The Impact of Demand-Driven Technology in the SCM Market: IBS
Written By: Predrag Jakovljevic
Published On: September 2005
The Sweden-based enterprise resource planning (ERP) and supply chain management (SCM) provider International Business Systems (IBS) (XSSE IBS B), while currently not a uniformly well-known mid-market global vendor, seems to be poised to change that situation. As the ERP and SCM markets suffered throughout the dismal last several years, IBS also felt a pinch of flat revenues at nearly $350 million (USD), but remained mostly profitable. This was a notable feat, especially with its ambitious product development effort is combined with the difficult competitive sales situation. (See Part One)
Part Three of the IBS Slow but Steady (and Demand-Driven) May Win the SCM Race series.
After "biting the bullet" a few years ago and committing a substantial investment in basically rewriting its flagship ASW ERP/SCM offering to make it both Web native and a web services amenable solution (XML and Java compliant), and to develop new Java 2 Enterprise Edition (J2EE)-based products like IBS Virtual Enterprise and IBS Integrator, IBS seems to be weathering the ongoing down economy quite well. IBS Virtual Enterprise, which integrates and coordinates different business systems in the supply chain, has been positively received by the market, and a number of projects have been conducted on behalf of large customers.
The market for integration solutions is likely to be an interesting growth area over the next few years, and IBS has an attractive offer for those companies with a complex and expensive business software at the group and headquarters level, wanting to lower their costs and speed up implementation in their operative subsidiaries by using IBS' business software for these companies.
Despite its resemblance in size, geographic coverage, and modesty, when compared to the flamboyancy of its North American peers to its Swedish peers IFS and Intentia (see IFS Continues Its Reinvention Through Pruning and Intentia's Movex for Food and Beverage: Gaining a Foothold in North America ), IBS has always paid close attention to its fiscal health. Accordingly, its balance sheet is relatively clean and strong, and the management team has largely been in place since the company's inception.
IBS Business History
The vendor has a history that is characterized by growth and stable finances, and it has made a profit in a total of twenty-five of the twenty-seven years it has been on the market. Even in 2003, despite a continued weak IT market, IBS succeeded in meeting its established objective of making a profit after financial items. This was possible due to heavy cuts in operating costs accompanied competitive solutions and services. Combined these prevented revenue from decreasing by more than five percent, which is considerably lower than for many of its competitors.
An improvement in market potential and an increase in profit (after financial items) was seen in 2004. This was attributable to increased software licences by about six percent, higher billing per consultant which has lead to an improved professional fee margin growing from 20 percent to 22 percent, and to larger portion of self-developed products, which has increased the software licence margin from 90 percent to 92 percent. Also, the vendor has improved profits in the crucial Swedish operations.
During 2004, IBS also strengthened its position within a number of sectors, including the distribution of pharmaceuticals, electronics, industrial supplies, machinery and equipment, automotive aftermarket, property management, paper and packaging, and foodstuffs. Here, a number of new international customer agreements have been entered into within these sectors. The efficiency of IBS software development will continue to improve in other ways, through increased outsourcing to low-cost countries. IBS currently has some of its development in low-cost countries such as Portugal, Poland and India. China will also be considered since IBS has decided to increase its presence in this expansive region.
To the credit of IBS, the vendor has long been targeting its sales and development efforts at the medium and large enterprises seeking proven, low-risk technologies that have a low total cost of ownership (TCO), and are relatively easy to operate at low cost and risk. These technology- and cost-sensitive companies have till recently been overlooked by many enterprise vendors. After several years of declining investments in IT, there has again been a pent-up need among many companies and organizations to increase profitability and competitiveness with the aid of new or improved business software. Priority is, above all, being given to investments that can generate measurable improvements and rapid payback through lower costs, increased customer service, integrated supply chains, improved financial control and information to corporate management. Another of the more important changes in the IT market is the respective management of IBS' companies, which are considerably more involved in decisions concerning business systems and IT investments. This has led to a change in focus from often more technical evaluations to more financially- and business-oriented assessments, which requires both specialized business software, as well as skilled consultants for its implementation.
