An Analyst's View of Process Industry SMB Challenges

The process industry provides many of the products we use in our daily lives for food, shelter, and health. Such products are created as materials and transformed through the use of energy resources and chemical products. In addition, the process industry manufactures products that are essential to advanced industries such as computing, biotechnology, telecommunications, automotive, scientific, and space exploration.

These industries are facing major pressures not only to meet the present needs of our global economy, but also to do so without compromising future generations by ensuring that processes

* meet environmental guidelines
* optimize energy resources efficiently
* result in products that are safer, more reliable, and more functional
* provide features that meet both industry and consumers needs

This article focuses on how enterprise resource planning (ERP) vendors are helping the process industry meet both the needs of today and deliver on anticipated functional requirements that will help meet the needs of tomorrow.

Process Industry Manufacturing Challenges

Manufacturers in the process industry are at a difficult crossroads. Although the industry is not facing any imminent substantial decrease in its overall profit margins, there is concern in the industry according to a recent study by the Canadian Manufacturers and Exporters Association, which cites the following issues:

* increased global competition
* foreign currency fluctuation
* changing patterns of customer demand
* escalating business costs
* problems in implementing new technologies
* competitive business pressures
* shortage of skilled workers

To address these issues, process industry manufacturers and distributors must manage the following key activities, and ensure they use an enterprise system that supports these activities:

* Planning production for both materials and capacity—to develop a production plan, manufacturers must ensure that there are sufficient available resources and materials, production capacity, and labor.
* Inventory tracking and controlling work-in-process (WIP)—monitoring material consumption and tracking work order progress is the basis of manufacturers' being able to meet sales order, demand, and delivery dates.
* Replenishment and demand planning—the ability to review variances between forecasted and actual sales is the basis of managing vendor lead times and raw material replenishment.
* Managing the supply chain for order fulfillment—reviewing the global supply chain provides manufacturers with the ability to coordinate logistics and operational activity to meet customer order fulfillment expectations.

Specific Requirements of an ERP System for the Process Industry

Here's an overview of how some of the functionalities of an ERP system for process industries help manufacturers better perform the activities listed above.

1. Conversion process capability
In the process industry, the bill of materials (BOM) used in discrete manufacturing is replaced by the master product formula, or simply the formula. The formula requires a conversion table for measures, such as weights from grams to pounds, and must have the ability to record liquid units of measure, in both metric and US-standard. The formula must also record specific information related to product characteristics that can affect manufacturing processes. For example, in the blending process, the system can record product information such as percentage calculations of raw materials, and the effective specific gravity, potency, density, and number of reactives of those raw materials.

2. Interface to other modules
The master formula can also be linked to submodules like quality assurance (QA), procurement, inventory, and accounts payable (A/P) for government compliance and safety issues. Also, the manufacturer must be able to trace products in order to manage dating of inventory lot control and the amount of inventory available at the distribution level. Furthermore, there are government and regulatory concerns that deal with the nature of the materials, as there may be a controlled substance with specific shipping, handling, and storage regulations. Or, the manufacturing process may emit hazardous by-products. Or, there may be logistical concerns within the manufacturing process itself.

Key Benefits of a Mixed-mode ERP System

Following are some of the major benefits a mixed-mode ERP system can offer:

• elimination of duplicate data entry

• a Web portal or executive dashboard that displays accurate, real-time data on key costs and trends, in a concise, graphical format

• a common user interface and a single set of processing goals to reduce training costs and to smooth IT operations

• a phased implementation rather than a single implementation, which means that not all legacy systems require implementation, thus resulting in a smoother transition

• the ability to support both discrete and process manufacturing modes

Vendor Solutions for a Mixed-mode Environment

An organization's decision-makers must be educated about the software applications and their key features in order to make the right choice. Each of the five major ERP vendors mentioned below can address the needs of both large-scale and small to medium size businesses with its software packages. Listed are the types of packages these vendors offer, including key features and functionality.

1. Lawson Process Manufacturing
Based in Saint Paul, Minnesota (US), Lawson Software has 40 offices worldwide. The vendor's software system has received broad industry acceptance, and features standard product functionality, along with a few interesting features. Lawson Process Manufacturing

• supports mixed-mode, discrete, and process manufacturing environments

• supports service-oriented architecture (SOA)

• offers a fully integrated suite of modules that can be integrated either individually or separately

2. Infor ERP XA
Infor one of the world's largest providers of business software, is based in Atlanta, Georgia (US). The vendor has acquired and developed ERP systems to serve both discrete and process manufacturing. Infor ERP XA

• supports mixed-mode, discrete, and process manufacturing environments

• integrates with shop floor services and the supply chain to aid material supply, distribution, warehousing, and freight management

• supports SOA

• links to radio frequency identification (RFID) and transportation management systems (TMSs)

• supports lean manufacturing

3. SAP
SAP,headquartered in Walldorf (Germany), has applied a great deal of its research on process industries into its product offerings. SAP's software packages

• support mixed-mode manufacturing environments

• offer easier integration through merged companies

• receive maintenance and support directly from SAP

4. Epicor Vantage
An Irvine, California (US)-based firm established in 1984, Epicor serves the mid-market, with over 20,000 installations globally. An integrated, out-of-the-box solution, Epicor Vantage

• offers integrated workflow processes that work collaboratively across modules

• supports paperless transactions as well as SOA

• provides a built-in project management feature as part of its planning and scheduling module

• features vendor portals (from its eBusiness Suite), which enable vendors to manage issues

5. JD Edwards by oracal
JD Edwards Enterprise One (formerly PeopleSoft) is a suite of modular, pre-integrated, industry-specific business applications designed on a pure Internet architecture. It is suited for organizations that manufacture, construct, distribute, service, or manage products or physical assets. JD Edwards Enterprise One

• offers an integrated modular approach

• provides manufacturing management dashboards with real-time metrics on key performance indicators (KPIs)

• features rapid deployment

• supports global installation based on localized versions of software available

Getting It Right: ERP Solutions for Mixed-mode Manufacturers

Mixed-mode manufacturers operate in both discrete and process environments. In the past, these organizations have not been well served by traditional discrete or process enterprise resource planning (ERP) solutions. But a recent trend in the ERP market has been the offering of software solutions by major discrete ERP vendors to the mixed-mode manufacturing sector. However, in terms of criteria and the overall weight assigned to them in a request for proposal (RFP), these vendors must consider the industry sector the mixed-mode manufacturer's operations serve, the manufacturing processes, government regulations, and the quality standards of the particular industry.

Key Differences between Discrete and Process Manufacturing

Discrete manufacturing uses bills of materials (BOMs); process manufacturing uses formulations, also known as recipes. A discrete manufacturer assembles products along a production sequence routing, whereas a process manufacturer blends in a batch.

In discrete manufacturing, a multi-level BOM is used to produce a finished good, indicating the base unit of measure with all the lower level assemblies and subassemblies featured below. In process manufacturing, all sequential steps are held within the product formula, including all relative secondary products. Batch sizes are based on specific units of measure and vary according to the formula and product yields. Process manufacturing systems must be able to track the equipment and materials used, equipment settings, and labor.

Table 1 lists examples of discrete and process manufacturing sectors.

Discrete Industry	Process Industry
aerospace manufacturing	lubricant manufacturing
automotive manufacturing	water treatment manufacturing
furniture manufacturing	mining companies
machines precision parts	organic and inorganic chemicals
electronics	pigments
	coatings and paints
	inks and dyes
	adhesive manufacturers
	oil and gas fields
	pool chemicals
	cleaning products and solvents
	pharmaceutical
	food and beverage
	biotechnology

Table 1. Discrete and process manufacturing sectors.

The Trouble with Traditional Discrete and Process ERP Systems

Because mixed-mode manufacturers fall somewhere in between discrete and process manufacturing, ERP systems geared solely toward one type or the other often fail to support key mixed-mode manufacturing processes, resulting in decreased productivity and customer satisfaction, not to mention a lower return on investment (ROI) for the manufacturer.

