions and misunderstandings in asset management than any other influencing factor. The results of decisions based on these concerns alone, while often bringing some short-term gains, are rarely sustainable and can even be dangerous in the medium to long term.

Ad-hoc or isolated cost cutting often leads to the eradication of skills or activities that assist in achieving production goals. In worst case scenarios they impinge on the safe operating environments of assets.

This does not mean that direct cost reductions are not achievable in asset management.

Much of the maintenance that we do today either achieves very little, or is actively counter productive. As such there is always scope for reducing areas of redundancy. Added to that are other areas of inefficiency such as planning and scheduling, stores management, and other key areas.

The concept of direct cost reduction needs to be replaced with the focus on reducing maintenance unit costs. This requires a redirection of costs from the present activities towards activities that we truly must do to achieve adequate performance levels. Any increase in attention, no matter where it comes from, is of course welcome. However it needs to be reinforced with knowledge of the true nature of asset management, as well as the strategic importance to many facets of corporate activity.

This may include regulatory and legislative compliance, safety and environmental integrity as well as the standard economic requirements of quality, production and efficiency.

The Strategic Importance of Asset Management Part One: Changing Attitudes

Society has become increasingly intolerant of industrial incidents, particularly in the areas of safety and environmental integrity. It is no longer considered acceptable to cause harm to either the environment or to people and the communities that they live in.

In the past ten years this has been reflected in various changes in legislation and regulation in countries around the world. Some of the recent developments in these areas include:

* Changes to the regulations governing electricity providers in the United Kingdom—now providing a high degree of focus on risk management and mitigation.

* Wide ranging fraud legislation by the federal government of Canada in response to the Westray disaster

* Legislation in response to the Longford disaster in Australia

It is becoming obvious that in the future those responsible for the management of physical assets will be more likely to be called to account when there is a failure, and as can be seen by recent history, it is likely that it will not be companies but individuals.

In extreme cases incidents can also mean irreversible damage to a company's public image. Think of such disasters as the Exxon-Valdez environmental incident, the Union Carbide disaster in Bhopal in India or more recently the linking of Powergen to the New York blackout. All of these incidents have remained chained to these companies in the public mind.

Heightened Level of Understanding

The publication of the report Reliability-centred Maintenance, prepared by Stan Nowlan and Howard Heap, has enabled a quantum leap in the way in which we understand how maintenance should be managed.

Many of the findings of this report fly in the face of long-held, "common-sense" type beliefs and have exposed the true complex nature of asset management. They also force companies to look at their physical asset base in an entirely different manner. At a high level these can be summarized in the following points:

* Changes to our understanding of how maintenance contributes to a company's strategic advantage

* Changes to the way in which we understand equipment failures

* The maintenance department alone is not capable of developing a sustainable and adequate maintenance strategy regime

* Maintenance is not about preventing failures, it is about preventing the consequences of failure

* An understanding of the ability of operational maintenance to drive capital expenditure

* More protection is not necessarily better

* An understanding of new ways of maintaining items, particularly those that don't fail according to long-held views

* Extensive data is not required to take decisions on maintenance policies


Many of these new ways of thinking have challenged long held industry views. So much so that they are often difficult for industry professionals to easily assimilate. They are even less likely to be understood by those outside of the field of asset management.

It’s the Aftermarket Service, Stupid! (Part I)

Regardless of the economic environment (and sentiments), I always think of the opportunity within the aftermarket service and support as a profitable, high-margin and customer-captive business, and yet, still underserved. General Electric (GE) would be the proverbial example of a company that has focused on aftermarket opportunities, going so far as to call itself a “services” company as opposed to a “products” company.

GE indeed, starting with Jack Welch’s long chief executive officer (CEO) tenure, has been widely reported to have significantly increased both its total revenue and profitability by focusing on services opportunities in addition to developing world-class products.

The manufacturing corporate giant has certainly proven the value of serving the product aftermarket, which has recently been purported in a quantifiable manner by many pundits as a high margin business. For instance, AMR Research reported recently that businesses earn 45 percent of gross profits from the aftermarket, yet it is only 24 percent of their revenues, while a recent article in Harvard Business Review claims that we all spend US$1 trillion every year on assets we already own.

A related software category term was mentioned in TEC’s 2003 article titled Service Lifecycle Management - Tapping into the Value of the Product Aftermarket. Namely, 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.

In another Harvard Business Review article titled Winning in the Aftermarket from May 2006, MCA Solutions’ co-founders, Dr. Morris Cohen and Dr. Vipul Agrawal, shared their insights on opportunities to increase corporate profitability through better management of the service business. The “Six Steps for Managing Service Networks” outlined therein explain how all service-oriented companies (not to be confused with “service-oriented architecture [SOA]”!) can take advantage of these opportunities.

Industry leaders like Cisco Systems have reportedly been leveraging MCA’s Service Planning and Optimization (SPO™) suite [evaluate this product] to do just that, and have benefited from reduced service parts inventory, improved service levels and greater profit.

Servigistics, one of the leaders in the nascent SLM software category, refers to it as “strategic service management”, which entails service parts planning & optimization, service labor planning & scheduling and service parts pricing. The focus of today’s blog post is the realm of service parts planning & optimization.

TEC’s 2006 article titled Enterprises May Be Overlooking Profits from After-sales Service concurs with this particular opportunity. Namely, if service parts (including their availability and pricing) and service personnel management are well managed, manufacturers can significantly improve their profits from service operations. This will in turn lead to significant overall profit margins.

This brings us again to MCA Solutions, a privately held company headquartered in Philadelphia, Pennsylvania, the United States (US). Besides Servigistics, MCA Solutions has become a “usual suspect” in most big-ticket service parts planning and optimization evaluations.

The above-mentioned MCA’s award-winning SPO software suite has helped a number of aerospace and defense (A&D), high-tech and capital equipment companies of all sizes transform their service supply chains into bottom-line business drivers, by reducing (excess and obsolete) inventory, lowering support costs and improving service levels to maximize customer satisfaction. These, in turn, often result with higher revenue and increased equipment availability.

Outside the service parts planning & optimization market, the “MCA” name can be confused for a record label, museum of contemporary art, and whatnot, but the company’s brand recognition in its target market needs not much bolstering. Virtually anyone dealing with service parts planning and optimization knows that MCA stands for Morris Cohen & Associates.

Dr. Morris Cohen is the Matsushita (Panasonic) professor of manufacturing and logistics at the Wharton School of the University of Pennsylvania, and co-director of Wharton’s Fishman-Davidson Center for Operations Management. Dr. Cohen has spent three decades researching, planning, and designing advanced value chain systems and working with customers such as IBM, Cisco, Applied Materials, Intel, General Motors, and the United States (US) Navy.

In 1999, he co-founded MCA Solutions to bring the intellectual capital of service value chain optimization from the classroom into the technology marketplace (i.e., the real world). Another MCA co-founder, Dr. Agrawal, was a student of Dr. Cohen’s at Wharton before becoming assistant professor in the operations management department at the Stern School of Business at New York University. Today, Dr. Cohen serves as chairman of MCA’s board, while Dr. Agrawal is MCA’s executive vice president of products.

The mere concept of inventory optimization sounds quite simple: one has to balance the risk of stockouts (i.e., missed sales opportunities translated into poor customer service) with the (often hefty) investment (and tied up capital and cash) in inventory (safety stocks). This becomes sort of a “damned if you do, damned if you don’t” situation.

But the situation becomes much more complicated when one has to take into consideration multi-echelon distribution channels that entail hundreds or thousands of possible part locations worldwide, and even hundred thousand parts/stock-keeping units (SKU’s). The multi-echelon term refers to the supply chain hierarchy that spreads from the top upstream inventory point (e.g., a central distribution center [DC]) downstream several layers to the farthest node in the service chain (e.g., a regional warehouse or even a field service van).

