One result of this has been many dot coms decide they don't need to do any warehousing. That has resulted in a real surge of business for third-party logistics providers (3PLs) as the dot coms turn to them for warehousing services.

But it's not just Internet companies that are turning to 3PLs to handle their distribution requirements. Traditional brick-and-mortar companies accustomed to picking and shipping pallets and full containers are also turning to 3PL's to handle the small, individual orders associated with a new business environment.

"Most companies are looking inwardly at all their functions and asking if this is a core competency," says Ronald Riggin, managing director, Global MARC products for TRW. "For the company that answers that question with a no, the 3PL can get all their inventory under control under one roof."

Those 3PLs need a different breed of WMS, and only recently has it become available to them. Most importantly, they need software flexible enough to adapt to their changing mix of customers and inventory.

"A 3PL doesn't know what its customer and inventory mix is going to look like from year to year," says Riggin. "It needs a WMS that can change when business changes."

In other words, 3PLs require all the functionality of a best-of-breed WMS, plus some additional functions. These include the ability to support multi-company ownership of inventory and the ability to provide detailed billing information, depending on how the customer is billed.

"Billing may be based on the number of transactions processed, on certain transaction types, on the amount of space utilized, or some combination of the three," says Patrick Majure of Majure Data. "The WMS has to be able to distinguish between those options, and do it for a number of different customers."

In a 3PL environment, the WMS also needs to differentiate between different order types. This requires the ability to assign different order types to different pickers, to print on different paper depending on the client, and to cycle count different products in different ways.

In a dot com environment, the WMS needs to be able to provide real-time information to a host system. This allows it to meet the increased demand for customer service and order information provided to e-commerce customers about the status of their orders. Catalog companies have typically received orders during the day and batched them over-night for picking and shipping the next day.

"The 3PL is not just processing orders, it is sharing information across disparate systems within a supply chain," says Dave Linnen, vice president of product strategy at Intrepa. "The WMS in a 3PL has to be able to receive information from different companies and different systems."

Avery Dennison Office Products-North America has found a simple solution to at least one complex info-tech problem. Earlier this year, the Brea, Calif.-based manufacturer decided to forego the purchase of costly load-planning software in favor of renting a transportation planning application called FreightLogic.

Although the software's vendor, Provia, actually runs the program on its computers, Avery Dennison managers at three separate warehouses can tap into the program from their sites. In operation, the transportation application takes information from Avery Dennison's order-management system, processes that information, and groups the orders into loads. The software then exports the load assignments back to Avery Dennison's warehouse management system with the shipments already configured and assigned to carriers.

Software rental expedited implementation of the program because Avery Dennison didn't have to install the package on its own computers. "It shortened the startup time because we didn't have to train technical people. All we do is file mapping with them," reports Tom McGilloway, senior project manager at Avery Dennison. "To me, it was a better option. We don't need to be experts in the software. We just need to be able to use it."

If the pundits are correct, a lot more companies in the next five years will be following Avery Dennison's lead and renting sophisticated supply chain programs. Software vendors will be transformed into what are known as "application service providers" (ASPs), which will give users access to their packages on a transaction basis or for a fixed monthly or annual fee-often over the Internet. "Five to seven years from now, almost all software will be [distributed via the] ASP model," predicts John Fontanella, research director for supply chain execution at AMR Research in Boston.

Web-hosted supply chain software applications offer the promise of quick deployment and easy connectivity among trading partners in a given industry channel. But some consultants question whether a company can still obtain all of the benefits of improved supply chain operation if all the requisite applications are not linked together under one roof.

A New Software Model

Since the industry's inception a decade or so ago, logistics software makers have charged for their products by means of licensing fees. In addition, their clients usually had to budget money-which typically was paid to an outside party like a consulting firm or systems integrator-to tie the software to existing programs for information exchange. And the costs didn't end there. Users also incurred expenses for training their personnel how to use a specific software application properly.

Once a company purchased the rights to a software package, it then installed the program on its own machines. But recent advances in computer technology have made it easier for companies to use an application remotely, with the actual application sitting on a computer miles away from the user's location.

Dan Gilmore, an analyst with the Meta Group in Stamford, Conn., says that many logistics software vendors take advantage of what's termed "thin-client" technology to provide access to business applications run off-site. One thin-client technology provider, Citrix Systems Inc. of Fort Lauderdale, Fla., helped foster the advent of ASPs by developing an enabling technology called Citrix MetaFrame. Because the applications are installed and updated on big computers called servers rather than maintained on individual computers, MetaFrame reduces the time and resources required to run applications that are not stored in the computer itself. It also makes it possible to run the application to any so-called client computer over a network, including the World Wide Web.

Working with application server software such as Citrix's package is just one approach used by ASPs to distribute their applications. Others are using HyperText Markup Language (HTML), the traditional language of the Internet, Gilmore notes. Still others are taking advantage of Web-enabled languages such as Java, which make it possible to have programs located on a server furnish operational instructions across the Internet to a client computer.

These technological developments allow software vendors to host the application themselves on their computers and offer the use of their programs through a private network or the Internet. The customer in most cases simply employs a standard Web browser to operate the application. In turn, so-called "Web-hosting" makes possible a new business model, one in which the software maker can charge for program use on a transaction basis or by charging a periodic fee.

Initially, some supply chain software providers seized upon this approach as a way to offer their wares to small companies that could not afford the huge upfront costs of license fees and installation. "The economics are shifting toward renting software because of the cost of IT (information technology) resources and talent," says Ken Ramoutar, vice president of marketing in the supply chain group of business software vendor InterBiz in Islandia, N.Y.

But as it turns out, many larger corporations are just as interested in the ASP approach because software rental requires less setup time than a purchase would and doesn't impose as much of a burden on the company's own information-technology staff. "There's a perception in the marketplace that it's the way for smaller companies," says Ronald Riggin, managing director at warehouse management system vendor TRW in Reston, Va., "but it's the bigger companies that are expressing the most interest."

AMR's Fontanella confirms that bigger companies are considering the ASP approach because they do not have to commit their own precious hardware and inhouse resources to supporting a rented application. "It has a light impact on internal IT resources, which are just plain scarce," says Fontanella. "The hurdles for joining an ASP are pretty low."

ASP Pioneers

Makers of transportation management systems (TMS) led the way in switching to the ASP model of business. Provia in Grand Rapids, Mich., for instance, has rented its load-planning software, FreightLogic, this way for a couple of years. Nistevo (formerly called Transview), based in Eden Prairie, Minn., also has been providing a service to manage, rate, and procure inbound and outbound carriers on a subscription basis for some time now. Likewise, Descartes Systems Group in Waterloo, Ontario, has been Web-hosting its EasyRouter route optimizer application as well as its supply chain visibility application, E-frame, for several years.

A couple of recent entrants into the supply chain marketplace are offering transportation applications based solely on the ASP model. Celarix in Boston has partnered with hosting concern Digex in Balfour, Md., to provide a tracking and visibility management tool that shippers can use with a standard Web browser for a monthly fee. Another recent startup, Capstan in San Francisco, offers for an annual subscription fee four application modules that shippers can use with a browser or even an old-fashioned telephone. The modules cover logistics management, export management, import management, and transaction management.

But the TMS software vendors are hardly alone. Syntra in New York City, which makes software for handling exports and imports, also has begun offering its wares using the ASP model. For the past year, companies have been able to use Syntra's Web-hosted service to check regulations and determine duty costs on a transaction-fee basis. "The [international] regulations change so often that we believe our clients will be interested in taking this on a service basis rather than as an internal application," explains Stephen Cole, Syntra's vice president of marketing.

San Francisco-based Qiva recently launched IQuator to provide shipment visibility and facilitate collaboration for shippers worldwide on an ASP model. Another concern, Logility in Atlanta, which makes forecasting software, has partnered with ebaseOne Corp. in Houston to deliver supply chain management solutions to facilitate trading partner collaboration and demand forecasting for products. Logility says the service will cut implementation time to between 60 and 90 days from six months or more. Andrew White, Logility's vice president of product strategy, says the company has a "fluid pricing model" for the service based on the volume of data. "Medium-sized companies can now have access to Logility without the usual costs and implementation cycle," he says.

Another supply chain vendor, Interbiz, has offered its MK Everywhere distribution and manufacturing software on an ASP basis for about 18 months. Most of the service's users are outside the United States, says Ramoutar of Interbiz.

Some of the traditional warehouse management system (WMS) providers are even adopting the ASP model. For example, TRW in Reston, Va., began Web-hosting its MARC-CS warehouse management system this past year. TRW maintains the WMS software on its own equipment and rents access on a user-fee basis. It's offering the service through a partner, US Internetworking of Annapolis, Md.

Other WMS players are expected to follow suit and begin online rental of their applications soon. HK Systems in New Berlin, Wis., for one, says it plans to Web-host its suite of supply chain programs, which includes a TMS, a WMS, and an order-management system.

In fact, some industry analysts see the ASP approach as the way of the future. Analysts at the ARC Advisory Group in Dedham, Mass., for instance, expect the market to climb from $77 million last year to $8 billion in five years. (See the accompanying chart.) ARC projects that shippers will spend $495 million on renting TMS software and another $80 million on renting WMS applications by 2004. "The biggest market for this will be enterprise resource planning, followed by TMS, and then CRM (Customer Relationship Management)," says Adrian Gonzalez, a senior analyst with the ARC Advisory Group. "For transportation, the ASP model makes particular sense when collaboration is involved."

Not for Everyone

Although industry experts believe that ASPs will gain plenty of converts among shippers in the coming years, online software rental isn't for every company. A business still must ensure that any Web-enabled application it uses interfaces with its own internal software programs. "Access to the software via an ASP attacks a portion of the cost of ownership of a piece of software-the installation and maintenance," notes Gary Cross, the supply chain ERP practice leader at IBM Consulting. "But in most supply chains and business management systems, there are a lot of other investments and commitments [necessary] to get the benefit out of it. All of the interfaces that have to be redesigned are a significant part of the implementation. The interfaces have to be constructed to feed the system and get value out of the software."

Most ASP vendors disagree with Cross, however, saying that their model based on Internet protocols can provide easy connections to corporate applications. Indeed, they argue that extended enterprise connectivity represents their greatest advantage. Trading partners with disparate information systems can obtain access to a central Web-hosted application that's housed on the vendors'computers. "Single connectivity is the greatest asset," says Ron Alvarez, president of Capstan. "The advantage is that the ASP establishes connections with the participants."

Indeed, the ASPs'ability to make good on claims of enhanced connectivity may well determine the practice's acceptance among shippers and the industry's whole future, says analyst Gilmore of the Meta Group. "There's a potential for increased information delay based on having to go through a more complex network rather than going through the four walls of a company," the analyst notes. "It places more responsibility on the ASP to perform this integration. There's not a whole lot of evidence on how well this will work. Everyone's looking to see how this will all play out."

Web-Hosting Expected to Grow

Overall 1999 market = $77 million

Enterprise Resource Planning (ERP)49.0%

Transportation Management Systems (TMS)27.4%

Customer Relationship Management (CRM)19.8%

Supply Chain Planning (SCP)2.3%

Warehouse Management Systems (WMS)1.5%

Projected 2004 market = $8 billion

Enterprise Resource Planning (ERP)62.2%

Customer Relationship Management (CRM)27.9%

Transportation Management Systems (TMS)6.2%

Supply Chain Planning (SCP)2.7%

Warehouse Management Systems (WMS)1.0%

ARC expects the market for the online rental of supply chain software to explode in the next five years.

Source: ARC Advisory Group

Trew: That depends on what problem they're trying to solve. Today, I think the cost of transportation is dictating a lot of these issues. In the B2C world today, the transportation costs are being given away to the consumer.

Linnen: We're seeing two different things. Companies that have already changed the processes in their warehouses are now looking outside the four walls. Then there are companies, like the pure dot coms, that are operating outside the four walls but haven't done anything in the warehouse. They're learning that it might be great to have a Web page, but if you can't get product to your customer you're not going to be in business.

MMH: So different people are at different points?

Christensen: I'd agree with that. Some are still focused internally, and are going to fix their warehouse first. Others have already done that and are migrating on to other issues.

MMH: As you talk to people are you generally surprised by how far along, or how not far along, companies are?

Pulling: Yes, especially with some of the dot com companies. On the one hand, they're really challenging you to be able to provide a solution, now. And then they tell you they don't really know if they need a warehouse management system.

Enslow: You sit down to review a business plan, which is maybe two pages long, and they say: now, tell us what you have in mind for our fulfillment. They have no idea.

MMH: Where do trading exchanges fit and how are they impacting the supply chain?

Trew: For starts, trading exchanges are the most in vogue thing to do. Until the NASDAQ market crashed, all you had to do was put B2B in a press release and watch the multiple on your stock go up. Everyone wants to do one. But ultimately, I think there is going to be some sort of consolidation once somebody finds a good business model for the exchange. You can't have 15 new trading exchanges announced every day.

Pulling: I'm not sure the exchanges have figured out how to price their services. There are so many models out there. It's very difficult for someone who wants to join an exchange to understand what their costs are going to be.

Trew: Or to know what they're getting.

White: As I've been researching and talking to trading exchanges, I think they're being grossly misapplied to the supply chain problem. All that most of them are doing is speeding up what they already do today. That's great for commodity-type products, where price is the critical driver, where there are many sources of supply, and you can drop a supplier at the drop of a hat. But trading exchanges are being thrown at every thing that moves, whether it's food, clothing, glasses, or telephones. That model is not a long-term viable solution for the bulk of B2B. What's missing is collaboration. How can a single company, be it a buyer or a seller, collaborate and successfully share data with any system operated by its trading partners.

Christensen: It's become a virtual shopping mall, where people can transact business, but the exchanges have done nothing to integrate the business processes of these buyers and sellers.

White: And there is a backlash. Manufacturers are realizing it's becoming a margin war. We have customers that won't publish their prices and don't want the business because they know they'll be crucified on price.

MMH: On the surface, it seems that trading exchanges have the potential to turn everything into a commodity. And then there's going to be great reluctance to be part of an exchange.

Pulling: Yes, and I don't think exchanges will really work until someone figures out a way that all of the people in a supply chain derive some value from the sale and not just the buyer. It can't just be a commodities exchange.

Enslow: We've seen a lot of customer back lash, especially in the transportation and logistics exchanges. We're finding that many carriers are refusing to participate because they don't want to post their rates on the Web and marginalize themselves with their existing customers.

Linnen: On the buy side, our customers are trying to automate the process of purchasing commodities and supplies. On the sell side, they're looking to the exchanges as an additional channel to sell obsolete inventory. The sales department might already be working with liquidators,. But if the guys in the warehouse can turn to a trading exchange to get rid of their obsolete inventory, they can provide value from the warehouse back through the entire organization. But I would agree that there's a huge skepticism about the transportation exchanges, especially in this day of just-in-time deliveries.

MMH: If I participate in an exchange, how does that impact my supply chain activities, or is it the same as e-commerce?

White: That's a great question. If the focus is just on the transaction, a trading exchange is perfect. It's streamlined, it's quick, it's very efficient. If the focus is on the relationship, that's not an exchange. That's a trading community. So the answer is, where's the focus from the buyer to the seller? If it's one of transaction where price is the key driver, a trading exchange is perfect for that. If it's relationship driven, where customer service and performance are a key competitive advantage, a trading community is far superior model.

MMH: Where does the GM, Chrysler, Ford trading exchange fit. Is it a community or a trading exchange?

Christensen: It's a community. You're trying to build a common process in a finite group. An exchange is open. A community is more regulated.

White: What you wonder is: what do these particular manufacturers get if they club together? Do they just have a much bigger club to shove down the throats of their suppliers?

Tonaissen: It may be reduced administrative costs.

White: Yes, of course, but are Ford, GM, and Chrysler going to share those savings amongst themselves? Are they going to win with their competitors? A community is when you win with your partner. A trading exchange is when you win at the expense of your partner. What they've set up is something that says I'll win with my competitor because they share the reduction in transaction costs with each other.

Enslow: In the aerospace industry we're seeing two different competing super power groups arise.

White: Well, that makes sense because you have a value chain versus value chain. In the long run, GM, Chrysler and Ford are not going to share strategic cost advantages with their competitors. At some point, some supplier is going to say to one of the automakers: gee, I can give you a special deal.

Tonaissen: I think Andrew is probably right. They can all say, well, we'll share a 10% reduction in this area but we'll compete in this other, but then it will turn out that the other field isn't big enough for differentiation.

MMH: We've talked about the four walls and we've talked about the supply chain, but when is manufacturing going to become a factor in e-commerce?

Pulling: I think there is some stuff going on in collaboration. In the semi-conductor business, for instance, companies electronically collaborate to design, build, and synchronize business processes. In fact, I think there's going to be a strong move towards collaboration in any organization where you contract the designs and manufacturing of your core products.

MMH: Does it extend much beyond the high tech industry.

White: Very much so. In the last two years, we've worked primarily with manufacturing companies, initially with consumer products, on the collaborative replenishment of the fulfillment process. Raw materials suppliers are just waking up to collaborative process, and carriers are also getting involved.

Linnen: We're seeing it in the publishing industry, especially in the production of brochures, trade materials, and manuals.

Riggin: Most of our traditional distribution clients have come back to us and asked what can we do for them in the manufacturing arena. A number of them want to move some of the manufacturing process into the warehousing area, so they can manufacture on demand and ship directly to their customers without warehousing.