For example, the challenge faced by a mixed-mode manufacturer when attempting to use an ERP package designed for the discrete manufacturer is the system's limitations in being able to account for the following process manufacturing requirements:

• yield estimation of products per job

• calculation of the available to promise (ATP) inventory allocation of finished goods

• increase or decrease in production yields based on ingredient levels or on lot or batch size limitations

• governmental and regulatory compliance related to lot control and traceability, as well as product quality—issues that the pharmaceutical and the food and beverage industries in particular must consider

• maintenance and tracking of quantities and costs of raw material process variances within the manufacturing process

Furthermore, a mixed-mode manufacturer may encounter the problems of longer implementation time and additional expense with an ERP system designed for discrete manufacturers, as modifications to the core functionality of the system may be required.

System Flexibility

Mixed-mode manufacturers need an ERP system that can handle formulations, batching, and other practices specific to process manufacturing in addition to the specific requirements of discrete manufacturing. What compounds mixed-mode manufacturers' malaise with ERP systems designed specifically for either discrete or process manufacturing is that these systems lock the mixed-mode manufacturer into a single line of business. They force companies to work around the software used for their other product lines by constructing spreadsheets or databases to compile data from various sources. When an organization's business model changes, the organization is usually forced to choose a whole new ERP system. For a mixed-mode manufacturer, the way around this scenario is to implement mixed-mode enterprise software instead. Mixed-mode software enables companies to switch manufacturing styles, and provides the flexibility needed to meet market demands.

Since implementing an ERP system is a time-consuming and costly undertaking, collaborative effort and research by all departments involved is required before a system is selected. A review of the current business processes and a documented view of the processes each department seeks to improve are essential to making the right choice. This review must be aligned with management's long-term objectives for the organization.

One way to shorten this cycle within the scoping phase is to obtain vital, up-to-date market and software solution information. Organizations can purchase relevant information on software systems from reputable software evaluation companies to save time and gain firsthand knowledge on the ERP market, as well as the proper tools to evaluate the product offerings that match their criteria. The goal of this exercise is to avoid making a costly investment in a system that is not flexible and that was not written with the mixed-mode manufacturer in mind.

Five Steps to Business Intelligence Project Success

Successful business intelligence (BI) projects encompass more than implementation of a solution on time and within budget. True success should be measured by how the BI solution improves the organization's overall performance through increased efficiency in reporting, planning, financial functions, and performance measurements. This will help ensure organizations' BI projects fall into the estimated 30 percent success rate.

Much has been written about measuring return on investment (ROI) for BI, and the general conclusion is that gaining tangible insight into the initial benefits is not easy. Identifying long-term benefits becomes more practical as planning and analysis, compliancy, and forward-looking approaches become more mainstream within organizations. To gain insight into how to implement a BI solution successfully, organizations should benchmark the success of other organizations—including their implementations and use of BI—against their own current initiatives. It is equally important that organizations learn from other organizations' failures—and avoid repeating them.

This article identifies and explores five steps organizations should take to avoid the common pitfalls encountered by many businesses when implementing a BI solution. These steps also provide an overview of items that need to be considered before implementing BI within an organization or business unit.

Step 1. Identifying the Business Problem

Identifying the BI business problem is the first step to ensuring a successful project. Once an organization knows what is broken, not only can it start to find ways to fix the problem, but it can also identify the proper resources, create user buy-in, and prioritize how to tackle the project. To produce an ROI, a BI solution needs to address specific business problems. Otherwise, implementing an ad hoc query tool, an online analytical process (OLAP) cube, or a dashboard will not result in lasting benefits.

Unfortunately, it is common for BI solutions to be pushed onto a business unit in order to meet an IT objective rather than an organizational need. Sometimes organizations get caught up with general initiatives and lose sight of the actual benefits BI provides in terms of performance management, collaboration, workflow, process improvement, etc.

To attain buy-in, the user community should be a part of the problem identification process. An implementation decision that comes from management still requires input from users as to what their requirements are, and this information can make the difference between the implementation of a tool that works as a value proposition and an implementation that may be seen as useless.

Step 2. Determining Expectations of Use

Once BI is implemented within an organization, its usage usually grows beyond initial expectations. For example, an organization may assume that its BI solution will be used by 10 to 20 users, when in reality over 400 users query data on a monthly basis. Because the initial design of the platform will have been based on a low number of potential users, the system may not be able to sustain such a high number of queries, and will most likely "crash" (fail), causing users to lose faith in the new system and potentially revert to their pre-BI environment for stability. In addition to lacking confidence in the new system, the organization may see the challenge of getting an unstable system up and running as not worth the effort, delays, and time required.

With unrealistic expectations, frustration may cause the organization to rethink its use of BI. Generally, once BI adoption occurs within one part of the organization and other departments or business units see its benefits, adoption begins to spread throughout the entire organization. For a BI solution to meet these increasing needs, organizations should anticipate the use of BI before implementation of a solution.

Another consideration is the type of BI tool use. For example, if a sales manager needs to increase sales and therefore wants to analyze trends, product distribution, and sales performance, creating a set of static reports will not be helpful. A data visualization tool to manage these items and to develop a plan based on trend analysis will more likely produce the appropriate results.
The BI solution's ability to collect the right information for reporting and analysis is essential if it is to deliver value to organizations. Although identifying the data required is time-consuming, it is the backbone of BI. Additionally, determining how data will be delivered, what the appropriate data cleansing activities should be, and whether the data is to be delivered in batch or in real time, should all be defined in advance. If data is not cleansed or delivered when needed, then the front-end BI tools will not provide the proper value to the organization. BI solutions impart value through the analysis of data, so it is essential that data arrives when required, in the proper format, and at the right time.

In addition to extract, transform, and load (ETL) tools, data quality and data cleansing need to be inherent aspects of the delivery of BI within the organization. In reality, short of an organization-wide master data management (MDM) initiative, the responsibility of providing accurate data will fall on the shoulders of the business units implementing BI.

Some organizations are misguided and think that their BI solution will provide the tools to fix their data problems. BI solutions can provide ongoing data quality processes, but these are not innate to software offerings. Some vendors' BI tools include enhanced data quality and integration features, and other vendors assume this responsibility should fall to the organization. Organizations should implement data management structures to minimize frustrations that result from data issues.

Step 4. Rolling Out Training Initiatives

Deciding when to roll out training contributes to project success. Training initiatives should begin right before or during the implementation phase. However, in many organizations, training is rolled out months before actual implementation, creating hype among the employees about the new system and what they will be able to do with it. By the time implementation actually occurs—sometimes months later—the initial excitement and buy-in has subsided, and more importantly, users have forgotten their newfound skills. To build momentum again, training needs to be repeated—wasting time and money.

Buy-in related to change is never easily achieved within organizations. Users become attached to their current processes, whether or not those processes are productive. Buy-in does not occur immediately upon showing users the inherent value of BI because it means the entire way they do business will change. Creating a training program—and delivering that training in a timely fashion—helps users apply their newfound skills immediately, thus helping to increase user buy-in.

Step 5. Choosing a Vertical- or Horizontal-based Solution

Organizations should identify whether more value will be provided by a vertical solution that is built specifically for the organization's industry or department, or by a horizontal solution that can grow with the organization. For example, does the organization need a generic reporting, querying, and analysis tool that will extend across the organization, or does the organization need to develop a process and compliancy that will adhere to the US Sarbanes-Oxley Act (SOX) or Health Insurance Portability and Accountability Act (HIPAA) standards? The answer to this question will help the organization define which type of solution will best meet its needs.

In addition, anticipated use of BI in the future may help determine whether a horizontal or a vertical solution will best meet the organization's needs. Organizations that must adhere to compliance standards should take advantage of vertical-based solutions, because vendors have developed solutions that meet specific compliance requirements. Horizontal solutions need a large degree of customization to bring them up to par, leading to extra time and money spent on developing the solutions.