A growing number of companies, and in particular companies with operations in several countries, have discovered that it is not only business software functionality that is of decisive importance in guaranteeing profitable IT projects (see Easy ERP: A Challenge to Conventional Thinking). Of equal importance is the actual installation project, in combination with ongoing support and further development. To that end, IBS has for many years focused its attention on providing implementation support for its customers through a combination of business consultants (with experience from specific industrial sectors) and technical consultants. It is this combination of knowledge about customer business processes, technical competence and a highly developed project management system that is the key to the successful installation of business software.
Accordingly, IBS has developed a new concept where, together with its customers, can identify customers' areas with the greatest potential for improvement regarding IT investments. This concept can also help these customers follow up and measure critical success factors and the ROI in completed projects. To that end, most IBS managers, sales staff, and operational consultants have undergone training in this method, with accompanying analysis and follow-up systems. This remains an important cornerstone in IBS' continued efforts towards further increasing sales and customer satisfaction.
The market for business software is, to a large extent, differentiated by a number of diverse national and international vendors and system integrators (SI). Despite rampant merger and acquisition (M&A) activity in the market, there are still several hundred companies throughout the world that develop business application software. Most of them are relatively small or medium-sized companies that are frequently locally oriented or specialized in certain types of applications and vertical segments. Many of these local and smaller suppliers will disappear or be merged with larger ever-expanding constellations.
In the future, we estimate that three categories of enterprise vendors will remain on the market:
- The first category consists of a limited number of large and broadly-based international suppliers, such as SAP, Oracle and Microsoft, that cover most types of applications. SSA Global and Infor Global Solutions also seem to be creeping into this group. IBM also falls into this category, albeit vicariously, given the lack of its own applications.
- The second category comprises internationally active, medium-sized companies such as IBS, which specialize in selected market areas and special customer segments. IBS, along with a number of solid tier two peers, such as QAD, IFS, Lawson Software/Intentia, or Adonix. These companies are not aggressive consolidators, like their larger brethren, but are more of "organic growers" with an inclination for selected acquisitions. They might be the "crown proof" that the market is not yet turning into a SAP-Oracle duopoly. In some geographic and vertical industry niches, such as Scandinavia, Belgium, Portugal or the Netherlands, IBS remains strong. IBS has international operations with twenty-two subsidiaries and ten partners throughout Europe, the Americas, and the Asia Pacific.
- The third category is made up of hundreds of smaller or locally-oriented companies that focus on a narrow geographical or sector-based specialization (see Competitive Advantage in a Saturated Market: How Will the Big Few Do It?).
But, contrary to most peer vendors, including the aforementioned Swedish ones, which started their ERP applications in the manufacturing or financial application space, IBS first established a strong presence and functionality in the distribution and logistics field. At an early stage, IBS specialized in business software for sales and distribution companies as well as demand-driven, fast moving manufacturing companies. Having mastered the idiosyncrasies of Scandinavian business requirements in distribution, administrative, and accounting procedures, the company has remained the local market leader, despite strong competition from international ERP vendors. This is well in line with the current trend towards giving customer relations and orders a focal position in business processes. At the same time, volume-oriented production is being increasingly relocated to low-price countries such as China, Mexico and the countries of eastern Europe.
Know Thy Customer
Four important trends that influence IBS' target market are
- Globalization, rampant M&A among user enterprises and the advent of Internet. These show that today's businesses find themselves in a rapidly changing world. This is partly due to tough competition and pricing pressures, but it is also due to the major technical openness provided by the Internet, such as fast and inexpensive digital communication between companies, customers, suppliers and other business partners.