Enslow: Available-to-promise is becoming important in e-commerce. We're seeing a tight coupling between manufacturing, distribution, and transportation capabilities so you can tell a customer, yes, I can get it to you on this date.

MMH: Is e-commerce for everybody, or is it something you can say doesn't apply to you?

White: When you say everybody, do you mean everybody in the U.S.? One of the things that e-commerce is driving that we have very little preparedness for is the global competition. Back in the 70's and 80's, global competition required a physical presence and huge factories, multi-nationals, that sort of thing. The e-commerce thing is opening up global competition to anyone. Just ask anyone here. We have competition for our customers from global companies over the Internet. I think we should assume that all marketplaces are one, and that's going to be a big change. The question is when?

Enslow: And if you can do it before your competitor can do it to you.

Christensen: We've had several manufacturers come to us and say: Web sites are fine, industry initiatives are fine, but my channels are petrified of e-business because they think they're going to be taken completely out of the equation. We're working with them to say, here's another strategy where you can actually make them a better partner and keep them as part of the equation.

Trew: I think it goes back to what value does your channel partner add. If it is simply a wholesale/distribution operation, where they store your product for a period of time without adding any value, those people should be petrified of e-commerce. But if in fact your distribution center adds value to the product line within the supply chain, then it's not just a pure distribution product. In that kind of model, your channel is very well protected with the value that you add.

Linnen: What's also interesting is to see some of the big retailers open Web sites that compete with their stores and catalogues. I recently went to a local big retailer to buy some furniture, and then found the price was $20 cheaper on their Web site. The Web channel was competing with the retail stores.

Hopkins: That gets us back to this issue of e-commerce versus the traditional distribution model that is dragging down a lot of major players, like Toys R Us. They don't have the distribution expertise to handle the end delivery of their product to the consumer. So, some are going to try to take on Internet fulfillment directly to the consumer, and they'll be successful. There are going to be others who'll fall flat on their faces.

Tonaissen: One thing we haven't talked about is the buyers. I think there are some buyers who will never use e-commerce for certain goods. My wife, for instance, won't buy clothing over the Internet. She likes to touch it, and she likes the shopping experience. At one point, all brick and mortar stores were going to be destroyed, and now we've found out that is not the case. I think there's going to be an eventual balance. We may find that goods are distributed differently. But I think we're going to find that e-commerce is not for everybody who's a consumer in all things.

MMH: How do you know a company isn't ready for e-commerce?

Linnen: When they want to give you stock instead of a license fee.

Christensen: When you ask: What's your e-commerce strategy? And they say: Oh, we've already taken care of that. We have a Web site. Because now you have to go train them on everything that they have to consider for the move to e-commerce.

MMH: Is there a certain point when you look at a prospect and say: This is going to be a lot of work?

Enslow: Well, if the CEO doesn't use the Web, that's a bad sign.

Tonaissen: If the company says it wants to do B2C fulfillment, but doesn't want to change its pallet and case picking processes, that's a bad sign. I don't care how good your hardware or software is: If you're not willing to change your processes, it won't work.

Pulling: If they're just trying to automate the existing chaos, they're done already. The classic example is a company that shall remain nameless that put a visibility solution in to show what's going on in their warehouse and then continued to overnight batch all of their transactions. The product was getting to the customer before the advance ship notice. People who think that way aren't really ready.

Riggin: Or they aren't willing to recognize they're own weaknesses. I've been in operations where the distribution director says to me: we do everything perfectly and our customers are elated. You feel like saying: Then really, why am I here?

Hopkins: I'm sure we've all walked through installations with potential clients, and thought: they're just not asking the right questions. They really are struggling with this and don't know the right questions to ask.

Roundtable participants:

Steve Christensen, vice president sales, Renaissance Software

Beth Enslow, vice president strategic initiatives, Descartes Systems Group

Gary Forger, executive editor, Modern Materials Handling

Ed Hopkins, vice president sales & marketing, Kewill Logistics

Dave Linnen, vice president of product strategy, Intrepa

John Pulling, vice president and chief operating officer, Provia Software

Ron Riggin, vice president & chief technology officer, TRW's Marc Systems

Steve Tonissen, executive vice president of sales and marketing, McHugh Software International

Dan Trew, vice president product strategy, Catalyst International

Andrew White, vice president product strategy, Logility

Although the company is not yet using the devices-handheld terminals made by Symbol Technologies-for bar-code scanning, Fresh-2-U plans to take advantage of that capability for inventory management sometime soon. In the meantime, the company seems confident it's made the right choice. "We're using the Symbol Palm because it's an industrialized device," says Fresh-2-U's vice president, Tim Andrew. "It's got a Palm 5 built into a heavy case, plus it has bar-coding capability if we need to do that down the road."

Because of their low cost and ease of programming, bar-code terminals and computers based on the Palm operating platform are starting to gain converts. Many believe that the Palm-based computer terminals will finally offer an inexpensive way for small companies to use automatic-identification technology in their fleet and warehouse operations.

PalmPilots Learn to Read

The event that made all this possible was the introduction last year of Symbol Technologies' SPT 1500 pen-based terminal-a computer that's small enough to fit into a shirt pocket. The technology powering this device was the same system used in the PalmPilot, the popular "personal digital assistant" originally made by 3Com Corp. of Santa Clara, Calif. (3Com spun off the PalmPilot product as a separate company called Palm Inc. earlier this year. Symbol, which is based in Holtsville, N.Y., has obtained the rights to market the product in certain industries.)

Like the standard PalmPilot, the SPT 1500 allows a worker to enter data using a stylus and a touchscreen. But the new unit features something more: Symbol has added a scan engine to the unit to enable it to read bar codes. It also enclosed the unit in a thicker case for industrial use. Most recently, the bar-code manufacturer introduced an upgraded version, the SPT 1700, which can transmit data wirelessly to a computer over a local area network.

At the same time, Symbol has also been developing Palm operating system (OS) devices with a company called Handspring Inc. in Mountain View, Calif. (A number of Handspring executives were involved in the original development of the Palm computing platform.) Handspring has come up with the Visor, its own handheld computer using the Palm operating system, and Symbol has developed a scanning module specifically for the Visor.

Other automatic-identification equipment manufacturers are hoping to enter the market for Palm OS bar-code terminals as well. PSC Inc. of Rochester, N.Y., has introduced a plug-in module called "Momentum" that turns the Handspring Visor handheld computer into a bar-code scanner. PSC says that its product, which is targeted at the grocery industry, requires no software to be pre-installed on the handheld computer. Instead, the plug-in module actually contains the application software. PSC's foray into the marketplace has not been without controversy, however. Earlier this year, Symbol slapped PSC with a patent infringement suit in U.S. District Court. At press time, that suit had not been settled.

Now, a third bar-code equipment maker is looking to get into the market. Microscan Systems Inc. of Renton, Wash., is working on technology that would allow its fixed-position scanners to output data to Palm OS devices, reports the company's marketing director, Scott MacKenzie. "We have some translation software and a special port that will allow wireless communication," he explains. "You can hook up a fixed-position scanner [with this technology] and the data will go right to a user's pocket PC when he or she walks by." MacKenzie says his company will target the distribution and supply chain markets when Microscan launches the product this fall.

Palm vs. Win CE

Just as bar-code terminals using the Palm operating system were entering the market last year, other terminal manufacturers began introducing units based on the rival Microsoft Windows CE (Win CE) platform. Microsoft, for one, recently announced plans to unveil its own handheld unit, the Pocket PC. Win CE advocates tout their system as being easier to integrate with other computing applications than the Palm OS and emphasize that bar-code terminals using the Win CE operating system offer the familiar Windows graphical user interface.

Despite these features, the Palm platform seems to be gaining the upper hand against CE. Although Palm and CE units together accounted for less than 15 percent of the 1.1 million bar-code terminals sold in 1999, Palm units are outpacing their CE counterparts in sales, reports David Krebs, a market analyst with research firm Venture Development Corp. in Natick, Mass. "The CE terminals have been slow to take off," says Krebs. "The CE operating system has been slow to gain acceptance because every new version [of the operating system] is different from the previous one. And the earlier versions were not flexible and used a lot of memory and power."

Even Intermec Technologies Corp. of Everett, Wash., one of the marketers of Win CE bar-code terminals, concedes that adoption of the company's units has been slow. Jeff Hovorka, a product manager at Intermec, says the sales of CE terminals were hindered by a dearth of development tools for programmers to write applications and a lack of stability in the CE system.

The Price Is Right

But Win CE's stumbles are only one factor behind the Palm operating system's success in the automatic-identification marketplace. The Palm OS terminals have gained wider marketplace acceptance for a variety of reasons-not the least of which is cost. Traditional handheld terminals used for data collection typically cost $2,000 or more. However, Symbol's Palm-based units go for around $700, notes Chris Siervo, a product manager at Symbol Technologies, while CE-based devices cost about $1,000.

The low unit cost makes Palm OS handheld terminals especially inviting for small and medium-sized companies interested in getting into tracking or bar coding warehouse merchandise. "This is designed for small warehouses and small fleets," says David Collins, president of the Data Capture Institute in Plymouth, Mass, "and it's priced for that."

Along with a low price per terminal, the Palm operating system provides a friendly, familiar face for users. "The presentation method in a pen-based system is simple," explains Collins. "Do this task, touch a button. Scan this, touch a button. It's easy to adapt to-which is especially helpful if you have a lot of turnover at the loading dock." Programmers also say they have found it easy to write applications for the Palm terminal.

Despite its surge in popularity, the Palm unit has some limitations at this time. For instance, its communication range is fairly restricted. Although Symbol does have a wireless unit, Collins says that it works best in the confined space of a local area network. "With a Palm," he notes, "you still have to go back to the cradle to download."

In addition, many developers of warehouse management systems (WMS) have yet to develop interfaces that allow communication between Palm OS devices and sophisticated warehouse management applications. "The links between Palm devices and WMS are an obstacle," says Steve Mulaik, director of the logistics systems practice at the Atlanta-based Progress Group consulting firm.

But at least one WMS vendor has cleared that hurdle. Marc Systems in Reston, Va., has developed an interface that handles Palm OS data in "near real-time," says Ron Riggin, Marc Systems' chief technology officer. The Palm device can download bar-coded data in traditional batch fashion when it is placed into a cradle that's connected to the WMS. Or it can transmit bar-coded information wirelessly over a short range to an infrared device that relays it to the application running the warehouse. "You point your Palm toward an infrared device and it just picks up the signals from six feet away," explains Riggin. "It's not as good as RF [radio frequency], but it's a lot less costly and it's better than paper."

Although the technology was developed with small companies in mind, Riggin says that global corporations have expressed just as much interest in using Palm-based units with WMS systems. "Its biggest sales potential lies with the large global corporation that doesn't want to put a full-blown RF network in a small facility," he says.

Hitting the Floor

In any event, many smaller companies have not yet invested in WMS, so real-time connectivity is not an issue for them. In their eyes, the Palm devices offer a way to capture inventory data, even if they have to make periodic batch downloads. "The smaller and medium-size companies are embracing this right now as a means of handling batch transactions inexpensively," reports Collins.

Should smaller companies adopt the Palm-based technology in large numbers, it could have a bigger impact on distribution than anyone had foreseen. The widespread deployment of handheld bar-code computers could change the role of the warehouse manager by allowing him or her to get out from behind the desk and spend more time on the floor. Mulaik, for one, believes that could prove to be the biggest long-term benefit of these units. "This could lead to giving supervisors terminals they can use on the floor," says the consultant. "The people running the warehouse now have to camp behind PCs all day to follow what's going on. With this technology, they could be on the floor managing people."

Even aside from the emerging e-fulfillment world, the world of warehousing and distribution centers is quite fluid these days. For instance, the warehouse shipping full truck loads of pallets and cases today may find itself picking by the piece, gift wrapping, and shipping by parcel carrier tomorrow. Or doing both.

Meanwhile, "the storage of products is becoming less important, while knowing where the product is in the supply chain is becoming more important," says Lars-Goran Olsson, director of product management for Industri-Matematik International, Mount Laurel, N.J.

To keep pace, the traditional warehouse management system (WMS) is changing too. While the traditional WMS once provided information about orders to users within the four walls of the warehouse, the WMS of tomorrow has to provide information to trading partners across the supply chain.

Olsson sees the WMS of the future satisfying five areas of need.

First, it serves as a supply chain hub to give transparency of inventory and orders across the supply chain.

Second, is the ability to handle a variety of warehouse models, including return centers, cross-dock centers, store replenishment centers, home delivery centers, and repair centers, each with their own WMS needs.

Third is coordination of all of the supply chain activities, including transportation.

Fourth is creating a storehouse of knowledge. The warehouse is the closest link in the supply chain to the customer, and can provide that information to the customer.

Lastly is the ability to provide item level detail about a shipment in real time.

That's why flexibility and visibility are the two key characteristics of new WMS systems.

What exactly does flexibility mean when applied to a software solution?

To Irving Chernofsky, research director for the Gartner Group, Stamford, Conn., it describes a WMS that is built to change rather than one that is built to last.

"One of the problems of early WMS vendors," says Chernofsky, "was that by the time a system was installed, the business had changed and the WMS had to be completely modified to handle the new processes."

A system that's built to change is one that's designed to adapt to changing business models without major modifications. "Today, many WMS systems are quite alike in the basic operations, so the question is how much can the system change to accommodate my future requirements," adds Olsson.

In a traditional fulfillment system, that might mean the ability to implement best practices like real-time cross-docking, postponement, or value-added services in a traditional warehouse. It might also mean handling the needs of a new business unit that wasn't even in existence the year before.

That's important, because the traditional warehouse models are morphing together, says Dan Trew, vice president of product strategy for Catalyst.

There used to be three distinct distribution models:

Large warehouses that shipped cases and full pallets by the truckload to wholesale distributors and stores.

Distribution centers that broke down pallets and cases, and then shipped smaller quantities of the product to individual stores.

Cataloguers that shipped individual items directly to consumers.

Today, says Trew, companies that previously performed just one or two of those functions now may do all three. "That's been an eye-opening experience for a lot of users," says Trew. "They have a system that was designed 10 years ago just to move cases and pallets, but now they have a new business model and they're not prepared for it."

The confusion over how to handle this new environment is leading many users to develop separate warehouses and even separate business units to handle their Internet fulfillment.

While space, storage, and equipment limitations may require two different facilities, the fact remains that a flexible WMS should be able to handle all three models in one warehouse. "There's no reason why you can't do pallet, case, and line item picking out of one facility, other than not having a warehouse physically set up to do it," says Trew. "In fact, I personally think a single facility has its advantages because the two business units can share inventory."

For users turning to the Internet as a new order placement tool, flexibility also refers to the ability to adapt quickly to the ebb and flow of demand for products.

"Products going through e-commerce channels tend to be more dynamic than traditional channels," says Rob Sweeney, director of product management for Yantra, Acton, Mass. "Not only do you have a high level of orders with fewer items, but the demand for specific items is changing all the time. That may require functions like dynamic slotting to reconfigure the warehouse based on what items are hot right now. Or, you may need to add new products on demand if your competitors are doing them, or by drop shipping them from a cooperating supplier without holding inventory."

In today's environment, individual consumers and business customers alike want to check the availability of inventory and the status of their order on-line without calling a customer service representative. Synchronizing the activities of multiple warehouses, or multiple partners in the supply chain, to provide a seamless, real-time view of inventory and order status beyond the four walls of the warehouse is what visibility is all about.

"That may mean integrating your WMS with your trading partners systems so you can monitor their activities in real time, or it may mean distributing-or deploying-your solution over the Internet to manage their facilities for them," says Steve Christensen, vice president of sales for Renaissance Software, Lake Success, N.Y.

Visibility tools allow users across the supply chain to receive alerts and notifications when events occur or don't occur so that a user can take proactive steps rather than just react. Visibility also allows users to do more effective cross-docking, merge-in-transit, and postponement.

"The goal is to provide item level detail in advance to the different nodes in the supply chain, whether they are DCs, consolidation centers, or return centers," says Olsson from Industri-Matematik International. "Think of those Russian dolls that nest inside of each other: You want to know about the item in a box, in a container, on a pallet, in a truck. That way, warehouse managers know exactly what's arriving, and what they want to do with that inventory before it arrives."

As WMS vendors develop the functionality to provide flexibility and visibility, they are bundling those together with other related applications, like transportation management and order management systems, to create integrated supply chain suites.

"That's clearly the next wave of product development," says Chernofsky of the Gartner Group. "Supply chain suites are going to be the next determining factor of who makes it and who doesn't in the WMS market."

We'll take a look at how those suites are altering the market in December's IT Report.

Steps to buying the right WMS

Early on, establish that the vendor has experience in your vertical, and a solution available for your platform, not in development.

Software Gal: Sure. We've done two dozen installations in the herbal tea industry.

Warehouse Guy: But are you running on an AS/400 platform?

Establish the potential savings and price points appropriate to your operation early on.

SG: We can reduce inventory by at least 15%, and save 10% on labor.

WG: But can you implement for $300,000? We can't afford a Tier I solution.

Are you both working in the same time frame?

SG: We can't implement for at least six months. And it'll take three months to go live.

WG: We have a year to roll this thing out. That'll work.

Clearly identify five to eight items that are critical to your operation. Beyond that, accept the basic package.

SG : Will you batch or wave pick?

WG: Wave pick. And we need RF capability.

Now's the time to visit a vertical like yours to see the solution in action.

WG: You had them up and running so they could receive and ship on the first day.

SG: We can do that for you too. No problem.

If you're satisfied with the site visit, script a demonstration of their system running your warehouse.