Organizations in key vertical industries should strongly consider vertical-based solutions that will meet their needs, out of the box. Vertical-based solutions are likely to meet the general requirements of a specific industry or department, but since horizontal BI solutions do not base themselves on specified data models, they may be more versatile to the changing demands of the organization. Therefore, if an organization anticipates rapid BI growth across the organization, having the ability to develop solutions based on individual needs may be more beneficial. This relates to identifying the business problem and anticipating the future needs of the organization.

Conclusion

All too often, BI projects fail to meet an organization's expectations. But with research, planning, and a solid methodology, failure can be avoided. To help ensure BI project success, organizations should work through these five essential steps: identifying the business problems, determining how a BI solution will be used, knowing how and when data is delivered, rolling out user training initiatives at appropriate times, and developing a framework for selecting the type of solution that will best fit their organizations' needs.

The Blurry Line between ERP and PLM

The purpose of integrating ERP and PLM is to ensure that product definition information (which is mainly generated by the product design and development department) is accessible instantly by the following processes (e.g., production and services). Also, data from non-design phases can be a valuable input for the decision-making process during the design and development stages. ERP and PLM vendors and implementers have developed technologies to integrate the two systems and to integrate CAD design information with enterprise software applications as well.

In the past, the boundary between the ERP camp and the PLM camp was quite clear. However, after seeing the market potential of PLM solutions, almost all major ERP players have entered into the PLM market. This doesn't necessarily mean that PLM solutions provided by ERP vendors integrate with ERP systems better than those provided by pure PLM vendors (sometimes it may take very long for an acquired PLM solution to be well integrated with its new owner's ERP system), but it should be somewhat easier to coordinate the efforts of integrating two systems together.

Both ERP and PLM vendors are trying to extend their respective solutions' capabilities to the other side. This effort makes the line between ERP and PLM blurrier—ERP solutions are now more capable of managing product data and PLM vendors are adding more transactional functionality in their offerings.

On one side, ERP solutions are increasing their inward capability of managing product data. This phenomenon can be found more significantly in ERP solutions specifically for the ETO industry. To explain how ETO ERP is advancing in providing PLM functionality, I selected two common sub-modules: product data management and product/item configurator. Both submodules are available in ETO ERP and Discrete ERP (which has more generic coverage on manufacturing industries) categories within the Technology Evaluation Centers' (TEC's) knowledge bases (KBs). The comparison of average rating scores (based on TEC's software selection methodology) of the two types of ERP on the selected submodules clearly shows that ETO ERP provides better PLM capability than Discrete ERP (see figure 1). These average scores are quite representative since they are based on 111 Discrete ERP and 35 ETO ERP solutions recorded in TEC's knowledge base. Although PLM-like functionality within an ETO ERP solution can't match what PLM can do, this extension may reflect that ETO manufacturers are eager to enhance the connectivity between product data and operation data.

Figure 1. Rating scores of two submodules within ETO ERP and Discrete ERP

On the other side, PLM vendors are now working on expanding to the ERP-like functionality. A good example is the increasing availability of sourcing solutions from non-ERP PLM vendors. No matter how a PLM vendor positions its products (i.e., sourcing as a part of the PLM package or as a parallel offering alongside PLM), it makes perfect sense to increase the proximity between product definition information and sourcing. For ETO manufacturers, delivering high-quality products on time requires efficient sourcing, decision-making, and operations which rely on instant access to accurate product definition information and streamlined collaboration around it.

The Blurry Line between ERP and PLM in Engineer-to-order (ETO) Manufacturing

The Need for ERP–PLM Integration in ETO Manufacturing

It is important for all manufacturers that have implemented ERP and PLM systems to build connections between the two software applications. For engineer-to-order (ETO) manufacturers (who design and manufacture products to the specific needs of the customer), the connection between ERP and PLM is even more important due to the specificity of the ETO sector.

Facilitating Engineering Changes

For ETO manufacturers, the probability of product and process changes is high. During the time between receiving customer requirements and delivering final products, changes happen (whether the customer modifies their requirements; design modifications are requested by the shop floor; or issues on the supplier's side result in using alternative parts). Quite often, a change initiated in one system (either ERP or PLM) will have a consequence in the other. For ETO manufacturers, the capability of efficiently capturing change requests and implementing change actions throughout the entire value chain (customer, manufacturer, and supplier) in a synchronized manner is one of the key success factors.

Reducing Rework and Scrap

Every manufacturer wants to reduce rework and scrap but ETO manufacturers dislike these costly activities more than the average manufacturer. In the ETO sector, the quantity of each product is usually small—unlike mass production manufacturing. This manufacturing process allows for a certain percentage of rework and scrap and costs are allocated to finished products without significant increase on unit price. For ETO companies to avoid catastrophic wastes in manufacturing processes, they have to make sure that the design department knows what can be made on the shop floor and that the production side always works on the up-to-date design specifications that reflect correct customer requirements.

Meeting Delivery Time
One of the major responsibilities that product/project managers at ETO manufacturers have is to ensure that the product can be delivered on time. Although one delivery delay may result in only one unhappy customer, for some ETO manufacturers, this customer may mean their entire business. The need to oversee both the development and production processes for every product poses a challenge for managers in the ETO sector. . The collaboration between product development and production is even more challenging since the two processes are mainly handled by two different information systems—PLM and ERP, respectively. Unless the two systems can talk to each other consistently, the collaboration won't be effective and efficient.

Providing High-quality After-sales Services

For many ETO manufacturers, after-sales services are not only obligations attached to the product but also an important revenue source. High-quality after-sales services rely on accurate product definition information (usually maintained in PLM systems), traceable service activities (which more likely reside in transactional systems such as ERP), and a convenient reference between the two sides. The entire perception of after-sales services is based on the experience dealing with the product provider as a single entity regardless if customers have access to ETO manufacturers' systems or have to interact using traditional communication means. That being said, ERP and PLM systems have to work as if they are a single system. For more discussion on the integration between PLM and ERP-like systems for service purposes, please read the blog post What Keeps EAM/CMMS Away From PLM?
Alongside other business objectives, the four factors mentioned above make the connectivity between ERP and PLM a necessity for ETO companies. Ideally, it would be great if there was a single system handling everything that an ETO manufacturer needs. However, during the early days of development, the product development application camp (e.g., computer aided design [CAD] and product data management [PDM] vendors) and the transactional enterprise system camp (e.g., ERP and supply chain management [SCM] vendors) were developing solutions in significant ignorance of each other. Also, ERP and PLM systems were not implemented at the same time for many organizations (often ERP was implemented earlier that PLM) and integration between the two systems seemed to be the only realistic option.

Tip Two: Extend Systems to Suppliers

Once the basic problem of aligning manufacturing schedules with demand is taken care of, the greatest bottleneck to improved supply chain efficiency is often the disconnect between internal scheduling processes and those of external suppliers. Companies that are vendors to major original equipment manufacturers (OEMs) know that large manufacturers are working to eliminate this bottleneck, and are often working with suppliers on a proactive basis to help them become more responsive.

Technology can play a vital role in eliminating this constraint. In the case of our paint and coatings manufacturer, one of their main bottlenecks was packaging. They outsourced printing on the cans their product was shipped in, which meant that the supplier cannot finalize their own can production schedule until they know the exact product numbers that will be filled. Their packaging actually took longer to produce than the manufacture of the product itself. Even though the cost of the packaging is low in comparison to the actual product to be filled, the scheduling of the packaging supply is one of the most critical and difficult parts of production planning.

The solution was to set up a supplier portal, so that the packaging vendor and other suppliers could look into the production plan and prepare their own schedule accordingly. This eliminated a lot of the manual and administrative work involved with interfacing with a supply chain partner in real time, removing all manual intervention and administrative delays. Portals of this nature can also provide a longer view of anticipated production so that vendors can manage their own inventories and plan their own capacity according to anticipated demand.

Figure 1. A supplier portal eliminates administrative waste and integrates the supply chain in real time.

Tip Three: Run Parallel MRP Processes

To clarify, this tip does not have as much to do with running parallel systems for manufacturing resources planning (MRP) as much as it is about delaying the commitment to manufacture to a point where demand is visible, known or certain.

