Critical to sales, customer service, quality, cash flow, and to a company's very survival, credit and collections is often caught up in a 1950's risk management time warp.

Lots of things have changed since the '50s, besides the color of my hair. One thing that has remained fairly constant though is how most business executives view the credit and collection function.

They Don't Know What They Don't Know

An 18-year-old kid knows everything worth knowing, or so he believes. Most business executives know everything worth knowing about credit and collections, or so they believe.

There are two questions I ask potential clients about their credit and collection operation:

1. How do you measure performance?
2. Do you have usable written policies and procedures?

If clients have any kind of trackable numbers with which to measure credit and collection performance, those numbers are usually tied to average turn-time on the accounts receivable (A/R)—the days sales outstanding (DSO) or collection days index (CDI)—and percent of A/R written off as a bad debt loss (money the customer didn't pay). The same as in the '50s. As for usable written policies and procedures, many of these companies have none; only a few have actually documented the why, what, how, and when. The problem with many of these companies is that they have had the same policies and procedures since the 1950s.

"The new guy learns from the old guy, who learned from the dead guy." (Scott Stratman)

The problem with verbal understandings is that everyone gets to be the policy maker and there are as many policies as there are people. Many companies have a loose collection of forms, memos, and letters that they mistakenly call policies and procedures. They can't hand these so-called policies and procedures to someone new and reasonably expect the person to know how things work.

If you think you have usable policies and procedures, pull them out and see if they answer the following questions:

1.

What is the purpose of the credit function?
2.

What is the goal of credit approval, and does that goal complement the purpose?
3.

What is the goal of collections (delinquent A/R management), and does it complement the purpose?
4.

How is credit approval performance measured, and does it complement the goal?
5.

How is collections measured, and does it complement the goal?

People Forget

Eli Goldratt, in his book The Goal, says people in business forget why they're in business, that they get caught up in the process (details) and lose sight of the purpose (vision). I think Goldratt is too kind. I think many people in business never knew the purpose of what they do to begin with. Recently I was visiting with a chief executive officer (CEO) and his vice president (VP) of purchasing, and I asked the VP what the purpose of his function was. He stumbled around and came up with something about customers' needs and balancing that against various other factors.

If the head of a department can't clearly state why that department exists, what are the chances his people know? Or care?

Considering the costs of extending credit to customers—namely, the additional administrative expenses, the cost of time and money that goes with carrying A/R, and the potential for loss (bad debt)—why should any business extend credit? What is the purpose of the credit function?

Why Credit?

Businesses incur the costs of extending credit terms for the following reasons:

1. It is a customer requirement. These companies are doing business with customers that require that they be given time to ensure they receive what they ordered; they require time to process the bill for payment. If credit terms aren't extended to such customers, the company loses profitable sales.
2. The customer sells downline. Customers add value to the goods or services they buy and then sell downline to their own customers. Such customers require time (credit terms) to add value, make sales, and perhaps to collect their own A/R before they can pay vendors and suppliers. And if credit terms are not extended, profitable sales are lost.
3. It is customary. In some industries, credit terms are customary, which means that other vendors and suppliers (competitors) extend credit terms. If credit terms aren't extended, profitable sales are lost.

The only reason to incur the costs that come with extending credit terms is to get profitable sales that would otherwise be lost.

Measurements over Purpose

How performance is monitored and measured means more than any stated purpose. Remember the first question I ask prospective clients: how are you measuring performance? If they are using DSO and bad debt, they are not measuring for how well the function performs in getting profitable sales; they're measuring for risk. The old comeback to credit being a lubricant of commerce, and allowing for the expanded movement of products and services is, "a sale's not a sale until you're paid." Consider this: If the purpose (vision) of credit is "to get profitable sales that would otherwise be lost," then should not the goal of credit approval be "to find ways of accommodating profitable sales while remaining confident of payment"? Who says we can't have our cake and eat it too? Stop painting credit as "the sales avoidance department" by measuring for what you want—profitable sales.

Factors in Credit Approval

There are three main factors companies consider when deciding to extend credit to a customer:

1. Customer profile and how the customer does business (i.e., process, paperwork, accounts payable [A/P] cycle, etc.).
2. Customer past performance. If they've never paid anyone in the past, chances are real good you won't be the first they will pay.
3. Seller's product value (i.e., the margin on the sale, the current demand for the product or service, and lending company's current capacity).

Based on these factors, the goal is to find ways to maximize sales and minimize risks.

Enforcement of Payment

Why do I hate the word collections when used to describe the management of delinquent A/R? Collections has always been defined as "the enforcement of payment." The problem with this definition is that the vast majority of “past dues” aren't trying to stiff creditors; there are very often good reasons why payment isn't made when due.

A recent survey of 1,550 companies found that, on average, 73 percent of the total past due A/Rs are tied to “something going wrong”: sales and service disputes, wrong shipments, overages or shortages, damages, returns, unissued credits, missing backup, lost paperwork, wrong purchase orders (POs), and on and on. A certain percentage of past dues are using vendors or suppliers as a form of short-term financing (the float), but they're not collection agency material. Other past due customers can't pay when due for good reasons, but will be able to pay in the near future.

It is the very smallest percentage of past dues that are trying to avoid making payment. Past due A/R management is "the process of completing the sale." The goals of delinquent A/R management should be to

1. Keep customers current and buying. Find out what stands between the customer and payment, and resolve the problem so that we get all the repeat business we can (the most profitable sale).
2. Identify early on the small percentage that represents a potential for loss, and control bad debt by limiting further credit sales and by successfully improving on position (personal guarantees, returns, barter, conversion to a promissory note with additional security).

Summary

Lots of things have changed since the '50s. Customers today have more goods and services to spend their money on than ever before in human history. Unlike the '50s, a business today must be concerned with quality. And unlike the '50s, competition is crawling out of the woodwork and out of cyberspace.

Ask yourself two questions:

1. How are you measuring the performance of your credit and collection function?
2. Do you have usable written policies and procedures that support why (the purpose) credit exists?

You may find that you have forgotten a critical link in supply chain management.

Critical to sales, customer service, quality, cash flow, and to a company's very survival, credit and collections is often caught up in a 1950's risk management time warp.

Lots of things have changed since the '50s, besides the color of my hair. One thing that has remained fairly constant though is how most business executives view the credit and collection function.

They Don't Know What They Don't Know

An 18-year-old kid knows everything worth knowing, or so he believes. Most business executives know everything worth knowing about credit and collections, or so they believe.

There are two questions I ask potential clients about their credit and collection operation:

1. How do you measure performance?
2. Do you have usable written policies and procedures?

If clients have any kind of trackable numbers with which to measure credit and collection performance, those numbers are usually tied to average turn-time on the accounts receivable (A/R)—the days sales outstanding (DSO) or collection days index (CDI)—and percent of A/R written off as a bad debt loss (money the customer didn't pay). The same as in the '50s. As for usable written policies and procedures, many of these companies have none; only a few have actually documented the why, what, how, and when. The problem with many of these companies is that they have had the same policies and procedures since the 1950s.

"The new guy learns from the old guy, who learned from the dead guy." (Scott Stratman)

The problem with verbal understandings is that everyone gets to be the policy maker and there are as many policies as there are people. Many companies have a loose collection of forms, memos, and letters that they mistakenly call policies and procedures. They can't hand these so-called policies and procedures to someone new and reasonably expect the person to know how things work.

If you think you have usable policies and procedures, pull them out and see if they answer the following questions:

1.

What is the purpose of the credit function?
2.

What is the goal of credit approval, and does that goal complement the purpose?
3.

What is the goal of collections (delinquent A/R management), and does it complement the purpose?
4.

How is credit approval performance measured, and does it complement the goal?
5.

How is collections measured, and does it complement the goal?

People Forget

Eli Goldratt, in his book The Goal, says people in business forget why they're in business, that they get caught up in the process (details) and lose sight of the purpose (vision). I think Goldratt is too kind. I think many people in business never knew the purpose of what they do to begin with. Recently I was visiting with a chief executive officer (CEO) and his vice president (VP) of purchasing, and I asked the VP what the purpose of his function was. He stumbled around and came up with something about customers' needs and balancing that against various other factors.

If the head of a department can't clearly state why that department exists, what are the chances his people know? Or care?

Considering the costs of extending credit to customers—namely, the additional administrative expenses, the cost of time and money that goes with carrying A/R, and the potential for loss (bad debt)—why should any business extend credit? What is the purpose of the credit function?

Why Credit?

Businesses incur the costs of extending credit terms for the following reasons:

1. It is a customer requirement. These companies are doing business with customers that require that they be given time to ensure they receive what they ordered; they require time to process the bill for payment. If credit terms aren't extended to such customers, the company loses profitable sales.
2. The customer sells downline. Customers add value to the goods or services they buy and then sell downline to their own customers. Such customers require time (credit terms) to add value, make sales, and perhaps to collect their own A/R before they can pay vendors and suppliers. And if credit terms are not extended, profitable sales are lost.
3. It is customary. In some industries, credit terms are customary, which means that other vendors and suppliers (competitors) extend credit terms. If credit terms aren't extended, profitable sales are lost.

The only reason to incur the costs that come with extending credit terms is to get profitable sales that would otherwise be lost.

Measurements over Purpose

How performance is monitored and measured means more than any stated purpose. Remember the first question I ask prospective clients: how are you measuring performance? If they are using DSO and bad debt, they are not measuring for how well the function performs in getting profitable sales; they're measuring for risk. The old comeback to credit being a lubricant of commerce, and allowing for the expanded movement of products and services is, "a sale's not a sale until you're paid." Consider this: If the purpose (vision) of credit is "to get profitable sales that would otherwise be lost," then should not the goal of credit approval be "to find ways of accommodating profitable sales while remaining confident of payment"? Who says we can't have our cake and eat it too? Stop painting credit as "the sales avoidance department" by measuring for what you want—profitable sales.

Factors in Credit Approval

There are three main factors companies consider when deciding to extend credit to a customer:

1. Customer profile and how the customer does business (i.e., process, paperwork, accounts payable [A/P] cycle, etc.).
2. Customer past performance. If they've never paid anyone in the past, chances are real good you won't be the first they will pay.
3. Seller's product value (i.e., the margin on the sale, the current demand for the product or service, and lending company's current capacity).

Based on these factors, the goal is to find ways to maximize sales and minimize risks.

Enforcement of Payment

Why do I hate the word collections when used to describe the management of delinquent A/R? Collections has always been defined as "the enforcement of payment." The problem with this definition is that the vast majority of “past dues” aren't trying to stiff creditors; there are very often good reasons why payment isn't made when due.

A recent survey of 1,550 companies found that, on average, 73 percent of the total past due A/Rs are tied to “something going wrong”: sales and service disputes, wrong shipments, overages or shortages, damages, returns, unissued credits, missing backup, lost paperwork, wrong purchase orders (POs), and on and on. A certain percentage of past dues are using vendors or suppliers as a form of short-term financing (the float), but they're not collection agency material. Other past due customers can't pay when due for good reasons, but will be able to pay in the near future.

It is the very smallest percentage of past dues that are trying to avoid making payment. Past due A/R management is "the process of completing the sale." The goals of delinquent A/R management should be to

1. Keep customers current and buying. Find out what stands between the customer and payment, and resolve the problem so that we get all the repeat business we can (the most profitable sale).
2. Identify early on the small percentage that represents a potential for loss, and control bad debt by limiting further credit sales and by successfully improving on position (personal guarantees, returns, barter, conversion to a promissory note with additional security).

Summary

Lots of things have changed since the '50s. Customers today have more goods and services to spend their money on than ever before in human history. Unlike the '50s, a business today must be concerned with quality. And unlike the '50s, competition is crawling out of the woodwork and out of cyberspace.

Ask yourself two questions:

1. How are you measuring the performance of your credit and collection function?
2. Do you have usable written policies and procedures that support why (the purpose) credit exists?

You may find that you have forgotten a critical link in supply chain management.

Managers are finding creative ways to mitigate supply chain costs while maintaining operational efficiency. New approaches, technologies, and methodologies are aiding with these cost-cutting measures. Use of a third party logistics provider (3PL), radio frequency identification (RFID) rentals, and attribute-based demand planning can drastically reduce supply chain costs and increase customer satisfaction.

This article will define those strategies and examine methods of cost reduction within the supply chain.

Definition of a Third Party Logistics Provider

The use of a 3PL has become a cost-effective way for small to medium businesses (SMBs) to compete against larger organizations. A 3PL charges for storage, labor, technology, and integration, or a combination of these services. This type of model enables a company to operate a virtual warehouse cycle without the physical entity (however, a company that uses a 3PL always owns the inventory being stored). There are several service options that can be incorporated within a 3PL arrangement. The most common business model within this structure is to house, pick, pack, and ship the items through a third party supplier.

Often, 3PLs receive the information from the original vendor, process the order, and drop-ship the products directly to the customer with the original company's packaging and shipping labels. This enables the original company to better compete with larger or more efficient companies within the industry. An SMB can now offer a wide range of products at reasonably lower prices than the large retailers, since a potential advantage is the ability to use an existing infrastructure. Services like storage (especially for controlled food items, pharmaceutical materials, and hazmat, which may all require specific conditions), picking of the products, and integration of the 3PL system into the vendor's own system (for efficient order processing, consolidation, and shipping) are already in place, and can handle the additional services required.

An example of this model is Amazon.com. Its Canadian operations are totally handled by a 3PL (Progistix), yet it competes with Indigo Books & Music. Indigo operates a full warehouse operation and has many brick and mortar stores. This illustrates the success and gains that an efficiently executed 3PL model can bring.

However, an obstacle to consider for the 3PL model is lack of inventory control. The company to whom the inventory belongs has no visibility into the management and execution of fulfillment of product to its customers. The originating company cannot easily track the data generated from the purchase transaction, as this information does not belong to the primary company—which means that it has difficulty in tracking total units sold at a particular time. This causes further planning and procurement headaches, since information is not up to date. Demand planning, sales forecasting, and inventory replenishment are compromised as a result. This disadvantage is usually a determining factor that motivates many companies to keep their supply chains within the organization.
RFID Outsourcing

A volatile and constantly changing RFID market is opening the door to flexibility for SMB manufacturers and retailers. There are several concerns that are addressed through this model: a full RFID implementation may be too cost-prohibitive; the organization may not have the resources to complete a forced mandate pushed down from key suppliers; or suppliers might require compliance in a short time span that means the organization cannot commit to a full RFID implementation. From the resource, cost, and expertise standpoint, this model is useful.

RFID rental companies have gained popularity in the market, as they can offer a whole or partial RFID solution. Companies in the RFID space offer the rentals of tags, interrogators, encoders, and even middleware. Most companies within this market offer consulting on RFID implementations, and can rapidly comply with mandates. Some even offer supplier integration to external trading partners for full supply chain collaboration. The expertise gained through knowledgeable partners can prove very valuable in avoiding common mistakes relating to the implementation. Issues with tag placement, inconsistent reads, and data interpretation can be avoided because of the experience the partner will have acquired from past projects. The data integration and aggregation from the RFID system can be interpreted by the partner for corporate consumption, and be formatted correctly for input to the enterprise resource planning (ERP) system. The partner will advise the customer on how to manage and further understand the power of the new information.