WG: What if I want to be alerted when inventory needs replenished?

SG: Watch. With exception management, you can get an e-mail when you're low.

If the site visit and demonstration are a success, it's time to weigh proposals, including costs, the implementation program, service, and testing. Then it's time to let the contract.

WG: If you can define the path for upgrades, we're let to go.

SG: We'll have it in the mail tomorrow.

Don't fall into this e-trap

With all the talk of e-commerce, there's a temptation to divide the world of warehouse management systems into two camps: new economy solutions for e-fulfillment, and old economy solutions to serve traditional facilities.

That would be a mistake.

That's because at the end of the day, the core activities of a WMS remain the same. It's true whether the system replenishes retail outlets with full pallets and cases, or takes orders from a Web site and delivers individual products directly to a consumer.

"The systems still have to receive, pick, pack, store, and ship product," says Stephen Critchfield, systems consultant, Majure Data, Roswell, Ga. "They still have to provide accurate information about inventory levels and picking activities."

"There's a perception that e-fulfillment is a completely new animal," adds Ron Riggin, chief technology officer, MARC Systems, Reston, Va. "In truth, high-volume, rapid-turnaround fulfillment has been done by cataloguers and the replacement parts business for years."

That isn't to say that e-commerce hasn't had an impact on WMS applications. It has. As business ramps up to Internet speed, systems with marginal areas of functionality just aren't cutting it any longer. It's much the same as an old car that works just fine going to the grocery store but rattles and shakes on the interstate.

"There's a tremendous focus on leveraging the power of the Internet by WMS vendors," says Jim Tompkins, founder of Tompkins Associates, Raleigh, N.C. "But vendors are also finding they have significant work to do on their basic packages to meet the new demands on the warehouse. The way many systems worked may have been fine in the past, but with Internet speed they're being forced to rethink how to do those well."

Supply-chain managers traditionally have met nosy questions about unions, labor management and performance standards with a “no comment” or something equally evasive. Though many remain reluctant to come out of the proverbial closet on the labor front, companies in increasing numbers now demonstrate an active interest in embracing advanced labor management techniques to boost the efficiency of their warehouse operations.

“We’re seeing new interest in labor management everywhere there is an opportunity to focus on direct labor, whether it’s in a wholesale facility, a grocery environment, retail business or auto parts distribution,” says Greg Utter, manager and application consultant for the retail industry at EXE Technologies. “We’re seeing software implementations that are more geared to the productivity piece as warehouse managers already are squeezing out most of the other costs.”

According to Utter, the supply chain as a whole “is getting smarter.” For example, he sees more relevance in EDI transmissions, with advance shipping notices being electronic in nature and no longer involving human phone calls. “Technology — computers, software, warehouse equipment — is helping us take out a lot of the costs that didn’t used to exist throughout the supply chain,” he explains. “As a result, we see customers that in the past were happy just having a Tier I warehouse management system to make their operations flow better now coming back to us for solutions for increasing their bottom line through labor efficiencies.”

Nevertheless, labor remains largely untapped as a source of supply-chain cost savings, according to research by Tompkins Associates, a leading logistics consultancy, and McHugh Software Inter- national. According to Tompkins, the potential exists for U.S. companies to snare more than $6.6bn in annual productivity gains through advanced labor management strategies, or LMS. Based on statistics from Torto Wheaton Research, Tompkins found that the 53 largest U.S. metro markets had 15,192 distribution facilities of 100,000 square feet or larger, with a total capacity of more than 3.3 billion square feet. The researchers determined that these facilities employed more than 1.1 million distribution workers at an annual cost of over $44bn. They reach the $6.6bn figure by applying an estimate of 15 percent average savings from increased labor productivity through the use of labor management solutions.

Add to that the findings by Herbert Davis and Company in its 2000 Logistics Cost Benchmarks and it’s easy see the driver behind the labor focus. After collecting data from hundreds of companies in a wide range of vertical markets, the Davis study concludes that the total cost of logistics for those companies constituted 9.44 percent of sales, an increase of 9.6 percent from the year before.

These cost increases follow a decade of relative stability, according to Davis. The cost increase breaks down like this: transportation amounted to 3.54 percent of sales; warehousing, 2.39 percent; order entry/customer service, 0.76 percent; administration, 0.85 percent; and inventory carrying costs, 2.03 percent. As for the actual increases, transportation was up by 5.2 percent, largely attributable to shipment profiles and fuel; order entry/customer service by 9.0 percent due to order complexity and wage pressure; administration costs dropped by 5.3 percent; inventory carrying costs rose by 12.7 percent due to high SKU counts and higher customer service requirements; and warehousing showed a 9.2 percent jump in costs year to year, with warehouse complexity coupled with expanding requirements for value-added services behind the higher numbers.

Market Broadens
“Labor is a great untold story, not just for McHugh but really for the marketplace in general,” says Dan Gillmore, vice president of marketing for McHugh. “Probably the biggest story in a sense is that less than 1 percent of the total customer base that could take advantage of these labor management strategies actually have done so. There’s just tremendous value out there to be had, as our research with Tompkins Associates shows.”

Once confined largely to the wholesale food vertical, labor management program vendors report that companies in a broadening range of verticals not only are putting out new feelers for labor management strategies but are actually coming on board. “Companies in non-grocery segments finally are starting to understand the value that can be created by labor management,” Gillmore adds. “The market is finally waking up to those possibilities.”

Exactly why the wholesale grocery business became the hot spot of labor management is a bit fuzzy. “The line is that margins are so low on the products grocery wholesalers sell that the actual productivity of the shipping operation is an extremely important element, and these companies want to provide tools to be able to reward those workers who are incredibly productive,” says Ron Riggin, MARC Global systems vice president and general manager.

MARC Global Systems is predominantly a supply-chain execution suite wrapped around warehouse management system capabilities. “We historically have had an extraordinarily high-fidelity engineering standards model that basically provided projections of how much time various tasks in the warehouse should take to accomplish,” says Riggin.

However, this module was applicable to a very finite market. “Basically, the module was used by grocery wholesalers and in hostile union environments where the company’s objective is to incent employees who are doing exceptionally well and get rid of employees who weren’t doing well at all,” he adds.

Labor constitutes a significant drain on those thin grocery margins, and most of the grocery environments are unionized, he explains. As companies pushed for a standards environment to encourage greater accountability and implement productivity- based compensation in the warehouse, unions responded essentially by telling warehouse managers that if the managers wanted a standards environment, then they had to have a system that could accurately represent every possible task. In essence, they said, if employee A had to take one more step than employee B, that difference had to be represented in the labor standards model before the unions would accept it as a basis for incentive pay.

As a result, says Riggin, the labor standards business evolved to this “horribly complex mathe- matical model” of calculating how much time things should take. For example, the worker steps on the pallet jack, drives pallet jack from location A to location B, steps off, picks a case, places it on the pallet, and affixes a label. “Every one of those tasks has a standard associated with it that can be held up in court, and the level of activity is adjusted for early-day versus late-day energy levels.” The standards are reached through time and motion studies.

Vendors now see the adoption of labor management in many other vertical industries, says Gillmore. “For example, last year a significant portion of our warehouse management sales were accompanied by labor management modules, but we also sold a lot of stand-alone labor management systems as well,” he says. “That goes to show that in many other industry verticals — particularly food and beverage, consumer packaged goods, dotcom and e-fulfillment companies, and 3PLs — there are a lot of other companies starting to realize that labor management offers very low-hanging fruit in terms of the ease of implementation, the accelerated return on investment and considerable bottom line savings. Labor management really is one of the great hidden secrets right now of productivity gains in a market that is still looking desperately for the next round of productivity enhancements.”

Opposition to Tools
Some of these verticals have many of the same characteristics as grocery retail does in terms of distribution operations, labor makeup and order profiles, says Gillmore. “The consumer packaged goods and food and beverage verticals continue to face significant competitive pressures in their respective marketplaces and are looking to squeeze every bit of operating improvement they can from their distribution operations.”

Third-party logistics companies also have become an important segment, he adds, “some on their own initiative, such as EDS Logistics, and some driven by their customer requirements, like AmeriCold.”

Two obstacles continue to hinder a broader call for advanced labor management tools in the warehouse. The first is simply a matter of education, says Gillmore. The second is what may be called the “Big Brother” aspect, or overly rigorous engineered standards.

“In many respects we’re still in education mode, trying to explain to the marketplace the value and opportunity of labor management tools,” he says. “Outside of some of the core markets, it’s almost a bit of a missionary sale. You have to explain to customers what this is and how they can benefit.”

Vendors simply don’t see many requests for proposal where a company is actually looking for labor management, but they often find receptive ears once the talk shifts to value, the ease of implementation of the solutions and the fast payback. The cost recovery almost always occurs in less than nine months, Gillmore adds. “And it’s almost instant ROI. From the time you turn the system on, you save money almost from day one.”

Other than educating the marketplace, LMS vendors continue to meet some resistance to the notion of engineered standards. For many managers, that’s a bit of a red flag in terms of how they want to operate their business. This creates the need for vendors to position their products in a less-hostile package as they expand their market reach.

For example, MARC early last month released a new version of its LMS that provides users with a more flexible approach to labor management. “That’s sort of the impetus behind the direction we are taking as we move to expand our customer base,” says Riggin. “We basically are saying we have a high-fidelity labor standards product with clients that use it and are happy with it. But we also can take this model and relax it a bit and let any client use it to build a labor standards solution without using it as a basis for incentive pay or to uphold court decisions, but just to get a better handle on how much work is going to be consumed with a specific amount of orders in the warehouse.”

Consequently, MARC built a model where the actual calculation engines and travel models are all the high-fidelity travel models, but the actual tasks being performed are more generalized and not nearly as detailed. Warehouse managers can plug their own numbers into the system instead of using the engineered standards and can then manage their own people according to the company’s own standards.

“MARC and most of our competitors always have been able to provide good counting mechanisms,” says Riggin, using such examples as 15 seconds per order line, 1,000 order lines, and 15,000 seconds of pick time. “But we’re trying to take it down another notch by saying, ‘here’s the 1,000 order lines, and here are the actual travel paths of the order lines, here are the actual vehicles being used, here are the general characteristics and tasks being performed.’ Together, [we’re] producing a higher fidelity model of how much time it is going to take to complete certain tasks.”

Riggin finds that increasing numbers of customers don’t want to wrap their entire warehouse operation in a labor standards mode, but prefers to use the LMS to troubleshoot particular areas in the warehouse environment that tend to become bottlenecks. “We’re about to embark on a project where the packing and gift-wrapping operation is the bottleneck in the warehouse, and the client wants to know with explicit detail how much time is going to be spent in the different gift wrap areas of the warehouse,” he explains. Another client wants to focus on order picking, while another targets their consolidation and sortation area. But the comprehensive implementations continue; the first customer for MARC’s new LMS is a large Kmart-type retailer based in Australia, which should come online this summer.

McHugh also now focuses on fighting the Big Brother reluctance. “Many prospective customers see labor management standards as being too strict a notion of how they want to operate,” according to Gillmore. “So we say, ‘fine, don’t approach it from an engineered standards perspective, approach it from a perspective of goals or objectives and use the right terminology and construct the approach that is in tune with the way you want to run your operation.’”

Every warehouse operation has to have goals and objectives, and the LMS allows companies to establish those objectives at multiple levels of their distribution operation, whether by employee, work area, customer or task, he says. “And the system allows you to drive continuous improvement in your organization by continually measuring your performance against those goals and taking the proper management steps to ensure attainment of those goals.”

Besides, says Gillmore, the Big Brother tag is a bit of a misnomer. “We have seen that employee satisfaction and retention actually go up, not down, after the LMS solution has been implemented. People want to understand how they are being evaluated, they want a fair evaluation system, and this system provides that,” he says. “It also provides a tremendous platform for implementing truly effective incentive management systems that enable both the employee and the company to benefit from above-average performance.”

Despite the challenges, the future looks good for labor management, says Gillmore. For starters, he says, there’s no question that the warehouse or distribution center compared to manufacturing has been a comparative black hole of costs. “In the warehouse or distribution center, costs are allocated on very gross measures and without the visibility into detailed activity or customer costs as you get in a manufacturing environment,” he says. As a result, much of this information is relatively new to companies, which “appeals to chief financial types as well as the logistics people because it allows them to understand their costs and customer profitability much more precisely than they ever have in the past.”

As a result, he says, a company considering the addition of some kind of logistics-oriented value-added service can determine the cost of that proposed service, its impact on profitability, whether it should it have a pricing impact, and if the move is good for the company.

Now that corporations are venturing into Internet sales and initiating online collaboration with their trading partners, they need to link data transmitted through cyberspace with the applications running inside the company. Integrators have stepped forward to help companies make those connections. "We're busier than we've ever been," says Steve Gold, a partner at the consulting firm KPMG Peat Marwick LLP in Chicago. "The demand for supply chain technology integration is off the chart."

Steady Demand

For the past decade, U.S. manufacturers have kept systems integrators very busy. Integrators have frequently been called upon to link applications like warehouse management systems (WMS) to legacy or enterprise resource planning (ERP) systems. They've also been in high demand for tying materials-handling equipment, radio-frequency systems, and bar-code systems to WMS packages.

Integrators charge hefty fees for their services, sometimes as high as $300 an hour. Despite the steep price, the market for such services has remained strong. ARC Research in Dedham, Mass., projects that U.S. businesses this year will spend $10 billion on systems integration, with about 10 percent of that amount earmarked for supply chain management systems.

Despite the steady demand for integration work, rumors were circulating last spring that recent technological advances would eliminate the need for these services. Some saw the advent of Web-hosted applications, which allow a buyer to rent software over the Internet, as a serious threat to integrators because they would no longer be needed to install packages. As it turned out, however, most companies found that they still needed to map data from Web-hosted applications to internal

systems.

Others saw the emergence of new middleware, such as enterprise application interface technology, endangering the integrators' livelihood. Middleware is intended to create a "plug and play" environment in which disparate applications can be joined together easily. But middleware remains an expensive add-on and makes sense largely for big corporations that have multiple facilities. "You can only cost-justify such a [middleware] tool if you're using it for every application in your enterprise," says Ron Riggin, vice president and general manager of the software vendor MARC Global Systems in Reston, Va. "Unless that's the case, it still makes sense to hire an integrator or else use the software vendor's set of interfaces [to link disparate applications]."

Likewise, there were those who held that the advent of XML-document language would eliminate the integrator's role by making it easier for companies to use the Internet for transmitting commercial messages. But the lack of widespread standards for XML-based messages has hobbled the adoption of that technology. "Everybody is coming up with their own sentence structure [for XML]," notes Riggin. "It's keeping a lot of people busy adapting to these new languages."

Bread and Butter Work

Although each of those technological advances promised to make software integration easier, none has produced an all-purpose, snap-on interface that connects one application to another or even to the Internet. A company that goes to install a supply chain package still finds that someone has to write the interfaces that allow communication between various applications. As a result, "the business of installing packages and tying code is booming," reports Steve Mulaik, director of the Atlanta-based Progress Group's logistics systems practice.

In the logistics area, integrators still find their services are in high demand, particularly when it comes to implementing WMS systems and connecting those packages to other systems. "We're still integrating WMS packages with business host systems," says Kevin Sperry, a vice president with the systems integration firm Disticon in Melbourne, Fla. "That's block-and-tackle type work."

Mulaik agrees. He says his company has no shortage of work these days implementing standard warehousing systems. "There's so much demand for putting WMS in that we're booked solid doing just that," says Mulaik. He adds that he's seeing an increasing interest among his clients in installing transportation management system (TMS) packages to complement their WMS applications.

Hot New Assignments

Although integrators are busy implementing TMS and WMS packages, they're also starting to tackle new assignments in the so-called new economy created by the Internet. "We're still doing WMS integration," says Gold, "but that's not where the action is right now."

One new area for integration work is e-fulfillment. PricewaterhouseCoopers consultant Angelo Perino says that clients want to have warehousing and transportation software linked to their Web sites to provide real-time inventory-status information. "It's an online event for companies from the time the order hits you to the time it gets delivered," says Perino, who's responsible for the New York City-based consulting firm's U.S. warehouse and logistics practice.

Consultant John Seidl says his Wilton, Conn.-based company, Deloitte Consulting, finds about a quarter of its work today linking Web storefronts to a company's WMS in order to display info on available inventory on an e-tailer's Web site. "The big push is around 'available to promise.' [Retailers] want the people taking orders in call centers or over the Internet to see what [is actually on hand]," says Seidl. "That means having real-time connections from the call center to the WMS to see the active inventory in the warehouse. It's a lot of custom integration work [to connect Web sites to WMS applications] because there aren't any standard interfaces."

In addition, many companies today want to track parts moving through the supply chain at the stock-keeping unit (SKU) level. Rosemary Coates, a consultant with the New York City-based firm AnswerThink, reports that her company has been busy installing packages that track items at the SKU level and then link those applications to the rest of the client's computer systems. "If you don't know what's coming to you at the SKU level," says Coates, who's AnswerThink's senior director of supply chain technologies, "you can't optimize [your distribution]."

Then, too, as exchanges and private company hubs have emerged, systems integrators are finding that clients want them to link their internal applications to exchanges, particularly to private exchanges run by a single company. "The integration of supply chain systems into private exchanges becomes critical," says Ken Crafford, chief technology officer of the integrator firm Future Next, based in McLean, Va.

Gold reports that his firm is finding that more companies want to connect to specific vertical industry exchanges than to general transportation exchanges. "We are mapping data from core ERP and back-office systems into and out of exchanges and private trading networks," says the KPMG consultant.