Even as companies try to focus on the disciplines normally associated with the idea of a lean supply chain, this another fundamental paradigm shift that must take place within their organization, and it is often overlooked.

For instance, many companies operate with one single MRP process. Consider that company that manufactures in a make-to-stock (MTS) mode, whose executives feel that this single MTS enterprise system is adequate for their needs. This attitude is fine—if a manufacturer has a stable, predictable demand for all of its products. But in reality, few manufacturers have the luxury of flat demand. More often the rule of Pareto is applicable. This rule suggests that 20 percent of products have a stable demand, and you can manufacture them efficiently in large quantities. But the other 80 percent of a manufacturers' part numbers are ordered less frequently, and therefore need to be treated differently in the company's processes, systems, and scheduling. This is why virtually any MTS manufacturer should run in multiple manufacturing modes. Most MTS manufacturers would gain from a parallel make-to-order (MTO) system. This will avoid the stockpiling of a large number of items that are more effectively handled in MTO mode, freeing up both capital and production capacity for other products, all without sacrificing responsiveness or customer service. By continually analyzing demand patterns and inventory turns, the point of postponement can be changed over time to achieve the optimal balance between efficiency and responsiveness.

A modern, agile enterprise application will include all of the necessary tools to handle these multiple modes. Apart from ensuring that they have the proper enabling technology, manufacturers will need to carefully analyze the demand patterns for their finished goods and divide them into MTS and MTO.

Figure 2. Demand Planning—Minimize the forecast error and improve customer service without sacrificing inventory turns.

Nine Ways to Use ERP to Make the Manufacturing Supply Chain Lean

Lean in a supply chain context is about a holistic view of procurement, manufacturing distribution, and sales order processing. This means that some level of enterprise technology is necessary to view the organization in an integrated context instead of as functional islands. However, before technology can facilitate the lean supply chain, manufacturing executives need to start thinking in lean supply chain terms. We will be reviewing those terms and sharing the key concepts that are the foundation for the lean effort. In short, we will discuss:

* Four tips to help you bring lean supply chain improvements to your manufacturing operation.
* Five technology tools that help automate these lean supply chain practices.

We'll use a few practical examples along the way to illustrate these concepts, but our main goal will be to define the specific things manufacturing executives can do to make their supply chain lean.

Tip One: Resolve Conflict Between Manufacturing Efficiency and Customer Service

One company that I have been involved with from a lean supply chain perspective, is a manufacturer of paints and coatings. After implementing their new enterprise application, they wanted to use the new-found visibility of their operations to implement a lean supply chain program. They found that before you can lean an organization, you have to have a good idea of what your current operations and processes really are. Then, once you know what you are doing, you can decide on process changes and then measure to what extent those changes have reduced non-value-added work.

What became immediately apparent is that like most manufacturers, this company faced the same conflict between the need to be efficient in production and the need to be responsive to customers. The manufacturing department tended to schedule for maximum efficiency by producing very large batches. This enabled efficient purchase or raw materials , maximum return on machine set-up time, manufacturing personnel, and other costs. Large batches are simply a good way to minimize the cost per produced unit. Low cost-per-unit is attractive, but it is in conflict with the goals of the sales organization. While manufacturing is rewarded for efficiency, the sales department is rewarded for serving the customer, which in turn leads to increased revenue and commissions. If manufacturing commits production capacity to large runs that are not immediately tied to customer demand, it might be difficult to meet the needs of customers as those needs change and fluctuate during the year. An item that is requested might not be in stock and may not be scheduled for production at a time when immediate capacity is committed due to the high-volume production schedule. Moreover, these large production runs mean that large amounts of capital are tied up in finished product inventory long before any revenue can be realized.

In the case of food and beverage and some other process industries, these large production runs can also result in spoilage as the effective life of raw materials and finished goods is spent sitting on the shelf.

The paint manufacturer did the obvious thing—decrease its batch sizes. Going forward, manufacturing would not be making unilateral decisions about batch sizes and production schedules, circumventing their natural tendency to focus on manufacturing efficiency. Instead, they would now be obliged to produce only enough to cover a certain period of time based on the sales projection. That means that every product will now be produced more frequently and in smaller batches. To encourage this behavior, other metrics and key performance indicators (KPIs) can be introduced that are more holistic and based on customer service levels and inventory turns, rather than just production output.
There are any number of formal disciplines designed to tie production in with sales forecasts. Sales and operations planning is one such method. By tying manufacturing schedules to sales projections that typically look a short distance into the future, you will be manufacturing what customers are actually asking for, improving customer service, and allowing greater responsiveness. Your inventory levels will decrease in proportion to your inventory turns. The higher the speed through the supply chain, the faster the inventory turns, and the less capital that will tied up in inventory at any given time. At the same time, the faster raw materials move through the supply chain, the less obsolescence you have and the less expired materials you have.

Merging Disparate IT Systems and Exploiting Multichannels

Companies that engage customers across many channels, earn trust and repeat business. In fact, there are some indications that multichannel customers spend even 50 percent or more during the holiday season than their traditional single-channel counterparts. For instance, Amazon.com is reportedly celebrating its best ever holiday season with record sales and bullish claims about the number of orders it was able to successfully fulfill. Yet, despite the affability of multichannels, except for a few groundbreaking companies, this is still uncharted territory.

Part Three of the Retailers Join Forces for a "Make or Break" Attempt Their Competitive Landscape series.

Better Web design and wider selections of products offered on-line are important to multichannel success; however it is crucial to understand that factors mitigating revenues and to ability to fulfill Web orders are also key. A good Web site design—one that has streamlined site navigation, search, and checkout processes—enables the kind of sales process that best fits the customer's and retailer's needs, as does good site performance, and a well-designed user interface. One will indeed never achieve proper order fulfillment without a self-evident navigational structure, the right search, help, linking of the site to the support center for synchronous user support, etc. Front-end business-to-customer (B2C) e-commerce success also requires good product information and pricing, because it is easy for Internet customers to comparison-shop. A $2 or so difference in the retail price of a DVD can have a large impact on sales volume when the competition is only one click away.

For a detailed discussion multi-channel sales see "Consumers Shop Everywhere: Understanding Multi-Channel Sales".

Once the retailer has designed its process to take advantage of the multi-channel sales opportunities, it must build a strong infrastructure that supports on-time delivery handles returns, instead of simply focusing on reducing costs. Multichannel retailers must be able to flawlessly execute a full range of services to engage, transact, and fulfill Web placed orders. Hence, most successful multichannel retailers of today had to either build a complete set o in-house or outsource some or all of them.

What's more, traditional brick and mortar retail stores still rely on store clerks and managers to support customers, while multichannel retailers must provide similar support via call centers that are adequately staffed so that customers are not on hold for too long. Additionally, these centers should be available around the clock. There should also be a number of appropriate financial services available, such as payment gateways, merchant accounts, fraud screening, and business payment services. For more information, see Differences in Complexity between B2C and B2B E-commerce.

Apart from Amazon as the Internet retailer pioneer, the likes of Best Buy, Staples, Ahold, Target, and Lowe's have also been carving out their niches. They are capturing growth and profits from multichannel, customer-centric marketing in a competitive market dominated by Wal-Mart's well-oiled retail machine. While Wal-Mart can match the growth of these retailers in absolute numbers just by opening new stores, it will hardly take more business in the competitive multichannel market serving customers with individual, personalized shopping experiences and by delivering on their complex requirements.
Considering the use of technology for supply chain effectiveness and differentiation, new technology will be indispensable for Sears Holdings, which will be created when Kmart Holding Corporation (NASDAQ:KMRT) and Sears, Roebuck and Co. (NASDAQ:S) complete their merger. Yet, so far, neither merging party has been a dominant force in any retail segment and neither are they known for their respective IT or supply chain management (SCM) proficiency. They have only had sporadic investments in some applications with less than limited success (to put it mildly). An astute IT strategy should help any company develop a strong competitive advantage whether it be improved time-to-market, better insights about customers behavior and preferences, or devising a more efficient supply chain.