This model can assist in planning, testing, and invoking a pilot program for the organization. With this option, an organization can also lease equipment and upgrade when new technology becomes available without going through significant capital expenses. The difficulties with this model must be weighed effectively to achieve maximum gain. There are a few drawbacks to consider if this model is pursued. When selecting an RFID outsourcing solution, always ensure there is an exit strategy built into the contract. If, for whatever reason, the company needs to change strategy or to find a more cost effective solution, there should be a way out of the current agreement. This has to be addressed by the vendor receiving the outsourced product or services. It is not usual practice for RFID outsourcers to issue an opt-out clause, so the vendor must specify that there is an equitable way out of the contract should conditions change.

Also, if supply strategy should change, there are many logistics and financial issues to deal with if the RFID component is outsourced. The organization possibly may not have planned for the implications of having these services returned to an in-house process. Implications the organization will have to consider include the acquisition cost of new infrastructure, hardware, and software; integration; compatibility with current systems; and functional and technical resources. Further to this, physical acquisition of warehouse space and labor, and the resources to execute the handling component if products are involved, need to be considered. With each of these tasks, there are several steps involved to execute each procedure, which can consume additional time, resources, and budget if not planned for accordingly.
Attribute-based Demand Planning

The goal of a supply chain is to operate at the least possible dollar amount invested in inventory while maximizing efficiency and adaptability to changing customer demands. An approach to reducing the size of the chain is to reduce the amount of inventory within that chain. Reducing inventory can lead to recovered monies that can be applied to the bottom line. A method of doing this is attribute-based demand planning. This is a variation of the just-in-time (JIT) methodology for inventory reduction. Attribute-based demand planning is defined as the granular differentiation of product, with additional products or services added to products in order to increase value or to minimize the total inventory carried.

Attribute-based demand planning can achieve several benefits:

*

Increased selling price (and gross revenue) for specialty products arises from the specific requirements that can be added to the items for specific consumption, location of manufacture, and specifications of raw materials. An example of this is a diamond company. The raw and uncut diamond is the base product that is in inventory. A customer can request a specific cut, such as a box cut. The company will then schedule the resources for this operation (for both labor and machinery) to be completed. With the value-added component of providing a polished box cut stone, the company can charge a higher selling price to the consumer.
*

Product differentiation is enhanced by allowing substitutes. Granularity for product differentiation can reduce inventory costs by enabling more definitive forecasting (for contract negotiations), and a finer level of detail can be used for demand planning.
*

Customer service is improved by having available-to-promise (ATP) and similar products available for sale. With the availability of real-time stock reporting, customer service can give the consumer an accurate picture of delivery time.
*

Inventories are reduced with a product pooling strategy and similar component strategy. By invoking a pooling strategy for inventory, if the finished good requires many similar base components that must be assembled to complete the final product, then the company may use similar parts for completion of the good (as long as it does not make a difference in the finished product).
*

Efficiencies for operation and machine scheduling are increased. By creating a clearer picture of planning, operations can schedule its resources, labor, and machines to complete the job.

Conclusion

There are many approaches to maximizing the efficiency and reducing the costs of a supply chain. One must consider the type of supply chain currently instituted, and closely analyze how these methods can benefit the current structure. It may be useful to follow a road map for supply chain evaluation:

*

Assess the current supply chain and identify all bottlenecks and anomalies.
*

Once identified, create a plan on how these situations can be corrected.
*

Evaluate the options and possible costs, and calculate the return on investment (ROI) for any solutions that may be required.
*

Compute a baseline for the company on key performance indicators (KPIs) that are industry standards. This information can usually be found on industry web sites for specific verticals.
*

Implement the strategies, software, and methodologies that would solve the constraints and bottlenecks.
*

Re-evaluate the supply chain with the new measures in place; re-establish the new baseline with the increased productivity gains.
*

Continue to assess the state of the chain, and improve performance along the entire chain.

The options of 3PL, RFID outsourcing, and attribute-based demand planning can add significant value to the company by saving money, reducing the size of the chain, and even allowing the company to compete with some of the larger players within the space.

The 3PL and the RFID outsourcing options best fit an SMB model. Attribute-based demand planning is best suited for large organizations that require constant product differentiation and that have large supply chains. The physical reduction of total parts carried within the chain will lead to significant savings over the course of the year.

Be cognizant that each step listed in the road map above requires full analysis and execution, and will lead to projects for each task. This rapidly becomes a large endeavor not to be taken lightly. If invoked, the company should plan for time, resources, and lost revenue (from shutdown time).

Managers are finding creative ways to mitigate supply chain costs while maintaining operational efficiency. New approaches, technologies, and methodologies are aiding with these cost-cutting measures. Use of a third party logistics provider (3PL), radio frequency identification (RFID) rentals, and attribute-based demand planning can drastically reduce supply chain costs and increase customer satisfaction.

This article will define those strategies and examine methods of cost reduction within the supply chain.

Definition of a Third Party Logistics Provider

The use of a 3PL has become a cost-effective way for small to medium businesses (SMBs) to compete against larger organizations. A 3PL charges for storage, labor, technology, and integration, or a combination of these services. This type of model enables a company to operate a virtual warehouse cycle without the physical entity (however, a company that uses a 3PL always owns the inventory being stored). There are several service options that can be incorporated within a 3PL arrangement. The most common business model within this structure is to house, pick, pack, and ship the items through a third party supplier.

Often, 3PLs receive the information from the original vendor, process the order, and drop-ship the products directly to the customer with the original company's packaging and shipping labels. This enables the original company to better compete with larger or more efficient companies within the industry. An SMB can now offer a wide range of products at reasonably lower prices than the large retailers, since a potential advantage is the ability to use an existing infrastructure. Services like storage (especially for controlled food items, pharmaceutical materials, and hazmat, which may all require specific conditions), picking of the products, and integration of the 3PL system into the vendor's own system (for efficient order processing, consolidation, and shipping) are already in place, and can handle the additional services required.

An example of this model is Amazon.com. Its Canadian operations are totally handled by a 3PL (Progistix), yet it competes with Indigo Books & Music. Indigo operates a full warehouse operation and has many brick and mortar stores. This illustrates the success and gains that an efficiently executed 3PL model can bring.

However, an obstacle to consider for the 3PL model is lack of inventory control. The company to whom the inventory belongs has no visibility into the management and execution of fulfillment of product to its customers. The originating company cannot easily track the data generated from the purchase transaction, as this information does not belong to the primary company—which means that it has difficulty in tracking total units sold at a particular time. This causes further planning and procurement headaches, since information is not up to date. Demand planning, sales forecasting, and inventory replenishment are compromised as a result. This disadvantage is usually a determining factor that motivates many companies to keep their supply chains within the organization.
RFID Outsourcing

A volatile and constantly changing RFID market is opening the door to flexibility for SMB manufacturers and retailers. There are several concerns that are addressed through this model: a full RFID implementation may be too cost-prohibitive; the organization may not have the resources to complete a forced mandate pushed down from key suppliers; or suppliers might require compliance in a short time span that means the organization cannot commit to a full RFID implementation. From the resource, cost, and expertise standpoint, this model is useful.

RFID rental companies have gained popularity in the market, as they can offer a whole or partial RFID solution. Companies in the RFID space offer the rentals of tags, interrogators, encoders, and even middleware. Most companies within this market offer consulting on RFID implementations, and can rapidly comply with mandates. Some even offer supplier integration to external trading partners for full supply chain collaboration. The expertise gained through knowledgeable partners can prove very valuable in avoiding common mistakes relating to the implementation. Issues with tag placement, inconsistent reads, and data interpretation can be avoided because of the experience the partner will have acquired from past projects. The data integration and aggregation from the RFID system can be interpreted by the partner for corporate consumption, and be formatted correctly for input to the enterprise resource planning (ERP) system. The partner will advise the customer on how to manage and further understand the power of the new information.

This model can assist in planning, testing, and invoking a pilot program for the organization. With this option, an organization can also lease equipment and upgrade when new technology becomes available without going through significant capital expenses. The difficulties with this model must be weighed effectively to achieve maximum gain. There are a few drawbacks to consider if this model is pursued. When selecting an RFID outsourcing solution, always ensure there is an exit strategy built into the contract. If, for whatever reason, the company needs to change strategy or to find a more cost effective solution, there should be a way out of the current agreement. This has to be addressed by the vendor receiving the outsourced product or services. It is not usual practice for RFID outsourcers to issue an opt-out clause, so the vendor must specify that there is an equitable way out of the contract should conditions change.

Also, if supply strategy should change, there are many logistics and financial issues to deal with if the RFID component is outsourced. The organization possibly may not have planned for the implications of having these services returned to an in-house process. Implications the organization will have to consider include the acquisition cost of new infrastructure, hardware, and software; integration; compatibility with current systems; and functional and technical resources. Further to this, physical acquisition of warehouse space and labor, and the resources to execute the handling component if products are involved, need to be considered. With each of these tasks, there are several steps involved to execute each procedure, which can consume additional time, resources, and budget if not planned for accordingly.
Attribute-based Demand Planning

The goal of a supply chain is to operate at the least possible dollar amount invested in inventory while maximizing efficiency and adaptability to changing customer demands. An approach to reducing the size of the chain is to reduce the amount of inventory within that chain. Reducing inventory can lead to recovered monies that can be applied to the bottom line. A method of doing this is attribute-based demand planning. This is a variation of the just-in-time (JIT) methodology for inventory reduction. Attribute-based demand planning is defined as the granular differentiation of product, with additional products or services added to products in order to increase value or to minimize the total inventory carried.

Attribute-based demand planning can achieve several benefits:

*

Increased selling price (and gross revenue) for specialty products arises from the specific requirements that can be added to the items for specific consumption, location of manufacture, and specifications of raw materials. An example of this is a diamond company. The raw and uncut diamond is the base product that is in inventory. A customer can request a specific cut, such as a box cut. The company will then schedule the resources for this operation (for both labor and machinery) to be completed. With the value-added component of providing a polished box cut stone, the company can charge a higher selling price to the consumer.
*

Product differentiation is enhanced by allowing substitutes. Granularity for product differentiation can reduce inventory costs by enabling more definitive forecasting (for contract negotiations), and a finer level of detail can be used for demand planning.
*

Customer service is improved by having available-to-promise (ATP) and similar products available for sale. With the availability of real-time stock reporting, customer service can give the consumer an accurate picture of delivery time.
*

Inventories are reduced with a product pooling strategy and similar component strategy. By invoking a pooling strategy for inventory, if the finished good requires many similar base components that must be assembled to complete the final product, then the company may use similar parts for completion of the good (as long as it does not make a difference in the finished product).
*

Efficiencies for operation and machine scheduling are increased. By creating a clearer picture of planning, operations can schedule its resources, labor, and machines to complete the job.

Conclusion

There are many approaches to maximizing the efficiency and reducing the costs of a supply chain. One must consider the type of supply chain currently instituted, and closely analyze how these methods can benefit the current structure. It may be useful to follow a road map for supply chain evaluation:

*

Assess the current supply chain and identify all bottlenecks and anomalies.
*

Once identified, create a plan on how these situations can be corrected.
*

Evaluate the options and possible costs, and calculate the return on investment (ROI) for any solutions that may be required.
*

Compute a baseline for the company on key performance indicators (KPIs) that are industry standards. This information can usually be found on industry web sites for specific verticals.
*

Implement the strategies, software, and methodologies that would solve the constraints and bottlenecks.
*

Re-evaluate the supply chain with the new measures in place; re-establish the new baseline with the increased productivity gains.
*

Continue to assess the state of the chain, and improve performance along the entire chain.

The options of 3PL, RFID outsourcing, and attribute-based demand planning can add significant value to the company by saving money, reducing the size of the chain, and even allowing the company to compete with some of the larger players within the space.

The 3PL and the RFID outsourcing options best fit an SMB model. Attribute-based demand planning is best suited for large organizations that require constant product differentiation and that have large supply chains. The physical reduction of total parts carried within the chain will lead to significant savings over the course of the year.

Be cognizant that each step listed in the road map above requires full analysis and execution, and will lead to projects for each task. This rapidly becomes a large endeavor not to be taken lightly. If invoked, the company should plan for time, resources, and lost revenue (from shutdown time).

Globalization and lean manufacturing are realities for today's manufacturers. As the manufacturing network increases and extends across borders, so do the complexities of moving components and tracking these goods, as well as difficulties in delivering the products on time, both to manufacturers and to final customers. This new reality of manufacturing is now facilitated through supply chain management (SCM).

SCM enables today's discrete manufacturers to produce and move goods or components more efficiently, thus arming them with a competitive edge. However, managing compliance, tax laws, internal policies, and contracts between multiple parties can be overwhelming for any manufacturer.

This article focuses specifically on contracts—better known as service level agreements (SLAs)—between multiple parties in the supply chain. It describes what an SLA entails and explains how a discrete manufacturer should negotiate an SLA with the numerous organizations in its supply chain.

Service Level Agreements Defined

An SLA is a contract between two parties that stipulates how one party will provide certain services and support within a given time frame to the other party.

A manufacturer can have multiple SLAs with two types of organizations: 1) suppliers and distributors that provide products to its location(s), and 2) the software provider.

Because supply chains and SCM software are very complex due to the nature of the discrete manufacturing business, SLAs are equally complex. Not only can SLAs be complicated, but a manufacturer might be dealing with multiple SLAs as well. For a manufacturer to not become overwhelmed by all these SLAs, terms must be clearly written out so that all parties involved know what is to be delivered and how. For more in-depth information on supply chains, please see Supply Chain 101: The Basics You Need to Know.

Many software SLAs include a service element in addition to information on how the software will perform, on upgrades, etc. The second element covers the terms of technical support and problem resolution. With this aspect of the SLA, software firms providing the technical support can be heavily fined if they do not respond within the time periods specified in the SLA (known as severity levels). This can bring large financial consequences to individuals involved, and disrupt the flow of business for all parties within the supply chain.

From a business standpoint, SLAs between companies, whether they are suppliers, manufacturers, or distributors, also stipulate the financial repercussions if components are (i) not delivered on time, (ii) defective, or (iii) not delivered at all.

Today, all SLAs must have a basic, fundamental format so that all parties involved know what is expected of them. Table 1 describes these elements.

Foundational Elements of the SLA

To clarify how to negotiate SLAs and minimize the risk of financial loss, Table 1 offers a basic breakdown of an SLA's main components. Subcomponents are identified and explained afterward.