It is thus a small wonder that MCA (and virtually every other optimization peer vendor) stems from the academia and its software’s concept is based on rocket science-like planning & optimization algorithms. In 2001, MCA released the first commercially available software for multi-echelon inventory planning for service parts.

As I have learned thus far from talking to the likes of MCA and Servigistics, these vendors remain quite cautious (if not outright secretive) about mentioning client’s names (especially if the client is involved in the product co-development) and about discussing their planning algorithms at a deeper level (not that many ordinary folks would understand these either, but, hey, the competition might listen in!).

Indeed, the planning and optimization models that these vendors tout can really be too overwhelming and hard to comprehend for ordinary mortals. For instance, in a single location with typical service parts, there can be deployed a few different methods of inventory planning, such as:

* Each part location is planned separately;
* With a so-called demand accommodation approach (mastered by Servigistics), which determines what parts to stock, then calculates demand satisfaction levels, to finally segment parts and locations into these different fulfillment (customer service) levels; and
* Overall optimization (arguably mastered by both MCA and Servigistics), as to achieve an overall desired service level across selected parts and locations.

Reportedly, the optimization approach can result in inventory about 30-40 percent lower than individual part location and 20 to 30 percent lower than the demand accommodation approach with much less planning and labor.

Warning: each prospective customer should check well which of these models would be the most appropriate for their business and ask the vendors to simulate real-life scenarios to them with germane data. Another warning: even then the recommended results from these packages might initially seem counterintuitive, with the rationale being difficult to explain. Nonetheless, MCA’s very first customer (I suspect it is Cisco) still successfully uses MCA SPO to manage a multi-billion dollar service parts inventory base, with 250,000 active parts across over a thousand service parts locations over several echelons.

Moreover, in some industries like aerospace & defense (A&D), stockouts are often prohibitively costly (i.e., planes are grounded due to missing critical parts), while, on the other hand, a mission-critical spare part can cost an arm-and-a-leg. There, the whopping investment in safety stocks has to be balanced rather against the risk of the part failure.

To that end, in 2003, MCA partnered with a well-known aerospace company to develop the first commercial software for planning based on service parts availability. Availability-based planning means that the system looks at the availability of all of the critical parts to support a piece of a complex equipment (installation), as opposed to independently planning for fulfillment rates of individual parts and locations.

With the same customer, MCA introduced software that managed multi-indentured and multi-echelon spare parts forecasting and planning, which was needed to support stringent “performance-based logistics (PBL)” programs that have been mandated by the US Department of Defense (DoD).

In 2004, MCA introduced risk-based tactical planning which takes a probabilistic approach to forecasting and applies it to the management and prioritization of service (work) orders. By prioritizing based on the risk of stockouts (i.e., the part’s criticality vs. its cost and the lead time to replenish it), the system ensures that supply is used optimally to meet spare parts service objectives, thus increasing service performance while making the planner more productive, too.

For more details on these principles see TEC’s earlier article titled Lucrative but ‘Risky’ Aftermarket Business—Service and Replacement Parts SCM. Also, TEC, with a courtesy of ChainLink Research, has featured Dr. Cohen’s article along similar lines entitled Service Supply Chain Strategies to Increase Corporate Profitability.

It’s the Aftermarket Service, Stupid! (Part II)

A related 2007 milestone at MCA included a significant expansion with both new and existing customers in core markets, including aviation and defense (A&D), high-tech, and semiconductor manufacturing. Specific wins included the first joint effort with SAP for a large commercial aircraft manufacturer, expanded work with the US Navy to include planning for the entire naval aviation fleet, and successful deployments at new medical and capital equipment customers.

In addition to working with the largest corporate customers, MCA also cited growing revenue in the mid-market. With its SPO OnDemand Software as a Service (SaaS) offering, MCA hopes to bring to smaller service organizations the same capability that service leaders in the Fortune 500 are seeing value from, but with a much lower upfront software and information technology (IT) infrastructure investment.

These benefits are attributed to lower monthly costs and faster implementations. The vendor will be expanding this offering in 2008 to make it even more appetizing and faster to deploy. The most recent win with the OnDemand SPO solution at Unisys Corporation might be a sign of succeeding with on-demand model at larger corporations as well as appealing to the mid-market.

Quintessential SAP Partnership

SAP now officially recognizes MCA’s Service Inventory Optimization (SIO) packaged composite application (PCA or “xApp” in SAP’s lingo) as an exclusive SAP-endorsed business solution (EBS) in the service parts planning space. In general, an SAP xApp is open to any third-party application that that qualifies technically, and hundreds of those are planned for certification and launch in 2008.

This compliance should make implementation in SAP environments fairly seamless, and, in MCA’s case, offer the market one of the most sophisticated integrated service parts planning and optimization solutions available.

In mid 2007, MCA completed solution qualification for SAP EBS and now the two companies boast several joint customers. I should point out here the importance of achieving the coveted EBS denomination, since there are currently only about a dozen or so such solutions. In other words, MCA SIO is an SAP xApp certified solution, with seamless process and data integration between the involved applications supported by both companies.

For those that are more technically inclined, SIO leverages many of the SAP NetWeaver platform’s components, such as Web Application Server (WAS) and Exchange Integration (XI)/Process Integration (PI). The product utilizes SAP’s enterprise services (or web services, again in SAP’s lingo) for integration between the SIO results (e.g., safety stock recommendations) and SAP’s Service Parts Planning (SPP) module part of the SAP SCM suite [evaluate this product]).

Moreover, SIO runs in SAP Enterprise Portal and leverages the MCA Strategy functionality (soon to be explained), with forecasting and multi-echelon optimization capabilities.

After having completed a stringent solution qualification process in SAP’s test facilities, SIO is nowadays tested and supported by both MCA and SAP. To illustrate the depth of an EBS-like partnership, let us see the evolutionary path that MCA has gone through over the years regarding its alliance with SAP (in the hope that a close relationship with SAP will prove to be very lucrative).

MCA indeed has a long history with SAP, and it has achieved certification at every level and for every major SAP platform. Namely, in 2005, MCA achieved “SAP Certified R/3 Integration” and “Certified for NetWeaver” open enrolment statuses. In 2006, MCA added “Powered by NetWeaver” to its sales collateral, although a few hundred other independent software vendors (ISV’s) can tout the same.

Still, 2007 might have been crucial for the SAP and MCA alliance. For one, due to the above-mentioned EBS status, which denotes the deepest partnership level, MCA also received the SAP Pinnacle Award for “Outstanding Software Solution Innovator”. Prospective customers should benefit from the tight integration of the broad planning process, and guaranteed support of the interfaces from both vendors through product upgrades. With the SAP EBS program, SAP’s existing and prospective customers can access support for partner solutions through the SAP Solution Manager repository.

Catering to All SAP’s Walks of Life

As a result, MCA has a spare parts planning solution configuration devised to return value and preserve information technology (IT) investment no matter where the client is in the SAP technology lifecycle. MCA’s SAP integration framework (coming from all the above-mentioned certifications) supports SAP’s proprietary IDoc’s and Business Applications Programming Interfaces (BAPI’s), and NetWeaver XI/PI enterprise services, which provide integration configuration flexibility and technology choices.

To that end, customers who don’t have the infrastructure to implement the entire joint NetWeaver-based SIO-SPP footprint may have other options, such as to integrate with SAP R/3 and other legacy enterprise resource planning (ERP) systems leveraging MCA SPO open API-based integration.

MCA SIO currently uses several SAP enterprise services, while the forthcoming release will incorporate around 20 services (which means even tighter integration with more SAP modules). The joint solution is integrated with SAP SPP, which ensures tight integration between the strategic and tactical plans, as SAP SPP is in turn tightly integrated with SAP ERP [evaluate this product] and transactional processes like collaboration, order fullfilment, purchasing, warehousing, etc.

