DDSN in Consumer Products: Rethinking Processes for Time to Market
From AMR Research/Lora Cecere, Michael Burkett
By definition, demand-driven supply networks (DDSN) power growth through embedded processes for innovation. As such, creating products that foster demand is one of five core strategies in becoming demand driven and a core competency for DDSN leaders. Unfortunately, while consumer products (CP) companies strive for innovation success and understand its importance, innovation processes remain an opportunity. To help, we share insights from three sources on CP innovation: quantitative results on planned investment, lessons from four leaders captured at the recent Consumer Goods Technology (CGT) workshop on innovation, and benchmark data on time to market.

A recent AMR Research/CGT Magazine joint study on IT spending found that 26% of 88 respondents have invested in PLM technologies, with 9% looking to invest in 2007. Among large companies (greater than $1B in revenue), 43% have PLM CP deployments while 11% of midmarket companies have invested.

Today's focus is on process, and some of the investments to support innovation do not fit the classical PLM definition. Leaders know that technology is vital for innovation. As such, CP leaders are investing in the following:

Product launch dashboards—Leaders have a clear definition of new product launch success, and are implementing dashboards to track stage-gate processes and the conversion of ideas to product concepts.

Effective translation of design quality to conformance quality in manufacturing—This translation is especially relevant for DDSN leaders as they manage and deepen contract manufacturing relationships while adhering to the regulatory constraints of CFR 21 Part 11.

Use of downstream data to sense product launch execution—In “What Is a Demand Signal Repository?” we look at DSR and the use of downstream data to sense product launch execution success at the shelf. Leaders are implementing systems to compare point-of-sale (POS) data to planogram presence to ensure that if a product was supposed to be on a shelf that it was scanned. The other use of downstream data is to track product adoption based on demand insights and evaluate product acceptance on a near-real time basis. This data is used to improve the launch or to kill a product early.

Collaborative package and artwork management—CP companies are making a major thrust in design networks. Innovation in collaborative technologies is helping with marketing, agency, and R&D artwork packaging development while visualization technologies are improving the effectiveness of supplier design networks.

Design for reuse rationalization—Companies are increasingly modeling the cost/benefit tradeoffs of design for supply and reuse strategies. These decisions are at the intersection of new product launch and sales and operations planning (S&OP) processes. A strong governance model and modeling tools are required between these two processes to ensure that the organization is consciously making the right tradeoffs. This is part of the company's desire to improve agility and reduce complexity.

For the complete report including case histories for Kimberly Clark, Kraft, Kroger and Sara Lee, go to:
http://www.amrresearch.com/

ADVERTISEMENT

IT Spending Survey: Business Issues Reflect Interest in SOA
From AMR Research/ Dennis Gaughan
Customer-driven issues and increased competition within industry are the two factors most affecting software investment (32% each), AMR Research's annual IT spending survey shows. Within customer issues, meeting the technology requirements of customers (22%) and maintaining customer loyalty (21%) are the most often noted factors behind investment. From a competitive standpoint, time-to-market improvements (29%) and growing market share (23%) are the key factors, followed closely by keeping up with competition.

Unfortunately, these business issues collide head on with IT organizations' current challenges: diverse application landscapes that are often poorly integrated which results in inflexibility and high cost to change and maintain. In fact, we conducted a survey late last year in which we asked respondents about their biggest challenges managing systems. Integration issues (25%), pace of change (24%), and cost of change (21%) are the barriers that organizations face when trying to meet customer and competitive demands.

In a nutshell, this is the root cause behind the overwhelming market buzz around service-oriented architecture (SOA). SOA is an architectural approach to building and maintaining systems designed to make change much easier by breaking systems up into more manageable (and reusable) services. With SOA, you can make changes to a service or a number of services while minimizing the impact to applications that use the service. More importantly, SOA is about connecting those services in new and distinct ways, orchestrating improved and more flexible business processes from existing assets.

In fact, many of the early examples of SOA that we see are directly targeted at the business drivers captured in the spending survey:

Customer issues—Several customers are using web services and SOA concepts to create new interaction points with customers. By combining customer information from multiple systems into one composite application, companies are looking to grow revenue from their customer base by making it easier to do business with them.