But, with the impending merger, the two giants will likely be preoccupied with rationalizing their numerous diverse IT assets, decommissioning redundant ones, and integrating the rest without losing crucial sales and inventory data, that there will be little time and resources to pursue anything else. Already lagging behind the competition technology-wise, it is difficult for us to see how Sears Holding will not fall further behind, let alone overtake the competition.

One should also bear in mind that poorly leveraged technology had been a major reason for Kmart's bankruptcy. Since the 1980s, Kmart seemed fall into complacency. It failed to stick to the traditional tenets of business—impressive customer service, constant innovation that keeps customers' attention, and cost savings. Moreover, while Kmart attempted to harness technology to address supply chain efficiency, it did not follow through to get value out of its solutions. For example, in mid 2000, Kmart deployed a number of SCM products including i2 Technologies and former EXE Technologies (now part of SSA Global), to launch an ambitious renovation attempt worth $1.4 billion (USD) of software to improve its supply chain systems. It aim to reduce store-level out-of-stocks and to increase inventory turns (see i2 Will Come Out Ahead in Kmart Deal). Unfortunately, Kmart had seemingly fallen prey to the misperception that packaged applications, in plain "vanilla mode," and without significant modification could run a complex organization of its size. The project had all but stalled. A year and a half later, before the systems ever went live, the company announced that it was abandoning most of its software and was instead buying a warehouse management system (WMS) worth $600 million (USD) from Manhattan Associates. This too apparently failed to solve the company's supply chain problems, and it went into bankruptcy in early 2002.

Yet, a significant software investment is necessary to effectively meet the needs of multichannel shoppers. Once can hardly imagine the success of Amazon.com without a significant application investment. Complex organizations need a level of applications customization. Given the potential of multichannels, the need for technology and of all these factors, Sears Holding must become more technically daring and innovative as it strives for a possible differentiation. Unlike the chaotic moves Kmart undertook a few years ago, at the same time the company was faltering, Sears must view IT as the enabler for business success, not the "be all, end all". A mitigating factor to Kmart's faulty forays may very well be that Sears seems to be more innovative and aggressive when it comes to leveraging technology to achieve operational efficiency.

Indeed, behind many success stories in American business lies an innovation. Going back a century, in the case of Sears, the innovation was the mail order catalog. At the time the company began in the late nineteenth century, rural general stores were ripping customers off by often charging 100 percent mark-ups on goods. Rural customers eventually rebelled by spending their dollars with mail-order pioneers, especially with Sears, whose model supported cheaper prices and higher volumes than the rural stores. Further, the system was backed by an ever-improving postal service. When Sears' catalog sales were at their peak, customers often ordered from the catalog over the telephone and picked up the goods at the nearest store. Since its introduction a few decades ago, the catalog pick-up area has always been very busy.

Fast forward to the 1990s. Sears did not sell anything on-line until 1997, and until 1999, it offered only one product category. From the beginning of the Internet revolution, Sears' strategy was to maintain at least one face to the customer. It wanted to ensure there were no rifts between "on-line" and "off-line" Sears. Today, products bought on-line can be picked up and returned to the stores, if necessary. Customers can also schedule in-store service visits on-line. Sears also provides near real-time inventory visibility across all stores.

Challenging the Competition: Mega-mergers and Supply Chain Technology

In the face of the mega-retail stores, like Wal-Mart and Target, some of America's oldest retailers have joined forces to remain competitive. Late 2004, Kmart Holding Corporation (NASDAQ:KMRT) and Sears, Roebuck and Co. (NASDAQ:S) signed a definitive agreement to merge. Following suit, Federated Department Stores, Inc. (NYSE:FD) and The May Department Stores Company (NYSE:MAY) announced February that they also entered into a merger agreement.

Part Two of the Retailers Join Forces for a "Make or Break" Attempt Their Competitive Landscape series.

On paper and in terms of numbers, these acquisitions look like idyllic marriages of convenience—they will, theoretically, create more powerful revenues players in the retail industry with their respective $55 and $30 billion (USD). Points of distribution and renowned proprietary home and apparel brands will be expanded and significant opportunities for improved scale and operating efficiencies will surely emerge. In the short term, by combining supply chains and aggregating their purchasing powers by, for example, consolidating shipments or leveraging volume deals with carriers, Sears and Kmart, estimates at least $300 million (USD) in savings. In theory, the merger could produce a new layer of competitive challenge to two undisputed mega-retailers, Wal-Mart and Target, by giving Sears Holdings a combined total of nearly 3,500 stores and by creating a service organization capable of a major expansion to serve the needs of existing Kmart and Sears customers.

The merger should generally enable the combined businesses of Sears and Kmart and of Federated and May, respectively, to produce higher profits or profit margins than any of these companies could achieve on their own. This may particularly be true for Kmart, for whom this merger is a virtue made out of necessity and likely the only way it could continue its long-term existence. While Kmart has improved its financial performance and operations since coming out of bankruptcy in 2003 to the point where it even become a buyer, it has not been able to distinguish itself from Wal-Mart and Target, not to mention an army of boutique specialty stores, catalog retailers, and Internet-based sellers. Without this merger, its stand-alone, long-term survival is difficult, at best.

The Kmart's conundrum has long been its inability to position itself clearly within the retail market. It was caught in a twilight zone between an extremely efficient low-cost retailer, Wal-Mart, and a fashion-oriented brand-name discounter, Target. At the same time, the company appeared to be oblivious to customers' voices of dissatisfaction as seen in its poor customer service, run-down stores, and indolent merchandising and outdated product lines.

Thus, Sears might provide a better corporate foundation, brand tradition, and more demand-driven growth strategy that can better leverage Kmart's extensive real estate assets more effectively in the highly competitive retail marketplace. Namely, the amalgamation might make the Sears and Kmart franchises stronger by accelerating Sears' much needed off-mall growth strategy by using existing, convenient Kmart locations.

As a proof of concept for the off-mall model, Sears is experiencing early positive results with three "grand" store formats. Instead of taking the time-consuming approach to assess a new site location and to build a store, Kmart's current store assets, distribution, and logistics infrastructure allows for a relatively immediate set of options that can be re-brand into Sears Grand and be broadened into new geographies. In fact, the idea for the merger was born during the recent sales transaction of several dozens stores between Sears and Kmart when they were independent.

Ultimately, the savings from the merger should certainly bolster Sears and Kmart's competitive strength, since their combined purchasing clout and streamlined supply chain capabilities is projected to result in $300 million (USD) of financial improvements. This may be cost equivalent to Target and somewhat improve costing against Wal-Mart. The volume of this combined portfolio can increased the opportunities for new private-label product development. According to some calculations, if improved process flows like stock availability, promotion planning, and price management are combined with (though not yet fully fleshed out) supply chain improvements, the combined entity could produce nearly $1 billion (USD) in cost and operational efficiencies. Still, these advantages, coupled with potential savings from workforce wages spiraling down across several industries, may reflect an emulation of Wal-Mart's practices rather than any sort of differentiation.

In the case of Federated and May, the cost efficiencies from their merger may not necessarily reverse the protracted decline in their department store sales, given its scale is much smaller than the behemoths like Wal-Mart and Home Depot. In fact, the merger might even increase the risk of brand equity erosion, given that in the future, their presence will no longer be as geographically dispersed, and that there will be a subsequent, reduced distinction between the stores' brand recognition.
The Sears-Kmart merger should "beef up" their brand portfolios, since each will benefit from the other's distinctive merchandise assortment. On one hand, as Sears continues to fine-tune its merchandise strategy, successful product lines like the Kmart's Martha Stewart Everyday or Jaclyn Smith should become viable options to include in the Sears mix. Conversely, Kmart's remaining branded locations could see the introduction of longstanding Sears product lines, including Craftsman, Kenmore, or even the new Lands' End apparel products. Merchandising is to retailers what rosters of pitchers and hitters are to baseball sport clubs: the broader assortment of options should, in principle, allow each retailer to fine-tune products to the appropriate target customer demographics for each of the remaining product lines.