Furthermore, in each of the potential configuration options (for virtually every SAP environment), MCA Strategy’s forecasting and inventory optimization is a core component. Its output is the target stock levels (min/max), reorder points (ROP) and reorder quantities (ROQ). MCA’s web site has the elaborate descriptions and nuances of all its products, which also include MCA Tactics and MCA Service Business Design (SBD).

MCA Tactics, whose scope is covered by SAP SPP in the joint SIO-SPP solution (confused yet?), is about generation of recommended orders (purchase orders, repair orders, allocation & transship orders, etc.) to ensure the user orders the right things to meet the service levels defined in the startegic plan. MCA SBD does what-if scenarios planning for various network situations - e.g. network design impacts, impacts of different service level agreements (SLA’s), impact of tradeoffs between part reliability and inventory stocking levels, etc.

Finally, MCA Solutions is a member of SAP’s Industry Value Networks (IVN’s) for High-Tech and A&D. All of the above integrations have been undertaken with the idea of facilitating the customer’s entry point flexibility and early “self-funding” return on investment (ROI), while preserving the current IT investment and lower total cost of ownership (TCO).

Certainly, SAP customers can utilize MCA’a knowledge of SAP integration and lower their IT support costs, since in the spare parts planning and optimization space, MCA is currently the only vendor with this range of certifications and this deep a partnership with SAP.

We should not forget here about Bob Salvucci, MCA’s president and chief executive officer (CEO), either. Prior to MCA, Mr. Salvucci had joined SAP America in the early 1990s, with responsibility for building the relationships with large SAP system integrators (SI’s) and technology partners. From there, he moved into various sales management roles, and later became the president of SAP Public Services, prior to joining MCA a few years back. He and some subsequent MCA hires of ex-SAP staffers should have a deep understanding about how to successfully navigate through the complexities of working within SAP.

Is There a Life Outside SAP’s Sanctuary?

However, while piggybacking on SAP remains critical, MCA cannot afford to “keep all its eggs in one basket” (in part given that the joint selling with SAP has yet to straighten some kinks out). Currently, MCA has about 60 employees and an install base of over 20 large discrete manufacturing enterprises, with all of them deploying MCA’s software across multiple sites.

Over half of MCA customers are SAP customers, while the rest have Oracle E-Business Suite [evaluate this product] and some legacy or mid-market ERP products. ERP integration is often cited as very important to prospective customers, while some existing MCA customers have requested that MCA develop a similar relationship with their ERP providers.

In fact, the recent three-party engagement at the US Air Force (USAF), with Oracle, IFS Applications [evaluate this product] and Xelus/Click Commerce (a competitor of MCA and Servigistics) may speak volumes about the co-opetitive nature of the market. While the SAP EBS-like relationship with other ERP vendors may not happen at MCA for various competitive reasons, the non-SAP base will continue to be important to MCA as it represents about one third of the pipeline.

It is thus no wonder that MCA has lately expanded the Oracle Partner Network (OPN) membership (at least to also send a “subtle” warning signal to SAP to get its ducks in a row for joint sale efforts). It remains to be seen how deep the partnership with Oracle can be in light of its capabilities via the recently acquired Demantra product.

Other Key Success Factors

MCA’s growth of late was driven by its focus on its core strengths: to become the solution of choice for aftermarket service parts planning, and to continue to drive innovation and better solutions. This implies working with and integrating with leading ERP vendors, and with other best-of-breed vendors, primarily those in the SAP’ ISV ecosystem. Most important of those would be Vendavo in service parts pricing, Questra in intelligent device management, and ClickSoftware in field service scheduling.

Still, the strength of MCA’s exclusive SAP relationship was a key factor not only in deals that the two vendors conducted together with their joint solution, but in any SAP environment. There were several SAP customers who went with MCA’s stand-alone solution but liked the partnership with SAP and the potential to evolve to the joint solution as they widen their SAP footprint.

Both SAP and MCA tout that the pairing has already resulted in shorter sales cycles and some early wins. The two vendors have done two deals together lately, whereby the first one, Varian, is not using the joint SIO solution, but may in the future. But they very recently closed their first joint deal at Bombardier Aerospace, which will be implementing the joint solution (MCA’s SIO and SAP’s SPP) later this year.

Another success factor has been MCA’s dominance in the A&D sector in the upper-end of the market. This included both expanding their footprint within existing accounts and adding new ones. In addition, there has been an increasing prevalence of performance-based logistics (PBL) know-how requirements by customers, and MCA’s capability there was demonstrated with some of the largest players like Boeing, Lockheed, and Rockwell Collins.

MCA expects to win in the complex A&D SPO contest almost all the time (it only lost one prospect to Servigistics last year), and will compete well in the high-tech and industrial equipment sectors (especially within SAP accounts). The comany has had several recent wins including replacing two different competitors’ solutions.

Keep Your IT Projects Focused with TEC’s Evaluation Centers

But putting your requirements first isn’t always easy. Software selection is a juggling act, and your requirements aren’t the only ball you need to keep in the air. You’ve also got to analyze reams of data from vendors (some of it fact, some of it marketing hype) to find out if their products actually meet your requirements. And you need to make sure that you’re analyzing those data the right way—using the right tools and a proven methodology.

That’s where TEC’s Evaluation Centers come in—helping you stay focused on your requirements without dropping anything else.

So What Is an Evaluation Center?

Our Evaluation Centers are dedicated, online environments for software selection. Each Center contains everything you need to compare a particular type of enterprise software solution, and include:

A structured method for defining and prioritizing your requirements: The Evaluation Center interface lets you work from a model of industry standard features and functions where you can identify the features and functions you need and set priorities to define their relative importance. Structuring your requirements this way makes it easy to see how well vendors support them. But more on that in a moment.

Detailed vendor information: We ask vendors in dozens of industries to respond to detailed requests for information (RFIs) so we know how well their solutions support thousands of industry-standard features and functions. Once it is vetted by our analysts, this information ends up in our knowledge bases (KBs), along with articles, white papers, and other relevant data.

Every Evaluation Center gives you access to one or more KBs, so you have up-to-date information about hundreds of vendor solutions at your disposal—information that would be, at best, difficult and time-consuming to gather on your own.

A built-in decision support engine: Powering TEC’s Evaluation Centers is ebestmatch™, our online decision support engine. ebestmatch compares your requirements to the capabilities of vendor solutions in order to first identify a short list of solutions and, later, to identify the “best-fit” solution.

ebestmatch has a number of unique characteristics that make it ideal for software selection. For example, ebestmatch can supplement traditional weighted-average-based analysis with the BestMatch Factor—a patented computation that analyzes not only how well a solution matches your requirements, but also how closely it hews to your priorities.

With ebestmatch, it is also possible to do a “value analysis” that tells you which solution offers the closest match to your requirements for the price, and shows you how other vendors would have to adjust their pricing to stay competitive.
How Does This Help Keep Your Selection Projects Focused?

I said at the beginning that properly defining your functional and technical requirements is a critical part of your software selection project. After all, the goal is to find the best software for your business, and your needs have to come first.

Using a TEC Evaluation Center removes much of the overhead of a traditional selection project, leaving you with more time to pay attention to what you need—and whether the vendors can deliver it.

For one thing, in an Evaluation Center, you model and prioritize your requirements using the exact structure found in TEC’s RFIs—the same RFIs that vendors respond to. So you can see exactly where a vendor does and doesn’t support your requirements, and make apples-to-apples comparisons of competing vendors. That makes the comparison process a whole lot faster.

For another thing, because the Evaluation Centers already contain vendor RFI responses, you don’t need to spend time collecting and validating RFIs to develop your initial short list of vendors. And while you will eventually need to send RFIs to the vendors who make the short list, you can load their responses into the Evaluation Center and do the same kind of quick, unbiased evaluation and comparison you did to arrive at a short list in the first place.