Competitive issues—Faster time to market is perhaps the most often cited reason for exploring SOA. This is particularly true in industries like high-tech, financial services, and telecommunications where the first to market with a new product or service is the one that captures the largest market share.

What is important to note is that SOA is neither a product you buy nor a panacea, but rather an approach that requires careful planning, effective change management processes, and strong governance in addition to technology. The companies that are successful adopting SOA will focus on the first three before they address number four.

From the complete report including tables, go to:
http://www.amrresearch.com/

ADVERTISEMENT

Will SOA Reduce the Need for Developers?
From Business Process Institute/David S. Linthicum
If you think SOAs will reduce the need for developers, you're dead wrong. There is a lot of talk about how SOA will significantly lower the need for developers; thus the savings of SOA. This will be accomplished through the promise of reuse that's driving many toward the SOA light. However, I'm not sure we'll see a reduction in development with the advent of SOA, but perhaps a redistribution of talent in the longer term. At the end of the day, the reason for leveraging SOA is agility. Reuse and development savings are a secondary benefit, if they happen at all.

Truth-be-told, we've been considering the demise of the developer during many "hype phases" over the last 15 years. This included the "component development" phase where I heard not one, but three software executives, in keynote speeches, talk about how "applications would be assembled like Ford assembles cars, from pre-built component parts," thus, the need for fewer developers. Same goes for the distributed object phase, the intranet phase, and now here we are in the SOA phase. The issues are exactly the same, with perhaps the technology being a bit more compelling. SOA, with all its rich chewy goodness, has three realities to consider:

First, it's something that really has not happened yet; people are talking about it, and in some instances, playing around with it, but true killer SOAs are few and far between right now. This is due to the fact that it's complex, a huge change in thinking, and those things take years to role out in most enterprises. It's more people issues than technology, by the way. Thus, it's too soon to understand what real savings will be realized from the use of SOAs. Or, in other words, we're a bit early to think about how many developers we can fire.

Second, if history is a teacher, we'll find that we actually need more developers—at least at first—with the promise of savings through reuse in the future. However, we've yet to get reuse right with all of the past opportunities such as object-oriented development, distributed objects, and component-based programming, so we're assuming we'll get it right with this technology, standards, and approaches. I'm optimistic, but I'm also a realist here, understanding that true adoption runs about two years behind the hype.

Finally, the use of services over the Internet will create a new generation of developers who build services for applications they'll never see. They build portions of applications for use in many applications as services, typically delivered over the Web, and that industry will be huge. All you need to do is to look at the growth of the major service providers out there and the emerging Web services marketplaces. So, you guys who get fired by the enterprises will have better jobs in these emerging areas.
We're building SOA for many different reasons, including savings on the development costs, but the primary focus of our SOAs should be on the notion of agility. The end result should be an architecture that's able to change with the needs of the business, and the more your business changes, the more value SOA brings to you. Not to beat a dead horse here, but that's the prize, and where SOA will make its real money for you.

The reduction in development costs will occur at the enterprise levels, but only after SOAs have been implemented and are systemic to the enterprise. This will take some time to accomplish with most businesses—years for many—before you can actually see development costs go down. Indeed, in the short term, development costs will go up.

In the future, more and more development will be occurring outside the enterprise, for consumption by the enterprise. This paradigm will provide even more cost savings, but the need for talented developers will always be there. These developers will be working on other things; service development, and perhaps for other companies, service providers and Web services marketplaces. Making more money, I'm sure….that's a win/win as far as I'm concerned.

David S. Linthicum is an internationally known application integration and service oriented architecture expert. In his career David has formed many of the ideas for modern distributed computing including EAI (Enterprise Application Integration) and B2B application integration, and Service Oriented Architecture (SOA), approaches and technology in wide use today.
http://www.soainstitute.org/

ADVERTISEMENT

Food and Beverage Industry Trends and Issues
From Technology Evaluation/Olin Thompson and PJ Jakovljevic
The food and beverage industry is not without significant pressures. Margins are slim, the demand for products unpredictable, and the demand for customers service significant. These challenges become life-or-death business issues when compounded with rapid turnaround time; extremely short shelf life; a constant influx of new, improved, and differently flavored prepared and packaged products; climate- and weather-related threats; and the high variability of ingredients. Throughout the product life cycle, dynamic environment factors must be carefully managed if a product is to continue to meet customer requirements for quality and cost.