However, one should note that though Kmart and Sears are large retailers, they do sell to different groups of consumers— Sears sells mainly to married men in their late thirties and early forties who are looking for Craftsmen tools. Kmart targets largely senior citizens with lower incomes. This might impair future cross-selling. Moreover, Sears has not proven its proficiency with apparel. Its 2002 acquisition of Land's End, which pioneered the virtual fitting room back in 1999, has been poorly exploited.

The Land's End customer profile seemed to be a good fit with the demographics of buyers of Sears appliances and tools, and Sears attempted to use the preppy brand to lure well-off shoppers to its combined apparel and home appliances department stores. However, with apparel being a stocking nightmare with nearly a gazillion styles, sizes, and colors that completely change every three months or so (see Intentia: Stepping Out With Fashion and Style; Part One: Characteristics and Trends of the Fashion Industry), Sears often had meager selections at each locations, discouraging its middle-class clientele. Thus, the merger with Kmart provides both an opportunity and challenge of how Sears should handle the popular Land's End brand. However, one should note, that Sears may have already decided as there are early indications that it is seeking a buyer for the Land's End division .

In general, Sears Holding will have to force customers through a new learning curve with significant advertising campaigns to increase market share and customer loyalty to certain product brands. Customers will have to change their perception from discount mass merchandise stores to more upscale stores. However, Sears Holding will have to make sure that customers are not pressured by too aggressive sales associates trying to push the new retail image, because customers need to feel they are making informed decisions about their purchases. If not, customer loyalty may be compromised.
Moreover, these potential benefits come with a number of significant "ifs and buts." The main question is whether Sears Holding can develop a successful, competitive strategy. At this stage, most consumers have different perceptions of merging parties. Kmart is still associated with low prices, boring store layouts, and mediocre services, while Sears, despite losing market share to equivalent general stores like Target, Lowe's or Kohl's, is synonymous with higher-quality merchandize and above-average customer service.

If Kmart is going to remain a mass discounter, how will it succeed in the long term if its prices remain even 15 percent higher than those of Wal-Mart? On the other hand, how will Sears, with its aura of a genuine North American retailer, differentiate from its competitors in terms of its product categories and the way its stores will be arranged, located, and stocked? In other words, the combined parties will have to figure out, first of all, what (or, if still diversified, in which ratio) they want to be. Do they want to be a mid-size retailer in the malls or a mega-store operator in the suburbs or rural areas? Once decided, they need to devise the merchandizing, pricing, payment, and other processes to back up their strategy.

The decisions the future Sears Holdings makes in the area of a coherent merchandizing strategy will not only have an impact on its future brand recognition, revenues, and margin, but also on the performance of its supply chain and downstream business processes. It must first figure out and then bring into line the capabilities and goals of merchandising, supply chain management (SCM), and its accompanying IT assets. It is expected that Sears Holdings will build its SCM capabilities around efficiency like Wal-Mart, but, for the sake of some differentiation, these competencies should also envelop speed and flexibility to compete with more versatile competitors.

Even if the two retailers merge their different corporate cultures, store formats, working procedures, and target demographics, perhaps the biggest challenge will be instilling a pervasive culture that embraces IT as an enabler.

Retailers Join Forces for a "Make or Break" Attempt in Their Competitive Landscape

Amid the ongoing spate of mergers in the business software market, our attention was drawn to the recent mega-merger of two of the oldest retailers in the US. In late in 2004, just before the holiday rush, Kmart Holding Corporation (NASDAQ:KMRT), and Sears, Roebuck and Co. (NYSE:S), announced a definitive merger agreement to form the Sears Holdings Corporation. What is interesting, is not that Sears Holdings will become the US' third largest retailer, with approximately $55 billion in annual revenues, 2,350 full-line and off-mall stores, and 1,100 specialty retail stores. It is how they will merge two disparate information technology departments and supply chains.

Part One of the Retailers Join Forces for a "Make or Break" Attempt Their Competitive Landscape series.

The issue isn't that they offer diametrically opposed products and services. Kmart is a mass merchandising company that offers customers products through a portfolio of exclusive brands that include Thalia Sodi, Jaclyn Smith, Joe Boxer, Martha Stewart Everyday, Route 66 and Sesame Street. Similarly, Sears is a broad-line retailer providing merchandise and services including home merchandise, apparel, and automotive products and services through more than 2,300 Sears-branded and affiliated stores in the US and Canada. While the combined business will supposedly create a broader retail presence and improved scale through a national footprint of nearly 3,500 retail stores, it also will create significant issues for their supply chain systems. Alone, the sheer size of these enterprises can make internal coordination difficult with their odd conglomerations of business practices and enterprise application packages from a variety of vendors. The problem is further exasperated by how these systems will be amalgamated. Recognizing this issue, both Sears and Kmart have lately made significant strides in transforming their organizations. The merger is hoped to further accelerate this process. It hopes to also benefit from improved operational efficiency in areas such as procurement, marketing, IT and supply chain management (SCM).
he fruits of this merger were borne when Sears purchased around fifty Kmart store locations for approximately $575 million (USD) earlier in 2004. Edward S. Lampert, a savvy financier who acquired the $23 billion Kmart for less than $1 billion of Kmart bonds and other debt in bankruptcy court and became its largest shareholder and chairman of the board, has since orchestrated the merger.

Under the terms of the agreement, which was unanimously approved by both companies' boards of directors, Sears Holdings will be headquartered in Hoffman Estates, Illinois (US), and Kmart will continue to have a significant presence in Troy, Michigan (US). Kmart shareholders will receive one share of new Sears Holdings common stock for each Kmart share. Sears shareholders, in turn, can elect to receive $50.00 (USD) in cash or 0.5 shares of Sears Holdings (valued at $50.61 based on the closing price of Kmart shares at the time of the announcement) for each Sears share. Shareholder elections will be prorated to ensure that in the aggregate 55 percent of Sears shares will be converted into Sears Holdings shares and 45 percent of Sears shares will be converted into cash. The value of the transaction to Sears shareholders was, at the time, valued at approximately $11 billion (USD). Additionally, ESL Investments Inc., a Greenwich, Connecticut-based hedge fund, and its affiliates, which were founded and controlled by Kmart's chairman Lampert, agreed to vote all their Kmart and Sears shares in favor of the merger. They also elected the stock option with respect to their shares of Sears. Lampert will become the chairman of Sears Holdings.

Lampert will be joined in the office of the chairman by Alan J. Lacy, current chair and chief executive officer (CEO) of Sears, and Aylwin B. Lewis, current president and CEO of Kmart. Lacy will be vice chairman and CEO of Sears Holdings, and Lewis will be president of Sears Holdings and CEO of Kmart and Sears Retail. Glenn R. Richter, currently executive vice president (EVP) and chief financial officer (CFO) of Sears, will be EVP and CFO of Sears Holdings. William C. Crowley, currently senior vice president (SVP) of finance of Kmart and a Kmart Board member will be EVP of finance and integration of Sears Holdings. Lampert, Lacy, and Lewis will join the ten-member Sears Holdings board of directors, which will include seven members of the current Kmart board and three members of the current Sears board. Sears Holdings will act as the holding company for the Sears and Kmart businesses, which will continue to operate separately under their respective brand names.

Kmart has made great progress over the past eighteen months to strengthen the organization in terms of profitability and product offerings. The merger marks a remarkable comeback for Kmart, which filled for Chapter 11 bankruptcy protection in early 2002 (see Wet Quarter Postpones Amazon's Desiccation While Kmart Drowns), which lead to about 600 stores (one third of stores at the time) to close; the termination of 57,000 former Kmart employees; and cancellation of company stock.

In March 2004, Kmart posted its first profitable quarter in three years, and the new management believes the merger will create a true leader in the retail industry—both as a key part of local communities and as a national presence. Together, Sears and Kmart hope to further enhance their capabilities to better serve customers by improving in-store execution and ultimately transform the customer's in-store experience.