And for yet another thing, TEC’s Evaluation Centers have analysis tools built right in, so you don’t need to spend time building and troubleshooting complicated spreadsheets (if you’ve been through a selection project before, you’ll immediately recognize what a time-saver this is). ebestmatch handles the underlying computations and displays the results in the Evaluation Center interface, using clear, easy-to-understand graphs, charts, and reports. You can see how the vendors perform at any level—from broad functional areas to individual features and functions.

Oh, and just so you know: every Evaluation Center is set up to guide you through the selection process according to TEC’s proven selection methodology, so you can be sure you’re going about things the right way.

Audit Considerations for Enterprise Software Implementations Part 1: Project Planning and Management

Recent scandals in the corporate world have created a refreshed awareness of the audit function. A direct by-product of these scandals is the Sarbanes-Oxley Act of 2002 (SOX), which gives legal and financial muscle to the assurance of the integrity, reliability, and accuracy of financial reporting and corporate disclosures. In fact, based on a recent survey of CFO's and IT executives, 71 percent of the respondents believe that Section 404 of the Act, which requires business process audits and documentation to support internal controls certification, is the most critical part of SOX. While some may argue that the Act does not go far enough, it is surely a positive, aggressive start.

While this reemphasis may be good news for current and ongoing systems, the process of developing an audit awareness and the need for substantial controls can and should be established as software is being implemented. If you are the project manager or the project sponsor, possibly the company's CEO or CFO, it is in your best interest to create a financially healthy environment from the start of the implementation project. The expectation is that this good inbreeding will continue with the software into production and throughout its entire lifecycle. Considering the extensive scope of enterprise software such as enterprise resource planning (ERP), supply chain management (SCM), and warehouse management systems (WMS) software, the need for adequate and substantial controls is even more apparent.

This two-part article looks at four key segments of an enterprise software implementation, with timely emphasis on SOX, and suggests audit procedures, controls, and processes that should be typified, observed, tested, and reported upon. These segments include:

* Project Planning and Management
* Documentation and Reporting
* Software Piloting
* Data Conversion

Clearly, there may be others and, hopefully, this discussion can encourage or scare you into identifying these other areas that may be pertinent and cost-effective to your organization.

Before the full impact of SOX can be absorbed into an organization as a basic component or guiding principle of a project's life cycle, considerable prep work is needed. Getting everyone acquainted with the requirements of the Act and making sure that projects are in compliance is no simple task. Be advised, it will not happen overnight. Consequently, an education and training process must be completed so that everyone is in agreement and on the same sheet of music. This mission should be undertaken as you would for any project but with special emphasis placed on securing a high profile executive to serve as the sponsor. Given the fact that they are most affected by SOX, a CEO or CFO are natural choices and should be easy to convince to participate.

The key elements of project planning and management that come under intense scrutiny include:

* Project charter and overall workplan
* Project plan
* Regular and documented status reporting format
* Issue resolution protocol
* Deliverable monitoring against plan
* Continual communications plan

You are probably saying this is not new stuff; we're doing it today. While the sections of SOX are still in a state of flux, particularly Section 404, the specifications for these elements will not be open to discussion but rather will be rigidly dictated and compliance strictly enforced. Consequently, more than casual attention must be given to these matters and must be available for future review.

Projects will be evaluated based on their impact on a company's bottom line. Specifically, large projects, particularly those associated with enterprise-wide systems, are responsible for consuming materially significant funds that can affect financial statements. Accordingly, the internal and external costs associated with a project can represent a significant expenditure and corresponding expense. The level of expenditure can determine whether software acquisition and implementation projects are capitalized between the balance sheet and income statement. Furthermore, the allocation method must be defensible. Typically, a company will rely on the project manager and the corresponding procedures and controls to support the position taken.

With the arrival of SOX, as project manager, you should be taking certain actions in preparation. Become familiar with the Act itself and see if your industry has additional requirements. An education process for the organization has been addressed above. The AICPA provides a nice and concise overview of the Act. Start looking at Sarbanes-Oxley tool sets. Typically, these are not intended to replace project management tools but rather act as repositories, providing a means to capture required data. Typically, your external auditors can help in this regard. As will be discussed below, start involving the audit function in the project management process as a way to install a control discipline and mindset at the start of a system's life cycle.

Probably those of you working in an overseas company and not subject to the Act may heave a sigh of relief. Good control practices, however, are not restricted by national boundaries or languages. These practices just make good sense and do not need legislation or the attachment of criminal penalties to be implemented. Steal the concepts from the SOX and start your own program to improve internal control practices.

As a project manager, you should encourage the involvement of the audit function from the outset. While specific and typical areas of involvement will be addressed in Part II of this article, as part of the planning and management process, coordination with the audit function can ensure that control objectives and guidelines are understood. In this way, team members will be able to assist in the identification of control weaknesses or gaps. Bear in mind, however, that the ultimate decision as to the materiality of a control weakness rests on the shoulders of the audit function.

Finally, a key aspect of project management is keeping management informed. Ensure that the steering committee, including the executive sponsor, is aware of the project's progress against plan, decision points, and significant changes in scope. Their approval will help keep you in SOX compliance. This is also an opportune time to discuss control objectives and their positive affect on and through the enterprise software. Companies are also starting to look more closely at the project management office (PMO) in an effort to provide more efficiencies but, more importantly, tighter control and monitoring of IT projects. But don't expect a quick fix, easy metrics, or an immediate payback.

The documentation required for compliance with SOX is rigorous. Consequently, a critical aspect of SOX compliance and an internal controls framework is developing a repository of documented controls. As indicated above, there are tool sets available to facilitate this activity. However, the implementation team, with the software's functionality fresh in mind, can start the compilation process and fill the repository. As the project team becomes familiar with the software, control aspects will come to light. For this reason, it is important the audit function defines internal controls, both hard and soft, so that the team knows what to be on the watch for. Confirmation of the controls can be completed in the testing and piloting phases.

Samples of documentation that could be used to satisfy the SOX requirements and, more importantly, can be accumulated during the acquisition and implementation of software are:

* Policy and procedure manual
* Job descriptions and desk procedures
* Systems documentation and workflows
* Report layouts and samples
* Edit criteria and error resolution procedures
* Ongoing reconciliation procedures

Many of these samples can be easily obtained from the vendor or vendor special interest groups where other companies may have already paved the way.

Some might argue that compliance with SOX will only add to the length of the overall project. First, to counter that argument, companies bound by SOX may have little choice. Secondly, it is easier to gather the information gradually as a work-in-progress rather than afterwards when interests have been transferred to other projects. Finally, below is the tradition timeline of an implementation project with the interjection of an audit presence. It would not appear that the extension of the overall project length is minor and could be considerably offset if the audit function serves an active member of the team.

Process Manufacturing: Industry Specific Requirements Part Two: Chemical

Traditionally, manufacturing is categorized by two methods: process and discrete. Many differences exist, but most can be grouped into two areas: those derived from material issues and those derived from production issues.

Process materials are different than discrete materials. Process materials are powder, liquids or gases; they must be confined, and they are more difficult to accurately measure. Process materials are close to their natural sources (farms, mines, etc.) and, therefore, are of inconsistent quality. Inconsistent quality means extensive quality procedures, segregation (lot control), restriction of use (for example, this lot is okay for one customer but not another), and usually the inclusion of quality attributes as part of their inventory definition. Process materials vary with time. They get better, they get worse, and they change their identity.

Production issues give us the simplest definition of process manufacturing. Specifically, once you produce your finished product, you cannot distill it back to its basic ingredients. Have you ever attempted to return orange juice back to its original water, sugar, sodium, and, of course, oranges or extract the pigments out of paint? However, you can disassemble a car back to its tires, spark plugs, carburetor, and engine block. There are similar components in process and discrete manufacturing: ingredients versus parts; formulas versus bill of materials; several units of measure (i.e., pounds, ounces, and liters) versus EA (each).