Coates adds that her firm has recently found itself installing a large number of trade management software packages as companies look to sell and ship goods overseas. "Trade management packages are another hot area," she reports.

The Next Wave

As companies continue to focus on managing the entire supply chain, their reliance on software and information technology will only continue. Although software developers may construct standard interfaces for trade management and other apps to minimize installation time, integrators will still play a key role in ensuring that information needed to optimize shipments moves smoothly from the Internet into internal company systems.

In fact, many expect to land more integration work in upcoming months as companies demand increased visibility of inventory in the pipeline and at their suppliers' warehouses. "Visibility into the suppliers' inventory is the next big wave," predicts Seidl. "And there's more money to be had on that side of the equation."

When you receive and store inventory in your warehouse, they're watching.

When you're picking orders, they're watching.

And when your product leaves the shipping dock, they're watching.

No, we're not talking about some crazed stalker in a supply chain horror film. The watcher stalking businesses today is the consumer.

Today's customer is a self-service beast who's no longer content to simply place an order and wait for delivery. Today's consumer wants to log on to your Website for information about inventory levels, order status, and transportation. And they want to do it 24/7/365.

What's more, they want the ability to change their mind – to add to or delete from an order at the last minute – and for your systems to be able to respond to those changes in real time without missing a beat.

What began as a dot com phenomenon in the direct-to-consumer market is becoming business as usual for the B2B company selling parts and equipment to another business.

The advantages are heightened customer service and flexibility.

"If I can bring all of the information about an order together in real time, I can offer a whole new level of service," says Henry Bruce, vice president of corporate marketing, Optum, Inc., White Plains, N.Y. "Now, either I or the customer can change our minds right up to the point when I close the doors on the truck off. It allows for better decision-making."

There's even a term for this new level of order information: It's called supply chain visibility and supply chain event management.

According to AMR Research, Boston, the market for this software is expected to grow to $1.1 billion by 2004, a compound growth rate of 88% per year.

Why here and why now?
There are at least four factors driving the growth of visibility solutions.

For one, the bar has been raised by companies that provide e-mail order confirmations and alerts. In today's environment, customer service counts.

"It's important that you give the consumer as accurate a prediction as possible about an order, and notify them if you can't meet your prediction," says Ruby Raley, program director, transportation and logistics, Descartes Systems Group. "In the world of the Web, it doesn't take much to change people's views of you."

For another, the velocity of information impacts efficiency. If your trading partners have visibility into your order fulfillment processes in real time, cycle times will go down, and inventory levels can be reduced.

The move to outsource order fulfillment and transportation services to third party logistics (3PL) providers is also an important factor. 3PLs must provide information to their customers.

Finally, don't under estimate the fear of being left behind. "If enough companies in a sector do something visible, like offer real-time in-formation to their customers, the competition is going to follow suit," says Andrew White, vice president of product strategy for Logility, Inc., Atlanta, Ga.

Visibility: end-to-end
Just what is supply chain visibility? In a nutshell, visibility solutions allow an enterprise to create a real-time snap shot of inventory and orders across a supply chain.

The idea is this: execution systems, like order, transportation, and warehouse management systems, create a wealth of data. Traditionally, however, that information was unavailable to the people who needed it until after the fact. The result was blind spots in the supply chain.

"For the past 10 or 15 years, most companies have focused on optimizing each of the nodes within the four walls of their enterprise," says Beth Enslow, vice president, Descartes Systems Group, Waterloo, Iowa. "But you can't track what happens between the nodes. It's like driving 20 miles over the speed limit to get to the airport, only to find out your plane is delayed by 2 hours."

Visibility systems change all of that. When a transaction occurs, information is automatically updated in the visibility system, which creates a real-time data warehouse. For in-stance, when an order is picked, a record is created and inventory available to promise is reduced by that amount. If an advance ship notice is received from a supplier, that inventory can then be factored into the product that is available to promise.

Such information isn't just of value to your customers. Connect your suppliers to the visibility system and you can gather information from them. Crossdocking, for instance, can be facilitated by knowing in advance what items are going to be received on a particular shipment.

"If I tell you when my trailer is going to arrive at your warehouse doors, you might save a few minutes unloading a trailer," says Ron Riggin, vice president, MARC Global Systems, Dulles, Va. "But if I identify in advance the pallets, the products, and the unique ID numbers associated with that order, you process that receipt faster and create tremendous productivity gains by optimizing your work flow before the load arrives."

Ideally, these systems allow users to answer a variety of questions about their supply chains, says Larry Lapide, vice president of supply chain for AMR Research, Boston, Mass.

Where is the inventory in my supply chain?

What is the true status of an order?

What's in transit and when will it be delivered?

How are my suppliers performing?

Is my supply chain performing as anticipated?

The answer to the last item is a side benefit of visibility. By bringing that information together, you not only have visibility into what's happening, you can use that information to measure the performance of your business.

Event management
Visibility is a step forward, but not enough. What good is information, afterall, if you can't act upon it to improve your business?

"Information is fine," says Larry Lapide of AMR Research. "But that information, whether things are going right or going wrong in the supply chain, is the real point of visibility."

Applications that provide visibility and notification when events occur are part of a new set of solutions that AMR call supply chain event management, or SCEM.

The idea behind event management is that you should be able to subscribe for notification about any event that is important to your job. That notification can be in the form of an e-mail, a printed page, or a fax.

Let's say you're expecting a full truckload of parts to make a production run. But when your main supplier fills the order, it only has a partial shipment. If you have subscribed to be notified in advance of partial shipments, your supplier's system will automatically send you an alert, notifying you that the order won't be complete. That allows you to take some kind of action before a problem arises.

Lapide breaks an event management system down into three areas.

One is the status of an order throughout the supply chain. The operative word is "throughout." Remember, an order may consist of a variety of components. Some may be coming parcel post from one facility. Others may be coming less-than-truckload from another. Still other parts may be back ordered for days or weeks. Visibility provides a centralized view of the status of all the component parts of that order.

Remember, however, that black holes of information may still exist if some of your carriers or trading partners don't have the capability to provide you with order status information.

Second is the ability to have information that is important to you delivered when needed. Some call this "subscribe and publish." Other terms are "event management," "alert management," and "exception management."

Third is to create a history of transactions that can be stored in a data warehouse and mined at a later date to measure the performance of your supply chain and carriers. A data warehouse with key performance indicators can provide a dashboard measurement of how your business is performing.

If those three elements are in place, you can do more than monitor events in your supply chain. Through alerts, you can notify a decision maker in a proactive way that an action might have to be taken as a result of events unfolding in the supply chain.

What's more, you can simulate, or create "what if" scenarios based on those events in order to make the right decision. Finally, you can act, and, thanks to visibility, notify all the parties who will be impacted by that decision.

Supply chain visibility and event management solutions are available today. It may be several more years before these concepts are common practice.

Then again, 2 years ago, the idea of e-commerce and an electronic marketplace seemed far-fetched and off in the distance too. The future may be sooner than we all think.

Remember, the customer is watching.

That's where a labor management system comes into play.

"There are really two aspects to labor management," says George Bishop, senior vice president for LxLi (416-621-9292, www.lxli.com). "The first is the creation of an engineered labor standard. The second is to use that information to forecast, plan, and manage your work force."

An engineered labor standard breaks down a task, like picking to a pallet or unloading a truck, into component parts. It then determines how long it should take to perform each step of that task to create the standard. Engineered labor standards take into consideration variables such as: the size and weight of a carton; how high an employee has to reach to pick product from a particular shelf; and at what speed a lift truck should travel from the dock to a putaway zone. The system then adds up the component pieces to determine how long it should take to perform a specific task.

Those standards can then be applied to forecast how much temporary labor a facility might need to hire in order to fill orders during the peak holiday season, for instance. Labor management software can also plan the optimal number of employees and resources, like lift trucks, to pick a wave of orders the next day.

Finally, labor management allows a facility manager to dynamically redeploy labor throughout the day if the work is running ahead or behind the plan.

"As orders change, and as conditions change, I can change my planning in real time by bringing in more temporary help or sending some of the workforce home," explains Ronald D. Riggin, chief technology officer for MARC Global (866-703-8279, www.marcglobal.com). "That's becoming more commonplace in the industry."

Riggin says that most facilities can see a 10% or more productivity improvement from a labor management system.

Along with forecasting and planning the labor needed to fill orders, a labor management system also allows managers to track the performance of individual employees. This is especially useful in facilities with performance-based incentive programs. "A WMS can tell you how many cases were shipped and how much labor was used at an aggregate level," Riggin says. "But a labor management system tracks how many cases Joe picked on a transaction by transaction basis, and whether Joe was performing ahead or behind of the standard."

A WMS after all determines the best way to pick orders utilizing all the resources available, including labor. But there is a difference between directing the activities of a work force and managing that labor.

"A WMS will generate the optimal picking sequence given all of your constraints," explains Dara Gault, business development leader for labor management for RedPrairie (877-733-7724, www.redprairie.com). "But a WMS won't tell you how much labor you need to do that work; it won't give your operators a completion time to do that work based on labor standards, and it won't tell your associates what to do next if they run out of work."

Those are the jobs of a labor management system. They extend the gains that a facility is already getting from a WMS, especially in large and complex distribution environments.

"A 20 percent reduction of direct labor costs is a conservative figure," says George Bishop, senior vice president for LxLi (416-621-9292, www.lxli.com), a provider of stand-alone labor management systems. "We have seen reductions of up to 50%."

Bishop contends that the savings from a labor management system aren't limited to just lower payroll costs. Fewer workers also translate into fewer pallet jacks, fewer battery changers, or increased throughput within the existing facility and work force. "These are tangible savings that often aren't taken into account when people are implementing a labor system," Bishop says.

Labor management systems are not new. Low margin industries like wholesale food distribution have used them for years to maximize productivity and with excellent results.

Now other industries are discovering the advantages of labor management, especially in very large facilities. "If you have a 100,000 square foot warehouse with twelve people picking orders, the payback may be too long to justify a system," says John J. Sidell, principal and co-founder of ESYNC (419-842-2210, www.esync.com). "The larger and more complex your orderpicking environment, the more benefit."

Still, labor management is a well-kept secret. "I think 80% of users could benefit just from the better forecasting and planning that you get from a labor management system," says Ronald D. Riggin, chief technology officer, MARC Global (800-876-3667, www.marcglobal.com). "And I would estimate that only 30% are using it."

Those returns come from three distinct components for a labor management system: labor planning, execution and reporting.

Labor planning
The creation of labor standards is the first step toward realizing the benefits of labor planning.

One approach is to create a "macro" standard based on statistical metrics: using the historical records of significant drivers like the number of locations visited, the number of cartons created, and the number of units picked to fill the average order, the system determines that the facility picks an average of 1,000 orders with ten workers during a ten hour shift, or 1 order per hour per employee. Using that standard, the system then determines how many operators will be needed to pick orders on the next shift.

The second approach is to create a "discrete" or engineered labor standard. An engineered labor standard breaks down each process into its component parts. Then through time motion studies and work sampling, the system determines how long it takes to safely complete each component of the task.

When planning the amount of labor it will take to fill a wave of orders, the labor management system will then take into account variables like the engineered labor standards for every task required to fill the order. It also takes into account the travel times required to get from location to location, lunch, coffee and personal breaks, the limitations and constraints of equipment and automated systems, and even the weight, cube and type of packaging required for the orders.

"Based on those variables, the system calculates the number of people required to fill the orders, and the time required for every task," Bishop explains.

Labor execution
Once a labor plan has been created and work has been released to the floor, the warehouse management system optimizes the orderpicking tasks.

Labor management, however, still plays a vital role by monitoring the execution of the labor plan.

At the highest level, the system provides dynamic information to management about the shift's progress. "The system is monitoring the warehouse to see if bottlenecks are occurring and provides the tools to alleviate a problem," says Prashant Bhatia, director of product management, Manhattan Associates (770-955-7070, www.manhattanassociates.com). "It can also tell a manager how much work is remaining and whether the facility is ahead or behind schedule. A supervisor then has the ability to reassign work in the system based on what's happening."

At a micro level, a labor management system monitors the performance of individual workers in real time. This is especially important for facilities with incentive-based compensation programs. "With a labor management system, you can provide real-time motivation to the people doing the work," says Gault of RedPrairie. Workers can see how they're doing against the standard for their tasks displayed on their scanning devices. "You're also presenting that information to supervisors who can follow up in real time on poor performance, or give someone a pat on the back," Gault says.

While many companies do provide real-time feedback to operators, others use the system to monitor performance without displaying goal times, according to Siddell of ESYNC. "The more progressive companies we work with believe that their operators are most efficient if they know they're being monitored but aren't given real-time access to their performance," says Siddell.

Measuring performance
Performance management is the last component of a labor management system. "Simply put, the system measures how well we did," explains Rob Sweeney, vice president of solutions engineering, Yantra Corp. (978-513-6000, www.yantra.com). "The best measurements are the ones that are most specific and the most granular."

For example, picking a case might be viewed as one task. In reality, it probably involves picking from a pallet location, sending that product to a drop off location, repalletizing on a new pallet, and sending that pallet to the shipping dock.

"The system can track the performance of each of those individual tasks to identify where individuals or the processes are working best and where bottlenecks are occurring," Sweeney says. "That information can also be used to redefine labor standards when order profiles or processes change."

The measurement function also provides a tool to audit employee performance for shops with incentive-based compensation programs, like pharmaceutical distributor AmerisourceBergen (see box on page 44).

Those are just some of the reasons that labor management is expanding today. "A tough economy has caused a lot of people to look at their supply chains to see what can be done," says Bhatia of Manhattan Associates. "That's putting the focus on optimizing labor."

In addition to calculating productivity on a real-time basis, the data enables "predictive management," he says, allowing for action to be taken when an issue arises in the supply chain, not after.

Riggin notes that incremental updates in a warehouse management system, such as his company's new business intelligence offering, are a minor expenditure when compared to replacing an aging system. "People want to leverage what they have in place," he says.

With that in mind, 3PL Menlo Logistics has created a method for tacking and projecting the costs of RFID tags and the data that goes with it.

Without this cost-tracking solution, “(we) couldn’t invoice each and every customer for tag and ship. If we were doing this for multiple customers in one location, we’d have to dedicate production lines (to track costs),” tells Menlo Logistics sales and marketing vice president Lonny Warner. The company handles RFID compliance for HP, and is committed to tracking costs at the granular level.

David Hushbeck, director of Menlo DirectTech, the 3PL’s solutions and services business, explains that the company can capture the costs of RFID tagging by using the tag data itself. “An RFID tag gives you a perfect identifier.”Tags are verified when printed, and when they pass through a final portal as tagged products are loaded onto a truck. Because a tag includes unique identifiers, the first and last tags serve as a time stamp for measuring labor costs and determining productivity.

As it turns out, Menlo is not alone in its efforts. Software supplier MARC Global combines its warehouse management system (WMS), workflow management tool and its business intelligence tool to track the cost of RFID.

The WMS turns order information into data on the tags. Workflow management determines the most efficient way to handle items and route them through the facility. It can also capture labor and other compliance costs by tracking the number of transactions per employee and the time required to complete each step. Based on these metrics, it can project costs based on anticipated volume.

MARC 3D monitors the work flow, identifying what is working well and not so well. “It is a visibility tool to measure performance against standards, internally and externally,” says MarcGlobal CTO Ron Riggin.

“What’s really cool is the ability to suck in data from multiple places easily,” says Tom Ryan, Ppincipal of TKR Consulting Associates. “They have made their WMS and labor management and RFID capability pre-configured into 3D. If Wal-Mart is putting your information into their supply portal, you can pull that info and then blend it with what you have on your labor and warehouse management systems.”

In the end, “Tag and ship is still all about money, you can’t get past the money,” says Menlo’s Warner.

'A lot of the problem with returns is that it's a sideline to the main business and no one is dedicated to managing it well,' says Chris Heim, president and general manager, HighJump Software (952-947-4088). 'It just gets thrown into a corner.'

Returns are complicated by the fact that customer expectations are changing, thanks to the Web. 'There is a growing complexity to handling returns because customers have come to expect better service and a lot more accommodation in returns,' says Jan Young, product manager, Catalyst International (414-362-6800). 'They are demanding a higher level of service.'

And returns are not the only challenge for warehouse and DC managers. There is also the matter of reverse logistics and recall management.

While a warehouse management system (WMS) won't make those problems go away, it can streamline all three by bringing automation, discipline and repeatability to the process. 'A WMS makes returns (in whatever form) part of the business process,' says Heim.

And the software does more than just manage the movement of returns. A WMS also provides timely feedback of information about them to other systems, like the order management system that's tied to the consumer, according to Noah Dixon, industry strategy leader, RedPrairie (877-733-7724).

Returns are unique
One reason returns are different from forward logistics is that effective returns management cuts across an enterprise.

'Returns don't just happen in the warehouse,' explains David Hommrich, senior director of reverse logistics, Manhattan Associates (770-955-7070). 'If you look at the process with a myopic warehouse view, you miss an opportunity to save money by managing the process upstream.'

That's where the WMS comes into play. 'Successful returns management is about all the processes from consumption back to the source,' says Hommrich.

In fact, some companies use the WMS to facilitate the returns process even before a product is shipped. 'Many direct-to-consumer companies will have the WMS create a return label when they are printing out the initial paper work,' says RedPrairie's Dixon. 'A residential customer can then go to a shipper like FedEx, UPS, or the post office and use that label to process the return.'

