New technologies

Preparing for the Third Act

by Lora Cecere on July 1, 2014 · 1 comment

The curtain is rising on the third act of supply chain planning.

Over the course of the last two decades, we have seen two evolutions of Supply Chain Planning (SCP) software. The first was the rise of Best-of-Breed providers. These first solutions were on the mainframe and with migration to client-server architectures. The market then shifted to include the extended Enterprise Resource Planning (ERP) providers. These solutions bundled Customer Relationship Management (CRM), Supply Chain Management (SCM), and Supplier Relationship Management (SRM) suites into the architectures, but there was a problem.  CRM and SRM functionality did not fit the needs for manufacturing-based companies (CRM was too lightweight. And SRM functionality, while automating indirect procurement, did not address the larger needs to automate direct material purchasing for a manufacturer.) We now know that focused, Best-of-Breed solutions delivered greater value.

So as companies start to assess the shifts in the market, here I share some tips and lessons that I learned the hard way. My goal is to enable you to be more equipped to purchase and select new forms of software for the third act.

Tips for the Road:

A) Cloud. Cloud solutions are being hyped today, but avoid the temptation to buy cloud for the sake of cloud. It is a mistake to try to automate today’s processes in the cloud. Why? The processes are changing. New forms of software provide new opportunities. Use this as an opportunity to up your ante and improve your solutions. Instead, opt for the new decision support technologies that are deeper and more specialized.

B) Get Clear on the Goals and Definition of the Architecture. System of Record, System of Differentiation, System of Reference. They all matter. A company needs all three. Build an architectural map to understand how the technologies are coming together. Refine the road map over time as the technologies shift and new capabilities become available.

C) Avoid the Hype, and Buy Consistently with Your Risk Profile. When you buy technologies, it could mean your job. If it goes well, you will be a hero. If does not go well, it can mean your job. Go slow and make the right investment, understanding the risk profile of your company. Typically, companies fall into the categories of early adopters, followers, late adopters, and laggards. If you are a laggard, don’t try to force the company to buy the newest software as a co-development partner.

Shifts in the Market.  My Predictions.

As the software market shifts, here are my predictions:

1)  Traditional Solutions Lose Steam.  JDA and Oracle become less significant in the supply chain planning market for different reasons. JDA has used the maintenance stream from customers as an annuity income base with very little innovation into manufacturing applications. While there has been some funding of retail applications, customers are disappointed.  As a result,  JDA is losing ground in the manufacturing sector, and lacks the visionaries to build the right products for the third act. The investment in flowcasting lacks the depth of analytics to rekindle market interest. (Distribution-centric industries are not all pull. The flows are a combination of push and pull based on demand shaping programs. As a result, flowcasting may be a good tool for turn-based volume, but lacks the depth of analytics to help with promoted goods and new product launch.) In a similar vein, we believe that the legacy category management technologies that JDA has made a lot of money on, will become obsolete.

2) Demand Signal Repository Vendors Redefine Loyalty, Assortment, Category Management and Digital Path to  Purchase. The downstream data technology market is too small to contain the small and fragmented vendors. As a result, look for these technology providers to start to redefine loyalty, category management, and assortment planning. They will soon become a competitor for JDA, and there will be several roll-ups and consolidation plays as this market rationalizes.

3) SAP Stumbles and Then Succeeds. SAP is an innovation copycat in the supply chain space. The forced HANA rewrite of APO will open up the market to new technology providers. It will be good news for the Dutch optimization vendors like OM Partners, Ortec, and Quintiq, and the technology vendors sitting on the sidelines like Kinaxis, Logility, ToolsGroup, et al. This is a great time for Kinaxis to redefine their solution for distribution-intensive industries. Network design technologies like Llamasoft and Solvoyo will define a new space for the design processes of the supply chain. (A new job description, Supply Chain Architect, will evolve.)

4) CRM and SRM Will Be Redefined for Manufacturers. With the evolution of unstructured data mining, and new forms of analytics for a cognitive supply chain, CRM and SRM will be redefined. Today, the ends of the supply chain are weaker than the center functions. The traditional frameworks for applications will be redefined. Get ready to draw new maps.

5) B2B Network Players Will Do Well. Solutions offering community, applications and canonical integration layers will do well in the third act as we start to build the extended supply chain. Expect that there will be consolidation and buy-outs of the players, but investments in these technologies will continue to drive ROI.

