Zooming into an Inventory Free Flow

The convenience of a 24x7 intranet marketplace may be the answer to a company's end-of-lifecycle (EOL) inventory ills. Entering their products into an online auction portal, companies can sell off their excess inventory to the highest bidder, and buyers can purchase needed items for a "steal."

Is There a Smarter Way to Handle Excess Active and Obsolete Inventory?

Given that one man's challenge often presents another man's opportunity, this brings us again to FreeFlow (http://www.FreeFlow.com). FreeFlow is a privately held provider of business services and patented technology whose stated mission is to help customers improve product life cycle profitability through the proactive identification and systematic reduction of at-risk and excess inventory. Founded in 2001, self-funded, and profitable virtually from the word go, FreeFlow has since provided many renowned high-tech manufacturers with business services and technology in a subscription-based, turnkey solution. These services and technology have enabled some customers to yield higher margins, increase their inventory throughput, and improve their cash flow while avoiding channel conflict, and to reduce overall reverse logistics costs. Most important, these benefits have reportedly been achieved quickly and with minimal overhead, since FreeFlow's solution requires no users' internal information technology (IT) involvement and uses a pay-as-you-go pricing model for a more immediate and apparent return on investment (ROI).

In brief, some of the vendor's practices for proactive identification of at-risk inventory are via establishing target market and pricing, hosted online private marketplaces, and supporting pre-auction and post-auction business services. Companies that use FreeFlow's technology are able to promote their inventory to clients, auction it to liquidators, and reprocess it using recycling companies. The technology allows the customer to control everything that happens online, and FreeFlow has the global patent on it. Started up during a rather depressed economic climate in the upstairs bedroom of the chief executive officer's (CEO) mother-in-law's house in Tralee, Ireland (currently awaiting a new 20,000 square foot headquarters), FreeFlow now has its United States headquarters in San Jose, California. The company most recently expanded its operations with the opening of its new offices in Hong Kong (China) in early 2006. This expansion into Asia, given the company's existing locations in Europe and the US, has given FreeFlow a strategic, worldwide presence in three key geographical locations, and has enhanced the service provided to clients within a global supply chain.

Given that FreeFlow preaches IT outsourcing to its clients, the company demonstrates the "eat own dog food" principle by attributing its own success to keeping its cost model varied (for example, the company has always had a variable cost-based and motivated sales force) and outsourcing where possible. To that end, the vendor does the administration in house, but it outsources the IT, Web development, and programming. In the company's early days, the founder could not possibly afford to take on a head count, so he approached some senior executives whom he had worked for and offered them a stockholding in the business along with a commission based on the business that would be generated from the high-tech companies (prospective users) they introduced him to. Consequently, the company now counts a dozen of the world's biggest multinationals as clients, and expects turnover to almost double in 2007, continuing five straight years of double growth in throughput. Some of FreeFlow's fully hosted inventory asset management solutions customers include Microsoft, Apple, Motorola, 3Com, Fujitsu, Logitech, Creative Labs, Trimble, SanDisk, and logistics provider partners ModusLink and ArvatoUSA. As an approximate breakdown, the company generates 70 percent of its revenue from the US and the remainder from Europe and Asia. The company remains intent on continuing its operations without any venture capital (VC) funding.

In October 2006, FreeFlow announced that its founder and CEO, Alan Scroope, was named the Emerging Entrepreneur of the Year by Ernst & Young in Ireland. Scroope was recognized for FreeFlow's innovation and the patented technology that transforms its customers' business processes by automating the identification and liquidation of at-risk inventory. This award came on the heels of two industry awards previously bestowed to FreeFlow for its pioneering technology. Namely, the company was chosen by Manufacturing Business Technology (MBT) magazine as one of the forty Emerging Software Vendors in 2006. This award recognizes leading entrepreneurial IT vendors based on dynamic criteria including growth statistics, recent customer wins, product innovation, and overall company direction. Additionally, Gartner recognized FreeFlow as Best Service Provider at its 2006 Fall RetailVision, a premier global event for the retail consumer channel.