In addition to managing reverse logistics, the WMS might also be used to track and manage returnable assets. 'Products have to come back, but so do returnable pallets, shipping platforms, and containers,' says Dixon.

Managing with WMS
There are at least five distinct steps in managing a successful return: authorization, receiving, inspection, disposition and crediting.

Authorization starts the process when a customer service representative creates a return authorization number that is forwarded to the WMS. That ties the incoming product to a specific customer. Customer service may also forward transportation routing information and information about why that product is coming back.

Authorization also facilitates planning. The information about the number of authorized returns can now be used by staff to handle the work.

The WMS really begins to shine once product arrives at the receiving dock. 'Receiving returns is different from other receiving processes because it always involves some form of inspection before you give the customer credit,' says Young of Catalyst. 'That inspection will also determine how we dispose of the return.'

Once an item is scanned into the system, it's routed to an inspection area. There, a receiver can verify that the item returned matches what the customer bought and said they were going to return.

After a return has been inspected, comes the disposition of that item. This will be done according to workflow rules programmed into the system.

That might involve routing the item to a repackaging or repair area. Or it might involve returning the merchandise to stock just like brand-new merchandise. Other returns may be crossdocked to another retail location, to the original manufacturer, to a discount retailer, or to a charity. Product beyond repair may be scrapped.

Finally, once the return has been confirmed, the WMS passes information back to the order management or customer service application so that the customer can be credited for the return.

Recall management
Some products are returned by the customer, but others are recalled by the manufacturer.

This is a different process from traditional returns because the manufacturer creates a recall. 'A direct-to-consumer apparel manufacturer doesn't create a return,' explains Ronald Riggin, chief technology officer, MARC Global (866-703-8279). 'But if a pharmaceutical company detects a manufacturing problem, it has to create an inventory of what is expected to be returned.'

When a product defect is discovered, many companies simply bring back everything that's been shipped out. A WMS with lot and serial number tracking, however, allows a company to bring back only the product with that defect.

'When a WMS has traceability functionality, we can identify the goods, the batch, the lot, the manufacturing dates, and the raw materials that went into a particular lot,' Riggin explains. 'We can also identify which customers received a shipment right down to an individual bottle of pills. That narrows the scope of the recall.'

Once the WMS has identified the specific product affected by the recall, 'traditional reverse logistics and returns management take over to record the actual receipt versus what was expected,' Riggin adds.

The next step
Evolving WMS technology is also being applied to streamline returns and recall management.

One French beverage company has combined lot tracking with supply chain event management to speed up the quality control process.

In the past, the company had to hold finished goods at the manufacturing plant for up to three days while quality control checks were done before they could ship to the warehouse. That consumed valuable manufacturing space.

Now, the manufacturer ships the product to the warehouse while the QC tests are being conducted. 'The product is received and put away by the WMS as quarantined stock,' says Brian Price, senior solutions manager for WMS applications at SSA Global (312-258-6000). 'Once the quality control checks are complete, the WMS is alerted to remove the hold and the product is available to ship days earlier than it used to be.'

In the rare event of a recall, the system identifies the specific pallets and containers that need to be shipped back to the factory.

In the future, RFID and WMS technology may be combined to narrow the scope of a recall. 'RFID allows us to track the pedigree of products and assign unique serial numbers to individual products,' says Riggin. 'We can do that now with bar codes, but RFID may streamline that process.'

The U.S. business community—and society in general—have become markedly more security conscious following the havoc of 9/11, and this new awareness has spotlighted the vulnerability of food and drug supply chains. Regulatory watchdogs of the already highly regulated health care and pharmaceuticals industries have shown unprecedented responsiveness to the dangers of drug counterfeiting, insecure supply lines, and medication error by issuing new requirements and specifying new technologies, including RFID.

Pharmaceuticals

In the pharmaceuticals sector, where profits can be enormous, cost savings may drive supply chain and enterprise technology to a degree, but never so much as does the U.S. Food and Drug Administration. One of its most far-reaching FDA regulations, 21 CFR, part 11, requires electronic records and signature validation for all product moves and any change of core data throughout the manufacturing and distribution processes, specifically affecting enterprise, manufacturing, warehouse, inventory, and pharmacy systems across the entire health care and pharmaceutical supply chain. Companies whose infrastructure can't collect, validate, and archive this data are forced to upgrade or lose FDA certification.

"GMP [Good Manufacturing Practices] CFR 21 requires rigorous regulatory compliance that we live every day," said Ron Riggin, CTO of MARC Global. MARC's supply chain/WMS software is often used by Tier One pharmaceuticals manufacturers, largely because 15 years ago MARC (formerly TRW) was developed specifically to help drug companies meet FDA regulatory compliance in such areas as lot and batch control, quality assurance management, electronic signatures, and recall management. In addition, MARC's WMS/SCM solution has broadened its functionality to meet evolving traceability and auditability procedures ever since, most recently embedding RFID anticounterfeiting technology.

THE ELECTRONIC PEDIGREE is a chain-of-custody document that details all prior owners or custodians of a drug. Each company adds to the pedigree as the drug moves through the supply chain from the manufacturer through wholesalers to the pharmacist. Image courtesy of SupplyScape.

Anticounterfeiting and RFID

A newer FDA initiative, however, issued this February in its "Combating Counterfeit Drugs" report recommends that class two pharmaceuticals carry unique identifiers at the item level and a chain-of-custody "pedigree" that records all product moves from manufacture to point-of-use. The new FDA initiative recommends EPC-compliant RFID tags, dovetailing with the Wal-Mart/DoD RFID compliance mandates, which specified that class two pharmaceuticals manufacturers implement RFID EPC tags at the case and pallet level by June 2004 (an extension of the earlier April 2004 deadline).

"The current demand for anticounterfeiting measures is supported equally by the manufacturers and the regulators of the industry," Mr. Riggin explained. "Pharmaceutical companies view anticounterfeiting technologies as one of the most significant advances in protecting the integrity and safety of their supply chains as well as their brands. Validation of these efforts is also being fast tracked by the FDA, which is continually reviewing RFID standards and providing authorization at an extraordinary pace. Emerging pedigree requirements are being applied to drug distributors, requiring a record of inventory moves throughout the entire supply chain. RFID tags may become the tool to collect data and register all moves. Who owns and manages this data is currently a big debate."

Although MARC's pharmaceuticals customers are gearing up to comply with the retail mandates issued by Wal-Mart, the DoD, and others, their priority initiatives relate more to anticounterfeit technologies," Mr. Riggin said. "Recent counterfeiting incidents affecting major pharmaceutical manufacturers emphasize the importance of addressing this problem."

"In the long term, RFID is going to be the tool used for ubiquitous tracking of goods, but my sense is that it's five to seven years out," Mr. Riggin concluded. "We must identify the true value proposition of this technology. For example, knowing the history of every carton that is taken into a facility without having to handle that carton to capture this content could truly change the way we do business. Pharmaceuticals will be very willing to spend on tags because of the high value of product. Higher-cost tags have more content and flexibility than penny tags—we'll see creative, interesting applications coming from this marketplace."

THIS PATIENT WRISTBAND was generated by a SATO bar code printer and SATO's Data-Link Patient ID Software that interprets data streams and uses it as variable information input to fields defined in the wristband format.

Electronic Pedigree

"Our pharmaceutical customers are moving to meet the Wal-Mart Class 2 narcotics June compliance deadline," said Steve Brown, vice president of marketing and business development for Acsis, a supply chain data collection and RFID systems provider.

He noted that in preparing for deployment, Acsis and its customers are devising solutions for such pharmaceutical-specific reading issues as the interference caused by the carbon content of smoked bottles. "Beyond the immediate June deadline, pharmaceutical manufacturers are very interested in RFID-based track-and-trace capability to prevent anticounterfeiting and antidivergence. Many pharmaceutical companies also have OTC products and are taking an overall look at RFID with the idea of leveraging common platforms for both anticounterfeiting and logistics applications."

Packaged Pedigree Tracking

EPC-based RFID technology will make the copying of medications either extremely difficult or unprofitable, according to the FDA's "Combating Counterfeit Drugs" report. Another Pedigree-tracking option, partnered by Sun Microsystems and SupplyScape, combines the latter's Electronic Pedigree software application resident on a Solaris- or Linux-based server running Sun's Java Enterprise System software.

The Electronic Pedigree anticounterfeit package comes with customizable business rules compliant with the Federal Prescription Drug Marketing Act (PDMA) and Nevada and Florida pedigree regulations to automate the entire pedigree process from manufacturer to pharmacy or point of use.

Shabbir Dahod, CEO of SupplyScape, explained that according to the FDA's timeline, the 30 top lifesaving drugs will bear individual item labels with EPC-encoded unique serial numbers by 2005, as well as pallets and cases for all pharmaceuticals by 2006. "All drugs are expected to have individual item EPC labels by 2007. But many large suppliers will use EPC labels and RFID technology for pallets, cases, and items sooner to meet 2005 mandates by Wal-Mart and the DoD. You'll be able to secure the supply chain based upon an authentic chain of custody and leverage RFID as well as other mass serialization technologies."

RFID Verification

Matrics, which also provides RFID-based supply chain tracking systems, already has pharmaceuticals customers preparing to announce item-level tracking implementations. "We're in various stages with many customers and anticipate five implementations by the second quarter," said Liz Churchill, Matrics' director of Life Science Solutions. "The challenge with Class 2 drugs is that the RFID inlay has to be incorporated on the bottle label." But it's not the only challenge. "Among other deployment issues we've tackled, RFID requires new functionality on the line," Ms. Churchill continued. "We've developed a verification station using a reader with a very small antenna at the packing station on the bottling line. It verifies all 48 bottles in the case. Currently, Class 2 pharmaceutical manufacturers are implementing item-level tracking, which was supposed to be in place by March 31, according to Wal-Mart. Everybody's late. Case and pallet tracking is due at the January 2005 deadline. We'll have two customers implemented next month."

RFID Temperature Taking

"RFID is a particularly important technology for pharmaceutical companies because it makes 100 percent proof of delivery possible," said Martijn Herder, CEO of Inther Logistics Engineering. Inther (headquartered in the Netherlands, with a U.S. office in Cary, IL) is a leading European logistics and systems integration company with Tier One customers in the pharmaceuticals industry (see the case study, "GlaxoSmnithKline Tames Growth by Fully Automating Logistics").

"The cost—presently 30 to 40 cents Euro per tag—isn't prohibitive for products of high value. RFID is also cost-effective with bin systems, because they're reusable. We have integrated RFID tags over a range of frequencies into our software and have two European pilots at the moment. One project involves 16,000 tagged bins, and the other project uses tags carrying sensors that check temperatures every half hour. This kind of tag will assure environmental quality control for pharmaceuticals as well other environmentally sensitive applications."

Health Care Providers

On the health care provider side, the customer base for enterprise and supply chain systems is undergoing a shift, according to Jamie Wyatt, PeopleSoft global industry executive for health care. "Over time we're seeing smaller organizations—a 200-bed hospital, for instance—that wouldn't have considered an ERP ten years ago. A much broader audience is willing to consider IT."

Debbie Murphy, life sciences market development manager for Zebra Technologies, notes that the health care and pharmaceutical/medical device supply chains are based on business models that are very different than those of automotive or retail. "In health care delivery, they are about the patient care first and foremost, and have not been as concerned if it is an efficient delivery." However, baseline technologies such as bar coding and RFID can be leveraged to improve both care and operations.

PeopleSoft's Mr. Wyatt noted that health care has also become aware of inventory carrying costs—especially unofficial inventory. "Dartmouth-Hitchcock Medical Center in New Hampshire had put in what they call par levels of products in all locations with automatic replenishment and consequently reduced inventory by 50 percent while at the same time improving service," he said.

Managing Hospital Materials

Electronic signature capture was a key selling point for Mike Pagan, corporate director of material management for Continuum Health Partners, a corporation of seven hospitals in New York City. "As we all merged over the last five to six years, we realized that we needed to develop one way of doing business," he said. "We decided to implement an Oracle ERP and to automate material management at the same time. We chose HighJump's inventory tracking system because it offered a range of options for replenishments as well as the ability to capture signatures for deliveries to meet our internal accountability requirements."

The wireless inventory system, interfaced to Oracle, uses Symbol Technology's PDT 8100s, has been in place about a year, replacing older handhelds and a paper-based system, according to Mr. Pagan. "All seven hospitals act as JIT supplies hospitals—they set par levels at one to two days of stock. JIT fulfillment wouldn't be practicable without this level of automation."

Bar Code Point of Care

Another important set of regulations, the HIPAA (Health Insurance Portability and Accountability Act), passed in 1996, is currently driving patient security measures in hospitals and clinics, according to Gary Krause, distribution manager for SATO America Inc. "HIPAA is an enormously large umbrella which mandates patient records privacy and the setting of standards for electronic health care transactions. This includes bar code point-of-care applications like patient wristband identification, data terminal medication look ups, and other security measures in response to the high rate of U.S. adverse drug events [120,000 annually]," he said.

SATO's answer to this issue is a bar coded patient wristband—using pictures and linear or 2D codes and built-in security to prevent unauthorized wristband removal. Mr. Krause explained that SATO's solution uses the hospital's data stream that traditionally produced embossed cards to encode the same information and a medical-record referent—as well as encoding name, gender, doctor, date of admission, and such data as allergy information in PDF, if desired. "We've just completed a beta site at a large western university hospital. There's a rush to the goal line right now, because there's a two-year window when some 5800 large facilities must have bar code point of care in place that are HIPAA compliant."

Software developers are responding by introducing new versions of their programs that support symbologies such as Reduced Space Symbologies (RSS), which allow for bar coding on items that were previously too small to put labels. "Loftware has seen an increase in requests from both healthcare and pharmaceutical companies to support RSS symbologies," said David Martin, director of sales and marketing for the company. Version 7.3 of the Loftware Print Server adds support for those symbologies (the program already supported other symbologies and RFID). Thanks to the new support for RSS, a Loftware customer can now fit a label on its sutcher products without changing its manufacturing process. Before, the bar code and label was too long and required an extra step to make it fit. "Now with RSS, when they stamp the product, there is no extra process and their current labels work with their current thermal printers," he said. Other customers have found that 2D labels fit perfectly on top of test tube caps. However, Mr. Martin notes that RFID allows for more information on a smaller space than RSS. "It is uncertain if RSS will stick as a standard in the pharmaceutical industry," he said.

Whether the underlying technology is bar coding, RFID, or something else, one thing is clear: patient safety, provider efficiency, and accuracy can all improve, thanks to leading-edge supply chain practices and technology.

How you answer that question may depend on whether you’re asking the right questions upfront, or whether your decision support system, if you have one, is asking the right questions.

“Business intelligence is a buzz word in the supply chain software industry right now,” says Ronald Riggin, chief technology officer, MARC Global (866-703-8279). “But too many people think that business intelligence is a decision support system that helps them find answers to their problems.”

If you already know what your problems are, you can find a solution to them on your own, he adds.

True business intelligence, on the other hand “should help you find answers to questions about your business you didn’t know to ask. That’s where you’ll find the value.”

Riggin explained the difference between these two approaches to business intelligence at MARC World, its annual user conference.

Much of business intelligence and analytics today have focused on supply chain visibility and event management. These solutions alert a user when an order didn’t ship on time that a trailer is late or that a key performance indicator (KPI) has dropped below a threshold.

“This is all good stuff,” says Riggin. “But too often, these are after the fact alerts to historical statistics.”

Instead, Riggin believes users need predictive alerts that can identify a trend based on supply chain information, and then predict what will happen next if the trend continues.

An example might be that as the number of temporary workers goes up, the order fill rate goes down. “What that tells you is that even though you have more help, they’re making a lot more mistakes,” says Riggin. “The point is that the software can look at millions of transactions that happen every day in your execution systems and make correlations that you might not notice on your own.”

By integrating a business intelligence application with other supply chain and enterprise solutions, Riggin adds, a user can look at the results from a business value perspective.

“Most solutions measure what happened,” says Riggin. “What they’re not measuring is the business value of what happened.”

A traditional performance management solution might tell a warehouse manager that they picked 15 picks per hour instead of 20. The kind of solution MARC is offering can also look at the profitability of those picks.

“Picking 15 high margin products an hour might be more valuable to the company than 20 low margin picks,” says Riggin. “Business intelligence lets you form a point of view that goes beyond just counting.”

—Niall Ferguson, author, The House of Rothschild

Two hundred years ago, the Rothschild banking family learned a valuable lesson about real-time information: The company that can act on the news faster than its rivals can win in the marketplace.

Back then it took 48 hours to send a letter by ship from the European continent to London. The Rothschilds cut that time in half using private couriers and homing pigeons. Their 24-hour advantage was the 19th century equivalent of operating in real time today.

Two hundred years later, businesses have closed more of the information gap. But they still face many of the same challenges as their earlier counterparts before they can operate in real time.

The first challenge is to devise and implement technology, systems and processes that allow the collection of information closer to the source of events.

The second is to increase the speed at which we communicate that information.

Finally, it's to have the systems and processes in place that allow the manipulation of that information to make meaningful business decisions.

Given that bar codes, sensors, warehouse management systems (WMS) and enterprise resource planning (ERP) have been in place for some time, many companies may assume they're already operating in real time. But these automated data collection technologies and software systems are only the building blocks of the next generation of real time in the plant, warehouse and supply chain.