There are, however, subtle differences. Process manufacturing is scalable. For example, if the formula calls for a 1,000 pounds of oranges but you only have 500 pounds, you can still make orange juice, just not as much. If you only have three tires, you are going to have wait for the fourth tire before the car can start rolling off the production line. In process, you tend make product in bulk or batches as in a vat of coke or a 500-gallon tanks of solvent and then pack it off to fulfill customer orders. On the other hand, in discrete manufacturing you would expect to see one computer at a time coming down the production line.

For a quick refresher on process manufacturing, peruse the articles, Process Manufacturing: A Primer or What Makes Process Process.

The remainder of this article focuses on process manufacturing. However, to say process manufacturing functions are the same in all industries is tantamount to saying that a Ferrari and a Ford truck are simply means of getting from point A to point B. Just as you would not use a Ferrari to haul lumber, aspects of process manufacturing cannot be applied equally and with the same importance to all industries. This article looks at the unique requirements of process manufacturing in three industries: food and beverage, chemical, and a hybrid industry, textiles. One way or another, these requirements must be satisfied. If a software vendor can provide this satisfaction, your organization's anxiety level concerning the implementation of enterprise-wide systems can be significantly reduced.

If you are not in these industries, you can stop reading � No, wait! Perhaps understanding how a particular requirement or aspect of process manufacturing relates to one of these industries may give you better understanding or insight on how it can be applied in your company. Whew! Thought that I had lost you! Glad you're back.

Editor's Note: For the purpose of this article, process and continuous-flow manufacturing are treated as synonymous. Continuous-flow manufacturing is the eradication of product stagnation in and between processes. Once a product has entered the manufacturing process, it moves on without having to be stored. Special considerations, such as one-piece-at-a-time production and multi-process handling for establishing a continuous-flow operation, will not be addressed in this article.

A new wrinkle that has been added to process manufacturing by the chemical industry is the introduction of hazardous material. As you would expect, the use of hazardous materials is closely regulated and must be reported. This creates two conditions that can be greatly simplified by software. First, when creating a new formula or modifying an existing one, the formula must be analyzed for the presence of hazardous materials. This check requires a continuously updated and current list of regulated materials that are considered hazardous. Also required is the percentage of these materials relative to the other ingredients.

Secondly, the reporting of hazardous materials must comply with a specific format, namely material safety data sheets (MSDS). These sheets will usually accompany the customer's bill of lading (BOL) and, therefore, must be integrated with the billing process. While copies of MSDS can be kept on file and manually matched with the BOL, most companies will not want to risk non-compliance and would rather seek an automated remedy. Likewise, companies who like to "live on the edge" will rely on manual procedures to determine when a formula and product requires an updated MSDS. More prudent companies, however, will seek to have update notification incorporated in their enterprise-wide software and automatically generated new MSDS when needed.

The programming of hazardous material compliance is not trivial when you consider that it involves list processing and matching, percent of total analysis, scheduling, and formatting. While there are bolt-on solutions because of the required tight integration, it is hard to argue against an enterprise-wide software solution that includes this functionality straight out of the box. Depending on how important formula analysis and MSDS reporting are to your organization, the inclusion of this functionality in a vendor's software offering could be a deal breaker or, at the very least, a tie breaker.

In many chemical companies, but particularly in specialty chemical companies, every order represents a new product. For example, tweak an existing formula or replace this chemical ingredient with that chemical ingredient. This places three demands on the functioning of the software. First, since the resulting chemical is being produced for the first time, a quote would normally be required. As a consequent, the software needs to have the ability to easily convert prospective quotes into firm orders and trigger an event in the production schedule.

Secondly, since new formulas will be needed, the maintenance and management of formulas need to be streamlined and responsive to customer inquiries, possibly while the customer is still on the phone. Templating would be a useful tool in this regard. You start with an existing formula as a template for the new formula and make ingredient changes as warranted. Finally, to compliment the templating concept, and because many chemical properties are interchangeable, a suggested ingredient substitution would facilitate the production process. Automated or suggestive ingredient substitution could allow your company to fulfill customer orders that otherwise have to be abandoned or, at best, delayed.

Producing chemicals typically involves all of the three common states of ingredients, namely solids, liquids, and gases. From a formula and mixing perspective, this necessitates a very robust unit of measure (UOM) conversion engine. Whether the formula requires conversion of US measurements to metric or imperial measurements, liquids to solids, or gases to liquids, such conversions should be transparent to the production of the finished goods. Furthermore, depending on the unique requirements of your company, software that allows the entry of free form conversion tables can be extremely useful.

Food and Drug Safety: Prevention Better Than Cure (For Sure) – Part 1

Food production and distribution is a serious and strategic business, and I am not aware of anyone in my surroundings that takes it lightly; food can not only delight us, but can also make us quite sick and indisposed. While my inner circles (pets included) have luckily not been casualties of recent salmonella, E.coli, and whatnot outbreaks from tainted chilly peppers, tomatoes, spinach, pet food, or most recently peanut butter, the 2008 year-end holidays were not much fun for my family.

Namely, the “G.I. bug” that our 18-month-old likely got in her playgroup spread so quickly and violently to anyone who was in contact with her (including the broader family members that stopped by to just traditionally exchange holiday gifts). Sure, viral gastroenteritis might likely have had nothing to do with what we ate at the time, but the feeling of being listless and other unpleasant (and unspeakable) G.I. bug symptoms were quite similar to those that food poisoning outbreaks can “treat” us to.

Food processing and distribution are not be the only market with burning product safety issues, since similar issues can also apply to the drug and pharmaceuticals sector or consumer packaged goods (CPGs); remember lead-tainted toys or antifreeze-laced toothpaste coming from China? Still, we all seem to be the most sensitive about food-related breaking news, possibly due to the likelihood of those hitting home (perhaps even in a willful way by bio-terrorists).

Thus, some food processing market experts have lately been frustrated by companies’ focus on location and lot control, serial number tracking, and traceability as the panaceas to solve product safety issues.

While important, these critical capabilities still help mostly with minimizing the damage (i.e., during product recalls), but the damage to customers and company’s brand has unfortunately already taken place, leaving many folks seriously ill (if not even fatally affected).

Track-and-trace After the Fact: Good But Insufficient

On the other hand, while I agree that detecting the problem before “the horse leaves the barn” would be a great use of IT tools, my IT experience still only involves location and lot tracking (while the product is in the hands of the manufacturer) and traceability (once the goods go to the customer). The goal has typically been the immediacy of problem identification and minimizing the extent of a product recall.

Sure, random sampling of ingredients is usually performed by labs and quality control (QC) departments, but they can only report an “accept” or “reject” status. To also be fair, Hazard Analysis and Critical Control Points (HACCP) is a systematic preventive approach to food safety and pharmaceutical safety that addresses physical, chemical, and biological hazards as a means of prevention rather than finished product inspection. Still, like lot control and traceability, HACCP is only a piece of a much broader product safety issue.

Proactive Product Safety

Some of the market experts within leading enterprise resource planning (ERP) vendors have thus started to develop a broader strategy to proactively protect food safety. The higher the risk (e.g., from non-processed “bag & ship” leafy green vegetables, seafood, meats, fruit and vegetables, dairy products, etc.), the greater the need for a proactive strategy.

Ultimately, this proactive approach could become part of an overarching governance, risk, and compliance (GRC) strategy (and message). Namely, companies can either choose to be reactive and support regulations and tracking as an imposed requirement or take a more proactive stance as part of a more comprehensive corporate social responsibility (CSR) message.

In other words, providing nutrition labeling and track-and-trace capability is one thing, whereas adding food education and balanced eating with more “green” or “organic” products is a whole different level that goes beyond simply compliance reporting. Implementing a comprehensive food safety management program both on the internal production side and overall supply chain side is one thing, whereas educating consumers is a CSR message.