Item	Explanation
1. Establish the names of all parties involved.	This can be multiple partners together, OR the software vendor and the name of the manufacturer. This establishes who all parties involved are, and sets the foundation for the rest of the contract.
2a. Establish service levels from the provider or supplier, and the expectation from the manufacturer's side.	This makes clear to suppliers what is to be delivered, where, and when, OR this will stipulate all the technical deliverables provided by the vendor, and what the manufacturer expects the vendor to provide in terms of features and functionality.
2b. Establish of how the vendor will deliver each level of service, and what the repercussions are to not providing these elements to the manufacturer.	Often, financial repercussions will occur either when products are not delivered on time, OR if technical support is not delivered when critical downtime occurs.
3. Establish all exceptions.	If an exception occurs, all parties will be notified, and roles and responsibilities will be defined.
4. Stipulate any and all changes to the business or the software.	As the business changes, or as more functionality to the software is modified, technical aspects in the SLA will change. This change will have to be followed by what is stipulated in this section.

Table 1. Main components of SLAs.

Subcomponents of SLAs include service availability, mission-critical definitions, and response time—elements that have a direct impact on a manufacturer's bottom line. If the SLA's guidelines for these are not adhered to, not only does the manufacturer lose money, but customers can be affected as well, depending on the industry.

Other items to factor into an SLA include training, outsourcing, implementation, and consulting. These elements can have a large cost associated with them, and negotiating them into the SLA is a crucial aspect executives should keep in mind. In addition, the SLA could include industry stipulations that need to be adhered to, either by conjunction of industry standards, safety regulations, or international laws.

Considerations

Due to the complexities outlined above, many problems can occur within each component of the SLA. Whether the relationship is between manufacturer and supplier or manufacturer and software vendor, difficulties can come about with how components will be delivered, how an implementation will be conducted, or a myriad of other unforeseen situations. The following section outlines some of these issues and tries to "clear the air" in order to ease negotiating and navigating through an SLA.

Three main elements should be addressed even before negotiating each technical element (as described in Table 1): compliance, internal and external policy, and channels of communication.

1. The legal issues of compliance need to be spelled out in an outline format so that when the SLA is being developed, each legal point is addressed, and both parties know that they are complying with both business and governmental law when conducting business.

2. Internal and external policies need to be addressed in the same flavor as is done with compliance issues (point 1 above), in that when negotiations are taking place, both parties know what is expected of them so that business practices will not be compromised.

3. How will communication between all parties take place? Channels of communication need to be established at the beginning of negotiations in order for all elements to fall into place. With regards to a software vendor-manufacturer relationship specifically, if this aspect is not established from the beginning, communication breakdowns will prolong implementation time.

Other challenges that need to be addressed in the beginning stages of negotiating an SLA include the following:

• What capabilities can the software vendor or supplier provide? The capabilities of the software solution or supplier need to be outlined to ensure they match with the manufacturer's business processes, as well as to make certain these capabilities will address the manufacturer's business needs.

• Particular to the software vendor-manufacturer relationship, the scope of the implementation, an overall definition of what is to be done, and who is to be assigned to each task should be addressed in order to clarify each aspect of the implementation and to create a road map. Each member of the implementation team (on each side) will then know exactly what they are responsible for and with whom they will be working.

Consideration Analysis

If both the manufacturer and the vendor follow these basic steps and outline their processes before negotiations begin, many unfortunate events will be happily averted, and a framework will be set in place: if anything goes wrong, processes and the people responsible will have been clearly defined, and the risk of more complications occurring will be minimized.

To be clear, a properly defined and negotiated SLA between both parties should either avert or help to resolve potential problems.

Implications for Both Vendors and Manufacturers

The bottom line is that SLAs help to reduce costs on both sides as well as to minimize the amount of technology used throughout the manufacturing supply chain. Both parties want an efficient and successful implementation or business partnership in order to 1) have the manufacturer's system up and running in as little time as possible, or to have the supplier deliver the necessary goods so that production can continue, and 2) not have the vendor lose time and money by fixing mistakes that could have been avoided if processes had been properly defined.

If the software vendor must continually fix problems and bugs, or if there is a loss of integration between software components and other items, its future projects may be affected in either of the following two ways: 1) the vendor will have less time to dedicate to new projects, having focused so much of its time on the present implementation, or 2) the vendor will receive a negative recommendation from the manufacturer because the vendor took too much time to complete the implementation, thus not winning future bids for software implementation projects.

Suppliers are also subject to the above repercussions. Suppliers within the supply chain that are negligent in providing products on time and within budget can receive poor recommendations from the manufacturers, thus losing bids to supply components to other discrete manufacturing companies.

Such issues can be avoided if every component of the SLA is clearly defined during the negotiation process and closely followed during the implementation—an approach that is in both party's interests. To not do so can result in higher costs for all parties involved.

Items to Negotiate in Technical Support

Between the manufacturer and the software vendor or supplier, the two components most recommended to negotiate are the response time and what constitutes a critical situation. The cost savings of having these two elements in line with the business needs is crucial to prevent financial loss because of unpredicted downtime.

Here are three questions the manufacturer should ask when negotiating with the software vendor or supplier:

1. How is the software vendor or supplier going to deliver these two crucial elements, and how fast are they going to respond?

2. What is the quality of the response? The manufacturer should do some preliminary research on the software vendor's or supplier's history with previous clients before making a selection.

3. How qualified is the software vendor's or supplier's support staff? If the software vendor or supplier is devoted to servicing the manufacturer at any cost, and if it has a proven track record of doing so with past clients, then the manufacturer should take this into consideration, as it is clear the software vendor or supplier places value on minimizing future problems.

Once these questions have been answered to the manufacturer's satisfaction, the manufacturer can expect the benefits that smooth technical support or delivery of goods provide, which include reduced costs, less nonscheduled downtime, and less overall frustration.

The Final Word

By following the steps discussed throughout this article, the process of negotiating a thorough and correct SLA for all parties within the supply chain—whether these parties are software vendors, manufacturers, or suppliers—should be eased. A few other points important to consider during negotiations include

• What service levels are going to be delivered by the providers?

• How are these items going to be delivered?

• In what time frame is each item going to be delivered?

• Who is responsible for each part of the above items in the negotiations?

The SLA allows the software vendor and the manufacturer know what the software solution's capabilities are and if there is room for scalability. If scalability is an option as the manufacturer's business grows, the SLA will outline how this will be dealt with.

An SLA can include multiple organizations within the supply chain so that goods flow easily throughout it. All parties' and key individuals' roles and responsibilities will be clearly defined so that production and movement of goods is quick and efficient.

A final element that needs to be stressed is the importance of responsiveness. If a software vendor has a track record of responding slowly to implementation issues, or if a supplier has a track record of not delivering products on time, the manufacturer must take these factors into consideration, as such poor performance has major (negative) financial implications for the manufacturer.

Globalization and lean manufacturing are realities for today's manufacturers. As the manufacturing network increases and extends across borders, so do the complexities of moving components and tracking these goods, as well as difficulties in delivering the products on time, both to manufacturers and to final customers. This new reality of manufacturing is now facilitated through supply chain management (SCM).

SCM enables today's discrete manufacturers to produce and move goods or components more efficiently, thus arming them with a competitive edge. However, managing compliance, tax laws, internal policies, and contracts between multiple parties can be overwhelming for any manufacturer.

This article focuses specifically on contracts—better known as service level agreements (SLAs)—between multiple parties in the supply chain. It describes what an SLA entails and explains how a discrete manufacturer should negotiate an SLA with the numerous organizations in its supply chain.

Service Level Agreements Defined

An SLA is a contract between two parties that stipulates how one party will provide certain services and support within a given time frame to the other party.

A manufacturer can have multiple SLAs with two types of organizations: 1) suppliers and distributors that provide products to its location(s), and 2) the software provider.

Because supply chains and SCM software are very complex due to the nature of the discrete manufacturing business, SLAs are equally complex. Not only can SLAs be complicated, but a manufacturer might be dealing with multiple SLAs as well. For a manufacturer to not become overwhelmed by all these SLAs, terms must be clearly written out so that all parties involved know what is to be delivered and how. For more in-depth information on supply chains, please see Supply Chain 101: The Basics You Need to Know.

Many software SLAs include a service element in addition to information on how the software will perform, on upgrades, etc. The second element covers the terms of technical support and problem resolution. With this aspect of the SLA, software firms providing the technical support can be heavily fined if they do not respond within the time periods specified in the SLA (known as severity levels). This can bring large financial consequences to individuals involved, and disrupt the flow of business for all parties within the supply chain.

From a business standpoint, SLAs between companies, whether they are suppliers, manufacturers, or distributors, also stipulate the financial repercussions if components are (i) not delivered on time, (ii) defective, or (iii) not delivered at all.

Today, all SLAs must have a basic, fundamental format so that all parties involved know what is expected of them. Table 1 describes these elements.

Foundational Elements of the SLA

To clarify how to negotiate SLAs and minimize the risk of financial loss, Table 1 offers a basic breakdown of an SLA's main components. Subcomponents are identified and explained afterward.

Item	Explanation
1. Establish the names of all parties involved.	This can be multiple partners together, OR the software vendor and the name of the manufacturer. This establishes who all parties involved are, and sets the foundation for the rest of the contract.
2a. Establish service levels from the provider or supplier, and the expectation from the manufacturer's side.	This makes clear to suppliers what is to be delivered, where, and when, OR this will stipulate all the technical deliverables provided by the vendor, and what the manufacturer expects the vendor to provide in terms of features and functionality.
2b. Establish of how the vendor will deliver each level of service, and what the repercussions are to not providing these elements to the manufacturer.	Often, financial repercussions will occur either when products are not delivered on time, OR if technical support is not delivered when critical downtime occurs.
3. Establish all exceptions.	If an exception occurs, all parties will be notified, and roles and responsibilities will be defined.
4. Stipulate any and all changes to the business or the software.	As the business changes, or as more functionality to the software is modified, technical aspects in the SLA will change. This change will have to be followed by what is stipulated in this section.

Table 1. Main components of SLAs.

Subcomponents of SLAs include service availability, mission-critical definitions, and response time—elements that have a direct impact on a manufacturer's bottom line. If the SLA's guidelines for these are not adhered to, not only does the manufacturer lose money, but customers can be affected as well, depending on the industry.

Other items to factor into an SLA include training, outsourcing, implementation, and consulting. These elements can have a large cost associated with them, and negotiating them into the SLA is a crucial aspect executives should keep in mind. In addition, the SLA could include industry stipulations that need to be adhered to, either by conjunction of industry standards, safety regulations, or international laws.

Considerations

Due to the complexities outlined above, many problems can occur within each component of the SLA. Whether the relationship is between manufacturer and supplier or manufacturer and software vendor, difficulties can come about with how components will be delivered, how an implementation will be conducted, or a myriad of other unforeseen situations. The following section outlines some of these issues and tries to "clear the air" in order to ease negotiating and navigating through an SLA.

Three main elements should be addressed even before negotiating each technical element (as described in Table 1): compliance, internal and external policy, and channels of communication.

1. The legal issues of compliance need to be spelled out in an outline format so that when the SLA is being developed, each legal point is addressed, and both parties know that they are complying with both business and governmental law when conducting business.

2. Internal and external policies need to be addressed in the same flavor as is done with compliance issues (point 1 above), in that when negotiations are taking place, both parties know what is expected of them so that business practices will not be compromised.

3. How will communication between all parties take place? Channels of communication need to be established at the beginning of negotiations in order for all elements to fall into place. With regards to a software vendor-manufacturer relationship specifically, if this aspect is not established from the beginning, communication breakdowns will prolong implementation time.

Other challenges that need to be addressed in the beginning stages of negotiating an SLA include the following:

• What capabilities can the software vendor or supplier provide? The capabilities of the software solution or supplier need to be outlined to ensure they match with the manufacturer's business processes, as well as to make certain these capabilities will address the manufacturer's business needs.

• Particular to the software vendor-manufacturer relationship, the scope of the implementation, an overall definition of what is to be done, and who is to be assigned to each task should be addressed in order to clarify each aspect of the implementation and to create a road map. Each member of the implementation team (on each side) will then know exactly what they are responsible for and with whom they will be working.

Consideration Analysis

If both the manufacturer and the vendor follow these basic steps and outline their processes before negotiations begin, many unfortunate events will be happily averted, and a framework will be set in place: if anything goes wrong, processes and the people responsible will have been clearly defined, and the risk of more complications occurring will be minimized.

To be clear, a properly defined and negotiated SLA between both parties should either avert or help to resolve potential problems.

Implications for Both Vendors and Manufacturers

The bottom line is that SLAs help to reduce costs on both sides as well as to minimize the amount of technology used throughout the manufacturing supply chain. Both parties want an efficient and successful implementation or business partnership in order to 1) have the manufacturer's system up and running in as little time as possible, or to have the supplier deliver the necessary goods so that production can continue, and 2) not have the vendor lose time and money by fixing mistakes that could have been avoided if processes had been properly defined.

If the software vendor must continually fix problems and bugs, or if there is a loss of integration between software components and other items, its future projects may be affected in either of the following two ways: 1) the vendor will have less time to dedicate to new projects, having focused so much of its time on the present implementation, or 2) the vendor will receive a negative recommendation from the manufacturer because the vendor took too much time to complete the implementation, thus not winning future bids for software implementation projects.

Suppliers are also subject to the above repercussions. Suppliers within the supply chain that are negligent in providing products on time and within budget can receive poor recommendations from the manufacturers, thus losing bids to supply components to other discrete manufacturing companies.

Such issues can be avoided if every component of the SLA is clearly defined during the negotiation process and closely followed during the implementation—an approach that is in both party's interests. To not do so can result in higher costs for all parties involved.

Items to Negotiate in Technical Support

Between the manufacturer and the software vendor or supplier, the two components most recommended to negotiate are the response time and what constitutes a critical situation. The cost savings of having these two elements in line with the business needs is crucial to prevent financial loss because of unpredicted downtime.

Here are three questions the manufacturer should ask when negotiating with the software vendor or supplier:

1. How is the software vendor or supplier going to deliver these two crucial elements, and how fast are they going to respond?

2. What is the quality of the response? The manufacturer should do some preliminary research on the software vendor's or supplier's history with previous clients before making a selection.

3. How qualified is the software vendor's or supplier's support staff? If the software vendor or supplier is devoted to servicing the manufacturer at any cost, and if it has a proven track record of doing so with past clients, then the manufacturer should take this into consideration, as it is clear the software vendor or supplier places value on minimizing future problems.

Once these questions have been answered to the manufacturer's satisfaction, the manufacturer can expect the benefits that smooth technical support or delivery of goods provide, which include reduced costs, less nonscheduled downtime, and less overall frustration.

The Final Word

By following the steps discussed throughout this article, the process of negotiating a thorough and correct SLA for all parties within the supply chain—whether these parties are software vendors, manufacturers, or suppliers—should be eased. A few other points important to consider during negotiations include

• What service levels are going to be delivered by the providers?

• How are these items going to be delivered?

• In what time frame is each item going to be delivered?

• Who is responsible for each part of the above items in the negotiations?

The SLA allows the software vendor and the manufacturer know what the software solution's capabilities are and if there is room for scalability. If scalability is an option as the manufacturer's business grows, the SLA will outline how this will be dealt with.

An SLA can include multiple organizations within the supply chain so that goods flow easily throughout it. All parties' and key individuals' roles and responsibilities will be clearly defined so that production and movement of goods is quick and efficient.