Sears Holdings will strive to feature a renowned home appliance franchise as well as strong positions in the tools, lawn and garden, home electronics, and automotive repair and maintenance categories. Key proprietary brands coming from Sears include Kenmore, Craftsman, and DieHard. The combined company will naturally have a broader apparel offering, including well-known labels such as Lands' End, Jaclyn Smith, and Joe Boxer as well as the Apostrophe and Covington brands. It will also have Martha Stewart Everyday products, which are now offered exclusively in the US by Kmart and in Canada by Sears Canada.

With revenues in 2003 of $41.1 billion (USD), the independent Sears has been offering its wide range of merchandise through its stores and through sears.com, landsend.com, and specialty catalogs. It is also possibly the largest provider of product repair services with more than 14 million (USD) service calls made annually. Kmart specialty retail stores will, for some time, continue to carry their current lineup in propriThe combined companies is conservatively estimated to generate $500 million (USD) of annualized cost and revenue synergies to be fully realized by the end of the third year after closing. The transaction is reportedly expected to be significantly accretive to earnings per share in the first year before one-time restructuring costs. For one, the companies expect approximately $200 million (USD) in incremental gross margin by capitalizing on cross-selling opportunities between Kmart and Sears' proprietary brands and by converting a substantial number of off-mall Kmart stores to the Sears nameplate in addition to the fifty Kmart stores Sears acquired earlier in year.

Namely, in mid 2004, Kmart announced that it has signed a definitive agreement with Sears to sell up to 54 of its stores for a maximum purchase price of $621 million (USD) in cash. Kmart will continue to operate them until March or April 2005. Sears initially agreed to consider offering employment to any Kmart employee at the converted stores. Earlier in June, Kmart announced that it has also signed similar definitive agreements with The Home Depot, Inc., to sell up to twenty-four stores for a maximum purchase price of $365 million (USD) in cash. The exact number of stores, locations, and total purchase amount were based upon the satisfaction of certain conditions to occur within the next sixty days.

Eventually, the transactions with Sears and Home Depot represented a total purchase price of almost $1 billion (USD) for less than eighty of Kmart stores, or approximately 5 percent of its erstwhile store base. Thus, for each of the past several quarters, Kmart has consistently delivered improved year-over-year profitability and cash flow by focusing on the fundamental aspects of its business. Operationally, it touts improved several areas including product design, buying, inventory management, distribution and the in-store environment. By the same token, the retailer pledges to take advantage of opportunities to create value that include the sale of existing stores, or the acquisition of new stores and businesses. Some who follow Kmart have speculated solely on the real estate value of the company; however, the company counters that it has been taking action on many different fronts simultaneously, all with the goal of making Kmart a great retail company once again.

Additionally, Sears Holdings expects to achieve annual cost savings of over $300 million (USD) through improved merchandising and non-merchandising purchasing scale and improved supply chain, administrative, and other operational efficiencies. Further, the combined company will complete a full store asset review as part of a plan to monetize non-strategic real estate assets as appropriate. Crowley and Richter will jointly lead an integration team of key operating executives from both companies to drive planning and execution of the integration of the companies' operations. The merger, which is expected to close by the end of March 2005, is subject to approval by Kmart and Sears shareholders, regulatory approvals, and customary closing conditions. Lehman Brothers served as financial advisor to Kmart, and Simpson Thacher & Bartlett LLP provided legal counsel to Kmart, whereas Morgan Stanley served as financial advisor to Sears, and Wachtell, Lipton, Rosen & Katz provided legal counsel to Sears.

Early in 2005 Kmart Holding Corporation announced strong profitability and cash generation for November and December of 2004 (period ending December 29, 2004). At that time, Kmart's same store sales has a significantly moderate rate of decline. Kmart expected to generate a net income (excluding any asset sales and bankruptcy-related expenses) of approximately $250 million (USD) for November and December of 2004 with income before interest and income taxes (excluding any asset sales and bankruptcy-related expenses) of approximately $400 million (USD). This will represented an increase income of approximately $23 million (USD), or 10 percent over the same period in 2003. Same store sales for November and December declined by 4.6 percent—in December alone, same store sales declined approximately 2.6 percent. This, however, represented a significant improvement compared to trends from earlier in 2004. Gross margin improved by over 100 basis points over the prior year period. The goal for the combined company is to achieve a 10 percent operating margin like those of Gap and Target.

At the end of December, Kmart's inventory levels were approximately $3.1 billion (USD), while its cash balance grew from $2.1 billion (USD) at the end of its 2003 fiscal year on January 28, 2004 to approximately $3.9 billion (USD) at the end of December. Kmart is expected to be approximately $3.2 billion (USD) at the end of its 2004 fiscal year on January 26, 2005. The $3.2 billion (USD) does not include the roughly $400 million (USD) receivable from Sears, expected in March and April of 2005.

As a result of its cash balances and cash generation, Kmart has terminated the balance of an existing credit agreement which it has never drawn from, with the exception of letters of credit. Kmart also has stated that several banks have committed $3.5 billion of a $4 billion (USD) loan for capital to be used once during its $11 billion (USD) deal to buy Sears. The loan will be effective when Kmart buys retailer Sears, and the money will be available for five years to pay for working capital needs, capital expenditures, acquisitions, and other general corporate purposes. Banks providing money for the loan include JPMorgan Chase, Citigroup, and Bank of America.
etary home and fashion lines

New Dimensions in EC and SCM Part 3: E-Procurement Can Broaden the Supplier Pool

Every business is a purchaser as well as a supplier, with many routinely processing hundreds of buying activities daily. Typically, purchases represent 50 to 90% of a company's cost structure — making procurement strategy and execution a critical lever for effective supply chain operations and superior business profitability.

Electronic commerce offers exciting new possibilities for businesses to improve their performance on this important "upstream" supply chain activity, both for indirect or support items and, increasingly, for materials that are direct components of the products and services that businesses make and sell.

As in many areas of e-commerce, the wide variety of alternatives can be confusing. This article outlines some of the major recent developments in e-procurement and the important strategic and tactical choices that companies need to make in order to answer these questions and to take full advantage of new "buy" side e-commerce developments.

This part discusses how e-procurement can Broaden the Supplier Pool and the pros and cons of this approach to procurement.
* Plethora of horizontal and vertical marketplaces makes comparison shopping easier.

* Don't expect to get the best prices just cruising the Web.

* Repeated switching of suppliers to chase lowest prices can be hard to manage and cause other problems that offset savings.

Broadening the Pool of Suppliers Discussion

Typically, a 1% improvement in the overall cost of purchased materials and services can increase a company's bottom line by 10 to 20% or more — a dramatic impact on profitability and shareholder value. It is no wonder a wide variety of e-procurement solutions have been developed to help companies access a broader range of suppliers and achieve price and service improvements.

This has quickly become a crowded and confusing area, with trade magazines and television ads touting the benefits of alternative Internet sites and start-ups that have emerged to improve the process of bringing buyers and sellers together in a more competitive way. These marketplaces or exchanges offer a defined set of materials and services from a number of different suppliers, where you can view and compare supplier catalogs and price lists, seek supplier quotations for specific needs, and make supplier selection decisions.

These services are typically organized in one of two ways:

* Horizontal marketplaces focus on product lines that companies in a number of different industries utilize, such as Maintenance, Repair, and Operations (MRO) items, office products, and capital equipment. As well, there are sites that focus exclusively on categories of purchased services that have become increasingly important in today's economy — information technology, shipping, management consulting, and others.

* Vertical marketplaces are designed to meet the unique needs of particular industries - plastics, high-tech, and automotive to name a few. Here, you can access information and pricing from suppliers of resins, integrated circuits, castings, and a broad range of other parts and components used extensively in your specific industry. Exchanges have also developed to cover excess inventory, used equipment, and other items and types of transactions that historically have been particularly inefficient or time-consuming.

The primary e-procurement benefit of these marketplaces is that they facilitate much easier comparison shopping. The substantial legwork that used to be required to identify potential new suppliers, understand what they offer and obtain price quotations from them now can often occur in a matter of minutes. In an increasingly global economy, it has become more and more important for companies to find and use appropriate suppliers anywhere in the world, and e-procurement marketplaces provide a valuable method for increasing the access to these new potential supply sources.