Certainly, phrases like “organic or real food” and “farm-to-table” may sound like elitist jargon tossed around at upscale restaurants, and completely out of touch with the folks than cannot afford even a $0.99 burger (or such junk food) these days. But the country’s top chefs, several of whom traveled to Washington, DC for President Obama’s recent inauguration, hope that Obama’s apparent flair for good and healthy food will encourage people to expand their horizons when it comes to what they eat.

These chefs tout locally grown, environmentally friendly and - most importantly - nutritious food. They urge diners, even those who may never be able to afford to eat at their extravagant restaurants, to grow their own vegetables, shop at farmers’ markets, and pay attention to where their food comes from.

But before this “organic pie in the sky” becomes a reality, let’s see what some pundits within ERP providers have in mind when it comes to being proactive about food safety. Whenever there is a serious discussion about the food industry, one cannot avoid Olin Thompson, VP of Industry Strategy at Lawson Software and former contributor to TEC’s newsletter (e.g., see TEC’s previous article entitled “Food Safety, Government Regulations, and Brand Protection”). Lately, Olin has been talking about his (and Lawson’s) holistic approach as the “Four Ps” (”4Ps”) of Food Safety (along the lines of well-known 4Ps of the Marketing Theory).

“Four Ps” of Food Safety

The first “P” is “Prevent” or take steps to avoid a problem, since the best defense is good offense. Olin considers this as the most important of the four Ps, whereby sanitation, QC, and HACCP are some utilized practices. The idea is to build a quality fence around your business, with top management’s genuine commitment to food safety. To that end, your business system should provide the following capabilities:

* Product specifications during procurement processes;
* Supplier/vendor ratings;
* Inbound QC testing;
* Quality specifications as part of inventory management modules;
* Product quarantine management;
* Product aging tracking;
* Date-sensitive picking; and
* Lot tracking.

The second “P” stands for “Prepare” or build the ability to react to a problem if and when it happens. Good preparation presumes that you will have an incident and prepares you to respond via integration of food safety data with operations and automated data collection (ADC), storage, and analysis of food safety data. To that end, your business system should provide lot track-and-trace and location management capabilities.

Next comes “Prove,” to both yourselves and other concerned parties, that you are preventing problems and you are prepared to react if you have one. In other words, you have to be able to prove to all concerned parties that your product recall system will respond when it is needed (whether due to problems of an internal nature or coming from customers and regulators). This can be achieved by frequently testing the system, whereby the business system should be able to conduct mock recalls.

Finally, the last P is “Proactively respond” (OK, Olin acknowledges that it requires a little stretch here to get another “P”). Namely, if a problem is uncovered, one must be aggressive in addressing the recall and other needs, since holding back usually makes it worse. All incidents must be taken seriously and the company must respond quickly and completely. Over-response is often less expensive in terms of dollars and negative PR than under-response.

While management commitment to a proactive response is critical, the company’s business system should also provide rapid recall support. In other words, to meet the four-hour response requirement set forth in the Bioterrorism Act of 2002, the system must provide the actionable information in minutes rather than hours.

Which Enterprise Applications Can Cater to the 4Ps of Product Safety?

The critical part in the 4Ps-enabling applications landscape would be a Process Manufacturing ERP system like Lawson M3 [evaluate this product]. These systems are typically the most important for tracing and establishing the quality fence. Namely, ERP systems process inventory transactions that can come from the entire value chain. Process manufacturing ERP systems often have the laboratory software applications as well, while the procurement module can handle specifications, vendor certifications, and vendor rating.

Interestingly, Olin doesn’t consider product lifecycle management (PLM) systems to be critical with regards to product safety. Still, he at least acknowledges PLM systems’ help with creating quality specifications and matching approved ingredients to geographic markets (e.g., can this ingredient be in a product that is going to be sold in Japan?).

Supply chain event management (SCEM) tools are certainly critical for visibility and action reasons, albeit they can overlap with the inventory management modules of ERP systems. These visibility and workflow-based tools help only if they have lot tracking capabilities, perhaps bolstered with radio frequency identification (RFID) sensors and accompanying applications.

To that end, recently launched Lawson M3 Trace Engine is a standalone solution that combines repository, SCEM, data cleansing and integration, and workflow capabilities for food safety in extended supply chains. The product was described in great detail in my previous two-part blog series.

Manufacturing execution systems (MES) are important since HACCP capabilities are often found within them, but typically a MES is lot-blind and thus has to be interfaced to an ERP counterpart. Likewise, a laboratory information management system (LIMS) or quality management system (QMS) is a critical part of the quality fence for handling testing rules, analysis of results, vendor ratings, lab instructions, etc.

But as a standalone solution LIMS/QMS is usually not linked to a recall system. Most recall systems are part of ERP, which again demands some involved integration or interfacing.

Part II of this blog series will introduce another process industries expert and his proactive product compliance strategy. Your views, comments, opinions, experiences, etc. about the abovementioned food safety issues are welcome in the meantime.

One Year Later at Deltek: More of the Same (And Then Some More) – Part III

Part I of this blog series explained Deltek’s ebullience despite a hostile and depressed environment, and also analyzed the recent developments (and anticipated future developments) at Deltek’s Professional Service line of business, which is largely represented by Deltek Vision [evaluate this product]. Part II then analyzed the recent developments (and anticipated future developments) at Deltek’s Government Contractors (GovCon) line of business, which is represented by Deltek Costpoint [evaluate this product] and Deltek GCS Premier [evaluate this product].

This final part will focus on Deltek’s Enterprise Project Management (EPM) line of business, which helps companies deal with the ever-growing reporting regulations being imposed by government agencies.

The Deltek EPM product portfolio [evaluate these products] offers the following three primary disciplines of program controls for government contractors:

1. Planning & Scheduling via Deltek Open Plan;
2. Cost and earned value management (EVM) via Deltek Cobra and Deltek MPM (to be explained soon); and
3. Risk Management via Deltek WelcomRisk.

To be fair, estimating is another key program management disciplne, which Deltek does via third-party solutions. Regarding estimating partners for EPM, Deltek works with several vendors, including Galorath, ProPricer, and PRICE Systems. Users can basically import comma-separated values (CSV) files from those estimating systems into Deltek Cobra. While Deltek works with all of the above-mentioned estimating vendors, it doesn’t yet have formalized partnerships with any of them, and doesn’t turn to one more than any other.

The “See Problems Before They Do,” “Share Program Information,” and “Trust the Data” Themes

As Deltek has built its EPM business and listened to its customers’ top priorities, it has focused its attention on building a technology roadmap that delivers features such as early warning indicators, automated reporting, “anywhere, anytime” access via the Web, and process controls to build consistency within the organization. The vendor continues to invest in EPM, and one recent highlight would be Deltek wInsight 6.4, the tool for EVM reporting and collaboration, which was released in late May, 2008.

The release included enhancements such as early warning indicators that provide a proactive view of project performance to avoid costly budget and schedule overruns. In addition, wInsight 6.4 added two new “trip wire” metrics for the United States (US) Office of Secretary of Defense (OSD): the Baseline Execution Index (BEI) and the Critical Path Length Index (CPLI). These indices are used to measure and forecast programs’ progress and are utilized by the US Defense Contract Management Agency (DCMA) for compliance audits.

The product also included faster US Office of Management and Budget (OMB) Part 300 reporting capabilities and simplified data integration. The latter was enabled via a United Nations Centre for Trade Facilitation and Electronic Business (UN/CEFACT) Extensible Markup Language (XML) data interchange to communicate EVM data to clients more easily.

Acquisition Further Bolsters EVM Leadership

As the second major move in the EPM space, in September 2008 Deltek announced the acquisition of MPM, Planview’s former EVM solution. Deltek received both software and key employees with this acquisition.