A final element that needs to be stressed is the importance of responsiveness. If a software vendor has a track record of responding slowly to implementation issues, or if a supplier has a track record of not delivering products on time, the manufacturer must take these factors into consideration, as such poor performance has major (negative) financial implications for the manufacturer.

The success of consumer packaged goods (CPG) supply chains in profitably delivering the right products, to the right place, at the right time, has largely remained theoretical. The focus is still to make planned products at the right times, as opposed to just the right products. This implies a "push" culture, and constitutes excessive focus on volume and capacity use. For too long, linear supply chains have fallen short—in many ways—in terms of delivering the flexibility and customer response needed to achieve superior bottom line results.

CPG companies have also realized that branding strategy alone is not enough, as consumers are more concerned about cost and quality in many categories (particularly for commodity products) than brand. Superstore retailers have developed strong consumer relations, and with their purchasing power are compelling suppliers to deliver higher levels of service. Additionally, the proliferation of store brands is cutting into the sales of traditional brands: gone are the days of the trade-offs where CPG companies sacrificed cost for service, as the need now is to balance and hit the multiple yet important objectives of cost, service, inventories, and quality.

A key area that has the potential to boost enterprise performance, as well as dynamically support new product introduction for customer retention, is the way the company supplies its customers. Gaining visibility and agility across supply channels is vital. Other survival requirements in today's competitive market place include knocking down internal silos; transforming closed-loop supply chains into illuminated open-loop supply networks through unflinching focus on demand; and fostering collaboration with consumers as well as with value chain partners.

Business Challenges in the CPG Vertical

With pressure coming from diverse sources, the limitations in existing CPG supply chains can lead to severe challenges that highlight certain fundamental areas for improvement. But those are not the only difficulties. CPG companies also face specific challenges inherent to the industry.

Decreasing profitability and market share
The one-strategy-fits-all approach within linear supply chains has not been adaptable enough to meet rapid operations that switch between requirements for low-cost/high-volume commodity products and low-volume/high-cost premium products. Typical asset- and cost-focused arrangements have diverted attention from anticipating and responding to unique and niche market requirements, leading to reduced growth and profitability. Also contributing to lost market shares is the intense competition from private label products. Furthermore, some low-growth local brands became targets for acquisition by stronger regional (as well as national) brands, leading to extended supply chains and hence added complexities and cost.

Effective management of promotions and new product introductions
Lack of communication or wider collaboration with retailers and distributors (as well as with internal teams) are significant factors in the less-than-stellar performance of CPG companies with respect to promotions and new product introductions. A number of CPG companies do not have formalized internal stage-gate processes to justify and effectively drive new product demand. Also, companies tend to focus more on initial new product sales (for example, for the first two quarters) and ignore subsequent demand, which then provides only partial insights into product failure or success factors.

Added costs due to regulatory compliance requirements
Regulatory bodies, including the United States Department of Agriculture (USDA), tightly regulate the packaged food and beverage sectors on the following mandates:

• Hazard Analysis of Critical Control Points (HAACP) regulations—quality control records and manufacturing data access

• Occupational Safety and Health (OSHA) requirements—material safety data sheets (MSDS) maintenance, good manufacturing practices (GMP), and safety programs

• country of origin labeling requirements

Increasing power of retailers
By leveraging geographical spread and strong consumer relations, retailers are able to demand more and more from suppliers in terms of lower costs and higher service levels. As with the CPG companies, the retailers are also chasing the twin priorities of constant shelf availability (by synchronizing stock flows to the store) and reduction of excessive in-store stocks and labor, in order to cut total retail supply costs. In spite of a strong focus on reducing out-of-stocks at the shelf, the numbers below indicate an opportunity to bring this metric up, without which both retailers and CPG companies stand to lose business. Channel- and account-specific requirements such as new labels and pallet size, diverse ways of sharing point of sale (POS) data, and (most recently) radio frequency identification (RFID) of products mean extra time, resource, and cost pressures which the CPG companies cannot resist.

Rising inventory
Consumer fragmentation has also driven CPG manufacturers to have wide assortments within categories. With higher service level expectations, most manufacturers have a tendency to build finished goods inventory to be able to respond better. Combined with a "make to plan" business process, inventories of raw materials and work in progress are also at higher levels. While most industry segments have reduced inventory levels gradually with improved supply chain processes, the CPG industry is still saddled with higher inventory and the associated inefficiencies.

Limitations of Traditional CPG Supply Chains

As explained above, CPG companies continue to face pressure on multiple fronts, and are not able to deliver efficiently and flexibly, due to the inherent limitations of the existing supply chains.

Internal silos and closed-loop activity
Instead of taking a holistic view of the supply chain, most companies are more concerned about local metrics and local departments; they lack of broader participation and commitment during critical phases such as forecasting and sales and operations planning. The mind-set is still of firefighting and knee-jerk reactions. Typical examples include manufacturing pushing for volume to keep their metrics of cost per unit and capacity use in control; and sales going out independently and striking promotion deals with retailers and distributors, without properly understanding the supply constraints. The infamous hockey stick effect (see figure 1) is prevalent in many CPG companies, and indicates low supply orientation and disparate management within their own supply chains.

Figure 1. The hockey stick effect.

Lack of flexible processes for dealing rapidly with change
Typically, traditional supply chain management (SCM) strategies and systems work best during steady states, but respond poorly during new product ramp-ups, surge demands, or a short lead time promotion. With shrinking product lifetimes and increasing product mix and distribution channels, traditional supply chains are slow to match the requirements of dynamic product portfolios. Excessive focus on asset or labor use, along with a lack of proactive constraint management practices and dynamic information feedback, combine to slow response times to the inevitable changes in the market place as well as with internal processes.

Traditional supply chains do not consider essential demand signals
The traditional demand indicator of forecasts frozen ahead of time can be too distorted, and does not take into account recent changes in actual demand. This practice, in conjunction with inherent uncertainty in forecasts, can add costs and unwanted inventory for manufacturers.

Using Demand to Drive Supply Networks

Until recently, CPG companies have adopted ad hoc initiatives to control costs and improve service levels, and over time many of these initiatives have been exhausted. Now is the right time to look beyond traditional practices and transform existing supply chains into illuminated and informed supply networks. Companies must start focusing on all forms of demand inputs from retailers, distributors, channel partners, and even end consumers, and use these as a guiding light to steer supply in the right direction and to enlighten its entire supply network with timely information.

In any dynamic system like a supply chain, variability is inherent. Sensing the variability in time and formulating strategies, innovative processes (and the technology to respond quickly to these variations) sets progressive companies apart from the competition. Using demand to regularly modulate the supply process is the new generation of SCM that integrates demand, supply, and product processes across the network of customers and suppliers to balance revenue against cost. It is a system of tightly linked processes and technologies, which not only responds to demand, but which can also reshape demand through solid collaboration with value chain partners in the market place.

Characteristics of the Demand-focused Approach

This approach encourages holistic design of all supply processes and information flows, in order to take care of end consumer demand rather than only the upstream requirements of factories or distribution systems.

Instead of asset-focused supply chains, the demand-focused approach fosters constant communication and correction of deviations between demand, supply, and product processes.

It requires change management and significant rethinking of the way process execution happens, in order to address continuous improvement of business-critical objectives like perfect order rates, operational efficiencies, and overall cost control. Table 1 depicts the differences between the two approaches.

Traditional Demand-focused Excessive focus on cost Balanced multiple objectives Continuous replenishment As-needed on-time replenishment Big batch, high-volume manufacturing Flexible shorter batches in tune with demand Information gaps or segmented processes Fully integrated for complete demand visibility

Traditional	Demand-focused
Excessive focus on cost	Balanced multiple objectives
Continuous replenishment	As-needed on-time replenishment
Big batch, high-volume manufacturing	Flexible shorter batches in tune with demand
Information gaps or segmented processes	Fully integrated for complete demand visibility

Table 1. Traditional versus demand-focused approach within linear supply chains.

Example of Supply Modulation towards Demand

A high product volume/mix CPG company in the southern United States had chronic problems with perfect order rates and operating cost overruns, typically caused by constant changes to the master production schedule, which in turn trickled down to an increased number of production changeovers and labor material mismatch. After years of running segmented processes and focusing on pushing volume out the door (without being able to deliver on the above critical objectives), the company started to look beyond its walls, and formed cross-functional sales-manufacturing teams to realign the supply process.

The team focused on two fronts. The first was tracking and understanding true consumer demand patterns of core products across all channels. This was followed by restructuring batch sizes to develop additional flexibility and minimize impact due to demand variation. By partnering and proactively communicating with retailers and other distributors, the sales team started funneling demand intelligence such as in-store promotion plans and (in some cases) POS information. Additionally, order fulfillment metrics were redesigned and customized across all channels to measure exactly what was important to these customers.

On the manufacturing side, the batch sizes of random medium- to low-volume products were reasonably increased to prevent schedule changes, and the batch sizes of steady high-volume products were reduced and sequenced back-to-back in tune with actual demand, so that batches could be added or removed quickly without causing major changeovers. This raised the short-term quantitative capacity flexibility, and hence responsiveness. Initial results of this process redesign was a sustained 9 percent increase in perfect order rates and a 20 percent setup time reduction due to a lower number of changeovers. Additionally, by slowly gaining trust, the company even began to influence the replenishment plans of large retailers.

Conclusion

CPG companies have no choice but to consistently deliver toward the dual objectives of shareholder and customer value. To profitably meet the expectations of the demanding customer and stay ahead of the competition requires CPG companies to reduce the gap between required and available capabilities. Just being customer-centric can only go so far, and progressive CPG companies are realizing the value of understanding, using, and—most importantly—redesigning processes to be flexible and in tune with true demand. The only way for this to happen is to move out of traditional supply chain practices, and transform into an ecosystem where true demand drives the processes, synchronizes supply, and gradually drives out unwanted costs and inefficiencies.

The success of consumer packaged goods (CPG) supply chains in profitably delivering the right products, to the right place, at the right time, has largely remained theoretical. The focus is still to make planned products at the right times, as opposed to just the right products. This implies a "push" culture, and constitutes excessive focus on volume and capacity use. For too long, linear supply chains have fallen short—in many ways—in terms of delivering the flexibility and customer response needed to achieve superior bottom line results.

CPG companies have also realized that branding strategy alone is not enough, as consumers are more concerned about cost and quality in many categories (particularly for commodity products) than brand. Superstore retailers have developed strong consumer relations, and with their purchasing power are compelling suppliers to deliver higher levels of service. Additionally, the proliferation of store brands is cutting into the sales of traditional brands: gone are the days of the trade-offs where CPG companies sacrificed cost for service, as the need now is to balance and hit the multiple yet important objectives of cost, service, inventories, and quality.

A key area that has the potential to boost enterprise performance, as well as dynamically support new product introduction for customer retention, is the way the company supplies its customers. Gaining visibility and agility across supply channels is vital. Other survival requirements in today's competitive market place include knocking down internal silos; transforming closed-loop supply chains into illuminated open-loop supply networks through unflinching focus on demand; and fostering collaboration with consumers as well as with value chain partners.

Business Challenges in the CPG Vertical

With pressure coming from diverse sources, the limitations in existing CPG supply chains can lead to severe challenges that highlight certain fundamental areas for improvement. But those are not the only difficulties. CPG companies also face specific challenges inherent to the industry.

Decreasing profitability and market share
The one-strategy-fits-all approach within linear supply chains has not been adaptable enough to meet rapid operations that switch between requirements for low-cost/high-volume commodity products and low-volume/high-cost premium products. Typical asset- and cost-focused arrangements have diverted attention from anticipating and responding to unique and niche market requirements, leading to reduced growth and profitability. Also contributing to lost market shares is the intense competition from private label products. Furthermore, some low-growth local brands became targets for acquisition by stronger regional (as well as national) brands, leading to extended supply chains and hence added complexities and cost.

Effective management of promotions and new product introductions
Lack of communication or wider collaboration with retailers and distributors (as well as with internal teams) are significant factors in the less-than-stellar performance of CPG companies with respect to promotions and new product introductions. A number of CPG companies do not have formalized internal stage-gate processes to justify and effectively drive new product demand. Also, companies tend to focus more on initial new product sales (for example, for the first two quarters) and ignore subsequent demand, which then provides only partial insights into product failure or success factors.

Added costs due to regulatory compliance requirements
Regulatory bodies, including the United States Department of Agriculture (USDA), tightly regulate the packaged food and beverage sectors on the following mandates:

• Hazard Analysis of Critical Control Points (HAACP) regulations—quality control records and manufacturing data access

• Occupational Safety and Health (OSHA) requirements—material safety data sheets (MSDS) maintenance, good manufacturing practices (GMP), and safety programs

• country of origin labeling requirements

Increasing power of retailers
By leveraging geographical spread and strong consumer relations, retailers are able to demand more and more from suppliers in terms of lower costs and higher service levels. As with the CPG companies, the retailers are also chasing the twin priorities of constant shelf availability (by synchronizing stock flows to the store) and reduction of excessive in-store stocks and labor, in order to cut total retail supply costs. In spite of a strong focus on reducing out-of-stocks at the shelf, the numbers below indicate an opportunity to bring this metric up, without which both retailers and CPG companies stand to lose business. Channel- and account-specific requirements such as new labels and pallet size, diverse ways of sharing point of sale (POS) data, and (most recently) radio frequency identification (RFID) of products mean extra time, resource, and cost pressures which the CPG companies cannot resist.

Rising inventory
Consumer fragmentation has also driven CPG manufacturers to have wide assortments within categories. With higher service level expectations, most manufacturers have a tendency to build finished goods inventory to be able to respond better. Combined with a "make to plan" business process, inventories of raw materials and work in progress are also at higher levels. While most industry segments have reduced inventory levels gradually with improved supply chain processes, the CPG industry is still saddled with higher inventory and the associated inefficiencies.

Limitations of Traditional CPG Supply Chains

As explained above, CPG companies continue to face pressure on multiple fronts, and are not able to deliver efficiently and flexibly, due to the inherent limitations of the existing supply chains.

Internal silos and closed-loop activity
Instead of taking a holistic view of the supply chain, most companies are more concerned about local metrics and local departments; they lack of broader participation and commitment during critical phases such as forecasting and sales and operations planning. The mind-set is still of firefighting and knee-jerk reactions. Typical examples include manufacturing pushing for volume to keep their metrics of cost per unit and capacity use in control; and sales going out independently and striking promotion deals with retailers and distributors, without properly understanding the supply constraints. The infamous hockey stick effect (see figure 1) is prevalent in many CPG companies, and indicates low supply orientation and disparate management within their own supply chains.

Figure 1. The hockey stick effect.

Lack of flexible processes for dealing rapidly with change
Typically, traditional supply chain management (SCM) strategies and systems work best during steady states, but respond poorly during new product ramp-ups, surge demands, or a short lead time promotion. With shrinking product lifetimes and increasing product mix and distribution channels, traditional supply chains are slow to match the requirements of dynamic product portfolios. Excessive focus on asset or labor use, along with a lack of proactive constraint management practices and dynamic information feedback, combine to slow response times to the inevitable changes in the market place as well as with internal processes.