There are also many product categories, and to compete, firms must constantly innovate. They not only have to meet production demands, but they also have to provide true research and development (R&D), additional product quality and safety testing, and the ability to bi-directionally expand the supply chain around the world. Hence, many rightfully think it is one of the most competitive industries. Further on, we will examine the major issues and resulting pressures on food and beverage manufacturers and distributors today, and analyze what these pressures mean to them (and for some cases look at what actions could alleviate the conundrum).

As consumers, we are fickle, and our behavior is ever-changing. We have new preferences and fads dominating our buying decisions. For example, refrigerated meats and poultry products increased their revenue by about 22 percent from 2003 to 2004, while frozen juice fell 15.4 percent, and seafood and dry-packaged dinners declined about 7 percent during the same time. Looking at the consumer demands for the next five years shows us that the rate of change will not slow down, and may even quicken. Furthermore, modern lifestyles and increased disposable incomes in many nations now dictate that food products not only come to us fresh, but also processed and packaged in different ways (as in fully cooked buffalo wings, marinated ribs, or grilled chicken breasts). This is because we want to spend less time in the kitchen preparing food (chopping and dicing) and more time in the active enjoyment of eating and drinking.

Moreover, cultural differences play a big part in how we prepare and cook our foods (according to kosher or vegan requirements, for instance), and distributors should know about the demographic details. Whether demanded by regulations or not, accompanying documentation has to provide ingredient statements, nutrition information, approved claims information, religious certification, details of allergens, and many other customer-specific requirements. As said earlier, we also tend to eat out more, choosing from a variety of restaurants and eating establishments. These trends require food products that are readily available fresh or at different levels of preparation to suit consumer convenience. The industry has to be ever more creative in providing choices that cater to consumer preferences, in order to increase turnover and gain market share.

The consolidation of retailers is a fact, and is a global trend that affects not just groceries but all retail categories. A $400 million (USD) food processor recently commented that the percentage of business it derives from its four largest accounts continues to rise each year. One of its executives summed up this trend by saying, “The small customers are getting both fewer and smaller, while the large ones are getting fewer and bigger.” The company has organized its business around these four major accounts plus “other accounts,” reflecting the concentration of its business. Customer consolidation means fewer decision makers with more power, where each controls greater volume and market coverage. More importantly, a loss of business from a major retailer eliminates the manufacturer from a large segment of the business, with decreasing options to make up the lost opportunity and volume.

Thus, the food and beverage and fast-moving consumer goods (FMCG) manufacturers and distributors that supply the major supermarket retailers share many common business challenges, along with a tough competitive environment. This holds true whether the product is food, drink, personal care, cleaning products, or any other product stocked and sold by supermarkets. The customers—huge, powerful, and demanding supermarkets and retail chains—want products manufactured “to order,” with lead times often measured in hours rather than days or weeks. In fact, in the sector it is routine to deal with delivery lead times shorter than the time actually needed to make the product. To top it all off, this circumstance is often bundled with highly variable forecasts, which shatters any remaining hint of predictability.

As indicated above, most consumer packaged goods (CPG) manufacturers have a few very important customers that account for much of their output, and these customers will usually provide some form of demand projection or forecast. Such customers are so-called channel masters, which control a significant portion of demand. The term channel master describes the role of the major retailers (Wal-Mart, Kroger, Tesco, Kmart, etc.), food service companies (MacDonald's, Wendy's, etc.) and food service distributors (Sysco). When asked to describe channel masters, a vice president (VP) of marketing at a food manufacturer explained, “when they demand something, the manufacturer just has to say 'thank you'.” These channel masters control access to the market. The channel master has the power to determine prices, promotions, placement, etc. Such customers want guaranteed supplies at guaranteed prices, though some specialty products do have seasonal variations. Their preference is to enter into price or supply contracts for periods of up to one year. The food services industry has organized buying groups to negotiate better prices, whereas major retail chains are large enough to negotiate their own pricing.

