On-demand gets down to business
Supply chain agility concepts, consulting engagements bring gains for NIBCO
By Roberto Michel, senior contributing editor -- Manufacturing Business Technology, 1/1/2005 12:00:00 AM
The most demanding thing about the on-demand business concept is its sheer scope. Since the philosophy targets greater business agility, it potentially maps back to many parts of the enterprise, making a singular path to it elusive. But that doesn't mean the concept lacks tangible examples.
At NIBCO, an Elkhart, Ind.-based manufacturer of flow-control products, on-demand entails bringing together the consulting expertise and algorithms needed to recharge company decision support for demand-driven manufacturing.
"For us, an on-demand supply chain means the establishment of a demand-pull methodology in which we have the right products in the right place to satisfy our customers' requirements on time," says John Hall, NIBCO's director of supply chain systems.
The foundation for NIBCO's operations is an ERP system from SAP, and Business Warehouse (BW), SAP's data warehouse solution. While the ERP system has been a success, inventory optimization for NIBCO's demand-pull operations was still being done in spreadsheets and remained disconnected from ERP. That situation changed, however, after NIBCO turned to IBM.
IBM's Business Consulting Services (BCS) organization improved demand-pull decision support through proprietary algorithms and expertise on how to implement them as part of the SAP environment. The result, say NIBCO executives Hall and Rod Masney, e-commerce and technology manager, is improved inventory planning.
NIBCO is practicing on-demand in the sense of business agility—rather than utility, or on-demand, computing—therefore, NIBCO is running the decision-support tools on its own.
"We are the type of company that believes in the competitive edge provided by technology, but we want to have ownership in end solutions," says Masney. "Just turning it over to IBM and saying, 'Go do this,' doesn't fit our culture. We prefer to work through the learning process so we can own it in the end."
IBM has popularized the on-demand moniker, but other vendors have similar notions about how to make data centers and business operations more efficient, flexible, and responsive. Rival Hewlett-Packard's (HP) Adaptive Enterprise concept, for instance, has some similarities.
Flexible, more responsive business processes are at the center of these concepts. Business process outsourcing, or BPO, can constitute an on-demand initiative, but the concept itself does not require outsourcing, says Tig Gilliam, global supply chain management leader with IBM BCS.
All these semantics can lead to confusion, say analysts. "There is a lot involved in these concepts," says Frank Gillett, an analyst with Cambridge, Mass.-based Forrester Research. "When you hear these terms, you almost have to call a 'delay of game' to assess what's being targeted—is it about enabling business change, or about finding a new way to deliver and pay for IT?"
Gillett says terms such as on-demand or adaptive enterprise, when applied to supply chain transformation, mesh with a Forrester concept called organic business. "There are technologies that support the organic business, but fundamentally, it's a behavior change,"says Gillett. "An organic business strategy requires sharing and integrating common elements in a process, and the ability to extend those processes to your partners."
Agility and variability
"Say a manufacturer is making to forecast," says IBM's Gilliam. "It could adjust its supply chain structure to become make-to-order. There is much involved with that type of transformation in how to collaborate with suppliers, but it's a way to make costs more variable without going to an outsourcing play."
A more variable cost structure, says Gilliam, is desirable under on-demand. After all, why be saddled with a fixed cost structure and asset base—especially in non-core areas—when demand is variable? Wouldn't it be better, Gilliam asks, to be able to ramp processes up or down to meet demand as needed?
BPO, says Gilliam, is a natural fit with this thinking, but can be complemented by other services. "In the procurement space, we've helped companies rework their processes and the way they measure supplier performance," says Gilliam. "As part of that, we may implement technology either hosted or deployed traditionally, but the key is to take all the process components [in procurement] and make them more variable."
IBM itself outsources most of its logistics operations and a good part of its manufacturing, says Gary Smith, VP of global logistics for IBM's integrated supply chain organization. However, he adds, some manufacturing is kept in-house, and IBM works closely with logistics partners to ensure excellent customer service. Says Smith, "If the focus of a transformation is simply cost reduction, then you're going to miss the big opportunity, which lies in improving service to the customer and establishing a competitive advantage."