Auction at the Core of Inventory Asset Management

Initially known as Web Component Trading (WCT) and operating as WCTbid.com, the company name was changed to FreeFlow in late 2005. The new name underscores the company's focus on not only identifying at-risk inventory for its customers, but also on allowing that inventory to "flow freely" through the sales channels. In mid-2006, expanding from its inventory liquidation and recycling roots, FreeFlow announced FreeFlowAuctions.com, a hosted, online, private auction solution that customers can use to standardize their sales and operations planning (S&OP) process of identifying at-risk inventory. This standardization drives all constituents to act on moving the idle inventory before it loses its market value, and to automate the disposition of the inventory. With the solution, user companies should be better able to manage active and idle inventory in order to maximize the life cycle profitability of their products, as the solution aims at enabling user companies to lower the amount of financial reserves needed, reduce the overall amount of write-offs (sometimes by several million dollars), and improve their bottom line every quarter.

Featuring a fairly user-friendly dashboard, FreeFlowAuctions integrates with a user company's S&OP process, providing automated list upload and approval routing capabilities. Password security access gives executives control over update capabilities for inventory quantities and pricing. The dashboard provides executives with at-a-glance views of key metrics such as product revenue performance, price recovery performance, and margin analysis of active and idle inventories by region or by product. Automated triggers notify executives of critical changes and provide significant time savings that would have previously been spent seeking approvals for inventory liquidations by phone or fax. FreeFlowAuctions also provides management with audit trails that show comprehensive bid history and transactions.

This solution is in sharp contrast to the dominant, customary practice of so many enterprises that continue to address at-risk inventory on an ad hoc basis, thereby missing the opportunity to maximize the life cycle profitability of each product. In other words, FreeFlowAuctions platform aims at helping customers to implement decisive operational processes on a regular, repeatable basis to accomplish this very goal. To that end, FreeFlow will build the auction site for clients and take responsibility for the site and the sale. The user company effectively outsources all of the administration hassle to FreeFlow, who assumes the risk and does not allow credit to any participating bidding party.

Auctioning Process Explained

To best illustrate the auctioneering service for FreeFlow's clients in the electronics or telecommunications industries, the process overview for an inventory liquidation event starts with FreeFlowAuctions, allowing members (who do not pay any subscription fees, but that have to be preapproved by the manufacturer) to view, bid, and purchase discounted inventory directly from manufacturers. FreeFlow, along with its strategic partners, has developed a target-pricing model that forms the underlying bidding process of the auction site. Thus, all inventory advertised on the site will have a target price assigned to it which will enable the bidding party to ascertain what the minimum expected recovery is on certain items. By bidding on or above the target price, bidding members will secure their allocation of this inventory automatically on the assumption that the inventory is still available.

However, by bidding below the target price, allocation is not guaranteed and the inventory will remain on the auction site until the strategic partner either decides to accept the lower bid or wait for another member to bid the target price. All target price bids are answered within twenty-four hours. If multiple bids for the same inventory are received within a twenty-four-hour period, the strategic partner (that is, the seller or manufacturer) will ultimately either allocate the inventory to the highest bid or to the oldest bid if all bids are equal. Once a bid is accepted, the successful bidding member will be contacted, and upon receipt of a purchase order (PO) and payment, the inventory will be dispatched from the strategic partner's facility via its carrier. Standard freight fees apply to all dispatches from the partner's facility, with the buyer absorbing freight costs.