Traditional supply chains do not consider essential demand signals
The traditional demand indicator of forecasts frozen ahead of time can be too distorted, and does not take into account recent changes in actual demand. This practice, in conjunction with inherent uncertainty in forecasts, can add costs and unwanted inventory for manufacturers.

Using Demand to Drive Supply Networks

Until recently, CPG companies have adopted ad hoc initiatives to control costs and improve service levels, and over time many of these initiatives have been exhausted. Now is the right time to look beyond traditional practices and transform existing supply chains into illuminated and informed supply networks. Companies must start focusing on all forms of demand inputs from retailers, distributors, channel partners, and even end consumers, and use these as a guiding light to steer supply in the right direction and to enlighten its entire supply network with timely information.

In any dynamic system like a supply chain, variability is inherent. Sensing the variability in time and formulating strategies, innovative processes (and the technology to respond quickly to these variations) sets progressive companies apart from the competition. Using demand to regularly modulate the supply process is the new generation of SCM that integrates demand, supply, and product processes across the network of customers and suppliers to balance revenue against cost. It is a system of tightly linked processes and technologies, which not only responds to demand, but which can also reshape demand through solid collaboration with value chain partners in the market place.

Characteristics of the Demand-focused Approach

This approach encourages holistic design of all supply processes and information flows, in order to take care of end consumer demand rather than only the upstream requirements of factories or distribution systems.

Instead of asset-focused supply chains, the demand-focused approach fosters constant communication and correction of deviations between demand, supply, and product processes.

It requires change management and significant rethinking of the way process execution happens, in order to address continuous improvement of business-critical objectives like perfect order rates, operational efficiencies, and overall cost control. Table 1 depicts the differences between the two approaches.

Traditional Demand-focused Excessive focus on cost Balanced multiple objectives Continuous replenishment As-needed on-time replenishment Big batch, high-volume manufacturing Flexible shorter batches in tune with demand Information gaps or segmented processes Fully integrated for complete demand visibility

Traditional	Demand-focused
Excessive focus on cost	Balanced multiple objectives
Continuous replenishment	As-needed on-time replenishment
Big batch, high-volume manufacturing	Flexible shorter batches in tune with demand
Information gaps or segmented processes	Fully integrated for complete demand visibility

Table 1. Traditional versus demand-focused approach within linear supply chains.

Example of Supply Modulation towards Demand

A high product volume/mix CPG company in the southern United States had chronic problems with perfect order rates and operating cost overruns, typically caused by constant changes to the master production schedule, which in turn trickled down to an increased number of production changeovers and labor material mismatch. After years of running segmented processes and focusing on pushing volume out the door (without being able to deliver on the above critical objectives), the company started to look beyond its walls, and formed cross-functional sales-manufacturing teams to realign the supply process.

The team focused on two fronts. The first was tracking and understanding true consumer demand patterns of core products across all channels. This was followed by restructuring batch sizes to develop additional flexibility and minimize impact due to demand variation. By partnering and proactively communicating with retailers and other distributors, the sales team started funneling demand intelligence such as in-store promotion plans and (in some cases) POS information. Additionally, order fulfillment metrics were redesigned and customized across all channels to measure exactly what was important to these customers.

On the manufacturing side, the batch sizes of random medium- to low-volume products were reasonably increased to prevent schedule changes, and the batch sizes of steady high-volume products were reduced and sequenced back-to-back in tune with actual demand, so that batches could be added or removed quickly without causing major changeovers. This raised the short-term quantitative capacity flexibility, and hence responsiveness. Initial results of this process redesign was a sustained 9 percent increase in perfect order rates and a 20 percent setup time reduction due to a lower number of changeovers. Additionally, by slowly gaining trust, the company even began to influence the replenishment plans of large retailers.

Conclusion

CPG companies have no choice but to consistently deliver toward the dual objectives of shareholder and customer value. To profitably meet the expectations of the demanding customer and stay ahead of the competition requires CPG companies to reduce the gap between required and available capabilities. Just being customer-centric can only go so far, and progressive CPG companies are realizing the value of understanding, using, and—most importantly—redesigning processes to be flexible and in tune with true demand. The only way for this to happen is to move out of traditional supply chain practices, and transform into an ecosystem where true demand drives the processes, synchronizes supply, and gradually drives out unwanted costs and inefficiencies.

The Consumer Packaged Goods Industry

Consumers today are more demanding; they have more disposable income and many options to choose from. Consumer packaged goods (CPG) companies need to keep abreast of changing consumer needs and business scenarios to remain competitive in the market. Such companies need to manage their new product innovations and promotions more efficiently and effectively in order to minimize costs and increase sales. At the same time, visibility of inventory and sales across the various channel partners (distributors and retailers) is essential for effective and efficient decision making.

IT has become an effective enabler in this fast-changing world. Emerging technologies are offering better solutions for seamless communication. CPG companies have traditionally invested in enterprise resource planning (ERP) packages for better internal planning. Also, many companies operate with multiple legacy systems, each addressing the needs of a particular functional area. However, these legacy and ERP systems are not integrated to provide a comprehensive view of the business. Web-based sales portals, by integrating internal systems with channel partner systems, provide a complete view of the business and help address many challenges of the CPG industry. Following are the challenges faced by CPG companies across the globe, where a sales portal can be an effective answer:

• new product introduction and monitoring, where failure of new products due to incorrect research, incorrect pricing, or improper promotional support are primary concerns

• lack of inventory visibility and sales data across the distribution channel, leading to poor financials

• meeting the distribution service level expectations of organized retail

• effective management of promotions, where poor planning, lack of timely data to restructure the promotion, and delay in settling payouts to channel partners are key concerns

• understanding market trends and competition analysis, where lack of the latest information on market trends and the competition hinders the ability to make appropriate decisions

Most of these problems are critical, and availability of accurate data at the right time is an absolute necessity to address these issues. The current practices of information collection and dissemination across the distribution channel are achieved by traditional means, such as telephone, fax, e-mail, and snail mail. But there are inherent limitations and delays in these modes of communication which, in turn, handicap fast and accurate decision making.

The Sales Portal and Its Key Functional Elements

A portal is a Web-based application that enables companies to interact with channel partners, allowing for collaboration and exchange of real-time information. A portal is a tool that provides for both data extraction and data upload. Sales portals in particular need to have certain functional elements:

• cost-effective and user-friendly portal technology, where channel partners and internal teams are able to retrieve data quickly and easily

• the capability to store large amounts of data

• an analytical tool to perform complex calculations

• scalability to incorporate additional channel partners into the existing system

Furthermore, a Web-based sales portal has to be able to integrate with internal ERP systems, as well as seamlessly integrate with the transactional databases of the channel partners. Security and authentication functionality of a portal should be able to interact with existing security tools, as well as provide a single sign-on. These functions should manage the user's profile so that the user is able to verify and open any applications within the portal (depending on the user's profile). A portal should enable access to data only to limited and authorized people (distributors and retailers should not be able to view data related to marketing spends, for example). Lastly, a sales portal must be safeguarded against viruses and spam; effective antivirus tools need to be incorporated into the system.

Administration functionality is required to manage a portal's content and users, where an administrator has the right to allow or disallow users to log in to the portal. This helps to facilitate the portal's capabilities remotely. The portal should have intervention tools to generate alerts, and exception reports to take timely action. For example, a delay in order execution over a specified time limit should generate an alert to users so that they can take the necessary action.

Figure 1. Schematic structure of a sales portal.

As a knowledge base, the portal should provide for the indexing and storing of an organization's collected data, as well as the information available to it from the channel partners.

Content management is a key activity, and a portal needs to provide the means to publish materials and generate periodic reports. These reports should be accessible to the various channel partners as required.

Benefits of a Sales Portal for CPG Manufacturers

A sales portal provides real-time information to a CPG manufacturer regarding sales and inventory across the channel. Through a sales portal, the company can track sales, inventory, and market credit of the channel partners on a near real-time basis, thereby enabling the company to perform accurate target-setting and better stock management. This helps in reducing stock-outs or excess inventory across channels.

In addition, a sales portal helps improve the promotion planning process by using past information effectively. A portal helps to communicate information about a promotion to the channel partners more quickly, enabling timely and uniform implementation of the promotion, as well as time-tracking. A sales portal with analytics as an additional feature will enable pre- and post-promotion analysis, which increases the effectiveness of execution and promotes faster and accurate settlement of promotion claims for the channel partners. This should go a long way in improving relationships between the manufacturer and its channel partners.

Furthermore, sales portals are useful in reducing lead times for new product introduction. Online product concept approval and finalization with feedback from sales teams and channel partners through a portal can help with the selection of the best product concept. It could also help reduce errors in product pricing and in forecasting for existing products, as the effect of new products on existing products can be factored into the planning process.

A sales portal can be used as a repository of knowledge for the latest information on the competition and their products and promotions. The sales team can update information in the portal whenever the competition introduces new products or promotions. A portal used as a repository can also track trends in the industry in terms of fashion, technology, product innovations, and so on. This information can be updated periodically by different sources to create a complete knowledge bank for future use.

A sales portal can be used as a tool to improve the productivity of the sales personnel. The availability of online data improves the sales team's efficiency of service to the outlets (that is, the sales team is able to effectively cover a greater number of outlets, as they spend less time performing paperwork, data analysis, and updates). Channel partners' sales and inventory data will help the company's sales officers to monitor their channels effectively. Sales officers can also focus more on managing the distributor sales team to improve its productivity. The company can ensure that goods are not being loaded on to select distributors, but rather that they are effectively distributed across all distributors, leading to more efficient distribution of stock.

Finally, a portal can be used by the company to communicate with all its channel partners through newsletters (as an example) published in the portal.

Benefits of a Sales Portal for Channel Partners

Sales portals provide a single interface to channel partners, which helps in placing orders and tracking their status online. A portal helps channel partners to effectively monitor their investments (inventory and credit).

Channel partners can benefit from faster settlement of claims during promotions. Traditionally, each time a promotion is completed, distributors or retailers must send their claims to the manufacturer on paper, which need to be approved before payment is released—a time-consuming process. A portal can enable a channel partner to enter its claims online in a predefined format that can be immediately approved online by an authorized person.

Through a sales portal, channel partners can gain visibility into new products being launched by the company. This visibility can help channel partners to better plan and forecast stock. Through the portal, channel partners can participate in the process of product development by providing feedback on the product concepts and pricing based on their market conditions. This could create a sense of ownership for channel partners, which in turn could increase the success rates of the new product launches.

Key Considerations for a Successful Sales Portal

A CPG manufacturer usually decides to develop a sales portal in order to communicate with all its channel partners easily, and to provide them with information and tools to sell more of the manufacturer's products. However, very often these sales portals fail to achieve their objectives, as channel members do not see the benefits of this initiative. To ensure success, several elements need to be considered before implementing a sales portal.

First and foremost, an organization must understand and factor in the needs of the channel partners. The objectives for setting up the portal need to be articulated clearly, indicating the roles, responsibilities, and functional limitations of each entity in the sales portal structure. An evaluation needs to be done to understand how the company is currently working with the channel partners, and what improvements a portal can achieve.

It is critical that a company knows how its relationship with distributors will evolve to create mutual success beyond what currently exists. Off-line processes that benefit from being streamlined by an online application need to be identified well in advance. The information that needs to be collected must be listed and clearly defined. To eliminate duplication of effort by leveraging online and integrated back-end systems, areas of double data entry that channel partners and a company's sales staff are currently performing need to be identified and segregated.

Figure 2. Key considerations for successful implementation of sales.

The company chief executive officer (CEO) must communicate the logic and purpose behind the portal as well as the expected business benefits to each and every channel partner and to each member of the internal sales team. Channel partners need to understand that the initiative is in their interests in terms of increasing return on investment (ROI). The cost-benefit analysis of the portal must be provided to the channel partners before the portal's implementation. Investments from the channel partners, if any, are to be clearly communicated and ratified. Once the sales portal is up and running, periodic bulletins should be sent to all channel partners on various key performance indicators (KPIs) to inform them of the system's progress and benefits.

Technological flexibility and simplicity are two other key aspects a CPG manufacturer must consider when planning to implement a sales portal. The portal has to be simple and user-friendly. A user should not have to deal with a multitude of screens to carry out a single transaction. Data transfer should be efficient, as the speed and size of data transfer are key aspects of a successful portal; this should be factored in the design stage of the portal itself. The portal should be able to seamlessly integrate with the existing systems of channel partners and the sales and marketing departments, without a significant increase in investments.

Companies benefit greatly if they take a structured approach to implementing sales portals.

Potential Drawbacks of a Sales Portal

While offering several benefits to CPG companies, there are certain risks associated with portals as well. Integrating multiple and disparate systems across the supply chain is a key challenge. Many times, performance is compromised during integration. Change management is essential, as the way of doing business in any company will change significantly with the implementation of a portal. If users are not convinced about the benefits a sales portal offers, the success of this new technology in an organization will be suboptimal. Also, unless the system is extremely secure, there is a chance of an organization's information being exposed to outsiders. Due diligence is required to ensure channel partners stick to guidelines; adherence to set regulations can be linked to channel partners' incentives in order to ensure compliance.

Conclusion

The possibilities sales portals can offer a CPG manufacturer are enormous; they can be leveraged according to the changing needs of the market. A sales portal can be used for integrating with material suppliers and other service providers, such as advertising agencies, market research agencies, consumer panels, etc. Market research agencies' information, such as syndicated retail audit data and consumer panel data, can be merged with internal information systems to provide a holistic view of a business. The sales portal can also provide a platform for interacting with consumers. This interaction may help in developing loyal consumer communities that can be involved in product development, communication development, and feedback activities. CPG companies can look at sales portals as an efficient way to coordinate and communicate with their channel partners. An effective sales portal is one that is flexible and user-friendly. A CPG company needs to take its sales and marketing teams, distributors, and retailers into confidence to ensure the successful implementation and use of a sales portal. Change management and information security are also paramount to the success of a sales portal; otherwise, the entire exercise may be a complete failure.

The Consumer Packaged Goods Industry

Consumers today are more demanding; they have more disposable income and many options to choose from. Consumer packaged goods (CPG) companies need to keep abreast of changing consumer needs and business scenarios to remain competitive in the market. Such companies need to manage their new product innovations and promotions more efficiently and effectively in order to minimize costs and increase sales. At the same time, visibility of inventory and sales across the various channel partners (distributors and retailers) is essential for effective and efficient decision making.