These marketplaces and exchanges initially focused mostly on indirect materials and support services, since they were arguably the items that are critical to a business and least risky to buy through these new methods. However, there has been a rapid expansion of categories that are covered, and now just about anything a business needs, including critical raw materials, components, subassemblies, and even basic commodities such as fuel and agricultural products can be bought using horizontal or vertical exchanges.
In most major categories of goods and services, and in most major industries, multiple marketplaces or exchanges now exist. The "land grab" in business-to-business e-commerce has largely been completed, with dot-coms having obtained venture capital financing, recruited leading industry and category experts, locked up the best Internet addresses, and established their presence in the marketplace through media advertising, industry marketing programs, e-mail discount offers, and other high-visibility activities.

The original concept of these exchanges was for independent operators to facilitate interactions between buyers and sellers in fragmented markets. But new developments occur quickly in electronic commerce. Most recently, in many industries the major buying companies in that industry have set up and are operating their own exchanges — in the automotive industry, high-tech manufacturing, retailing, agri-business, and many others. While these "buyer-centric" exchanges can no doubt be effective, there is a growing concern among suppliers that their purpose is not to broaden the pool of suppliers but to enable the biggest corporate buyers to exert their combined clout over their smaller suppliers and extract lower and lower prices. Using e-procurement tools to achieve volume leverage is discussed in more detail in the next section.

With extensive competition both within and between exchanges, suppliers need to offer sharper pricing, better quality, and more value-added services to differentiate themselves and retain and grow their businesses — at least in theory.

So which of these many alternatives provides the best e-procurement value? And are they significantly better than more traditional methods? A personal market test of the alternatives available to small professional services businesses is described in a sidebar to this article — and concludes there is some modest value that is available but that a substantial amount of legwork is still required to achieve it.

An Analyst’s View of Process Industry SMB Challenges

The process industry provides many of the products we use in our daily lives for food, shelter, and health. Such products are created when materials are transformed through the use of energy resources and chemical products. In addition, the process industry manufactures products that are essential to advanced industries such as computing, biotechnology, telecommunications, automotive, scientific, and space exploration.

These industries are facing major pressures not only to meet the present needs of our global economy, but also to do so without compromising future generations by ensuring that processes

* meet environmental guidelines
* optimize energy resources efficiently
* result in products that are safer, more reliable, and more functional
* provide features that meet both industry and consumers needs

This article focuses on how enterprise resource planning (ERP) vendors are helping the process industry meet both the needs of today and deliver on anticipated functional requirements that will help meet the needs of tomorrow.

Process Industry Manufacturing Challenges

Manufacturers in the process industry are at a difficult crossroads. Although the industry is not facing any imminent substantial decrease in its overall profit margins, there is concern in the industry according to a recent study by the Canadian Manufacturers and Exporters Association, which cites the following issues:

* increased global competition
* foreign currency fluctuation
* changing patterns of customer demand
* escalating business costs
* problems in implementing new technologies
* competitive business pressures
* shortage of skilled workers

To address these issues, process industry manufacturers and distributors must manage the following key activities, and ensure they use an enterprise system that supports these activities:

* Planning production for both materials and capacity—to develop a production plan, manufacturers must ensure that there are sufficient available resources and materials, production capacity, and labor.
* Inventory tracking and controlling work-in-process (WIP)—monitoring material consumption and tracking work order progress is the basis of manufacturers’ being able to meet sales order, demand, and delivery dates.
* Replenishment and demand planning—the ability to review variances between forecasted and actual sales is the basis of managing vendor lead times and raw material replenishment.
* Managing the supply chain for order fulfillment—reviewing the global supply chain provides manufacturers with the ability to coordinate logistics and operational activity to meet customer order fulfillment expectations.

Specific Requirements of an ERP System for the Process Industry

Here’s an overview of how some of the functionalities of an ERP system for process industries help manufacturers better perform the activities listed above.

1. Conversion process capability
In the process industry, the bill of materials (BOM) used in discrete manufacturing is replaced by the master product formula, or simply the formula. The formula requires a conversion table for measures, such as weights from grams to pounds, and must have the ability to record liquid units of measure, in both metric and US-standard. The formula must also record specific information related to product characteristics that can affect manufacturing processes. For example, in the blending process, the system can record product information such as percentage calculations of raw materials, and the effective specific gravity, potency, density, and number of reactives of those raw materials.

2. Interface to other modules
The master formula can also be linked to submodules like quality assurance (QA), procurement, inventory, and accounts payable (A/P) for government compliance and safety issues. Also, the manufacturer must be able to trace products in order to manage dating of inventory lot control and the amount of inventory available at the distribution level. Furthermore, there are government and regulatory concerns that deal with the nature of the materials, as there may be a controlled substance with specific shipping, handling, and storage regulations. Or, the manufacturing process may emit hazardous by-products. Or, there may be logistical concerns within the manufacturing process itself.
3. QA module and flexible formula adjustments
A process industry ERP system must also have a formulation-balancing operation based on the premise that the QA group tests random samplings of production batches. The system needs the ability to adjust, through a program logic control (PLC) interface, any variations in materials used and external factors such as humidity, temperature, cool-down speeds, etc. Also, the material flow and consumption is recorded back into the ERP system. The system’s routing functionalities reflect those capabilities as a requirement or not, depending on the user’s specifications.

4. Reworking all co-products and scrap materials
As a result of manufacturing processes, residual materials (by-products) may be created. These by-products can be collected as waste and reused. This is the case within the plastics industry, for which the collection and re-entry of materials into process creates very specific criteria. In the process industry, due to a continuous production flow operation, the production process generates a theoretical production yield, which may be calculated by the downstream packaging operation as units for case-pack quantities. The residual amount generated from the production process may vary within a percentage point, but in the downstream conversion process, the residual quantities may be aligned to complete full, case-size box quantities. By using flexible formulas, process ERP systems can demonstrate how the residual materials can be reworked from waste back into materials used in production.

5. Supply chain management (SCM)
Collaborative forecasting and planning are essential features of the process industry ERP system, especially for the automotive and consumer products industries. Some the most important functionalities include

* visibility over inventory across the global supply chain
* enterprise-wide planning in the areas of sales and marketing, procurement, and production
* the ability to integrate planning for what-if scenarios
* the ability to benchmark quality and vendor performance issues
* detailed reporting that highlights areas where parameters may be out of scope
* real-time available-to-promise (ATP) information for customer service

6. Process industry costing
The financial system for the process industry must also be able to provide for multiple-level formulas on the same production work order, and for outside processing at subcontract facilities. Given the nature of process industry products, most plants must operate on a continuous basis, which drives maintenance costs up. As a result, maintenance costs usually comprise 30 percent of a process industry plant’s operating budget. Thus, an ERP system must integrate with some type of best-of-breed system to meet the requirements of the operation, and with some form of asset management system, which takes into account predictive and preventative maintenance.

ERP System Constraints in the Process Industry

For lack of an available solution designed for their needs, some process manufacturers have attempted to implement an ERP system for discrete manufacturing. As there are several fundamental differences between the operations and practices of process and discrete manufacturing, opting for such a stop-gap measure is not always effective. Process manufacturers have no doubt noted the constraints that are placed on their operations as a result of using a system that was not designed for their needs. The nature of the process manufacturing business is such that it is difficult to manage inventories and profits. Process manufacturers experience large quantities of finished product in transit and of raw inventory. The products often have low yields with substantial scrap (fine chemicals, pharmaceuticals, or plastics).

Business dynamics is putting demands on ERP systems to help with

* maintaining a lead over competition
* simplifying the product lines
* responding to shorter product life cycles
* providing mass customizations (car options, computer system accessories, etc.)
* complying with regulations compliances

In an attempt to meet these demands, many manufacturers have looked at ways to improve supply chain optimization by re-examining manufacturing processes, relocating closer to markets, and looking at cheaper energy, transportation, and labor. The businesses’ needs are such that an ERP system must be powerful enough and diverse enough in functionality to do more than simple process manufacturing.