"The next generation of real-time operation is about all the nodes of operation having access to the same information and giving you visibility across the system," says Mike Kotecki, senior vice president, HK Systems (800-457-8367). "It's the Holy Grail. We aren't there yet, but we're getting there."

Real-enough time
Just what is real time?

It's not a simple question. In fact, when it comes to manufacturing, distribution and the supply chain, real time is a relative term, depending on whether you're talking about an automated materials handling system or a business system.

"In materials handling and process control, real time is having information fast enough for the equipment to keep up with demand," says Ralph Rio, research director, ARC Advisory Group (781-471-1000). "In a business system, real time means having information a little faster than your competitors."

Think of it as real-enough time. The first might be measured in nanoseconds so that a conveyor diverter can sort cartons traveling at 600 feet per minute. The second might be measured in hours, or even days. Either way, it's having information at the ready when a decision has to be made, whether that information was collected a split second earlier or the previous day.

For instance, a distribution center that replenishes while filling orders has to operate in real time. "Otherwise, pickers will be out of synch with inventories," says John Hill, principal with ESYNC, (419-842-2210). Like-wise, Hill adds, a facility that crossdocks must be in real time to coordinate incoming merchandise with hot orders and outgoing trucks.

In a value-added processing operation, on the other hand, batching information is usually fast enough. "Most people handle value-added processing with temporary labor," Hill explains. "They don't have time to train temps on scanning devices. So, they tell the WMS they're going to move a bunch of picks to the value-added processing area. They wait until the temps have completed all their tasks to receive those picks back into the WMS. Just knowing that they're in the value-added processing area is enough."

But for those operations that require real time on a higher level, there are three components experts say must be in place. The first is inventory transparency. The second is data communication capability. And the third is the ability to make and execute decisions no sooner than is absolutely necessary.

Transparency
There are several reasons real time is becoming more important. One is the evolution from a make-to-stock to a make-to-order environment. Despite lean inventories, manufacturers and distributors have to be able to make and deliver an order when they promised it to the customer. To do that, they need real-time transparency of inventory and capacity.

"The Holy Grail used to be available to promise," says Tom Comstock, vice president of product marketing, Brooks Software (978-262-2400). "Now, with lean inventories, it's capable to promise. Can you make and deliver it when you say you will? Our customers tell us they'd rather turn down an order than miss a delivery."

The tools that provide that transparency are not new. However, a change in how they're used is underway.

"From our perspective, collecting information in real time hasn't changed much in the last ten years," according to Hank Stephens, product manager, wireless networking, LXE (770-447-4224). "What is changing is that the application of those real-time tools is extending deeper into the enterprise. We're no longer talking about automating the warehouse. We're now talking about moving outside the warehouse to get visibility into the movement of product across the supply chain."

But since not every move represents an important event, the key is to get visibility into the movements that matter.

"Real-time exceptions are becoming a big thing for customers as they move toward the real-time factory and warehouse," says Mike Frichol, director of manufacturing industry solutions, Microsoft Business Solutions (888-477-7989). "If I'm operating according to plan, I don't need to know anything. But I want to know immediately when an exception occurs."

The Holy Grail, of course, is that when a consumer removes a product from a shelf, that event would trigger the replenishment of that product all the way back to the manufacturing plant.

"We're a long way from that, but the technologies that could make it happen are becoming feasible," says Stephens of LXE.

Communication
In fact, there is still a disconnect between collecting information with a bar code, for instance, and communicating that information to a location where the data can be used for decision making.

"A bar code scan in and of itself doesn't mean anything," says Stephens. "If you haven't told your systems that you scanned the product, you're not operating in real time."

Why the disconnect? Despite 30 years of bar coding, "Not every company has the infrastructure in place to take advantage of that information," says Gil Bautista, senior director, warehouse distribution solutions, Symbol Technologies (866-416-8545).

Point of sale data is the perfect example. When it comes to the retail supply chain, few processes are closer to consumer demand than a real-time scan at the checkout counter. "Everyone does it," says Bautista. "But the question is: Do retailers use that information to replenish their shelves? The answer is: No, they don't."

In fact, according to John Hill, it takes up to ten days for information collected at a checkout counter to find its way back to a planning system that will schedule the replenishment of that item. "The infrastructure is wanting to support the real-time supply chain," says Hill.

Decision-making
Transparency and a communications infrastructure are critical elements of the real-time supply chain. But in order to advance the ball, companies must be able to execute against that information. More importantly, they must be able to make broader business decisions with that information.

"There are two components to real time today," says Ron Riggin, chief technology officer, MARC Global (866-703-8279). "One is the ability in real time to present a transaction to a user, execute it, record it in your system and move on." That's basic blocking and tackling today, says Riggin.

Real-time decision-making is the next step. "At the end of a day, we may have collected information from millions of transactions that were all executed and updated in real time," says Riggin. "But if you can't derive some meaning out of those transactions, what good are they?"

In other words, it's great to know in real time that a trailer is going to be late if the inventory on that trailer will keep a production line going. It's even better to know that it's one of a series of late deliveries in recent weeks. "What's developing, and what's different, are intelligent systems that can look at real-time information to alert us to what's happening now, but also forecast what might happen if we continue on the same trend," says Riggin.

Real-time materials handling
Just as real time is changing information systems, it will also have an affect on the materials handling systems that receive that information. In fact, the real-time materials handling system of today is not what it will become. But in some instances, it is an excellent start.

Consider this. A warehouse management system releases an order to a pick-to-light system. Order pickers select the items and place them in totes that are taken by conveyor to a sortation system that speeds the order to the shipping dock. Best of all, that order was not received until 7 p.m. and is being shipped less than an hour later.

Most people would call that a real-time system today. But is it the real-time handling system of the future? Not according to Gary Cash, vice president of product management and marketing, FKI Logistex (877-935-4564). "Real-time systems of the future will let what's already on a conveyor to fill one order be redirected to another more needy order. That's different than what is being done today," says Cash.

And he's not alone in that view.

"The next generation of real time will involve a constant reevaluation of all assets every second and operate as if it's a single mind across the facility," says Kotecki of HK Systems. "It's a new level of intelligence and users don't know what they're missing now."

The following stories in this special issue detail how materials handling and information systems both within and outside the four walls of facilities are changing to make true real-time operation a reality.

That the leading best-of-breed provider of supply chain execution (SCE) solutions, like warehouse (WMS) and transportation management (TMS) systems, is jumping into supply chain planning says something about how the world of supply chain management is changing.

For one, the acquisition takes Manhattan’s solutions from the warehouse into the executive suites, where major decisions are made. That’s an area that ERP players have had to themselves.

For another, it demonstrates just how the lines between execution and planning, two disciplines that were once distinct, are beginning to blur.

Manhattan says the move was a natural once the company began offering labor and transportation management. Those two execution systems require a certain amount of advance planning to make the best use of constrained resources like labor, trucks and trailers.

“As the lines grayed, we asked ourselves whether it makes sense to start thinking about the planning, replenishment and forecasting side of the business,” says Eddie Capel, senior vice president of product management at Manhattan.

The answer was “yes” for more reasons than just thinking outside the lines. Manhattan, like other SCE providers, is facing stiffer competition from ERP providers who now offer planning and execution solutions.

What’s more, the struggles of stand-alone planning vendors like i2 (800.926-9286) and Manugistics (301-255-5000) potentially opened the door to more competition, especially from end-users who want to reduce the number of vendors they deal with. To that end, Manhattan now offers a complete supply chain management platform.

Beyond the business benefits, there may be operational reasons to bring execution and planning together, according to Steve Banker, service director, supply chain management, ARC Advisory Group (781-471-1000). “In the past, when we talked about inventory optimization, we were really talking about maintaining the minimum level of safety stock needed inside a DC to meet customer service levels,” says Banker. “That’s a WMS function.”

The real gains come from looking at the whole flow of inventory, from the manufacturing plant through the distribution centers and on to the end customer. That’s a process known as multi-echelon inventory optimization. “That is something that a replenishment planning solution does,” says Banker. “There is a fit between these things.”

In fact, Banker expects to see other execution vendors follow suit.

Some of that is already happening. For instance, Logility (404-261-9777) has long offered demand and inventory planning as part of its suite. More recently, providers like Provia (616-285-3311) added planning functionalityto their optimization applications.

“If you want to know where WMS is going,” adds Ronald Riggin, chief technology officer for MARC Global (678-287-4040), “it’s going enterprise wide and it’s going to integrate more tightly with demand planning and management. That is going to become an integral part of our business.”

“I talk to 150 supply chain executives and distribution center managers a year,” says Steve Banker, service director, supply chain management, ARC Advisory Group (781-471-1000). “If you want to get these guys going, ask them about how they’re measured and whether those metrics make sense. They are all looking for tools that will give them better real-time data and better decision-making tools.”

While business intelligence solutions have been commonplace for the financial side of the business for years, they are just now being adapted for the supply chain.

That domain expertise is important for anyone trying to look for value in the millions of transactions generated each day by the typical supply chain execution system as it receives, puts-away, picks and ships inventory.

“BI derives meaning out of all that information that has value,” says Ron Riggin, chief technology officer, MARC Global (866-703-8279). “The tools synthesize the information to show you trends in the past, the activities in the present and forecast where you might end up if you continue that trend.”

Riggin says business intelligence tools feature four functions.

The first is analysis. By filtering information from execution systems, as well as other enterprise systems, the BI tools identify meaningful trends and forecast results.

The second is visualization. The system delivers personalized views of key performance indicators and operations that are important to specific users in real-time.

The third is alerts. Once a user of the system has defined operational norms that are important to that user’s job, the system can deliver real-time predictive alerts that indicate any deviation from the norm.

Finally, the systems allow users to easily create or modify reports.

While many supply chain execution systems can deliver key performance indicators (KPIs) to an end-user, a BI system can tie a value to that information, says Riggin.

“A WMS with a KPI dashboard can tell a 3PL that the employees did 20,000 picks that day or even alert the facility manager that they are ahead or behind of schedule,” says Riggin. “A BI engine can tell you what the value of those picks was to the enterprise, or what kind of margins were earned on them.”

The retail store and not the warehouse is the next frontier for optimizing the retail supply chain, according to Ron Riggin, senior vice president of technology for RedPrairie.

“If you already have a warehouse management system (WMS) in place, optimizing your DC will give you incremental improvement,” says Riggin. That’s great, Riggin adds, “but if I can use consumer demand from the store to figure out my inventory levels and share that with my supplier, I might not even need that DC.”

That may sound surprising coming from a company like RedPrairie that sells warehouse management systems. But the point is that the investment DCs have made in WMS over the years has already paid off: The best DCs using a WMS are often operating with 99% accuracy and order fulfillment rates.

Meanwhile, the out of stock rate at stores is about 8% and hasn’t improved for the past 10 years.

What’s needed instead is a better view of real demand, using point of sale data, RFID and bar code data, movement signals in the distribution center and external factors like promotions and seasonality.

The next step is to use that wealth of information to calculate a replenishment plan that can be executed by existing supply chain execution systems. What’s more, that plan can take into consideration pricing and promotion information, on-hand inventory levels in the store and the distribution center as well as visibility into in-transit inventory coming from a manufacturing plant or already in route from the DC to a store.

“If I can get visibility into demand from the store and the supply in my network, I can tie that into my WMS, my labor management and my transportation management systems and do something with that information,” says David Landau, senior director of retailer solutions for Manhattan Associates. “That allows me to eliminate out of stocks and reduce markdowns at the store, and to lower my transportation and distribution costs in the DC.”

Once a retailer captures real-time information in the store, all the components of an integrated supply chain execution system can come into play to drive the activities in the distribution center.

As an example, a beverage salesman visiting a grocery store may discover that the retailer is willing to provide more shelf space for a hot-selling wine. Today, not much happens with that information until the salesman returns to the office. Even then, there may be a several day delay between entering an order, picking the wine and delivering it to the store.

“With integrated software tools, the salesman can access the WMS and view the inventory for that wine from a PDA while he’s in the store,” says Joe Blauert, chief operating officer for HighJump Software. “If inventory is available, he can not only reserve the inventory, he can place an order in the WMS so that someone is picking the wine for the next truck going to that store.”

Knowing what’s selling in the store can also be used to match the supply of labor to demand in the DC and the store, says Ron Riggin, senior vice president of technology for RedPrairie. “If I know what’s selling and when it’s selling, I can allocate labor in the store to that department at the busiest times of the day,” says Riggin. “And, I can use that information to create a labor plan for replenishing the store from my distribution center.”

At the end of the day, Riggin adds, we can now take the information in the store and the supply chain to optimize transportation, inventory and labor in the DC and the store. “We’ve had all this information for years,” Riggin says. “What we haven’t had before are the tools to correlate the information and drive execution.”

Out of stock. Those may be the three most important words in the retail supply chain today.

"Avoiding out of stocks is the number one problem our retail customers are trying to address," says Steve Simmerman, vice president of marketing and business development for Swisslog (757-820-3400). "If product isn't on their shelves, customers will buy it somewhere else."

In fact, avoiding out of stocks is driving many of the supply chain execution projects by leading retailers. For proof, look no further than RFID.

"Our retail customers tell us the biggest value they expect to get from RFID isn't learning that product arrived at the store or even that it sold," says David Landau, senior director of retail solutions for Manhattan Associates (770-955-7070). "It's to tell them that product moved from the backroom onto the floor when it was supposed to."

That's because the simplest way to improve top line sales is to eliminate out of stocks. What's more, the easiest way to improve bottom line profits is to reduce the number of markdowns caused by having too much of the wrong inventory.

To make that happen, the supply chain execution systems that previously ran warehouses and distribution centers are reaching beyond the DC shelf to the store shelf.

"Retailers are aggressively trying to connect the dots between the points of customer interaction and the events that lead up to a sale," says Robert Garf, research director of retail for AMR Research (617-542-6600). "That includes tying together everything from merchandising activities to activities in the distribution center."

New strategy
Such new thinking represents a change in the relationship between the DC and the store. "Warehouses and stores have traditionally been autonomous," says Bruce Bowen, vice president of sales for Aldata (404-355-3220). "Now, they want DCs to be responsive to the stores."

In the old way of doing things, retailers replenished warehouses based on predetermined reorder points after inventory was shipped out of the warehouse (see diagram). "What you really need to do is bring in the items you need to support the store based on promotions, seasonality and what's selling," says Bowen. "Retailers are trying to get to the point where consumer demand in the stores is driving the replenishment activities in the warehouse."

Investments in distribution centers over the years have paid off. The best DCs using a warehouse management system (WMS) are often operating with 99% accuracy and order fulfillment rates.

The problem is that those products aren't making it to the shelves. "The out of stock rate at stores is about 8%, and it hasn't improved for the past 10 years," says Eric Peters, CEO of TrueDemand (408-399-1924). "That means that if a big box retailer stocks 100,000 different items, 8,000 items are empty every day."

What that says is that better DC operations will only get a retailer so far. "What we need today isn't better warehouse management systems," says Peters. "It's to get a better view of real demand, using point-of-sale data, RFID and bar code data, movement signals in the distribution center and external factors like promotions and seasonality."

The idea is to take the wealth of information now available at the store level and use that to calculate a replenishment plan. That plan can take into consideration pricing and promotion information as well as on-hand inventory levels in the store and the distribution center. It also includes visibility into in-transit inventory coming from a manufacturing plant or already in route from the DC to a store.
"We've had all of this information for years," says Ron Riggin, senior vice president of technology for RedPrairie (262-317-2000). "What we haven't had are the tools to correlate that information and then drive execution."

To Riggin, the store, not the warehouse is the next frontier for the supply chain. "If I already have a warehouse management system, optimizing my DC gives me incremental improvement," says Riggin. "But if I can use consumer demand from the store to figure out my inventory levels and share that with my suppliers, I might not even need that DC."

Demand driven
What that means is becoming demand driven. "The idea behind the demand-driven network is simple," says Swisslog's Simmerman. "If I buy a tube of toothpaste, that sale creates a demand signal that triggers replenishment of that tube."

That's the theory. In reality, AMR Research found that it typically takes two weeks or more for that signal to get from a store to another system. "To become demand driven, retailers need to break down the walls between the store, the distribution center and manufacturers," says Garf.

That's why it's not just retailers that want the information: So do manufacturers who are planning what to make in their plants. "Until about 18 months ago, most manufacturers thought their customer was the retailer," says Peters. "What's emerging is that the consumer is as important a customer to the manufacturer as is the retailer."

"At the end of the day, everyone wants to know the true demand at the retail shelf for their product," Peters adds.

Executing the plan
Once a retailer captures real-time demand, all the components of an integrated supply chain execution system can come into play, based on the kind of supply chain a retailer wants to operate.

"Quality, cost and service are the three legs of the supply chain," Manhattan's Landau says. "As a retailer, you have to figure out which one of those legs you hang your hat on. Then, you can use the supply chain execution tools to figure out what kind of balance you want."

When solutions are integrated, the retailer can balance inventory carrying costs, order fulfillment costs and transportation costs to meet the retailer's strategy. The next step is to use those systems to link to activities in the store. As an example, a beverage salesman visiting a grocery store may discover that a particular wine is selling well and that the retailer is willing to provide more shelf space for it.

Today, not much happens with that information until the salesman returns to the office.

"With integrated software tools, the salesman can access the warehouse management system and view the inventory for that wine while he's in the store," says Joe Blauert, chief operating officer for HighJump Software (800-328-3271). "If inventory is available, he can not only reserve the inventory, he can place an order in the WMS so that someone is picking and packing the wine for the next truck going to that store."