- Major potential for rationalization within business and supply chain operations. Although the manufacturing industry has undergone incredible development over the last few years, there is still considerable potential for further rationalization and efficiency gains in the field of SCM. Namely, there is still a multitude of manual routines and poorly integrated IT systems and processes between companies. It is in this field that the new e-business technology has its greatest potential, which is something management is beginning to recognise and acknowledge.
- New business models and supply chain patterns. Market trends are driving a development towards new business models and distribution methods. Dell was an early example of how a company can replace a large share of its middlemen retailers by Internet operations, and not actually manufacture anything until an actual order is received. Now that many are copying this recipe, Dell has taken the next step, and has contracted UPS, not only to run transport operations, but also for purchasing and assembly of its computers. Cisco Systems is another example of a company moving ahead by developing more and more advanced products. Like Dell, it hardly manufactures anything itself, putting SCM truly in focus. Manufacturing is now becoming either so simple or so advanced that many companies choose to outsource processes to specialists, and concentrate on selling and distribution. This is exactly where IBS has its core competencies, and this is what makes a lot of demands on astute new enterprise applications.
- Today, there are advanced standardized e-business systems with integrated logistics functionality for B2B trading—with a little need for customized solutions. When it comes to systems for business-to-consumer (B2C), there is still a lot of customization work going on, but that too will change down the track (for more of relevant info, see Differences in Complexity between B2C and B2B E-commerce ).
Other resulting market trends and business drivers for existing and prospective IBS customers include the need for goods and information crossing geographical and organizational boundaries; the integration of disparate systems and companies; the automation of business processes; the enablement of customer self-service, single front-end, and Web-based purchasing; improved visibility and analysis, and so on. In other words, tomorrow's SCM practices will feature an explosion of transaction volumes (whereby automation and system integration are needed), virtual logistics and information systems, and fewer jobs but more qualified staff. In other words, a proper SCM will be a key success factor (KSF).
Typical issues and pains that customers might likely consequently experience would be multiple ERP and other associated enterprise systems that are costly to integrate, replace, or update; a lack of supply chain visibility (i.e., the benefits of aggregated purchasing, resulting with costly inefficiencies and loss of power and business); manual transactions, delays and errors lead to costly inaccuracies, and longer lead times and redundancies. Multiple units of measures (UOM), inventory rules and policies, and touch points will also cause additional costly inefficiencies in the supply chain.
The IBS value proposition is the vendor's universal solution of tying different business operations together with industry standard tools, while offering company-wide supply chain visibility to enable key performance indicators (KPI) and total performance analysis. The solution contains business logic, such as procurement sales and reporting, thereby enabling automation of business processes via predefined rules and priorities. It also enables supply chain synchronization with company-wide optimization, rules, and convenient single order point.
The value for customers should come from less maintenance and redundancy, which should give lower cost to replace and update disparate systems. Benefits also come from improved visibility with consolidation possibilities, improved competitive edge (i.e., sales and profit), and fewer manual transactions, delays, and errors. Further benefits include reduced inaccuracies, lead time, redundancy cost, etc. Unified UOMs, inventory management rules and single (or at least reduced) touch points should all result with improved SCM efficiency, service, and profit.
To help in this area, IBS has a swath of available functional modules. Although not a spearheading product, the IBS' ASW Financials suite enables customers to harness the benefits of a broad financials solution, suited to any business environment that needs financial integration, budget management, and general financial routines, such as general ledger (GL) transaction processing, reconciliation, and period/year end closing. It efficiently manages banking and credit routines with cash book, accounts payable (AP), and accounts receivable (AR) resources, while also gaining a complete control over assets. This has made ASW Financials the leading product in its class in the Netherlands.
The ASW CRM Sales and Marketing suite aims at supporting the entire customer acquisition life cycle from finding customers, keeping them interested, and getting to know them and nurturing the relationship. The solution does this through the following capabilities":
- target sales and marketing activities for improved return on investment (ROI);
- avoid customer "call-backs' with instantly accessible customer records;
- manage the entire flow of incoming requests, including initiating returns;
- maximize profit potential by using the global appeal of the Internet; and
- reduce transaction costs while retaining customers and increasing their satisfaction.