All new users (in this case prospective buyers) must open an account with FreeFlowAuctions, which is a fairly simple process. All it requires is filling in a few customary details (company name, address, e-mail address, etc.), and each applicant can decide its own user identification (ID) and password. Still, in addition to restricting access to approved buyers or brokers only, this step allows the manufacturer to screen each applicant from a trade and compliance perspective. After a user has successfully logged in, the user must click on the "Search Product" tab to search for available product, and will then be asked to enter the search criteria. Although it is compulsory to click on at least one tab to bring up a result, it is however, better to enter the manufacturer and the description or part ID, as the description tabs will only return results if the name the user enters is part of the product name. The "Packaging" tab has two separate categories: "Generic Boxed" (classified as refurbished material; product that has been returned but legally cannot be sold again as new) and "Retail Boxed" (a new and factory-sealed product). The process for searching components via the "Search Component" tab is basically the same, with the difference being that the search engines for components are "Packaging" (for example, reel, tape, tube, etc.), "Component Type" (SDRAM, linear, logic, chips, etc.), and "Manufacturing Date" (that is, date of manufacture).

Once the user or bidder has located the product or component of interest, he or she can enter a bid which is placed based on the target price requested by the manufacturer (in this case, the seller). Once a bid is placed, FreeFlowAuctions will return with a response within twenty-four hours via an e-mail that will highlight whether a bid was successful or not. If the bid is accepted, then the member must submit a PO via prescribed fax or e-mail accounts. Upon receipt of a PO, FreeFlow will arrange for the manufacturer to ship the product, and in turn will provide tracking details for its shipping. The tracking number is provided by the manufacturer to the auctioneer and is placed up on the web site next to the shipment. Once this is completed, FreeFlow will request payment from the buyer (a minimum order value of $3,000 [USD]). Payment up to $4,000 (USD) can be made by credit card (Visa and Mastercard only), and for amounts over $4,000 (USD), by wire transfer. A currency converter is provided online to assist the conversion of US dollars into the member's own currency.

Once shipping details are issued by the manufacturer, a tracking number is provided and is uploaded to the site. The member can then track the shipment by logging onto the site and clicking on the tracking link relevant to the bid. The inventory is shipped out using the manufacturer's current freight forwarders only, whereby freight fees will be applied to each shipment using the preferential rates that the manufacturer has agreed upon with its forwarder. All shipments from the partner's facilities are on a delivery duty unpaid (DDU) basis, and once a bid is accepted, shipments will be dispatched within forty-eight hours. FreeFlow's commission ranges from 8 percent to 50 percent depending on the level of support it gives to the auction process. That is to say, some companies might require pre- and post-auction support (where, for instance, products need to be catalogued and counted so that they can be advertised properly), while others simply provide a list of available stock. FreeFlow administers the auction, but the client ships out the inventory. All FreeFlow auctions are private auctions, and the customer approves the members or bidders. Getting started is fairly easy, as upload templates are populated with simple extracts from the customer's inventory management system.

Different Strokes for Different Folks (and Different Product Life Cycles)

Working in conjunction with the FreeFlowAuctions.com platform are two cornerstone applications to FreeFlow's integrated inventory asset management suite. While aiming at different product life cycle phases (that is, still active inventory and EOL or obsolete inventory), both are fully hosted solutions that require no internal IT involvement and offer pay-as-you-use services that are easier on the budget. The solutions can be used on a monthly, flat fee subscription basis or on a transaction fee basis. As a business services provider, FreeFlow hosts the software application and provides all related administrative and operational process support. The user enterprise is in charge of the key decisions (such as what inventory to liquidate and at what target price), but the business services provider takes care of everything else. There is no software to install and maintain, and with a pay-as-you-use software-as-a-service (SaaS) model, users have no lengthy payback period to justify on a software license. Further, the user's staffers can remain focused on their core tasks, not on managing brokers and juggling spreadsheets, e-mails, and phone calls (see What Is Software as a Service?).