Knowing what orders have to be picked in the warehouse and what's selling in the store also can be used to match the labor supply to the demand – not only in the DC but also in the store. "At the end of the day, we're using consumer demand to optimize the inventory levels in the stores and to optimize labor, inventory, warehouse and transportation resources in the warehouse," says RedPrairie's Riggin.

Moving to the demand-driven supply chain will take time, but the tools are now in place to make that a reality. "This is not going to happen overnight," says Riggin. "But if people start thinking about what's happening at their customer's customer and how they can help their suppliers' supplier, they'll all be better at the end of the day."

These days, it seems every company wants to acquire a third-party logistics provider (3PL). Mergers and acquisitions -- involving not only 3PLs, but carriers and supply chain IT providers as well -- are on the upswing.

A number of factors -- from positive cash positions to globalization to the pendulum swing of merger cycles -- make this the right time for supply chain players to merge, analysts agree.

Each M&A transaction announcement is peppered with rosy promises such as synergy, breadth, and enhanced customer service.

But while some transactions are textbook examples of how to merge, not every deal proceeds as smoothly as promised, and it's hard to find one without fallout for at least some companies and their customers.

Despite the potential risk, however, analysts do not expect the thirst for acquisitions to be quenched in 2007.

The intent behind M&A transactions is often to buy a company's customers, product/service offerings, people, and sometimes, assets. While the subtleties differ in each deal, several common denominators across the supply chain make this the right time for your carriers, 3PLs, and IT providers to buy or sell:

1. Globalization. Shippers are increasingly likely to source and sell goods outside their own borders. Moving shipments across oceans and continents is inherently more complex than moving shipments domestically, so shippers are required to build or buy international shipping expertise.

"Shippers turn to 3PLs to solve a multitude of challenges, most of which extend their services well beyond the traditional capabilities of warehousing and transportation," says Greg Aimi, research director at AMR Research, Boston.

"But companies today find it difficult to locate service providers with the required competence, capabilities, and proven experience in these new opportunity areas."

Sixty-one percent of U.S. shippers piggyback on their forwarder's or 3PL's online systems to manage the global trade process, according to Aberdeen Group's report, New Strategies for Global Trade Management. In response, freight forwarders and 3PLs are bolstering their global expertise and reach by acquiring other companies to fill the gaps.

2. Big companies, big providers. For many 3PLs, growing larger is essential to match the increasing girth of their customer base.

"Retail is becoming national, so retail suppliers need national solutions," says Dan Sanker, CEO of Santa Monica, Calif.-based 3PL CaseStack Inc., which merged with AtomicBox Logistics in 2006. "Manufacturers, too, are consolidating to better serve large retailers."

Similarly, supply chain IT developer RedPrairie, Waukesha, Wis., bought logistics technology firms MARC Global Holdings, BlueCube Software, and most recently, StorePerform Technologies, to bulk up its services to meet the demands of large, national companies.

"We work with multi-billion-dollar global conglomerates," says Ron Riggin, vice president, RedPrairie. "Why would they put mission-critical systems in the hands of a small provider? We need to grow to be a $500-million company -- quickly," he says.

The company plans to reach that goal through continued acquisitions.

3. Cash is flowing. Currently, many large companies -- including private equity firms, shippers, and 3PLs -- boast of a lot of cash on the books. Investors find 3PLs particularly inviting because they have solid compounded annual growth rates and low market penetration. They are growing faster than the economy, and they compete in a fragmented industry, which investors like.

The same is true of acquisition targets.

"For the first time in a long time, companies have strong balance sheets," says Lana Batts, Arlington, Va.-based managing partner for Transport Capital Partners, a transportation consulting firm specializing in the trucking industry. "It's an advantage to sell when times are good."

4. Retirement wave. The trucking industry, in particular, is experiencing an uptick in retirement interest from company owners who launched their businesses following deregulation in the early 1980s -- a trend Batts calls "the graying of the entrepreneur."

"The company founders' sons or daughters are saying the revenue this business generates is not worth the risk," she says. This makes them particularly open to merger or acquisition offers.

5. Relaxed regulation. "Alliances among ocean carriers became substitutes for mergers during the era of tight regulation," says Paul Bingham, principal, global trade and transportation practice, for Global Insight, an economic and financial analysis firm in Waltham, Mass. "As regulations relax, the pace of acquisition and mergers increases."

Politics can also play a role in driving M&A activity, as DP World's recent sale of U.S. port operations illustrates. A political firestorm over port security erupted last year when the Dubai-based company took over operations at several U.S. ports, causing the company to eventually back out and sell to New York City-based AIG Global Investment Group.

Strategic Versus Financial Buyers
Shippers have traditionally greeted with reservation the news that an investment firm, rather than a supply chain company, is acquiring their service provider.

While it's generally true that investors resell their new acquisitions within five to seven years, the tide of opinion on what will now happen during that time may be turning. In the past, financial investors' intent has been to squeeze as much cash from the operation as possible, then get out. But those days are over.

Today, investors buying a service provider need to increase the value of the company within a few years, which often means broadening services and adding technology.

Typically, investors search for large, profitable, non-asset-based providers with 15 percent to 20 percent earnings before interest, tax, and amortization -- and they want management to stay with the company after the merger.

They also want to earn money from each customer. "The fact that a company has been a provider's customer for 40 years doesn't matter to investors. They are short-term driven," Batts says.

"Private equity companies are getting a fresh look as owners of logistics service providers," says Dave Kulik.

He speaks from experience: once group managing director at CEVA Logistics, (formerly TNT Logistics), Jacksonville, Fla., Kulik was on the supervisory board that decided to spin off TNT's logistics division, and he was the company's CEO when it accepted an offer from Apollo Management, a private equity firm that buys undervalued companies.

The draw for Kulik was the fact that TNT Logistics' global operations would remain intact, albeit with a new name.

"Being a private company enhances our ability to create better solutions for shippers, and security for our employees," Kulik says. That includes 250 senior managers who are now part owners.

The spinoff means CEVA can avoid rationalization, integration, and other tasks that often are created by strategic acquisitions. It also enables management to continue its focus on helping customers reengineer their supply chains.

Some see this deal as marking a reversal in the trend toward one-stop logistics consolidation.

"Financial and strategic acquisitions are two dramatically different models," says John Sutthoff, vice president of global marketing and strategy for UPS Supply Chain Solutions, Atlanta. While financial investors have increased the value of some providers they acquired, they don't usually implement many changes, he notes.

Meeting Shipper Needs
Change, however, is the mission for UPS as it continues its buying spree, which includes more than 20 companies over the past seven years.

"In most cases, we purchase companies operating in a business we're not currently in," Sutthoff says. UPS added LTL capabilities, for instance, through its strategic acquisition of Richmond, Va.-based trucking carrier Overnite Transportation Company.

"We needed to take a broader view of the business than merely moving small packages. Our customers want an end-to-end supply chain," Sutthoff explains. That way, shippers need only use a few preferred providers, but gain variety of services, as well as reliability, visibility, and customer-enabling technology.

"When fewer companies manage your merchandise, you have more control," he adds.

Similar motives were at work in the Deutsche Bahn AG/BAX Global and BAX/Schenker Logistics deals.

"In the past, Schenker was known as a freight forwarder," says Claude Germain, executive vice president and chief operating officer at Schenker of Canada. "Freight forwarders move shipments from Point A to Point B, similar to a travel agent. Now we operate more like a tour operator, organizing the supply chain for shippers."

BAX and Schenker dovetail well, Germain says, because BAX possesses a strong following among Asian and North American companies, while Schenker specializes in serving businesses in Asia and Europe. The combined international operations of the two companies blend nicely with BAX's domestic air distribution, enabling easy hand-offs for expedited moves.

What Can Go Wrong -- and Right
When performed correctly, acquisitions can bring together the disparate strengths of two companies to add benefits to their respective customers. Of course, getting to those benefits requires some initial disruption.

"In general, acquisition is a painful process," says RedPrairie's Riggin. "Several steps always occur: responsibilities transition, staff numbers decrease, and employees and customers worry."

Hallmarks of a good integration include similar cultures between the two companies, minimal overlap in offerings and services, early and clear communication, and conducting the deal at the right pace.

Companies must balance between proceeding slowly enough with the acquisition and integration to not disrupt customers, but fast enough so the providers themselves do not lose momentum.

Of course, many companies can tell horror stories of acquisitions gone bad. Here are some major areas of concern for shippers:

Fewer choices. Without new entrants to balance out the effects of M&A activity, consolidation inevitably reduces the available stable of providers. But those companies should also now be able to do more for shippers -- a prospect customers have embraced with supplier rationalization projects.

Riggin calls these shipper consolidation initiatives "10 in 2010" -- the idea that by 2010, shippers won't want to deal with more than 10 major IT providers in their supply chain.

Rate changes. Shippers' rates generally increase as a result of a provider merger because the acquiring company tends to bring more resources to bear.

"The sophistication of yield management software for pricing tends to squeeze small shippers," says Global Insight's Bingham. But the combined providers' newfound efficiencies and buying power can also help hold down rates in the long run.

Reduced services. "Just because one company acquires another, it doesn't mean the new owners want to continue the business," says John Gentle, formerly transportation affairs leader with Owens Corning and now president of John A. Gentle & Associates, a transportation consultancy in Toledo, Ohio.

During his transportation career, Gentle experienced mergers where large carriers acquired smaller carriers, "and our capacity literally disappeared while service went to hell in a hand basket," he says.

In successful deals, however, the breadth of services increases.

RedPrairie, for example, hopes to broaden its customers' horizons with its new ability to enable end-to-end processes. The acquisition of BlueCube, a workforce management development company based in Atlanta, fleshes out the company's vision of closely tying retail store operations with supply chain activities.

Integration stumbles. Bringing together disparate processes and systems can be challenging. The cost of changing to a new IT platform can be substantial for all parties, and it can take years to harmonize disparate applications.

Acquisitions are more successful -- and less disruptive to shippers -- when the providers involved share compatible platforms, or when the larger company brings the smaller company's technology up to date.

Quality of service declines. "For some shippers, a provider's acquisition changes not the product offering, but the services around it," says Global Insight's Bingham. "Shippers may perceive a loss of service quality."

That's exactly what happened to Lanca Sales, a food service disposables distributor located in Hillside, N.J. It has been unhappy with one of its ocean carriers since it was acquired by another company.

"We pay a premium and are forced to deal with rotten service and a 'now hear this' attitude," says Tim Avanzato, Lanca's logistics director. Fortunately, the company fared better when its 3PL, Exel, was acquired by Deutsche Post World Net. "That acquisition has been a non-factor for us," he says.

The loss of local flair that can occur with mergers can also be a problem, says CaseStack's Sanker, who notes the tendency for large operations to lose an eye for detail. Sometimes, one provider's drivers or dock and warehouse employees know how to deal better with the idiosyncrasies of particular markets and customers, he explains.

"The challenge is keeping the necessary expertise. You can't lose that regional aspect," Sanker says.

Support staff changes. "Often, during a merger or acquisition, the best employees leave and fear of change permeates the environment," says Greg Gries, data manager, supply planning systems at Perdue Farms, Salisbury, Md.

Fortunately, Gries says, that did not occur when Scottsdale, Ariz.-based JDA Software Group acquired Perdue's IT provider, Manugistics, Rockville, Md. (See sidebar, below, for more on Perdue's merger experience.)

When companies are in fast-growth mode, the employee overlap that occurs with acquisitions may be offset by the need to expand staff, so workers keep their jobs.

Cultures clash. Companies that have distinctly different cultures, such as centralized versus decentralized, often experience problems when merging.

"Culture drives performance in service businesses," says Schenker's Germain. In the Schenker/BAX deal, the companies were careful to allow their myriad cultures to continue -- the culture of international air service, for example, is different than that of warehousing or customs.

Promises are not always fulfilled. Bingham points to the rash of rail industry mergers in the last decade as an example of unkept promises.

"The managers at these rail companies were not prepared to handle the task of consolidating networks adequately, and shippers suffered enormously," he says.

Consolidating IT
IT integration is among the biggest potential stumbling blocks in any merger or acquisition. "It is important for providers going through integration to minimize the impact to their customers," says UPS' Sutthoff.

Integrating newly acquired companies into UPS requires a careful balancing act -- porting them to UPS' platform, while taking the best of the technology already in place, he explains.

Technology integration concerns are particularly pronounced when the IT developers themselves are merging. Sometimes, systems that shippers depend upon are discarded or merged with other products.
"You can end up with an orphaned product," says Bingham.

"Shippers concerned with the fate of a software package need to either get the source code or have the ability to support the software while determining a migration path to a supported solution."

Platform conflict is a related issue. While JDA and Manugistics, for instance, share 150 common customers, the two didn't share a development environment: JDA is based on Microsoft .NET, while Manugistics uses J2EE.

Ron Kubera, JDA's vice president of supply chain, and his colleagues, spent a good deal of time assuring customers that it would continue to develop both product suites.

The companies created a special web site mapping out the future of every product to reassure customers.

Greener Grass
While the conditions driving merger and acquisition interest persist, opinions have begun to diverge on the best future course for logistics companies. Some embrace the one-stop model and expect carriers to continue to snap up 3PLs to round out services. Others doubt the long-term success of that approach.

For example, trucking companies that haul a lot of business for 3PLs are difficult to sell to investors these days, says Transport Capital's Batts. "Buyers want to be able to touch the customer," she says.

That is harder to do when a large portion of business comes from 3PL middlemen. Now, the stakes have come full circle -- 3PLs are looking to buy trucking companies to ensure capacity, she says.

The one certainty in logistics M&A, it seems, is change.

Protect Yourself

From M&A Malaise

Informed shippers can weather the ongoing storm of logistics provider mergers and acquisitions. Keep these tips in mind:

Know the market and your risk.
"Understand how dependent you are on your providers, and the likelihood they will be acquired," says Paul Bingham, a consultant with Global Insight. When news of a merger or acquisition transaction surfaces, understand how it fits into your logistics strategy, particularly if your provider is the one being absorbed.

"Stay alert to signs of trouble, such as a rotation of account managers or customer service reps, or a lack of clarity on the part of the provider," advises Claude Germain of Schenker. "Stability and reliability should be shippers' overriding concerns."

Devise Plan B.
Always use more than one provider and maintain a list of other companies that offer the specialized services you need. In addition, review contracts and options regularly, and understand the working relationships that impact your shipments, advises transportation consultant John Gentle.

"As business professionals, we are paid not to be caught off-guard, but when the unforeseen happens, we must have a plan in place to protect our company and our customers," he explains.

While large supply chain providers are widely viewed as the answer to increasingly complex supply chain infrastructure, patronizing small, lean providers can also be a strategic advantage. "To balance your portfolio you need to utilize solid-performing small to mid-size providers," says Gentle.

Use service-level agreements and key performance indicators.
Your contract with service providers should clearly spell out service-level agreements and key performance indicator requirements.

Maintain a formal contract review process, and hold off on contract renewal if your provider has a merger pending. Wait until you clearly understand what impact the merger will have on your company before renewing.

Be a good customer.
Companies acquiring service providers often cull customer lists and drop shippers that cost too much -- in fees or in hassle, says consultant Lana Batts of Transport Capital Partners.

Other tips to being a good customer include: pay your bills and fuel surcharges, don't nit-pick over minor issues, and don't keep drivers waiting, particularly in today's environment, where there is more freight than capacity.

Acquisition in Action:

Perdue Keeps on Cooking

When it comes to supply chain IT mergers, the assumption is, "if you're using the acquiring company's product, you're at an advantage over those using the acquired company's software," says Greg Gries, data manager, supply planning systems for Perdue Farms Inc.

So when news of JDA Software's intended acquisition of Perdue provider Manugistics surfaced, Gries' relief that the latter's long-term financial future would be more certain was mixed with a healthy degree of concern: what would happen to the software? The people? The support? Perdue still bore scars from an unsuccessful IT provider merger in the past.

Fortunately, his fears were unfounded.

"This is the best post-acquisition working agreement that I've experienced," Gries says. "We have the opportunity to work with both Manugistics and JDA products, and they have mutual respect for each other's suite of solutions."

The acquisition not only shored up Manugistics' finances, but also helped ensure a smoother cash flow for JDA, once heavily dependent upon the up and down fortunes of retailers, says Ron Kubera, vice president of supply chain for JDA and formerly senior vice president of consumer goods and head of European operations for Manugistics.

As chairperson of one of Manugistics' user group committees, Gries gained insight into the planned product roadmap and got answers to merger concerns such as platform choice, retention of service representatives, and continued development of the three Manugistics products Perdue uses.

Among his fellow Manugistics users, "the first reaction was, 'Everything is going to be okay, I'll be able to do business and not lose anything,'" says Gries. "The second was, 'What can we do differently?'"

The integration of the two companies' products feeds well into an initiative Perdue already had underway with major customers.

"We are initiating a vendor-managed inventory program with some of our retailers in the next 18 to 24 months," Gries explains. "We wanted to put collaborative products behind the initiative that will allow us to work with retailers on a conjunctive forecast."

Ironically, this project may have led Perdue to JDA's doors regardless of the merger. For Perdue and its customers, the JDA and Manugistics deal proved to be a recipe for success.

Any reporter who’s been in the business awhile has a few go-to sources. Those are guys or gals who look beyond the hype and tell you what’s really going on.