IT has become an effective enabler in this fast-changing world. Emerging technologies are offering better solutions for seamless communication. CPG companies have traditionally invested in enterprise resource planning (ERP) packages for better internal planning. Also, many companies operate with multiple legacy systems, each addressing the needs of a particular functional area. However, these legacy and ERP systems are not integrated to provide a comprehensive view of the business. Web-based sales portals, by integrating internal systems with channel partner systems, provide a complete view of the business and help address many challenges of the CPG industry. Following are the challenges faced by CPG companies across the globe, where a sales portal can be an effective answer:

• new product introduction and monitoring, where failure of new products due to incorrect research, incorrect pricing, or improper promotional support are primary concerns

• lack of inventory visibility and sales data across the distribution channel, leading to poor financials

• meeting the distribution service level expectations of organized retail

• effective management of promotions, where poor planning, lack of timely data to restructure the promotion, and delay in settling payouts to channel partners are key concerns

• understanding market trends and competition analysis, where lack of the latest information on market trends and the competition hinders the ability to make appropriate decisions

Most of these problems are critical, and availability of accurate data at the right time is an absolute necessity to address these issues. The current practices of information collection and dissemination across the distribution channel are achieved by traditional means, such as telephone, fax, e-mail, and snail mail. But there are inherent limitations and delays in these modes of communication which, in turn, handicap fast and accurate decision making.

The Sales Portal and Its Key Functional Elements

A portal is a Web-based application that enables companies to interact with channel partners, allowing for collaboration and exchange of real-time information. A portal is a tool that provides for both data extraction and data upload. Sales portals in particular need to have certain functional elements:

• cost-effective and user-friendly portal technology, where channel partners and internal teams are able to retrieve data quickly and easily

• the capability to store large amounts of data

• an analytical tool to perform complex calculations

• scalability to incorporate additional channel partners into the existing system

Furthermore, a Web-based sales portal has to be able to integrate with internal ERP systems, as well as seamlessly integrate with the transactional databases of the channel partners. Security and authentication functionality of a portal should be able to interact with existing security tools, as well as provide a single sign-on. These functions should manage the user's profile so that the user is able to verify and open any applications within the portal (depending on the user's profile). A portal should enable access to data only to limited and authorized people (distributors and retailers should not be able to view data related to marketing spends, for example). Lastly, a sales portal must be safeguarded against viruses and spam; effective antivirus tools need to be incorporated into the system.

Administration functionality is required to manage a portal's content and users, where an administrator has the right to allow or disallow users to log in to the portal. This helps to facilitate the portal's capabilities remotely. The portal should have intervention tools to generate alerts, and exception reports to take timely action. For example, a delay in order execution over a specified time limit should generate an alert to users so that they can take the necessary action.

Figure 1. Schematic structure of a sales portal.

As a knowledge base, the portal should provide for the indexing and storing of an organization's collected data, as well as the information available to it from the channel partners.

Content management is a key activity, and a portal needs to provide the means to publish materials and generate periodic reports. These reports should be accessible to the various channel partners as required.

Benefits of a Sales Portal for CPG Manufacturers

A sales portal provides real-time information to a CPG manufacturer regarding sales and inventory across the channel. Through a sales portal, the company can track sales, inventory, and market credit of the channel partners on a near real-time basis, thereby enabling the company to perform accurate target-setting and better stock management. This helps in reducing stock-outs or excess inventory across channels.

In addition, a sales portal helps improve the promotion planning process by using past information effectively. A portal helps to communicate information about a promotion to the channel partners more quickly, enabling timely and uniform implementation of the promotion, as well as time-tracking. A sales portal with analytics as an additional feature will enable pre- and post-promotion analysis, which increases the effectiveness of execution and promotes faster and accurate settlement of promotion claims for the channel partners. This should go a long way in improving relationships between the manufacturer and its channel partners.

Furthermore, sales portals are useful in reducing lead times for new product introduction. Online product concept approval and finalization with feedback from sales teams and channel partners through a portal can help with the selection of the best product concept. It could also help reduce errors in product pricing and in forecasting for existing products, as the effect of new products on existing products can be factored into the planning process.

A sales portal can be used as a repository of knowledge for the latest information on the competition and their products and promotions. The sales team can update information in the portal whenever the competition introduces new products or promotions. A portal used as a repository can also track trends in the industry in terms of fashion, technology, product innovations, and so on. This information can be updated periodically by different sources to create a complete knowledge bank for future use.

A sales portal can be used as a tool to improve the productivity of the sales personnel. The availability of online data improves the sales team's efficiency of service to the outlets (that is, the sales team is able to effectively cover a greater number of outlets, as they spend less time performing paperwork, data analysis, and updates). Channel partners' sales and inventory data will help the company's sales officers to monitor their channels effectively. Sales officers can also focus more on managing the distributor sales team to improve its productivity. The company can ensure that goods are not being loaded on to select distributors, but rather that they are effectively distributed across all distributors, leading to more efficient distribution of stock.

Finally, a portal can be used by the company to communicate with all its channel partners through newsletters (as an example) published in the portal.

Benefits of a Sales Portal for Channel Partners

Sales portals provide a single interface to channel partners, which helps in placing orders and tracking their status online. A portal helps channel partners to effectively monitor their investments (inventory and credit).

Channel partners can benefit from faster settlement of claims during promotions. Traditionally, each time a promotion is completed, distributors or retailers must send their claims to the manufacturer on paper, which need to be approved before payment is released—a time-consuming process. A portal can enable a channel partner to enter its claims online in a predefined format that can be immediately approved online by an authorized person.

Through a sales portal, channel partners can gain visibility into new products being launched by the company. This visibility can help channel partners to better plan and forecast stock. Through the portal, channel partners can participate in the process of product development by providing feedback on the product concepts and pricing based on their market conditions. This could create a sense of ownership for channel partners, which in turn could increase the success rates of the new product launches.

Key Considerations for a Successful Sales Portal

A CPG manufacturer usually decides to develop a sales portal in order to communicate with all its channel partners easily, and to provide them with information and tools to sell more of the manufacturer's products. However, very often these sales portals fail to achieve their objectives, as channel members do not see the benefits of this initiative. To ensure success, several elements need to be considered before implementing a sales portal.

First and foremost, an organization must understand and factor in the needs of the channel partners. The objectives for setting up the portal need to be articulated clearly, indicating the roles, responsibilities, and functional limitations of each entity in the sales portal structure. An evaluation needs to be done to understand how the company is currently working with the channel partners, and what improvements a portal can achieve.

It is critical that a company knows how its relationship with distributors will evolve to create mutual success beyond what currently exists. Off-line processes that benefit from being streamlined by an online application need to be identified well in advance. The information that needs to be collected must be listed and clearly defined. To eliminate duplication of effort by leveraging online and integrated back-end systems, areas of double data entry that channel partners and a company's sales staff are currently performing need to be identified and segregated.

Figure 2. Key considerations for successful implementation of sales.

The company chief executive officer (CEO) must communicate the logic and purpose behind the portal as well as the expected business benefits to each and every channel partner and to each member of the internal sales team. Channel partners need to understand that the initiative is in their interests in terms of increasing return on investment (ROI). The cost-benefit analysis of the portal must be provided to the channel partners before the portal's implementation. Investments from the channel partners, if any, are to be clearly communicated and ratified. Once the sales portal is up and running, periodic bulletins should be sent to all channel partners on various key performance indicators (KPIs) to inform them of the system's progress and benefits.

Technological flexibility and simplicity are two other key aspects a CPG manufacturer must consider when planning to implement a sales portal. The portal has to be simple and user-friendly. A user should not have to deal with a multitude of screens to carry out a single transaction. Data transfer should be efficient, as the speed and size of data transfer are key aspects of a successful portal; this should be factored in the design stage of the portal itself. The portal should be able to seamlessly integrate with the existing systems of channel partners and the sales and marketing departments, without a significant increase in investments.

Companies benefit greatly if they take a structured approach to implementing sales portals.

Potential Drawbacks of a Sales Portal

While offering several benefits to CPG companies, there are certain risks associated with portals as well. Integrating multiple and disparate systems across the supply chain is a key challenge. Many times, performance is compromised during integration. Change management is essential, as the way of doing business in any company will change significantly with the implementation of a portal. If users are not convinced about the benefits a sales portal offers, the success of this new technology in an organization will be suboptimal. Also, unless the system is extremely secure, there is a chance of an organization's information being exposed to outsiders. Due diligence is required to ensure channel partners stick to guidelines; adherence to set regulations can be linked to channel partners' incentives in order to ensure compliance.

Conclusion

The possibilities sales portals can offer a CPG manufacturer are enormous; they can be leveraged according to the changing needs of the market. A sales portal can be used for integrating with material suppliers and other service providers, such as advertising agencies, market research agencies, consumer panels, etc. Market research agencies' information, such as syndicated retail audit data and consumer panel data, can be merged with internal information systems to provide a holistic view of a business. The sales portal can also provide a platform for interacting with consumers. This interaction may help in developing loyal consumer communities that can be involved in product development, communication development, and feedback activities. CPG companies can look at sales portals as an efficient way to coordinate and communicate with their channel partners. An effective sales portal is one that is flexible and user-friendly. A CPG company needs to take its sales and marketing teams, distributors, and retailers into confidence to ensure the successful implementation and use of a sales portal. Change management and information security are also paramount to the success of a sales portal; otherwise, the entire exercise may be a complete failure.

The idea behind an enterprise resource planning (ERP) system is to give organizations the transparency and visibility they need to have into their business activities. But what if the ERP system in fact creates a "blind spot" for the business? How could this happen, you might ask? Well, before we answer this question, a little history is needed.

In developed nations, many manufacturing activities have moved offshore. Manufacturers have done this because the cost of labor is cheaper in developing nations. But offshore manufacturing has led to some key concerns:

• How do you measure quality assurance?

• Is it really cheaper to outsource production, given rising energy prices?

From an economic and an IT perspective, several negative factors about moving manufacturing offshore have become apparent:

Negative economic factors:

• The manufacturer is subject to the stability of the local economy where their facilities are located, meaning that labor may be tougher to acquire.

• The speed at which components and parts are acquired is subject to global—and potentially faulty—supply chains.

• Offshore currency instability may make components more expensive to acquire or sell.

• Tracking the cost of resources and reverse logistics can prove to be difficult.

Negative IT factors:

• Access to critical, real-time data may be impeded by disparate enterprise applications in different regions.

• Tracking components may be more difficult due to a low-quality IT infrastructure or minimal IT resources. Or perhaps the ERP software is too inflexible to service the entire organization.

• Financial tracking can be difficult to maintain, due to the factors listed above.

Traditionally, ERP systems come with financials and human resources modules to track all costs throughout the organization. The system controls these processes through a manufacturing management module. The manufacturing management module of a typical ERP solution includes multi-level bills of materials (BOMs), advanced plant scheduling, shop floor control, field service and repair, production planning, project management, product data management, inventory management, purchasing management, quality management, and sales management.

This range of traditional functionality can be sufficient for most manufacturers, giving them the ability to manage their operations very well within the four walls of the manufacturing plant. However, if a manufacturer's business is carried out in multiple locations across continents, and if its supply chain involves complex activities, then a more robust ERP system is needed. This is because such a manufacturer is faced with changing economic, quality, and logistical problems, and its traditional ERP system can actually impede its growth and flexibility by not delivering what this manufacturer needs most: transparency and visibility into all manufacturing and supply chain activities. The manufacturer can develop a sort of "tunnel vision" with respect to their operations if nothing is done.

So what can a manufacturer do if the ERP system provides faulty vision? Can an ERP system really adapt to a fluctuating manufacturing environment?

The Economics of a Shifting Manufacturing Industry

To fully understand how an ERP system can create this tunnel vision for a manufacturer, shifts in the manufacturing sector in developed nations needs to be explained.

The trend of offshoring manufacturing processes has brought different economies together from countries that would not otherwise conduct business with one another. This has caused the manufacturing world in developed nations to shift its focus to distribution, which has led to supply chain management (SCM)—please refer to the article From Manufacturing to Distribution: The Evolution of ERP in Our New Global Economy.

However, there is a new trend to consider: manufacturing has started to revert back to developed nations due to the rise in the price of fuel and issues of quality control. Thus, even though the shift in developed nations is heading toward more distribution-type activities within the manufacturing sector, and even though discrete manufacturing is still a heavy economic sector, changes in the amount of products being produced can be difficult for manufacturers to deal with, as they need to accommodate both logistics and manufacturing activities.

The truth of the matter is that most industrialized nations have a large manufacturing base. And even though many manufacturers have outsourced their manufacturing to developing nations, these firms need to stay flexible if changes in either the local or international economies occur.

How can manufacturers deal with this ever-changing climate? How can ERP vendors help take the blinders off for manufacturers and allow them to become flexible enough to deal with these global challenges?

How to Free Yourself from Tunnel Vision!

Manufacturers must examine their business operations in the context of the global manufacturing environment and properly evaluate their software tools. Manufacturers faced with the complexities of manufacturing activities that are teetering back and forth from location to location must be able to track and manage the global business operations. This means that the enterprise software in place must be flexible enough to efficiently handle shifts in operations between heavier manufacturing to distribution, or vice versa.

To achieve this flexibility, something more than the traditional discrete ERP system is needed: a combination of SCM and business intelligence (BI) software, together with an ERP system.

SCM Software
SCM software is not only of benefit to global enterprises. It is also important for manufacturers that need to forecast demand for products; manage warehouse inventory, supplier relationships, and transportation vehicles; and track goods.

Integrating SCM software with an ERP system enables the manufacturer to have an "ERP for distribution" system. The main advantage of SCM software is that it gives discrete manufacturers the flexibility and visibility they need to know what is happening in terms of logistics. SCM software also helps manufacturing operations set up in multiple locations, through integrated warehouses and high-level demand planning. In addition, SCM software can pinpoint the nearest location to procure components for a lower cost, which can also help in terms of quality issues due to the proximity of the manufacturing plant.

BI software
Two other major issues need to be addressed for a manufacturer to become truly flexible: compliance and real-time information.

Compliance issues introduced by such regulations as the US Sarbanes-Oxley Act (SOX), import and export duties, international trading tariffs, etc., become even more complex when it comes to the business of offshoring. To handle these issues and standards properly and effectively, BI software can help a company get a grip on the amount of information passing through it, allowing improved visibility and transparency.

Many types of BI software are now Web-based. What this means for companies with in-house ERP applications is that they do not need to add much more IT infrastructure to their operations. Software as a service (SaaS) and service-oriented architecture (SOA) have been developed so that the BI enterprise application can "sit" on top of the ERP system, collect the necessary data, and make information available to managers so they are better able to make the right business decisions.

Market Overview

Along with compliance and real-time information, BI also provides analytics capabilities within the organization. Both manufacturing and supply chain analytics are very important to (a) improve internal business processes, and (b) provide workarounds when a potential problem is detected.

Three long-time ERP vendors that offer extensive supply chain modules have acquired large BI vendors: Oracle acquired Hyperion; SAP acquired Business Objects; and IBM acquired Cognos. These acquisitions have allowed these vendors to add to their solution offerings so that they can address manufacturers' problems of reduced transparency and visibility. Each of these vendors offers Web-based enterprise applications as well.

Vendors such as Infor, Exact Software, IFS, and Lawson all started with traditional ERP software. As these vendors grew out, they also built some of the functionality mentioned above, or bought out companies that provided SCM and BI capabilities. However, these ERP vendors (as well as other vendors not mentioned here) can now integrate such functionality through SOA-based software to provide an enterprise solution that gives the discrete manufacturer the flexibility it needs to conquer the challenges of changing manufacturing and economic clients as well as quality issues.