Prior to this acquisition, the two dominant EVM applications in the market were Planview MPM and Deltek Cobra. Now, Deltek becomes the industry-standard solution in the marketplace for EVM, since acquiring MPM effectively allowed the vendor to corner this market niche. This acquisition indeed extends Deltek’s leadership position as the largest and most comprehensive EVM provider.

Deltek MPM is an EVM application widely used by government contractors and agencies, including 8 of the top 10 aerospace and defense (A&D) contractors, to meet the complex compliance requirements of the US Federal Government. The solution competes directly with Artemis CostView and Dekker, and is used primarily by government contractors to comply with the ANSI 748-98A standards for earned value reporting.

Accordingly, MPM takes initial program budgets to an integrated baseline review (IBR) and then allows users to monitor and report on program performance. MPM produces 48 standard (”canned”) reports required by the government such as contract performance format (CPR): Format 1-4 and NASA Form 533: Monthly Contractor Financial Management Report. On a high level, the product’s key capabilities are the following: program overview and initial setup, work breakdown structure (WBS), estimating, what-if analysis, planning & status reviewing, graphic drill-down, Microsoft Project integration, and reporting capabilities in terms of sample reports.

Why This Acquisition?

I think Deltek made the MPM acquisition for two reasons. For one, as mentioned earlier on, the purchase solidifies Deltek’s standing as the leading EVM vendor in the world. These numbers are only estimates, but it is my belief that MPM and Cobra’s combined install base gives Deltek about 70 percent of the market share for EVM applications.

MPM’s former parent Planview is focused on the information information technology (IT) governance side of the project portfolio management (PPM) market and felt that selling its EVM solution to Deltek would re-focus the company on what it is good at, and gives it additional resources to focus on the strategy. For Deltek, the vendor gets a solution that fits into its EVM product set, which was the second reason it made this move.

Namely, MPM gives Deltek an EVM solution that complements the overall EPM portfolio. MPM is a great fit for organizations that have decentralized EVM processes where EVM is managed on individual programs.

It is a desktop application that is relatively easy to use, intuitive, quick to implement, and requires few IT resources. In that sense, while it will be sold to and used by the largest companies in the world (Northrop Grumman Corporation and Raytheon Company are MPM customers), it is an ideal fit for small to midsize government contractors that want to get up and running on EVM quickly.

The application is capable of handling only one project at a time (although it can store multiple projects). For instance, WBS can only be done on a project-by-project basis, since there is no concept for centralized enterprise project structure (EPS). There is a summary level WBS with roll-up assignments of WBS to owners (or contract account managers [CAMs]). The product also does not offer some critical reports such as the Functional Cost Hour Report (DD Form 1921-1 Part 1) and OMB 300.

Thus, MPM is not focused on enterprise-level deals due to lack of enterprise functionality, and this is where Cobra plays. Deltek Cobra, though it is also used by small companies, is a great solution for organizations that manage EVM on a centralized enterprise-basis, and these tend to be larger firms. For companies like Lockheed Martin that have centralized EVM functions, the scalability and “roll-up” capabilities of Cobra make it a better solution than MPM for centralized EVM management.

Since MPM has been used by hundreds of customers, and it is a tight fit for small to medium sized government contractors that need to implement EVM on a program-by-program basis, Deltek will not be sun-setting the product and will continue to support/sell MPM to customers. As the vendor assesses the EVM needs of its customers and prospects, it will sell Cobra or MPM depending on how EVM is managed inside relevant customer organizations.

Due to MPM’s architecture, it is not difficult to push/pull data to and from the application. In that sense, EVM data can be transferred between MPM and GCS Premier, Costpoint, and Vision. However, Deltek is exploring deeper integration plans and will reveal those to the market as they are developed.

What Might the Future Bring?

For the future, Deltek’s ambitious goal within the EPM suite is to unify all the various applications it owns on one common technology. Since a few years ago, when it first acquired a number of functional point solutions from multiple sources on various technologies (and with little to no integration at all), Deltek has made great strides in this area. But the vendor wants to eventually offer an Integrated Program Management framework from a single vendor, on a single technology, and with a strong application integration framework to interact with any outside systems, not just to Deltek’s (where it is already integrated today).

Deltek is well down this path already, although serious work remains. For example, Deltek Cobra’s upcoming release, as an EVM solution targeted to large government contractors (that need to standardize on EVM practices across multiple programs within their complex organizations), will likely feature Microsoft .NET Framework-based more scalable architecture.

The upcoming CAM dashboard would be another exciting innovation, since on major programs, CAMs act as specialists for specific components of that program. But at this stage, I am only at liberty to hint that this functionality should greatly enhance (dare I say revolutionize?) the way A&D firms manage program performance. In the meantime, we will have to stay tuned for more product’s details and the official availability announcement by Deltek.

“Act Vertical” vs. “Go Extinct” Retailers – Part 3

Part 1 of this blog series set the historical background for supply chain management (SCM) evolution and presented the advantages and shortcomings of vertical vs. horizontal integration. The analysis then moved onto the generally embattled retail sector, where a select group of innovative retailers has found a “happy medium” approach to stay well above the fray.

Kurt Salmon Associated (KSA), the leading global management consulting firm specializing in the retail and consumer goods industries, dubbed this strategy “Act Vertical” in its seminal research study. The firm presented the highlights of the study at the National Retail Federation (NRF) Annual Convention & EXPO 2009 (also known as the Retail Big Show) in January in New York City. The accompanying slide deck can be downloaded here.

Part 2 of this blog series then outlined the five drivers for retailers to act vertical, and the three key tenets of the approach. The post explained in depth the following first two requirements for acting vertical:

1. Effectively bring unique and compelling products and services to consumers; and
2. Offer differentiating customer experiences through multiple, integrated channels.

This final part will focus on the need for retailers to collaborate and synchronize internally and externally with customers and suppliers, often via customized agile supply chains, as necessary.

This supply network agility and flexibility is critical to creating products based on the attributes of smaller consumer segments and “fast tracking” greater numbers of products to respond to ever-shorter selling time windows. Different products have different supply chain requirements, given that many products’ variables may combine in different ways, each variable suggesting its own type of supply chain strategy.

Different (Supply Chain) Strokes for Different Folks

In his Harvard Business Review 1997 article entitled “What Is the Right Supply Chain for Your Product?” Marshall L. Fisher distinguished two types of products that call for different supply chain strategies: functional and innovative. They differ as follows:

* Functional products, like canned soup and blue jeans, have longer life cycles (perhaps more than two years), relatively low contribution margins, and little variety. Because demand for them is stable, they are fairly easy to forecast, with a margin of error in the 10 percent range, very few out-of-stock situations, and no end-of-season markdowns.
* Innovative products differ from functional products in every aspect. They have unpredictable demand, relatively short life cycles (e.g., three months for seasonal clothing), and high contribution margins of 20 to 60 percent. They may have millions of variants in each category, an average stock-out rate from 10 to 40 percent, and end-of-season markdowns in the range of 10 to 25 percent of the regular price. The margin of error on forecasts for innovative products is as high as 40 to 100 percent, but the lead time to make them to order may be as low as one day and is generally no more than two weeks.

The idea that the same type of product can be either functional or innovative implies that one company might have more than one supply chain. And that’s the contention of Jonathan Byrnes, a professor at MIT. Writing in the Harvard Business School’s Working Knowledge 2005 article entitled “You Only Have One Supply Chain?”, Byrnes also asserts that one supply chain is not enough: two, three, or more would be preferable.

“One size fits all” supply chains may have been sufficient in the past, he believes, when that was the competitive norm, but modern IT makes it possible to have multiple, dynamic chains that can accommodate different product and information flows. Byrnes breaks apparel products into the following three categories: staples, seasonal products, and fashion. These products have very distinct design and replenishment characteristics.