The first application, ChannelFlow, is a monthly, subscription-based intranet system (with fee structures based on throughput volume) for still active but at-risk inventory. Such excess inventory is promoted (offered) using channel partner direct bidding or the client's sales force to proxy bid on behalf of their accounts. The solution is a Web-based, private auction that provides inventory visibility and preapproved discounting to channel partners. Bidders are typically company sales personnel acting on behalf of the retailers and distributors they support. Data is uploaded manually or through system integration from the user company's inventory system, and extracted based on criteria agreed upon by the sales, finance, and supply chain management (SCM) organizations. The criteria are typically inventory policy (inventory in excess of an agreed number of weeks of supply) and product life cycle status (current, active products). Once the inventory listing is uploaded, authorized finance personnel will update the system with minimum pricing and, together with the sales organization, finalize the target quantities to be promoted. Visibility to the items' condition (new, re-boxed, etc.) allows promotion of new products as well as products not in original packaging. The turnkey convenience of ChannelFlow eliminates the inevitable administrative overhead related to marketing promotions, and saves time and money by moving product through the channel faster. Another major feature of the system includes the provision of sales representatives' performance tracking.

The secret to improved financial returns for any enterprise is its awareness of its product's pricing history, the current market, and its competition. This knowledge, which is critical to the manufacturer's go-to-market strategy for excess inventory, comes to the user enterprise in the form of FreeFlow Market Intelligence. FreeFlow Market Intelligence can be used to set price minimums, determine auction lot sizing, and (most importantly) identify the best buying community for the products. FreeFlow's ClearFlow-managed broker auctions provide the combination of flexible, Internet-based technology and years of market experience with a common result of consistently higher recovery and reduced inventory management overhead for the user. The solution is deployed as part of an enterprise's routine inventory review cycle and is integrated with the S&OP process. FreeFlow also provides optional system integration, approval automation, and list management to standardize and automate the inventory management workflow processes.

In addition, ClearFlow is a transaction fee based (although there is an average onetime setup fee of $20,000 [US]), extranet, private auction liquidation platform that efficiently moves EOL, obsolete, returned, or refurbished inventory that is otherwise sitting idle in warehouses and costing companies money. Its key features include secure private auctions (whereby web sites can be branded or anonymous); comprehensive market intelligence (broker performance reporting and recommended pricing, for example); competitive bidding for improved recovery and managed logistics; credit; collections; and settlement.

Whereas some customers elect to go to market anonymously with inventory sold on the standard http://www.FreeFlowAuctions.com site, other FreeFlow customers might elect to have branded sites powered by FreeFlow in a private label fashion. Powerful brands generate additional interest, which translates into measurable percentage point improvement in returns. A good example of a branded, private labeled auction site is one from ModusLink Corporation, a subsidiary of CMGI, Inc. In late 2005, ModusLink announced the official launch of its online auctions service, enabling clients to more systematically and proactively manage the high cost of product excess and obsolescence. By leveraging ModusLink's online auction portal, ModusLinkAuction.com, to solicit competitive bids from prequalified buyers, clients have been able to liquidate excess, obsolete, returned, and refurbished inventory more quickly, and to mitigate the high cost of traditional disposition methods. ModusLink's online auction service complements its existing remarket services, thereby providing clients with more choice and greater flexibility in determining how to eliminate excess inventory from the books.

ModusLink Corporation is a Waltham, Massachusetts (US)-based provider of global SCM solutions with forty-two facilities in fourteen countries, and employs 3,900 people worldwide. The company provides global technology clients in the software, hardware, consumer electronics, telecommunications, and wireless markets with customized supply chain solutions that aim at reducing risk and time-to-market and at improving efficiency and productivity. ModusLink's services include demand planning; sourcing and procurement; manufacturing support; kitting and assembly; fulfillment; full-cycle logistics; systems integration and development; customer support; and optimization consulting. Exposure to new, previously untapped buyer markets in such a low-cost, low-overhead venue can help clients obtain maximum recovery on their asset conversion. To further reduce costs, auctioned products can be pulled from existing supply chain inventories and shipped directly from ModusLink's facility at the buyer's expense, thus eliminating redundant product moves and additional transportation charges. ModusLink claims its clients frequently receive bids up to three times higher than if they had limited their scope to include only the traditional post-market buyers.