If the organization is a truly global manufacturer and has very large operations, it may want to consider a full BI solution to integrate with its ERP system. BI vendors such as Business Objects, Cognos, Information Builders, SAS, Oco, and Microstrategy offer very robust in-house applications. They offer hosted solutions as well, which can be advantageous for organizations that do not have additional capital to spend on more in-house enterprise applications. Web-enabled solutions offer the added benefit of allowing access to data from anywhere in the world via the Web. This delivers even greater flexibility and transparency for global manufacturing managers.

The Final Word

In order to provide insight into the blind spots that an ERP system may potentially lead to, a combination of enterprise software (specifically, BI and SCM) really is the key to freeing yourself from ERP tunnel vision. When used in the appropriate way, these applications can help the organization mitigate the negative economic and IT challenges mentioned in this article.

For discrete manufacturers to respond flexibly with the ever-changing manufacturing climate, an IT strategy needs to be set in place that allows them to judge which types of software applications can best help them. BI and SCM software applications have been developed to enable manufacturers to deal with such situations as bringing part of the manufacturing process back to their original plant, or focusing their operations more heavily on logistics and the supply chain.

Finally, establishing proper business requirements and aligning software selection to the needs of the business is a crucial element to having complete vision of what's happening in the organization, which will remove your "blinders"—and cure a nasty case of tunnel vision.

The idea behind an enterprise resource planning (ERP) system is to give organizations the transparency and visibility they need to have into their business activities. But what if the ERP system in fact creates a "blind spot" for the business? How could this happen, you might ask? Well, before we answer this question, a little history is needed.

In developed nations, many manufacturing activities have moved offshore. Manufacturers have done this because the cost of labor is cheaper in developing nations. But offshore manufacturing has led to some key concerns:

• How do you measure quality assurance?

• Is it really cheaper to outsource production, given rising energy prices?

From an economic and an IT perspective, several negative factors about moving manufacturing offshore have become apparent:

Negative economic factors:

• The manufacturer is subject to the stability of the local economy where their facilities are located, meaning that labor may be tougher to acquire.

• The speed at which components and parts are acquired is subject to global—and potentially faulty—supply chains.

• Offshore currency instability may make components more expensive to acquire or sell.

• Tracking the cost of resources and reverse logistics can prove to be difficult.

Negative IT factors:

• Access to critical, real-time data may be impeded by disparate enterprise applications in different regions.

• Tracking components may be more difficult due to a low-quality IT infrastructure or minimal IT resources. Or perhaps the ERP software is too inflexible to service the entire organization.

• Financial tracking can be difficult to maintain, due to the factors listed above.

Traditionally, ERP systems come with financials and human resources modules to track all costs throughout the organization. The system controls these processes through a manufacturing management module. The manufacturing management module of a typical ERP solution includes multi-level bills of materials (BOMs), advanced plant scheduling, shop floor control, field service and repair, production planning, project management, product data management, inventory management, purchasing management, quality management, and sales management.

This range of traditional functionality can be sufficient for most manufacturers, giving them the ability to manage their operations very well within the four walls of the manufacturing plant. However, if a manufacturer's business is carried out in multiple locations across continents, and if its supply chain involves complex activities, then a more robust ERP system is needed. This is because such a manufacturer is faced with changing economic, quality, and logistical problems, and its traditional ERP system can actually impede its growth and flexibility by not delivering what this manufacturer needs most: transparency and visibility into all manufacturing and supply chain activities. The manufacturer can develop a sort of "tunnel vision" with respect to their operations if nothing is done.

So what can a manufacturer do if the ERP system provides faulty vision? Can an ERP system really adapt to a fluctuating manufacturing environment?

The Economics of a Shifting Manufacturing Industry

To fully understand how an ERP system can create this tunnel vision for a manufacturer, shifts in the manufacturing sector in developed nations needs to be explained.

The trend of offshoring manufacturing processes has brought different economies together from countries that would not otherwise conduct business with one another. This has caused the manufacturing world in developed nations to shift its focus to distribution, which has led to supply chain management (SCM)—please refer to the article From Manufacturing to Distribution: The Evolution of ERP in Our New Global Economy.

However, there is a new trend to consider: manufacturing has started to revert back to developed nations due to the rise in the price of fuel and issues of quality control. Thus, even though the shift in developed nations is heading toward more distribution-type activities within the manufacturing sector, and even though discrete manufacturing is still a heavy economic sector, changes in the amount of products being produced can be difficult for manufacturers to deal with, as they need to accommodate both logistics and manufacturing activities.

The truth of the matter is that most industrialized nations have a large manufacturing base. And even though many manufacturers have outsourced their manufacturing to developing nations, these firms need to stay flexible if changes in either the local or international economies occur.

How can manufacturers deal with this ever-changing climate? How can ERP vendors help take the blinders off for manufacturers and allow them to become flexible enough to deal with these global challenges?

How to Free Yourself from Tunnel Vision!

Manufacturers must examine their business operations in the context of the global manufacturing environment and properly evaluate their software tools. Manufacturers faced with the complexities of manufacturing activities that are teetering back and forth from location to location must be able to track and manage the global business operations. This means that the enterprise software in place must be flexible enough to efficiently handle shifts in operations between heavier manufacturing to distribution, or vice versa.

To achieve this flexibility, something more than the traditional discrete ERP system is needed: a combination of SCM and business intelligence (BI) software, together with an ERP system.

SCM Software
SCM software is not only of benefit to global enterprises. It is also important for manufacturers that need to forecast demand for products; manage warehouse inventory, supplier relationships, and transportation vehicles; and track goods.

Integrating SCM software with an ERP system enables the manufacturer to have an "ERP for distribution" system. The main advantage of SCM software is that it gives discrete manufacturers the flexibility and visibility they need to know what is happening in terms of logistics. SCM software also helps manufacturing operations set up in multiple locations, through integrated warehouses and high-level demand planning. In addition, SCM software can pinpoint the nearest location to procure components for a lower cost, which can also help in terms of quality issues due to the proximity of the manufacturing plant.

BI software
Two other major issues need to be addressed for a manufacturer to become truly flexible: compliance and real-time information.

Compliance issues introduced by such regulations as the US Sarbanes-Oxley Act (SOX), import and export duties, international trading tariffs, etc., become even more complex when it comes to the business of offshoring. To handle these issues and standards properly and effectively, BI software can help a company get a grip on the amount of information passing through it, allowing improved visibility and transparency.

Many types of BI software are now Web-based. What this means for companies with in-house ERP applications is that they do not need to add much more IT infrastructure to their operations. Software as a service (SaaS) and service-oriented architecture (SOA) have been developed so that the BI enterprise application can "sit" on top of the ERP system, collect the necessary data, and make information available to managers so they are better able to make the right business decisions.

Market Overview

Along with compliance and real-time information, BI also provides analytics capabilities within the organization. Both manufacturing and supply chain analytics are very important to (a) improve internal business processes, and (b) provide workarounds when a potential problem is detected.

Three long-time ERP vendors that offer extensive supply chain modules have acquired large BI vendors: Oracle acquired Hyperion; SAP acquired Business Objects; and IBM acquired Cognos. These acquisitions have allowed these vendors to add to their solution offerings so that they can address manufacturers' problems of reduced transparency and visibility. Each of these vendors offers Web-based enterprise applications as well.

Vendors such as Infor, Exact Software, IFS, and Lawson all started with traditional ERP software. As these vendors grew out, they also built some of the functionality mentioned above, or bought out companies that provided SCM and BI capabilities. However, these ERP vendors (as well as other vendors not mentioned here) can now integrate such functionality through SOA-based software to provide an enterprise solution that gives the discrete manufacturer the flexibility it needs to conquer the challenges of changing manufacturing and economic clients as well as quality issues.

If the organization is a truly global manufacturer and has very large operations, it may want to consider a full BI solution to integrate with its ERP system. BI vendors such as Business Objects, Cognos, Information Builders, SAS, Oco, and Microstrategy offer very robust in-house applications. They offer hosted solutions as well, which can be advantageous for organizations that do not have additional capital to spend on more in-house enterprise applications. Web-enabled solutions offer the added benefit of allowing access to data from anywhere in the world via the Web. This delivers even greater flexibility and transparency for global manufacturing managers.

The Final Word

In order to provide insight into the blind spots that an ERP system may potentially lead to, a combination of enterprise software (specifically, BI and SCM) really is the key to freeing yourself from ERP tunnel vision. When used in the appropriate way, these applications can help the organization mitigate the negative economic and IT challenges mentioned in this article.

For discrete manufacturers to respond flexibly with the ever-changing manufacturing climate, an IT strategy needs to be set in place that allows them to judge which types of software applications can best help them. BI and SCM software applications have been developed to enable manufacturers to deal with such situations as bringing part of the manufacturing process back to their original plant, or focusing their operations more heavily on logistics and the supply chain.

Finally, establishing proper business requirements and aligning software selection to the needs of the business is a crucial element to having complete vision of what's happening in the organization, which will remove your "blinders"—and cure a nasty case of tunnel vision.

Over the past fifty years, manufacturing has changed from individual companies producing and distributing their own products, to a global network of suppliers, manufacturers, and distributors. Efficiency, price, and quality are being scrutinized in the production of each product. Because of this global network, manufacturers are competing on a worldwide scale, and they have moved their production to countries where the costs of labor and capital are low in order to gain the advantages they need to compete.

Today, the complex manufacturing environment faces many challenges. Many products are manufactured in environments where supplies come from different parts of the world. The components to be used in supply chain manufacturing are transported across the globe to different manufacturers, distributors, and third party logistics (3PL) providers. The challenges for many manufacturers have become how to track supply chain costs and how to deal with manufacturing costs throughout the production of goods. Software vendors, however, are now addressing these manufacturing challenges by developing new applications.

The Economic Shift

Global competition has played a key role in industrialized countries shifting from being production-oriented economies to service-based economies. Manufacturers in North America, Western Europe, and other industrialized nations have adapted to the shift by redesigning their manufacturing production into a distribution and logistics industry, and the skills of the labor force have changed to reflect this transition. Developing countries have similarly changed their manufacturing production environments to reflect current demands; they are accommodating the production of goods in industries where manufacturers have chosen to move their production offshore—the textile industry being a prime example of this move.

A report from the US Census Bureau titled Statistics for Industry Groups and Industries: 2005 and another from Statistics Canada titled Wholesale Trade: The Year 2006 in Review indicate that wholesalers are changing their business models to become distributors as opposed to manufacturers. Between 2002 and 2005, overall labor and capital in the manufacturing sectors decreased substantially. US industry data (from about 10 years ago) indicates that the North American manufacturing industry was engaged in 80 percent manufacturing processes and only 20 percent distribution activities. Today, however, these percentages have changed dramatically; the current trend is in the opposite direction. Manufacturing processes account for around 30 percent of the industry processes, and wholesale and distribution activities, approximately 70 percent.

In addition, a report from the National Association of Manufacturers indicates that the US economy imports $1.3 trillion (USD) worth of manufactured goods, but exports only $806 billion (USD) worth of goods manufactured in the US. This negative trade balance is a clear indication of the changing economic trend toward the manufacturing of goods in low-cost labor nations.

Figure 1. Evidence of a declining manufacturing industry in the G7 countries (from Forfas's The Changing Nature of Manufacturing and Services: Irish Trends and International Context, July 2006)

In figure 1, the horizontal axis represents the year time line, and the vertical axis represents the percentage change in the number of people working in each indicated industry.

The main reason for this huge manufacturing shift is the increasing operating costs of production in industrialized countries. These rising costs are forcing manufacturers to move their production to developing nations because of the low cost of labor in these countries. This includes Asian countries (such as China and Indonesia) as well as Eastern European countries (such as the Czech Republic and Slovakia).

Figure 1 illustrates the number of workers (in percentages) in specified industries in G7 countries, and uses 1980 as the base year with 100 percent full employment in each industry. The industries with relatively constant rates of employment are the food and drink and the tobacco industries. Since 1995, all other industries have been maintaining less and less manufacturing employees, as indicated by the declining slopes in the graph. The shift in the textiles and leather, metals, and other manufacturing industries is moving toward production of goods in low-wage, developing countries.

Results of the Shifting Manufacturing Industry

Manufacturing is a global industry, and although a manufacturing company may be based in an industrialized country, it may have the bulk of its manufacturing facilities in a developing country. Producing goods in such a country reduces wage and capital costs for the manufacturer; however, some manufacturing control is lost in offshore production. Shipping, distribution, and rental costs, for example, are often difficult to track and manage, and quality control can be compromised in a production environment that is not local.

Two main outcomes can be seen within the manufacturing industry because of this manufacturing shift: manufacturers have a sense of having relinquished control of their production to low-cost labor nations, and supply chain management (SCM) has now become the answer to manufacturing within industrialized nations.

Suppliers that provide components to manufacturers often have issues with quality. Being part of a large network of suppliers, each supplier tries to offer the lowest prices for its products when bidding to manufacturers. Although a supplier may win the bid, its products may not be up to standard, and this can lead to the production of faulty goods. Therefore, when using offshore suppliers, quality issues, product auditing, and supplier auditing become extremely important.

Because the manufacturing model is changing, manufacturing has become more of a service-based industry than a pure manufacturing industry. Even though the physical process of manufacturing hasn't changed, the actual locations of where the goods are being produced have. This fact is now compelling industrialized countries to engage in more assembly driven activities—a service-based model. The manufacturing process has transformed into obtaining parts and reassembling them into the final product. The final product is then redistributed throughout the appropriate channel or to the consumer. SCM methods are now reacting to this change as well; they are taking into account final assembly needs, and they are distributing particular products to consumers or manufacturers.

SCM is becoming the norm for manufacturers in the industrialized world. Offshoring is now standard practice, and methods such as SCM have been set up to deal with these economic and logistical business realities.

The economic shift happening in both industrialized and developing countries is dramatic. As the level of management knowledge increases, better methods of constructing offshore products are available in SCM solutions. In both types of economies, the changes in the labor force skill sets and manufacturing environments have consequently led to new software solutions being developed in order to manage this dramatic change.

ERP - Distribution: The Answer to the Manufacturing Shift

Within the software industry, many SCM and enterprise resource planning (ERP) vendors are following the economic shift. They are developing new functionality—ERP - distribution software—to meet the recent demands and needs of the changing manufacturing and distribution industries.

SCM and ERP software are converging to better address these new demands in the manufacturing industry. In the enterprise software market, ERP software vendors have reached a point of saturation; their installs are slowing down and they are seeing a reduction in sales. Therefore, ERP providers are developing new functionality in order to remain competitive with other ERP vendors, in addition to looking for new opportunities. ERP vendors are trying to adapt to the changing market in order to increase their revenues. They are integrating SCM functionality into their ERP offerings, creating ERP - distribution software that can span the entire production process across many continents (if necessary), and that is able to track final goods, components, and materials.

