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Web services as a strategic element of your Supply Chain

Web services are seen as a wonderful advancement in technology enabling all manners of integration and information exchange between multiple platforms, operating systems, databases and systems. To date, however, the sparkling examples of Web services have been currency converters, stock quote services, etc. All good examples of a Web service, but akin to demonstrating a car by showing how the dome light goes on when you open the door. This article will apply Web services to a specific business model. We will ignore the consumer model for the time being and instead focus on how business's can benefit from deploying Web services in their Supply Chain.


Market Analysis

Web services as a strategic element of your Supply Chain
Web services are seen as a wonderful advancement in technology enabling all manners of integration and information exchange between multiple platforms, operating systems, databases and systems. Recent adoptions of Web service based strategies by software companies, portals and systems integrators supports the life of Web services as a viable toolset. To date, however, the sparkling examples of Web services have been currency converters, stock quote services, etc. All good examples of a Web service, but akin to demonstrating a car by showing how the dome light goes on when you open the door.

This article will apply Web services to a specific business model. We will ignore the consumer model for the time being and instead focus on how business's can benefit from deploying Web services in their Supply Chain. First, let's understand what this author means by Supply Chain.

Definition
A Supply Chain is comprised of suppliers, partners, customers and employees. These separate companies work in concert to deliver information and products/services to fulfill demand of the market. Each of these companies, and sometimes the departments or divisions within a company, utilize widely disparate technologies and systems to support their participation in the aggregate model. This has been a significant barrier to deploying true, collaborative business processes that improve the exchange of information and product.

These existing systems (ERP, SCM, CRM, etc.) are data rich, secure and scalable relative to the scope of their design intent. Yet this scope is too narrow for today's opportunities that demand intra and inter-company collaboration. Add to this the technology utilized to develop these systems is not a service-oriented architecture and as such, introduce tremendous risk, cost and time in modifying them to address the pressing issues of your Supply Chain. Web services allows you to protect your existing system investments and play to their advantages while creating the common infrastructure, framework and application set that can exploit the opportunities of your Supply Chain as you deploy a Collaborative Supply Chain.

What are the opportunities in my Supply Chain?
A Collaborative Supply Chain yields the following results [see ref. below]:

  • Decrease inventory levels 10-20%
  • Reduce inventory carrying costs 5-15%
  • Increase sales by 10-30%
  • Increase margins by 5-15%

The financial impact is significant if even one of these improvements is realized. Web services provide the ability to realize these benefits by enabling you to utilize the data from your existing systems to improve the flow of information and product that creates these benefits. Web services for the Supply Chain represent a new way of deploying software. Historically, an entire solution was implemented that required replacing existing systems and process. This is very disruptive to the business and can result in headlines about your projects failure. Web services are an incremental solution that take advantage of your existing systems and don't put your business at risk. Web services projects should be directly aligned with a benefit and managed in smaller, discrete projects with short duration and clearly measurable benchmarks and results. Let's look at each opportunity separately to understand how the benefit can be achieved.

How can they be achieved?
Decreasing inventory levels by 10-20% is achieved by improving the availability and timeliness of information across the Supply Chain. The impact of improved information up and down the Supply Chain results in reduced inventory levels as companies can begin moving away from a forecast model to an actual demand model. Actual demand is achieved by gaining visibility into inventory levels and order status (purchase and sales) in real time. Web services minimize the complexity of gaining this view by protecting the existing systems up and down the Supply Chain. Your supplier or customer's choice of system no longer impedes your ability to fully understand what is happening in your Supply Chain and how your company can react to improve its performance as well as that of the entire Supply Chain. Programs such as Vendor Managed Inventory, Consignment, and Just-In-Time can now be implemented without the cost or risk associated with managing these programs. Innovative relationships can be developed with supplier and customer alike that drive down inventory levels throughout the Supply Chain and result in real dollar cost savings for everyone.

Reducing inventory carrying costs 5-15% is a direct result of the same improved information flow that reduced inventory levels. Traditionally, it has been estimated that inventory-carrying costs are nearly 20% of the inventory value. These costs are tied to the administrative expense required to manage today's systems and relationships, the operational expense associated with handling and storing the excessive level of inventory, and the financial expense of tying up valuable capital in inventory. The administrative expense will be reduced as systems and relationships take less time to manage successfully. The operational expense will be reduced as inventory levels lower and less facility space and labor time is required to receive, track and ship the inventory. Financial expense related to inventory will reduce as dollars are freed up from financing inventory levels and made available for other investments to facilitate growth.

Increasing sales by 10-30% is achieved by establishing better relationships with customers, better service levels to customers, and a more cooperative win-win approach to being their partner. If you implement a Vendor Managed Inventory program with your customer, you will likely be offering a service your competitors are not offering. If you implement a Vendor Managed Inventory program with Web services to your customer, you are offering this program at a cost and service level your competition couldn't afford to approach. As such, you have strengthened your relationship with your customer and provided them financial benefits as their re-ordering expense drops and their product availability improves.