Lessons Learned from the First Two Acts. Follow the Money:

1) Understand the Funding Cycle. Before purchasing, ask how the vendor is financed. The answers usually fall into five categories: Private (Bootstrap start-up, angel investors, Venture Capital 1st Round, Venture Capital 2nd Round) and Public. If the funding is through venture capital firms understand the governance models and listen carefully to how the company plans to evolve.  Ask the question, “When you need to “turn the capital,” what are your exit strategies?”  Essentially, every five to ten years, investors in a technology firm want their money out of the firm, and the technology company will have to ‘turn the capital’ or seek new investors to buy out the original investors. When this happens, the technology company is vulnerable. They may not find new investors, or the new investment team may want to drive a change in investment strategy. Understand these cycles, and help the vendor to navigate the market.

2) Partnerships Are Marketing Hype. Partnerships in the software market should never be part of the buying decision. They are fleeting: coming and going at will and adding no real value. Companies in the software market should never view a partnership as adding strategic advantage. This is especially true of large technology vendors like IBM, Oracle and SAP. Partnerships take three definitions. Embedded technology partnerships, go-to-market partnerships where the deal is finalized on a common contract, and marketing partnerships. In the first two acts of the evolution of the software planning market, they added little value.

3) Consultants Buying Software Companies Are the Kiss of Death. I know of no instance where a consulting partner buying a software company has been good for the buyer of software. While the marketing message may sound good running a software company and managing a consulting company are distinctly different skill sets.

4) Public IPO. After a public IPO by a software company, expect employee turnover. If your software company is going through an IPO, ensure that you have clarity of key contacts for yourself moving through the IPO. Stay close to the vendor through the process.

5) Maintenance. In your work with the software vendor, understand where your maintenance dollars are being spent. Maintenance was designed to deliver against three promises for the buyer:  call–center support, bug fixes, and software upgrades and evolution. It is important for you to keep your pulse on innovation. In the discussions with your technology provider get a clear understanding of where the maintenance dollars go and what is tagged for innovation. When markets consolidate, the maintenance dollars, unfortunately, become an annuity stream for the new owners, and the rate of innovation slows down.

6) Before You Engage. Understand How You Are Going to Buy. A problem that I see over and over again is that companies are not clear how they are going to make a decisions when they start the process of evaluating software. Spend time and get clear on how you are going to buy. Avoid circular arguments and put some methodology in place before you contact the technology providers.

7) Software Sales Is Hard. While the salesman working the deal with you is getting paid well, usually a commission-based position can be $250,000 to $1.5 million, they are well-trained in strategic selling skills. What does this mean? They work the deal. Deal cycles are long, and they do not work many deals simultaneously. They play to win. As part of strategic selling methodologies, they are trained to pit team members against other team members, and change the game by going up in the organization to sway the executive team. In your work with software sales teams, out-deal the deal. Beat the team at their own tactics. Invest in reading books like Hope Is Not a Strategy, and help your team to weather the storm.

8) Software as a Service. Where possible, try to buy software as a service (SaaS) technology. This type of purchase enables companies to have more stickiness with their technology provider. The relationship is based on the term, and the software vendor is seeking to make the buyer happy so that they will renew. There is more incentive in a software-as-a-service deal to drive value. However, not all types of software are well-suited for SaaS. Heavy optimization software is not a good candidate for cloud deployment.

9) Remember Why Buying Software Still Makes Sense.  The software market is predicated on a couple of belief statements that I think are still true. The first is that a company is vulnerable with custom code. Software programmers come and go, and manufacturers are not developers. Buying software has its place in your strategy. Just as you buy, remember why.

I welcome the third act. I feel that supply chain management software is ready for a redefinition. I say, “Bring it ON!” Are there any tips and insights that you think that I missed. As always, I look forward to your feedback.

Do No Harm…

by Lora Cecere on June 16, 2014 · 0 comments

 

“…I will apply dietetic measures for the benefit of the sick according to my ability and judgment; I will keep them from harm and injustice….

…If I fulfill this oath and do not violate it, may it be granted to me to enjoy life and art, being honored with fame among all men for all time to come; if I transgress it and swear falsely, may the opposite of all this be my lot.”

—Translation from the Greek by Ludwig Edelstein. From The Hippocratic Oath: Text, Translation, and Interpretation, by Ludwig Edelstein. Baltimore: Johns Hopkins Press, 1943.

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Today, nine out of ten supply chains are stuck.  Despite two decades of advancement in supply chain technologies, companies are struggling to gain balance at the intersection of operating margin, inventory turns and case fulfillment. Market volatility is increasing and supply chains can respond, but they cannot sense. They are slow to adapt.

Over the course of the last year, I have written about this extensively. The research that I have conducted has enabled me to look at this holistically. For me, this has been discovery.