Stan Lepeak, an analyst with META Group, Stamford, Conn., says managers are wary of such consulting industry "Trojan horses" as being merely BPO by a different name. "Not that outsourcing couldn't be the right answer in a particular situation," says Lepeak, "but there should be a rigorous thought process to form that recommendation, rather than leading with it."
In the zone
NIBCO's inventory planning project did not involve BPO. The company makes a diverse line of products—including metal and plastic fittings, valves, and actuators for multiple markets—and has 12 manufacturing plants throughout the U.S., Mexico, and Poland.
According to Hall, NIBCO operates the plants under a demand-pull approach in which inventories are kept to a minimum, while kanban and bottleneck management techniques handle production. But for the system to work properly, effective inventory planning is necessary at three levels, or "zones," including safety stocks, reorder points, and maximum inventory levels.
IBM's BCS organization provided some formulas to improve planning for these zones—especially in regard to safety stocks. "They brought in some statistical sampling systems—some formulas—and were able to apply those to our products and our demand stream to find the best-fit calculations for our inventory," says Hall.
That work, however, also was integrated with the SAP environment. The consultants identified master data elements that needed to be adjusted in NIBCO's ERP system to support the inventory zone strategy. IBM also helped NIBCO apply the formulas to the BW data warehouse. The result, says Hall, is a range of powerful "what-if?" capabilities in BW that allow leaner operations and better customer service.
"BW optimizes in the sense of planning because of the 'what-ifs?'," says Hall. "With this application, we can see the best course of action to take if volume was to increase by 20 percent on a given product, or decrease by 10 percent. Likewise, we can test what would happen if we moved inventory from one warehouse location to another, or decided to increase the product-availability level by a certain percentage."
In one case, says Hall, BW and its underlying algorithms led to quick calculation of a warehouse's size during a facilities-consolidation project. In another case, the tool determined that trying to increase one product's availability by just 1 percent would have increased costs dramatically without any real impact on customer satisfaction.
With this type of decision support, says Hall, NIBCO is able to account for demand variation while keeping a low-cost inventory structure. "The question I've been asked for years," he says, is 'OK, you guys are so good in supply chain, what is the break-even point between inventory and customer service for this product?' With this tool, I'm able to calculate with confidence where that break-even point is."
As a result of the inventory optimization project, operational in February 2004, NIBCO realized $400,000 in inventory asset savings within three months and projected enterprisewide savings of nearly 13 percent within one to three years via lower inventory levels. The time to compute inventory levels dropped from eight hours to mere minutes under previous off-line techniques.
Consultant landscape
Ultimately, business agility projects vary by company, says Forrester's Gillett, from supply chain reorganization to a restructuring of data centers to make them more supportive of what Forrester calls "organic IT"—functions such as provisioning (i.e., the rapid allocation of resources). "It all depends on what your goals are," says Gillett.
This variety also brings complexity to consulting choices. Large companies like IBM offer the broadest range of capabilities—mixing business consulting and data-center expertise, says META Group's Lepeak. "If you look at on-demand as business transformation, that eliminates from the short list the more IT-oriented service providers, but brings in consulting outfits like Accenture, or even a strategic advisory firm such as McKinsey," he says.
These types of providers also partner for solutions, notes Peter Jeffcock, director of marketing for Sun Microsystems' N1 solutions for the data center. Sun, he says, partners with Accenture and Electronic Data Systems to combine improved data-center infrastructure with supply chain agility concepts.
Brian Ferrar, director of worldwide manufacturing marketing at HP, says differentiators for HP include its solutions breadth, as well as 50-percent market share as a platform vendor in SAP environments. Its Adaptive Enterprise strategy, he adds, can involve a range of projects, with priorities identified via a brief advisory engagement called an Agility Assessment Service.
"This service brings a more quantitative approach to business agility concepts," says Ferrar. "Of course, the executives we deal with know how to run supply chains and manage manufacturing, but the strength of this service is the ability to step back, assess the big picture, and set priorities."
Pursuit of a more variable cost structure via outsourcing, hosted applications, or supply chain improvement projects all fit under the banner, so becoming an on-demand business boils down to what's the best fit for each company. NIBCO's Masney, for instance, credits IBM with the insight to leverage NIBCO's existing applications. As Masney sums up: "IBM was able to help us with inventory planning using some intellectual property it had developed, while also driving more value from our SAP investment, and it worked."