The ASW CRM Sales Order Management module caters to the sales order life cycle, which involves creating sales opportunity and sales orders, sourcing materials, confirming sales orders, delivery, invoicing, and follow up, via the following actions:
- offers customers a range of order process options—self service, telephonic, electronic data interchange (EDI) etc.;
- encourages loyal, profitable trading relationships through customer delivery schedules;
- utilizes advanced pricing techniques for optimum gross margins and maximum flexibility;
- increases order value and profit by offering alternative and complementary products; and
- effortlessly processes drop shipments, alternative sourcing and non-stocked B2B orders.
Likewise, the ASW Procurement module caters for the purchase order life cycle. This life cycle includes pre-replenishment, demand planning, replenishment optimization, suggestion management, purchase management, goods reception, invoice and follow up. ASW Procurement includes the following capabilities:
- reduces average inventory investment while increasing customer service levels;
- avoids overstocking, slow moving and obsolete inventory;
- reduces costs by simulating changing inventory models;
- forges closer, more profitable trading relationships through vendor managed inventory (VMI); and
- provides accurate requirement forecasts to suppliers, possibly ensuring maximum service at minimum cost.
Demand-Driven versus Traditional MRP Planning
Traditional material requirements planning (MRP) processes are often at ends with the pressure to increase productivity while driving down costs. Traditional MPR lacks the agility and responsiveness required for today's competitive market because it applies a high degree of precision to something that is imprecise: demand. Add to this the natural variations that occur in real life such as strikes, delayed shipments etc, further add variation. Making matters worse is that product life cycles are decreasing. Supply—whether finished products, components, or subassemblies—cannot sit on shelves. Given this, there is a real need to reduce inventory through supply chain nodes.
Demand-driven principals, which advocates making the product as close to the point of the order as possible, anticipating needs, and delivering within an acceptable time frame, are a means to overcome traditional MRP problems. Unfortunately, the majority of companies still use traditional MRP. For an in-depth discussion see Demand-Driven versus Traditional MRP Planning.
Professor Anders Segerstedt from the Swedish Lule University of Technology has developed an alternative to MRP that makes demand-driven manufacturing a reality. IBS is one of the few companies to incorporate his ideas of cover-time planning (CTP), into its business software applications. CTP has been a part of the IBS demand-driven manufacturing solution since the mid-1990s.
CTP is a "pull" system, but with the intent of planning and not merely waiting for the execution time to act. It does not take into account every minute detail and parameter, but rather, nothing gets produced unless it is going to be ordered or has been consumed. Using CTP alongside MRP, IBS software offers an alternative way of working by prioritizing time instead of quantity as the basis for production planning.
While MRP concerns itself primarily with the quantities of parts and components that a factory has in stock, and the quantities and dates for future requirements, such as "How much buffer stock does a factory need to meet demand before re-ordering?"). Conversely, with CTP, the question rather becomes "With the present and future consumption of parts and components, how much time do we need in order to cover anticipated consumption in the near future?".
Taking the amount of parts and components that are on hand and ready to use, and dividing that number by the average daily consumption, yields a number corresponding to the number of days the inventory will last. Then, by subtracting the expected lead-time for the part (e.g., five days, 10 days, etc.), the result will provide production planners with a clear indication of how far they are from a reorder point This prioritization by time is the root of CTP. By subtracting the lead time in a manufacturing process from the cover time (the amount of time existing stock can be used), creates a priority number. Thereafter, the manufacturing orders for the different items can be sorted and handled in a priority sequence to focus on what is most important and avoid shortages.
This concludes Part Three of a four-part note.
Part One introduced the company.
Part Two presented ASW features.
Part Four will cover warehousing, challenges, and make user recommendations.