I am an old gal. Like an artifact, I have kicked around in the supply chain space since the 1980s. I believed that the first generation of supply chain systems would improve operations to a greater degree than actually happened. As an analyst, I had predicted great things that did not happen. Recently, I did a mea culpa. I am sorry.

As a result, I am trying to be more careful to not overhype the market. When I left AMR Research I invested over 400K in building a database of supply chain financial ratios to correlate supply chain results. My goal is to understand the impact of technologies and processes. It is easier said than done. After three years of research, I have just refined the methodology to start to pull the trends.

I have learned that supply chain systems are more complex than I originally thought, and that the relationships between supply chain metrics are nonlinear. I have also learned that you need a large data pool to derive the type of analysis that I want to publish. It takes more than one or two respondents from a company.

I need to finish the work, but in the process—like the Hippocratic Oath above—I want to do no harm.

Why It Matters

Today, we have a number of burning platforms. Recently, I spoke to a major European retailer that lost 5% of their grocery revenues to Amazon in the first quarter of 2014. It is clear to them that Amazon is going to be anything that they want to be, and that they need to defend their turf. In a similar vein, a major 3PL that I spoke to last week at Eye for Transport is considering discontinuing the traditional storage of spare parts and initiating a new service to do 3D printing of parts on demand. There are many tipping points happening together, and companies want to know what can drive the greatest value.

What I See in the Data

In my work on the Supply Chain Index, I see that companies I recognize as doing network design well are rising faster on the list of the Supply Chain Index work. The network design technologies have changed a lot in the last decade. (I sometimes wonder if I should create a new class of technologies for the network design tools because they have changed so much.) The older tools from CAPS Logistics, SNO from Oracle, and Manugistics Network Planning are giving way to new technologies like the Logictools product (purchased from IBM), the Solvoyo product for concurrent planning, the Quintiq technology for concurrent optimization, and the Llamasoft technology platform for optimization and simulation.

These technologies are applicable to solve many problems. These tools allow us to look at sell, source, make, and deliver together. They also enable the evaluation of networks for both sales and procurement relationships to optimize the flows upstream and downstream. The technologies enable the evaluation of both volumetric flows and cost.  And optimization, as well as simulation, can now be done together.

I am a big fan of the use of these types of technologies. The work on the Supply Chain Index shows me that the companies that I consider to be the most mature in the use of these technologies—General Mills, Intel, Cisco, and Seagate—are outperforming their peers. Is it coincidence? I don’t think so. I think that it matters.

Next week I will be speaking at the Llamasoft Summercon conference (follow this link to see the slides). On October 15th, I will be speaking on the Qunitiq World Tour in Philadelphia. Along the way, I will be doing more work on network design case studies. In preparation for these speeches, I have recently completed some quantitative research on network design. Here I share a cut of the data.

Figure 1.

Where Would I Start?

In figure 1, from the research, I share the current state of network design usage. As you can see from the data, while companies have increased the frequency of network design work from yearly to quarterly, most of the work is still focused on basic network design. The focus is on physical assets. I feel that the opportunities are in flows. The greatest gap is in the design of supplier and manufacturing networks. I also think that there is a great opportunity for increased focus on flow-path analysis and a shift from optimizing inventory levels to optimizing the form and function of inventory in value networks.

Anyway, in my effort to do no harm, this week, in a series of blog posts, I outline what I would do if I was a supply chain leader managing a company that was stalled at the intersection of inventory turns and operating margin. My first investment would be in network design to holistically design the network. I would not stop with the physical design. Instead, I would look at network flows, the form and function of inventory, cost-to-serve analysis, and the determination of the supplier network. I would infuse it into S&OP, risk management, and supplier development. I would build an expertise system in the Supply Chain Center of Excellence. I believe that it matters. While there are many factors that affect corporate performance, I can see that the leaders in the implementation of network design technologies are rising up the ranks on the Index and outpacing their peers.

If you are interested in some of our other studies on supply chain planning excellence, consider participating in our study on Supply Chain Planning: Is Faster Better. And, in our Digital Manufacturing Study. Both of these studies are slated to close in a week to be available for our July newsletter. Companies participating in the planning study will be able to benchmark the number of planners needed by supply chain complexity and better evaluate the rate of implementation. In contrast, the digital manufacturing study evaluates the rate of adoption of new technologies like The Internet of Things and 3D printing to change manufacturing strategies. As always, when you give to us, we give to you. We never release the names or the individual responses of the respondents, but we always share the results in aggregate and offer a one-hour call for those that want to better understand the data.

All of these studies that we are doing this summer will be showcased in a series of infographics at our upcoming Supply Chain Insights Global Summit on September 10th-11th in Scottsdale, Arizona. We hope to see you there!