Furthermore, these exacting customers often demand that their suppliers come up with new product ideas and to run test production, without any guarantee that the new line will be approved. As if that were not enough, the costs of the finished goods are constantly being driven downwards—but consistent high quality is mandatory. Variability is the major enemy of food and beverage manufacturers, whether in terms of the attributes, shelf life, or potency of raw materials, intermediate products, and finished-goods inventory. These dynamics all create significant challenges for process specifications, and can add delays and costs to the process, and impact customer satisfaction if the quality for the products is not maintained within strict tolerances.

To thrive and grow in the sector, food manufacturers will have to increase their value, and differentiate through tighter relationships and with exemplary service for their mighty customers. They will have to address many demands of these customers in a variety of areas, including product quality, sales commitments and product availability, make-to-order (MTO) capabilities, vendor-managed inventory (VMI), on-time delivery, and customer service. For instance, product bundling is a common practice for retailers, as one retailer might want a three-pack kit simply because its competitor sells a two-pack. These requests are most efficiently executed in distribution when they support a final assembly postponement strategy. CPG manufacturers have to measure the most important metric of all: orders delivered on time, in full ).

Channel masters also determine the business methods and technologies necessary to do business with them. To that end, radio frequency identification (RFID) technology has pervaded the consumer and industry news, since channel masters are increasingly setting technical and business process requirements and deadlines for their suppliers. Despite the emerging technology's growing pains and hype, no one doubts that RFID will be an absolute requirement in the future. In fact, the issue is not if, but when.

RFID is just one element of a continuing process on the part of retailers to drive costs out of the supply chain. The food industry was in fact an early innovator in the exchange of electronic communication based on the Wal-Mart electronic data interchange (EDI) model. EDI communication with several business partners has never been easy. For that reason, it is not terribly surprising that other data interchange protocols—such as extensible markup language (XML) messaging and more recently, global data synchronization (GDS) and product information management (PIM)—have emerged.

One fact is certain: the development of Internet-based communications with global supply chain partners will continue to expand as food distributors look for simpler but faster ways to exchange information. It is essential that trading partners and technology providers provide open systems that make it far easier for business applications to exchange information. These technology-driven requirements represent an ever-higher technology hurdle that manufacturers must clear to participate in the retailer's sales success.

For many, these technology demands should benefit both the retailer and the manufacturer. For example, AMR Research has reported that GDS reduces invoice and purchase order errors by more than 40 percent, while decreasing the time to introduce new items by as much as three weeks. Wal-Mart's drive toward “everyday low prices” is not new, but has clearly helped the retailer become the largest retailer in the world. Wal-Mart continues this quest by leveraging both its size and technology to drive costs out of its supply chain. If a manufacturer wants to do business with Wal-Mart, it has to provide more than just product. It must also meet Wal-Mart's technology requirements.

Wal-Mart is not an isolated example, but it is the one we hear about most often. Technology mandates also exist from Marks & Spencer, Tesco, Albertsons, and other major names. Often, a mandate is for the same technology but with individual twists. Meeting Wal-Mart's RFID requirements is not the same as meeting those of Tesco or Marks & Spencer. The manufacturer needs the ability both to meet the technology requirement and to tailor its response to the demands of the individual retailer. In fact, since every major customer may have its own way of managing sales order entries, the supplier's back-office or enterprise resource planning (ERP) system must be sufficiently flexible and workflow-enabled to support the user's particular method of managing customer orders. A midsized food company recently had an introductory meeting with buyers from a major retailer. A key part of the meeting consisted of the retailer probing into the food company's ability to meet the retailer's technical needs. It was clear that if the food company could not jump over the retailer's technology hurdle, no second meeting would be necessary.

Retailers continue to push other business practices that cut costs and increase product availability, such as point of sale (POS) information to help manage restocking by examining sales and stocking levels for generating sales orders and delivery schedules, for both short- and long-term delivery plans. This, in turn, should help food distributors with the call-offs against the customer's supply contracts, predicting where there might be shortfalls and overruns; food distributors should use this information to notify suppliers of any changes in their delivery schedules. With those objectives in mind, the channel masters insist on tighter shipping schedules. This yields fewer inventories across the supply chain, which reduces cost and also results in less stock handled, which in turn reduces labor and damage. Product availability or the elimination of out-of-stocks has a major financial impact on both retailer and manufacturer. A supply chain executive at Procter and Gamble (P&G) says of the impact of retail out-of-stocks, “retailers on average lose the sale 41 percent of the time, while P&G loses 29 percent of the time.”