Traditional ERP solutions included some SCM functionality, which was needed to distribute the companies' produced goods. These systems also allowed components and parts to be imported in order to assemble these goods. But offshore manufacturing and expansion into new markets has required SCM functionality in ERP software to be extended. Some larger vendors have acquired other companies in order to meet these changing demands. For example, Oracle acquired G-Log, a transportation management systems (TMS) vendor, and Agile, a product lifecycle management (PLM) vendor; and Activant acquired Intuit Eclipse.

SCM software vendors, in contrast, have felt encroached upon by ERP vendors. The situation has posed a real threat to SCM providers in the market, forcing them to extend their ERP functionality to compete with ERP vendors and to try to gain new clients in the distribution and logistics industry.

ERP - distribution software has integrated SCM functionality into its existing functionality to navigate through the complex global manufacturing environment. SCM software maps five processes into one solution: planning, sourcing (obtaining materials), producing, delivering, and returning final products if defective. These processes help to track and manage the goods throughout their entire life cycles. In addition, ERP solutions are used to manage the entire operations of an organization, not only a product's life cycle. This gives users the broad capability to manage operations and use the SCM functionality to manage the movement of goods, whether components or finished product.

With the ability to gain accurate inventory visibility and SCM production, ERP - distribution software is able to see the whole chain of manufacturing and distribution events, from supplier to manufacturer, all the way to the final consumer. Figure 2 illustrates this process.

Figure 2. The merging of a distribution and manufacturing business model

Figure 2 depicts three business models. The first is the SCM model, which includes the manufacturing process. The second is the retail model, which is the distribution of final products to the consumer, business, or retailer. The third model is a combination of the first two business models, joined by the ERP - distribution software solution into one seamless process.

Within the SCM process, goods can either be brought in (imported) through foreign manufacturers, or acquired locally. The goods are then given to a distributor, 3PL provider, or wholesaler in order to reach the final client.

Within the retail model, the products are taken from a distributor, 3PL provider, or wholesaler, and are distributed to the appropriate person. Note that there is a "shift" for the consumer. This is to indicate that through the Internet or other forms of technology, consumers are now able to buy directly from distributors. The power of the consumer has changed; where manufacturers once provided products to consumers, consumers are now creating demand, and manufacturers have to meet that demand.

SCM solutions (as seen in figure 2) focus on the relationship between the supplier and manufacturer. However, ERP - distribution software has taken functionality from SCM software and combined it with retail software (such as point-of-sale and e-commerce solutions); it is now able to span across the entire supply chain and to track goods along the complete manufacturing process.

Figure 2 is a simplified view of the complexities of today's manufacturing processes. These complexities have made it crucial for trading partners to unite with manufacturers in order to help alleviate the frustrations that can occur within this global network. Specifically, trading partners are coming together with manufacturers to unite services, products, and customer experience so that business processes (such as manufacturing and distribution) become more efficient and that goods can move through these processes with minimal problems.

Emerging Opportunities for Revenue

SCM can be thought of as the management of "warehousing processes," in which the movement of goods occurs through multiple warehouses or manufacturing facilities. Tracking the costs of moving products and components through the maze of warehousing and manufacturing facilities is a tricky process, and many organizations lose money at each warehousing step.

Within the flow of goods in the manufacturing sector, the warehouse is a crucial part of the supply chain. Traditionally, the warehouse has been a source of frustration because the manufacturer or supplier pays for the use of the warehouse (whether owned or rented by the company). This leads to two possible scenarios: 1) the costs of the warehouse are incurred by a 3PL or manufacturing company, or 2) the costs are passed from one warehouse to another warehouse, and the original warehouse charges for these costs.

The typical warehouse process includes the following steps: receiving, put away, picking, kitting, packing, repacking, cross-docking, and shipping. ERP - distribution software is able to track costs across the entire organization and to aid companies in reducing costs that were previously tough to track.

As seen in figure 2, an ERP - distribution system encompasses the entire production of the final good. The ERP - distribution system is able to include inventory visibility from points "A to Z" (start to finish) and to track each warehouse cost from supplier to manufacturer to user, whether consumer, business, or retailer.

The Final Word

ERP - distribution software has been developed to meet the growing needs of the manufacturing and distribution industries. The capabilities incorporated into the software work across entire organizations, and even across continents.

Because of the economic shift in the manufacturing industry, the emergence of new software has been vital for businesses to stay competitive, meet the industry demands and emerging shift, and to keep business processes efficient to gain better profit margins.

ERP - distribution software is able to track the processes of manufacturing goods and distributing components, even if the manufacturer has facilities in North America and the Far East. With the SCM component in ERP software, manufacturing and tracking goods becomes manageable. Distributors and manufacturers can now work together in order to better meet customer requirements.

Over the past fifty years, manufacturing has changed from individual companies producing and distributing their own products, to a global network of suppliers, manufacturers, and distributors. Efficiency, price, and quality are being scrutinized in the production of each product. Because of this global network, manufacturers are competing on a worldwide scale, and they have moved their production to countries where the costs of labor and capital are low in order to gain the advantages they need to compete.

Today, the complex manufacturing environment faces many challenges. Many products are manufactured in environments where supplies come from different parts of the world. The components to be used in supply chain manufacturing are transported across the globe to different manufacturers, distributors, and third party logistics (3PL) providers. The challenges for many manufacturers have become how to track supply chain costs and how to deal with manufacturing costs throughout the production of goods. Software vendors, however, are now addressing these manufacturing challenges by developing new applications.

The Economic Shift

Global competition has played a key role in industrialized countries shifting from being production-oriented economies to service-based economies. Manufacturers in North America, Western Europe, and other industrialized nations have adapted to the shift by redesigning their manufacturing production into a distribution and logistics industry, and the skills of the labor force have changed to reflect this transition. Developing countries have similarly changed their manufacturing production environments to reflect current demands; they are accommodating the production of goods in industries where manufacturers have chosen to move their production offshore—the textile industry being a prime example of this move.

A report from the US Census Bureau titled Statistics for Industry Groups and Industries: 2005 and another from Statistics Canada titled Wholesale Trade: The Year 2006 in Review indicate that wholesalers are changing their business models to become distributors as opposed to manufacturers. Between 2002 and 2005, overall labor and capital in the manufacturing sectors decreased substantially. US industry data (from about 10 years ago) indicates that the North American manufacturing industry was engaged in 80 percent manufacturing processes and only 20 percent distribution activities. Today, however, these percentages have changed dramatically; the current trend is in the opposite direction. Manufacturing processes account for around 30 percent of the industry processes, and wholesale and distribution activities, approximately 70 percent.

In addition, a report from the National Association of Manufacturers indicates that the US economy imports $1.3 trillion (USD) worth of manufactured goods, but exports only $806 billion (USD) worth of goods manufactured in the US. This negative trade balance is a clear indication of the changing economic trend toward the manufacturing of goods in low-cost labor nations.

Figure 1. Evidence of a declining manufacturing industry in the G7 countries (from Forfas's The Changing Nature of Manufacturing and Services: Irish Trends and International Context, July 2006)

In figure 1, the horizontal axis represents the year time line, and the vertical axis represents the percentage change in the number of people working in each indicated industry.

The main reason for this huge manufacturing shift is the increasing operating costs of production in industrialized countries. These rising costs are forcing manufacturers to move their production to developing nations because of the low cost of labor in these countries. This includes Asian countries (such as China and Indonesia) as well as Eastern European countries (such as the Czech Republic and Slovakia).

Figure 1 illustrates the number of workers (in percentages) in specified industries in G7 countries, and uses 1980 as the base year with 100 percent full employment in each industry. The industries with relatively constant rates of employment are the food and drink and the tobacco industries. Since 1995, all other industries have been maintaining less and less manufacturing employees, as indicated by the declining slopes in the graph. The shift in the textiles and leather, metals, and other manufacturing industries is moving toward production of goods in low-wage, developing countries.

Results of the Shifting Manufacturing Industry

Manufacturing is a global industry, and although a manufacturing company may be based in an industrialized country, it may have the bulk of its manufacturing facilities in a developing country. Producing goods in such a country reduces wage and capital costs for the manufacturer; however, some manufacturing control is lost in offshore production. Shipping, distribution, and rental costs, for example, are often difficult to track and manage, and quality control can be compromised in a production environment that is not local.

Two main outcomes can be seen within the manufacturing industry because of this manufacturing shift: manufacturers have a sense of having relinquished control of their production to low-cost labor nations, and supply chain management (SCM) has now become the answer to manufacturing within industrialized nations.

Suppliers that provide components to manufacturers often have issues with quality. Being part of a large network of suppliers, each supplier tries to offer the lowest prices for its products when bidding to manufacturers. Although a supplier may win the bid, its products may not be up to standard, and this can lead to the production of faulty goods. Therefore, when using offshore suppliers, quality issues, product auditing, and supplier auditing become extremely important.

Because the manufacturing model is changing, manufacturing has become more of a service-based industry than a pure manufacturing industry. Even though the physical process of manufacturing hasn't changed, the actual locations of where the goods are being produced have. This fact is now compelling industrialized countries to engage in more assembly driven activities—a service-based model. The manufacturing process has transformed into obtaining parts and reassembling them into the final product. The final product is then redistributed throughout the appropriate channel or to the consumer. SCM methods are now reacting to this change as well; they are taking into account final assembly needs, and they are distributing particular products to consumers or manufacturers.

SCM is becoming the norm for manufacturers in the industrialized world. Offshoring is now standard practice, and methods such as SCM have been set up to deal with these economic and logistical business realities.

The economic shift happening in both industrialized and developing countries is dramatic. As the level of management knowledge increases, better methods of constructing offshore products are available in SCM solutions. In both types of economies, the changes in the labor force skill sets and manufacturing environments have consequently led to new software solutions being developed in order to manage this dramatic change.

ERP - Distribution: The Answer to the Manufacturing Shift

Within the software industry, many SCM and enterprise resource planning (ERP) vendors are following the economic shift. They are developing new functionality—ERP - distribution software—to meet the recent demands and needs of the changing manufacturing and distribution industries.

SCM and ERP software are converging to better address these new demands in the manufacturing industry. In the enterprise software market, ERP software vendors have reached a point of saturation; their installs are slowing down and they are seeing a reduction in sales. Therefore, ERP providers are developing new functionality in order to remain competitive with other ERP vendors, in addition to looking for new opportunities. ERP vendors are trying to adapt to the changing market in order to increase their revenues. They are integrating SCM functionality into their ERP offerings, creating ERP - distribution software that can span the entire production process across many continents (if necessary), and that is able to track final goods, components, and materials.

Traditional ERP solutions included some SCM functionality, which was needed to distribute the companies' produced goods. These systems also allowed components and parts to be imported in order to assemble these goods. But offshore manufacturing and expansion into new markets has required SCM functionality in ERP software to be extended. Some larger vendors have acquired other companies in order to meet these changing demands. For example, Oracle acquired G-Log, a transportation management systems (TMS) vendor, and Agile, a product lifecycle management (PLM) vendor; and Activant acquired Intuit Eclipse.

SCM software vendors, in contrast, have felt encroached upon by ERP vendors. The situation has posed a real threat to SCM providers in the market, forcing them to extend their ERP functionality to compete with ERP vendors and to try to gain new clients in the distribution and logistics industry.

ERP - distribution software has integrated SCM functionality into its existing functionality to navigate through the complex global manufacturing environment. SCM software maps five processes into one solution: planning, sourcing (obtaining materials), producing, delivering, and returning final products if defective. These processes help to track and manage the goods throughout their entire life cycles. In addition, ERP solutions are used to manage the entire operations of an organization, not only a product's life cycle. This gives users the broad capability to manage operations and use the SCM functionality to manage the movement of goods, whether components or finished product.

With the ability to gain accurate inventory visibility and SCM production, ERP - distribution software is able to see the whole chain of manufacturing and distribution events, from supplier to manufacturer, all the way to the final consumer. Figure 2 illustrates this process.

Figure 2. The merging of a distribution and manufacturing business model

Figure 2 depicts three business models. The first is the SCM model, which includes the manufacturing process. The second is the retail model, which is the distribution of final products to the consumer, business, or retailer. The third model is a combination of the first two business models, joined by the ERP - distribution software solution into one seamless process.

Within the SCM process, goods can either be brought in (imported) through foreign manufacturers, or acquired locally. The goods are then given to a distributor, 3PL provider, or wholesaler in order to reach the final client.

Within the retail model, the products are taken from a distributor, 3PL provider, or wholesaler, and are distributed to the appropriate person. Note that there is a "shift" for the consumer. This is to indicate that through the Internet or other forms of technology, consumers are now able to buy directly from distributors. The power of the consumer has changed; where manufacturers once provided products to consumers, consumers are now creating demand, and manufacturers have to meet that demand.

SCM solutions (as seen in figure 2) focus on the relationship between the supplier and manufacturer. However, ERP - distribution software has taken functionality from SCM software and combined it with retail software (such as point-of-sale and e-commerce solutions); it is now able to span across the entire supply chain and to track goods along the complete manufacturing process.

Figure 2 is a simplified view of the complexities of today's manufacturing processes. These complexities have made it crucial for trading partners to unite with manufacturers in order to help alleviate the frustrations that can occur within this global network. Specifically, trading partners are coming together with manufacturers to unite services, products, and customer experience so that business processes (such as manufacturing and distribution) become more efficient and that goods can move through these processes with minimal problems.

Emerging Opportunities for Revenue

SCM can be thought of as the management of "warehousing processes," in which the movement of goods occurs through multiple warehouses or manufacturing facilities. Tracking the costs of moving products and components through the maze of warehousing and manufacturing facilities is a tricky process, and many organizations lose money at each warehousing step.

Within the flow of goods in the manufacturing sector, the warehouse is a crucial part of the supply chain. Traditionally, the warehouse has been a source of frustration because the manufacturer or supplier pays for the use of the warehouse (whether owned or rented by the company). This leads to two possible scenarios: 1) the costs of the warehouse are incurred by a 3PL or manufacturing company, or 2) the costs are passed from one warehouse to another warehouse, and the original warehouse charges for these costs.

The typical warehouse process includes the following steps: receiving, put away, picking, kitting, packing, repacking, cross-docking, and shipping. ERP - distribution software is able to track costs across the entire organization and to aid companies in reducing costs that were previously tough to track.

As seen in figure 2, an ERP - distribution system encompasses the entire production of the final good. The ERP - distribution system is able to include inventory visibility from points "A to Z" (start to finish) and to track each warehouse cost from supplier to manufacturer to user, whether consumer, business, or retailer.

The Final Word

ERP - distribution software has been developed to meet the growing needs of the manufacturing and distribution industries. The capabilities incorporated into the software work across entire organizations, and even across continents.

Because of the economic shift in the manufacturing industry, the emergence of new software has been vital for businesses to stay competitive, meet the industry demands and emerging shift, and to keep business processes efficient to gain better profit margins.

ERP - distribution software is able to track the processes of manufacturing goods and distributing components, even if the manufacturer has facilities in North America and the Far East. With the SCM component in ERP software, manufacturing and tracking goods becomes manageable. Distributors and manufacturers can now work together in order to better meet customer requirements.