Much like Fisher’s functional products, staples (e.g., white underwear) have steady, year-round demand and low margins. He advises stocking them only in retail outlets in small quantities and transporting them in truckload quantities (a full truck is more cost-effective for the shipper than a partially loaded vehicle, i.e. less-than-truckload [LTL] shipping.) Fashion products are like Fisher’s innovative items with unpredictable demand.

Consequently, Zara, the famous Spanish clothing manufacturer, has two supply chains, one for staples and the other for fashion clothing. To get the fastest response time, Zara uses pricey Western European suppliers for the fashion items. But for the more predictable demand items, it uses Eastern European suppliers, which have poorer response time (not a major concern here) but at much lower cost.

In addition to varying the supply chain by product type, Fisher recommends several other variables to consider, such as store type and time in the season or product cycle. Demand varies considerably over the life cycle of many products, whereby the same item might have infrequent demand at first, more stable demand in its maturity phase, and falling demand at the end of its life cycle.

With more than one supply chain, a master retailer can move its products from one chain to the other in response to changing variables, such as type of channel or life-cycle stage. Yet most retailers still move all three types of items to their stores through the same supply chain. Conversely, leading vertical retailers have multiple supply chains, based on a combination of factors such as service levels required, type of demand (e.g., basic products should never be out of stock), and display.

By having a variety of tailored supply chains, retailers that Act Vertical can actually reduce supply chain costs by streamlining the flow of goods. KSA points out one unnamed multibillion-dollar retailer that expects to boost earnings by US$40 million annually and generate more than US$100 million in cash next year by replacing one inefficient supply chain with three streamlined ones.

You Can Control Only What You Measure

Moreover, to Act Vertical, retailers must also change the way they measure supply chain performance, which should be in a holistic, balanced scorecard manner. Namely, many retailers today manage with the goal of achieving the lowest transportation and logistics costs. However, that can increase inventory levels at the store, in the truck, at the distribution center (DC), on the boat, or in the factory.

Excess inventory often then needs to be marked down, and lower margins from markdown sale items can greatly reduce profits and wipe out the cost reductions achieved in transportation. Instead, retailers that Act Vertical track their supply chain performance according to “net-realized-margin,” which takes into account the total profitability and total landed costs of getting products from the factory to the store, including their selling price.

These retailers also use different measures to track the performance of products in the stores, based on different in-stock goals and service strategies by product category. According to Module One of the APICS CSCP Learning System, the appropriate supply chain for functional products should emphasize predictability and low cost with key performance indicators (KPIs) such as the following:

* High average utilization rate in manufacturing;
* Minimal necessary inventory with high inventory turns;
* Short lead times (consistent with low cost);
* Suppliers chosen for cost and quality; and
* Product design that strives for maximum performance and minimal cost.

Conversely, the supply chain for innovative products should emphasize market responsiveness rather than physical efficiency, with KPIs such as the following:

* excess buffer capacity and significant safety stock (buffer stock) of parts or finished items;
* aggressive reduction of lead times;
* suppliers chosen for speed, flexibility, and quality (rather than cost); and
* modular design that postpones the customer order decoupling point (CODP) decision (and differentiation) as long as possible.

The KPIs for each supply chain differ because the products’ characteristics differ too. Aggressively reducing lead times, for example, is appropriate for innovative products but would be irrelevant for functional products that can be manufactured and delivered on predictable schedules in high volumes.

On the other hand, inventory reduction makes good sense as a KPI for supply chains if the product is functional but not if it’s innovative. Because profit margins are low on functional products (those markets tend to be very competitive), cost reduction in the functional supply chain is essential.

Innovative products, however, with their high margins and unpredictable demand, justify extra expense for holding costs. In addition, manufacturers of innovative products can look for other solutions to the problem of unpredictable demand, such as to aggressively reduce lead times and build products to order rather than in a made-to-stock (MTS) manner.

The same class of product, the author argues, can be either innovative or functional. For instance, coffee can be functional (e.g., for business meetings, at gas stations, or on airplanes), in which case it should be available quickly at a low price with perhaps cream and sugar as options. At an upscale coffee shop, on the other hand, patrons are willing to endure longer lead times and pay more money for their coffee, but they want variety in return. As a Starbucks addict, I can vouch for the latter case.

All of the above practices increase the likelihood of delivering the right product to the right place at the right time, and at the right cost (and price). Basically every retailer will have to act vertical over the next few years to react quickly to more-demanding consumers whose tastes are changing faster than ever.

The Seven Magic Core Competencies

So how were the abovementioned act-vertical retailers able to create and execute distinctive and compelling offerings and customer experiences, and what exactly did they do to achieve superior financial performance? First, KSA points out that they have a clear retail-brand strategy: a sharp articulation of their target customers and the kind of offering and experience they would deliver to them.

Second, these retailers have developed the following seven core capabilities that enabled them to deliver unique and compelling offerings and customer experiences:

1. Market research that identifies emerging customer needs and product opportunities. Research that PetSmart Inc. conducted in the late 1990s opened its eyes about how critical pet services were to pet owners. Aeropostale Inc., the mall-based specialty retailer of casual apparel for young people, empowers its employees to travel extensively to see what its core young teen segment is wearing.
2. Product design and development that balances creativity and commercial appeal. Both Coach Inc., a leading American designer and maker of luxury lifestyle handbags and accessories, and Aeropostale, make sure that the quantitative analyses don’t dominate the design creativity.
3. Extensive consumer testing that shapes the offerings and customer experiences and reduces the risk of product innovation. For example, Coach spends US$5 million annually on such consumer research, including 70,000 in-depth interviews.
4. Tight relationships with sourcing vendors, which enables manufacturing capacity to scale up quickly and quality to be maintained. This accelerated manufacturing cycle also allows the delay of key product decisions to accommodate consumer and fashion changes in the nick of time. In addition to Zara’s abovementioned example of two supply chains, Coach works directly with leather suppliers to ensure its handbags meet its exacting standards.
5. Inventory management (assortment, allocation and replenishment) capabilities that can rapidly move products to places of greatest demand and maximized pricing.
6. Design and execution of an engaging and consistent brand experience across all shopping channels stores, catalogs, and the Web. Apple organized its stores (which have the highest per square foot sales in retailing) not by technology categories but rather by how customers use them. Its about 250 stores group hardware, software, and accessories in sections such as music, movies, photos, and children.
7. Marketing that communicates the brand promise across all channels and showcases how the retailer’s offering and experiences enhance their customers’ lifestyle.

More details and examples can be found on KSA’s website.

The Act Vertical Imperative as the Conclusion

Part 2 outlined the reasons that are driving retailers to Act Vertical, i.e., control over most decisions about the products that flow through their stores. These drivers are not abating; if anything, they are increasing.

Indeed, consumers have a fast-expanding variety of shopping choices, and Internet-based retailing continues to take a bigger slice of the pie. And in a global world, the number of product brands consumers can choose from continues to grow in categories from high-tech gadgets to apparel.

Therefore, all retailers must radically change their business models to keep once-loyal consumers from defecting. Retailers that can adopt and embrace an Act Vertical business model will increase their influence on the design, development, manufacture, and distribution of the goods they bring to market. They will be then able to put a differentiating and recognizable stamp on those products, as well as on how consumers experience them, thereby distinguishing their stores (and online storefronts) from the pack.

It is interesting to note, thought, that most retailers have put just a few Act Vertical elements in place. Only a few have created the three-part foundation (outlined in Part 2) that is essential to creating a successful act vertical business model.

But despite their rapid and profitable growth, none of the retailers that KSA has studied had mastered all seven components of acting vertical. This might present considerable opportunities both for laggard retailers that have yet to pursue an act vertical model and for retailers that are already operating this way.

Future blog posts will analyze how leading retail supply chain management (SCM) providers can help retailers with their Act Vertical forays. Till then, what are your thoughts and comments in this regard? What are your experiences in dealing with the abovementioned retailers? What particular software applications do you think can help these companies in their Act Vertical efforts?