When it comes to supply chain information technology, Ron Riggin is one of Modern Materials Handling’s go-to guys. Today, Riggin is president of Acuity Global, a supply chain consulting firm. But we first got to know him during the Internet boom, when Riggin was chief technology officer of MARC Global. After MARC was acquired by RedPrairie last year, Riggin stayed on for a time as senior vice president of technology.
We recently asked Riggin what he’s tracking in the supply chain today. “There’s some pretty big shifts going on in the retail supply chain,” Riggin told us. “The big one is that CPG manufacturers and retailers alike are realizing that after years of talking about it, a demand-driven supply chain is something they need to understand and focus on.”
Demand driven supply chain

The idea of a demand-driven supply chain is a simple one. Instead of manufacturers loading up warehouses with what they think people will buy and then pushing that out to stores, product will be manufactured and pulled through the supply chain based on what customers are saying they want to buy from point-of-sale data in the retail store.
Instead of a focus on the DC, the focus is on the store. In the best of all worlds, manufacturers would bypass the DC all together and ship directly to the store.

Now, that may not sound like big news. After all, retailers, supply chain consultants and software providers have been talking about this evolution for years.

But, as Riggin points out, it’s been mostly talk.
“Until now, we haven’t really had a way to create a demand signal repository for a retailer,” says Riggin. “That’s a way to collect, cleanse and aggregate retail point of sale data that can be used to forecast demand at the store level, and then present that information across the enterprise to drive supply chain operations.”
Information that can add value now

Over the last few years, Riggin adds, retailers have spent a lot of time and effort on RFID projects that they believe are going to solve that issue. He’s not convinced that’s the answer.
“RFID will be effective once it’s fully deployed and all the tools to make use of it are in place, but that won’t be for years,” Riggin says. “Meanwhile, there’s a wealth of information out there that can add value and be used now.”

What, then, needs to happen? Riggin sees two important changes. One is a new generation of applications for aggregating demand data from the point of sale.

“The mega-retailers here and abroad have created huge custom solutions to address the need for a repository for their demand information and for supplier portals,” says Riggin. “Now, we’re watching a new generation of demand-driven supply chain solutions that are readily available for all tiers of retailers.”

The second change is the next generation of forecasting, planning and collaboration tools to make use of that data both internally and with suppliers.

“I think what the big retailers are realizing is that they have really efficient supply chains already,” Riggin says. “At this point, improvements inside the warehouse through mechanization will be incremental. The real opportunity is to make your supply chain more responsive to demand or to eliminate the warehouse all together by shipping directly to the store.”

In both cases, Riggin says these new systems are built on standards-based Web services, also known as services oriented architecture or SOA, and are offered in an on-demand, subscription model, also known as software as a service. Both are relatively easy to deploy and affordable, which should promote their use by retailers.

The automotive industry continues to shift gears, backing up and moving forward at the same time.

U.S. automakers keep slipping into reverse. Ford Motor Company lost $12.7 billion in 2006, surpassing its $10.6-billion loss in 2005. Its top U.S. rival, General Motors, also is expected to announce a significant loss for 2006, after losing more than $8 billion in 2005.

Non-U.S. automakers, in comparison, are revving into overdrive. American Honda Motor Company recorded a sales increase of more than 20 percent for 2006, and Toyota's 2006 sales broke company records for the 11th consecutive year.

When 2006 figures are announced, Toyota will finally overtake GM as the world's number-one car maker, predicts forecasting firm Global Insight. The latest forecast shows Toyota producing 9,018,461 units for the year, while GM is estimated to build 8,714,803 units, compared to 2005's actual figures of 8,322,417 units for Toyota and 8,615,949 units for GM.

"While Toyota has been busy adding production capacity and building new plants over the past 12 months, GM has been taking exactly the opposite path in the face of consistently heavy losses," notes Global Insight in a recent report.

In addition, GM's global vehicle production and sales have remained static, while Toyota's have risen as a result of extra investment in plant capacity, the report notes.

"The really alarming aspect for Toyota's rivals is the fact that Japan's number-one car maker has achieved this feat without having a particularly convincing strategy in China and India, the world's two fastest-growing major automotive markets," Global Insight notes.

With the company now working hard to address this weakness, Toyota looks set to strengthen its position in the coming years.

Fuel for Thought
Intense competition is forcing change on a major scale across the auto industry landscape. As part of that change, U.S. automakers are scrutinizing their supply chains like never before.

Two concurrent forces are fueling major transformation: globalization, and the changing role of automotive suppliers.

Globalization. From the late 1920s until the late 1970s, the U.S. auto industry had the home market mostly to itself, notes The American Automotive Industry Supply Chain - In the Throes of a Rattling Revolution, a recent report by the International Trade Administration (ITA), U.S. Department of Commerce.

That changed when Volkswagen (1979), Honda (1982), Nissan (1983), and Toyota (1984) established large-scale U.S. assembly operations. Total "transplant" vehicle assembly began to increase steadily in the United States.

This globalization trend spread across the entire auto industry, redefining where vehicles are manufactured - even for the slow-to-change Detroit Big 3 automakers.

"Last year, for the first time, General Motors sold more vehicles outside the United States than it did in America," notes Jim Press, president of Toyota Motor North America.

With this new influx of competition, car makers of all kinds sought to establish manufacturing alliances in an effort to drive down costs and generate greater economies of scale.

"In 2004, six separate corporate clusters, representing 25 large-volume auto manufacturers, produced 75 percent of the world's output," the ITA notes.

"While these Global 6 automakers -- GM, Toyota, Ford, Honda, Chrysler, and Nissan -- will still operate in 2010, and will still represent 75 percent of the world's output, where they produce those vehicles will shift significantly," the ITA says.

China's global share of vehicle production, for example, will rise from 5 percent in 2003 to 8 percent in 2010, buoyed by a 90-percent increase in output to 5.3 million units, predicts PricewaterhouseCoopers' Autofacts research. NAFTA's global share, in comparison, could slip one point to 27 percent.

U.S. automakers found adapting to globalization a challenge.

"They grew up operating under a regional business model," explains Cary Vandenavond, vice president sales for automotive, aerospace and defense, industrial and metals, i2 Technologies Inc. "Under that model, if the company makes vehicles in a particular region, it sells and markets them only in that region.

"That model sets up the domestic automakers as regional operating entities in North America, South America, Europe, and greater Asia Pacific," he adds.

It's also a model that is quite different than the way original equipment manufacturers (OEMs) operate in Asia.

"Asian OEMs leverage their assets globally, and ship vehicles across large bodies of water and land," Vandenavond notes. "They make anywhere, source anywhere, assemble anywhere, and market and distribute anywhere."

Globalization has also given rise to the production of globalized vehicles, which are designed to sell across different regions of the world and are built off the same platform with common sets of parts.
A new tier structure and expanding supplier responsibilities. The second major force reshaping the auto industry stems from a shift in OEM manufacturing practices.

Increasingly, the major OEMs are moving toward a "Vehicle Brand Owner" (VBO) business model. Under this model, each VBO eventually will be responsible primarily for managing, marketing, and maintaining a stable of car brands, and surrender responsibility for content engineering and vehicle assembly to outside suppliers, explains the ITA.

OEMs are now evaluating their suppliers not only on the basis of near-term price and long-term cost reduction programs, but also on their corporate stability, product design, and production engineering capabilities.

OEMs also judge suppliers on the downstream management of their own supply chains, delivery reliability, willingness to locate plants in close proximity to the OEMs, and participation in the assembly process.

Suppliers are in the throes of responding to these new challenges. Some are willingly taking on the new responsibilities OEMs demand, transforming themselves into what the ITA calls "tier one-half systems integrators."

These suppliers/integrators engineer and build complete modules -- for example, an entire interior or rolling chassis. They assume vastly expanded product design and development responsibilities, as well as downstream supply chain management functions previously handled by OEMs.

Suppliers also are building additional plants to satisfy OEMs' production line requirements, adopting global manufacturing best practices, investing in the development of new technologies, and buying or merging with firms that can contribute new technology and skills, as well as complementary products.

Traveling a Different Road
Other suppliers, however, are choosing not to pursue this new role, consciously deciding to remain in the less-demanding tiers.

The Original Equipment Suppliers Association (OESA), which represents automotive suppliers, estimates that 30,000 firms in North America were part of automotive supply chain tiers in 1990, but only 8,000 in 2004. By 2010, OESA predicts their numbers will dwindle to no more than 5,000, each enjoying significantly higher sales volume.

These changes hold dramatic supply chain implications for OEMs and their suppliers.

First, supporting the automotive OEMs' manufacturing operations continues to grow more complex. "More new models are launched, and the OEMs are trying to bring these new vehicles to market more rapidly," explains Dick Jenning, vice president automotive supply chain, Ryder.

Second, OEMs are retrofitting their assembly plants to embrace flexible manufacturing, so that many different models can be produced in the same facility. That drives a need for exponentially more parts.

Finally, OEMs are sourcing from greater distances, "making the supply chain geographically longer," Jenning notes.

OEMs also are changing the way they manufacture -- moving to a modular assembly model, where suppliers provide full modules -- such as dashboard assemblies -- rather than individual parts to the production line.

"The move to modular assembly means that many sub-assembly processes occur outside the OEM manufacturing plant, often at supplier campuses," explains Tom Cross, senior director logistics for Ryder. "This trend, in turn, drives up complexity for Tier 1 suppliers providing these sub-assemblies."

At the same time, OEMs are evolving away from traditional just-in-time (JIT) practices toward a just-in-sequence (JIS) supply model.
"OEMs now tell component suppliers what specific cars they will build on which days of the week," explains Ron Riggin, senior vice president - technology, RedPrairie.

The suppliers then determine what assemblies to make -- interior dashboards, for instance -- produce them, then sequence delivery in the exact order of the manufacturing production run.

This JIS model shifts the focus to building assemblies-to-order, bringing them to a staging location, and sequencing them to the manufacturing line.

The sequencing is a matching process that greatly facilitates manufacturing and reduces errors. It also shortens the OEMs' cash-to-cash cycle by cutting material inventories.

"While JIT means moving frequent small-lot deliveries from suppliers to the OEM's plant, JIS means moving larger lots less frequently from suppliers into a distribution center, then making frequent small-lot deliveries to the manufacturing plant," explains Dan Greenberg, vice president - parts logistics for Vascor Ltd., a third-party logistics provider located in Georgetown, Ky.

Instead of a 3PL delivering to a supplier 16 times a day, it may go to the supplier twice a day, bring the materials to the DC, then move from there 16 times to the OEM plant.

"The plant still receives the same 16 deliveries," Greenberg notes, "but the external flow makes more economic sense. If, for example, the 3PL moves material from a supplier 100 miles away from the OEM, a roundtrip runs 200 miles. Delivering 16 times a day equals 3,200 miles.

"If, on the other hand, the 3PL moves material from the supplier twice a day in larger quantities, and puts the shipments in a distribution center close to the OEM's plant, travel distance is reduced to 400 miles," he says.

"As volume grows," adds Jim Brutsman, vice president business development for Vascor, "this network design has a bigger impact -- it trades transportation costs for distribution center costs.

A DC can do two things: serve the plant where it sits, and operate as a regional DC serving other OEMs or suppliers. A 3PL may pick up material from nearby suppliers, crossdock it, split out what's going to the local OEM plant, and load the rest on a truck for delivery to another DC or plant."

Capitalizing on these types of network-wide efficiencies offers a rich source of savings opportunities.

"It is very important for every truck, railcar, or ship to run at the maximum capacity possible," Ryder's Jenning says. "Sometimes, because automakers want to operate in a strict JIT environment, their 3PLs don't move or deliver material in full trailer or container loads.

"But significant opportunities exist for multiple companies in a supply chain to create a collaborative network and optimize it as a whole. Everyone benefits."

Early Planning Pays Off
A high degree of collaboration and robust planning capabilities help 3PLs support the new automotive supply chain.

"The only way 3PLs can execute to flexible assembly manufacturing and manage this complex network effectively, is to get involved early in the vehicle-making process," Jenning says. "For Ryder, this means getting involved two to three years ahead of production, when automakers are still selecting suppliers."

Ryder also likes to participate in packaging decisions for inbound parts and assemblies at an early stage in a vehicle's planning cycle.

"It is important for Ryder to have input into packaging decisions because it helps us match internal assembly plant logistics to external supply chain logistics," notes Jenning. "We want to make sure packaging is consistent with ensuring good transportation capacity utilization."

Having the opportunity to influence packaging decisions early on also helps 3PLs assess a material or assembly's total landed cost, and base sourcing decisions on that data.

Once an automaker finalizes its parts sourcing decisions and packaging configurations, Ryder begins to build a logistics database -- one part at a time.

"We plan inbound logistics for every part the assembly line will require," Cross explains.

Ryder's database contains information on the primary container delivered to the assembly line for the operators' use, as well as the secondary packaging in which the material is shipped.

"Certain physical characteristics of the packaging material are consistent with allowing for good transportation equipment utilization," Cross notes.

Part of Ryder's process also includes developing contingency plans for every part.

"If an automaker uses a supplier located 50 miles from its plant, the risk is minimal because of the proximity," Jenning explains. "But if the supplier is 2,000 miles away, the risk of supply disruption or delay is greater, creating a different set of issues for the car maker to deal with. For every part, Ryder creates a decision tree geared to responding to the unexpected."

Accurate, real-time visibility is a critical necessity in today's globalized automotive supply chain.

"The time devoted to decision-making has shrunk," notes David Ellis, solutions engineer with Covisint, a B2B visibility platform. "No longer can suppliers or OEMs wait for paper or e-mail to filter through people. At some production plants, a line stoppage could cost an OEM $10,000 to $100,000 per minute."

This means OEMs must know in real time about shipment delays, order shortages, and other supply chain events that could impact production. Immediate visibility into these events gives OEMs, as well as their suppliers, 3PLs, or other parties, time to take corrective action.

"Timeliness of information is critical," Ellis says.

The Detroit Big 3 automakers believe visibility is so critical to their operations that, in 2000, they founded Covisint to provide exactly that.

Initially, Covisint was established as a technical services organization to provide interoperability and data information to the OEM supplier community and outside processors. But it has evolved into a global B2B interoperability platform.

"Covisint provides global visibility and secure access to data -- including logistics and supply chain information -- anywhere in the world," Ellis explains.

Covisint today boasts 280,000 users, representing 30,000 supply chain participants in 96 countries. Here's how it works:

Materials managers can log on to the Covisint web site, check the status of shipments, and receive alerts for weather-related or other kinds of delays. All parties are notified if, for example, a shipment is delayed three weeks so they can make alternate plans.

"Users can keep the inventory visibility dashboard up on their desktops in real time, and check where products are in the world at all times," Ellis says.

Looking through the windshield toward the horizon, the auto industry, both domestically and globally, has made tremendous strides in reinventing itself, and will continue to do so in the coming years.

"Despite some of today's headlines, the automotive industry is alive and well, and expanding," says Toyota's Jim Press. "Globally, sales are rising because people in major developing countries such as China, India, Russia, and Brazil are achieving a higher standard of living and discovering the freedom that cars provide.

"In the United States, business is steady," Press continues. "With America's population reaching the 300-million mark, the future is full of promise.

"The U.S. auto industry is coming off its third-best year in history. General Motors and Ford are taking bold steps to recover, and good things are starting to happen. Both were profitable in Asia, Europe, and Latin America in the first quarter.

"And their sales have doubled so far this year in China, which is rapidly becoming the world's second-largest auto market.

"I firmly believe GM and Ford will both come back stronger than ever and be successful," Press says. "And that's important because they are vital to our industry and our national economy."

A Strong Future
Press and other industry analysts agree that we are seeing not the demise of the U.S. auto industry, but rather its globalization, as car companies restructure and redeploy resources to meet the needs of markets around the world.

The supply chain plays a major role in achieving this evolution.
"Many practices in place today are designed to satisfy lean manufacturing requirements," notes Jenning of Ryder.

"Now we're creating lean logistics practices as well. We're working to build totally integrated systems that take into account the cost trade-offs of decisions made all across the supply chain. Lean logistics will continue to evolve."

Automotive OEMs that are able to comprehend the total cost of materials movement will be more competitive.

Offering the lowest vehicle purchase cost is one thing, but attaining the lowest sourcing and transportation costs drives home the real benefits of an efficient automotive supply chain


Doing More With What You Have

To squeeze out unnecessary costs and improve efficiencies, OEMs are looking to all areas of their production operations - including the receiving dock and yard.

"The OEMs' existing facilities were devised for low-frequency, large-quantity deliveries," says Gary Latham, director industry solutions in the automotive practice for RFID technology company WhereNet Corp. "Under today's manufacturing practices, however, they receive far more deliveries, which taxes the capabilities of their yards.

"The OEMs had one choice: either increase the size of their yards, which is often impossible due to space/land constraints, or find technology that helps them optimize the throughput of their facilities. Active RFID gives them this ability," he says.

Ford Motor Company implemented a WhereNet active-RFID-based, real-time locating system to help manage inbound freight activity at most of its plants throughout North America and Europe.

Ford initially implemented the WhereNet system in 1998 to track materials within a 250,000-square-foot area of its Van Dyke facility in Sterling Heights, Mich., which produces more than nine million components annually for Ford cars and trucks.

Utilizing the same local infrastructure of antennas, Ford and WhereNet then co-developed a wireless "call" system, known as WhereCall, to bring parts to the assembly line as needed.

When supply of a specific part reaches a pre-determined replenishment level at an assembly station, the line worker presses the WhereCall button, which sends a signal to re-stock that particular part so the line never runs out of it.

This process eliminates the need for replenishment workers to travel routes to pick up Kanban cards. It also cuts some lag time from the process, further minimizing line-side inventories.