If you really want to capture the attention of your customer, explain to them that you will consign the inventory in their operation and they will only have to pay you when the product actually sells. Web services make this model extremely attractive to both you and the customer. The customer gets obvious benefits from this program because now all of the inventory dollars tied to your product is freed up. They will only incur a purchasing cost when they actually consume an item. The benefits to you are not as obvious. With Web services, this model can improve your order to cash cycle, increase your margins as you provide a financial service to the customer, and increase your service levels. All of which will increase your sales to this customer.

Increasing margins by 5-15% is a by-product of decreasing your inventory levels, inventory carrying costs and offering your customer greater service. This has also resulted in increased sales. The customer has not paid any more money for your product than they did previously, but your company is making a greater margin that contributes to your cash flow and puts you in the enviable position of deciding what to do with the extra money.

Case Study
Now let's take this model and apply it to a fictional company. The company is a wholesaler who sells to convenience stores. They have an ERP system in place to manage their financials as well as the purchasing and order management. They have a warehouse management system in place to fulfill the orders. Their customers have a myriad of systems for running their retail locations. Some customers just have a cash register and no real systems in place. The first step this customer took is in estimating their opportunity. Taking their current sales, inventory levels, gross margin, operating margin and net margin, we are able to calculate their opportunity. Here is a snapshot of their operations today:

Sales.........................$100M
Inventory......................$15M
Gross Margin....................28%
Operating Margin................20%
Net Margin.......................6%

Applying the opportunity model for their Supply Chain, and assuming they are currently operating at normal levels for their industry, we can calculate the opportunity that exists. The first analysis should be for internal improvements only and not consider the external improvements in sales. This analysis yields the following new numbers:

Sales.........................$100M
Inventory...................$12.75M
Gross Margin.................28.16%
Operating Margin.............22.72%
Net Margin...................12.01%

As you can see, they went from making a net profit before taxes of $6M to making a net profit before taxes of over $12M. These numbers don't start falling out of the computer the second you turn on the Web services, but instead are achieved incrementally as you establish more and more functionality in the Web services layer. Now let's consider the full impact on our company when we consider the external opportunities of increased sales. Applying the full opportunity model for their Supply Chain yields the following new numbers:

Sales.........................$120M
Inventory....................$15.3M
Gross Margin.................28.14%
Operating Margin.............22.70%
Net Margin...................11.99%

The numbers stay relatively the same for each of the margins (rounding contributes the greatest impact). The inventory level increased to reflect the increase in sales but is proportionate to the inventory level achieved in the first analysis (15% decrease). Without changing product mix, without increasing the number of facilities and while decreasing your operational costs per dollar, our company has realized a 20% increase in sales and nearly doubled the profit. These are the types of opportunity that Web services can bring a Supply Chain.

Summary
Web services can protect your existing investment in systems and process that support your Supply Chain. They provide an incremental strategy to creating new and innovative ways to collaborate with your suppliers, partners, customers and employees. This incremental strategy allows your company to better control risk, cost and time as you explore areas of improvement. The financial opportunity is significant for everyone involved in your Supply Chain and positions your company to take a competitive lead in your industry. In short, Web services eliminate barriers that prevent you from collaborating effectively and maximize the effectiveness and return on your assets.

Sources: [ Back to Article ]

The Performance Measurement Group (www.pmgbenchmarking.com)
Volume 2 Number 6
Stage of Maturity Correlates with Performance, Profitability, and Sales Growth: Signals of Performance

PRTM Insight Magazine (May 2001)
Supply Chain Cost Management: New Breakthrough Potential

PRTM Insight Magazine (August 2000)
The New Value Chain

PRTM Insight Magazine (August 2000)
Replacing the Supply Chain with a 'Web of Webs'

PRTM Insight Magazine (December 1997)
Benchmarking Study Shows Dramatic Reductions in Costs Using Best Practices for Supply-Chain Management


Copyright 2002. Reprinted with permission. Babbleware LLC is a software product company specializing in Web services developed Collaborative Supply Chain solutions.

About the Author:

Steve Christensen is the President and Founder of Babbleware and has been involved in Supply Chain systems since 1987: Four years in Manufacturing and Wholesale Distribution and 11 years in Software. His career includes roles as financial analyst, business analyst, project manager, director of projects, product management, sales and marketing. He holds a BBA in Finance from the Univ. of Iowa and did his graduate studies at the Univ. of Cincinnati in International Finance and International Marketing. Steve has been published in trade magazines, spoken at numerous conferences and participated in Industry Roundtable discussions.

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