Indeed, with a reported average retail out-of-stock rate of about 7 percent, availability is a huge issue affecting manufacturers, distributors, and retailers. The major retail chains dictate highly demanding service levels and delivery requirements, and expect zero errors. Their turnover volumes are so large that they often source the same products from several different food distributors. If a supplier's performance dwindles, the retail chain might suspend the order call-offs and switch to another supplier for a month or two. There are no guarantees: the major food retailers have all the power, so it is essential to establish a supply operation to support the “right the first time, every time” guiding principle. Most food and beverage manufacturers operate on relatively thin margins, and with the added overhead of retailer and regulatory compliance, the need to minimize rework becomes critical. For most companies, small percentages of rework translate into significant cuts into profits, and executing processes right the first time is vital to survival and growth.

Because of the tight time scales involved, manufacturers have to interpret forecasts astutely in order to set the production processes in motion, and order entry has to be very closely coupled with forecasting, demand management, and manufacturing planning. The fast-moving food and consumer goods industries were the primary innovators of efficient consumer response (ECR). This practice enables retailers to use vast databases of sales information to analyze customer buying patterns and predict future product and packaging requirements. Collaborative planning, forecasting, and replenishment (CPFR) is another industry initiative that enables companies along the supply chain to work together via the Internet to develop a single, more accurate demand forecast, and to create a plan for delivering product to meet that demand. This information is useful for food producers and growers to plan product strategies.

The APICS Dictionary (eleventh edition) defines CPFR as “a collaboration process whereby supply chain trading partners can jointly plan key supply chain activities from production and delivery of raw materials to production and delivery of final products to end customers. Collaboration encompasses business planning, sales forecasting, and all operations required to replenish raw materials and finished goods….”

CPFR is considered a standard, endorsed by the Voluntary Inter-industry Commerce Standards.

In any case, dealing with a channel master means increased volume and revenue, but it means increased complexity and cost of customer service. With tight margins throughout the industry, what does doing business with a channel master mean to the manufacturer's bottom line?
.
A form of consolidation comes from food distributors. Many food distributors act as commodity brokers, negotiating annual supply contracts for major retail chains for a range of food products. Often, these are “own label” or “private label” products that are sourced from several different growers or food processors around the world to guarantee a year-round supply. Brands play a major role in the food industry. Stores count on brands to help promote their stores, and feel comfortably certain that consumers prefer branded products to “unknown products.” Grocery stores will typically carry two or three brands in a category, with one of the brands often being the grocery store's own brand, a known store brand, or a private label. If a manufacturer is not able to gain shelf space due to the limited number of brands being carried, it cannot sell their products at all through that retailer. The existence of private label or store brands yields a business opportunity for manufacturers. Most of the private label products are produced by manufacturers who package these products with the retailer's label. For some retailers, a large portion of their sales come from private label products. For example, half of Wal-Mart's grocery sales are from store brands. At Kroger, that number is 24 percent, while Safeway reports that 23 percent of its sales are store brands.

These products are processed and packaged to precise specifications, and containerized for shipment. A resulting common occurrence is that canned products will be stored as “bright stock,” meaning they are simply cans without labels. Then, as demand is established, the cans are run through a labeling operation to give them a name brand or store brand label, depending on the order. Some containers might be shipped directly to a customer's own distribution center (DC), whereas others are shipped to a distributor's warehouse or to public warehousing. The logistics planning, documentation, and quality of the product must be precise if costs are to be kept under control. If the quality is not up to standard and the consignment is rejected, the food distributor has the problem of replacement, re-labeling, and disposal on the secondary market, almost surely at a loss.
For the complete report and related research, go to:
http://www.technologyevaluation.com/


Click here to subscribe or renew your subscription to Global Logistics & Supply Chain Strategies magazine