Similar to the ways of FreeFlow's generic site, ModusLink can sponsor auctions for its clients anonymously using ModusLinkAuction.com or under its client's name for maximum brand exposure depending on the client's specific business objectives. Prequalified buyers are invited to participate and compete against each other online and in real time, driving up demand and price as they bid. The online auction service includes customized auction site design, product cataloguing, and payment processing and collection. These in turn generate buyer participation, market intelligence, and performance reporting as well as coordination of shipping, transportation, and customs clearance processes. ModusLink has been leveraging its service provider partnership with FreeFlow for site hosting, underlying technology (Web-based auction platform and bid management engine), and auction industry expertise.

Other FreeFlow-powered, branded sites would include http://www.appleexcess.com, http://www.sandiskexcess.com, www.3comexcess.com, http://www.logitechexcess.com, and http://www.motorolaexcess.com/. Most recently, in mid-November, 2006, FreeFlow announced that Force5 Sales Group will also leverage FreeFlow's Web-based auction technology on behalf of manufacturers in the electronics retail sector. Force5 Sales Group is a professional sales and services sales company for technology manufacturers in the traditional and alternative retail, academic, and corporate markets. Launching in the same month, Force5's private auction platform is dubbed http://www.force5auctions.com/ and is powered by FreeFlow. The new alliance brings FreeFlow's combined offering of hosted auction technology and product-specific market intelligence to Force5's global network of manufacturers and retailers in the consumer electronics environment.

Know-how Does It

Moreover, FreeFlow's patent-pending, Internet-based bid management engine within its hosted online marketplace software is supplemented by the business processes of broker engagement, financial settlement, logistics, and transportation, where FreeFlow's deep industry expertise and worldwide network of strategic alliances in technology play major parts. FreeFlow's online marketplace software has impressive features including secure private auctions that can be branded or anonymous; multifunction or multitier; easily configured; and that come with customized reporting. The company believes its proactive identification and disposition of at-risk inventory is accomplished through a solid combination of three complementary offerings:

  1. straightforward process methodology;
  2. hosted, Web-based auction technology; and
  3. supporting value-add services, consisting of critical market intelligence and market creation on the front end, and logistics support and financial clearing on the back end, respectively.

To that end, FreeFlow offers optional pre-auction services to accommodate remarketing strategy and opportunity analysis, marketing intelligence, and auction strategy identification. These services include competitive market research; defining the best auction strategy; establishing the right minimum pricing and target pricing; and finding the right buyers for the company's products while avoiding channel conflict. Alternatively, post-auction services accommodate the buying, shipping, and settlement processes—all financial clearing is managed by FreeFlow. In addition, the vendor's post-auction services provide a single sell-to account, logistics support and shipment dispute resolution, and performance reporting.

With prescribed processes for the routine identification of at-risk inventory and a suite of Internet-based auction portals to streamline its disposition, the major task remaining is the establishment of a tool set for list routing and approval and for reporting of key performance indicators (KPIs). That is the task handled by FreeFlow Site Manager module. With this module, approval routings take the hassle out of the inventory listing approval process. To that end, automated list routing to the sales, finance, and SCM personnel (with password security controlling update capability of quantities and prices) should streamline the approval process. Further, imbedded e-mail triggers eliminate time wasted chasing approvals by phone, while real-time change tracking provides visibility to who has changed what over the course of the approval process.

Since any well-managed process uses performance metrics to track improvement over time, with the FreeFlow dashboard capability, users can track and report

  1. product revenue performance (high runners and low runners);
  2. recovery performance;
  3. margin analysis;
  4. sales representative performance on channel auctions; and
  5. broker performance on liquidation auctions. For instance, when it comes to component shortages, purchased part variance (PPV) is the scorecard that shows how much the users paid for components compared to how much they planned to pay (standard cost). The PPV scorecard reflects the impact of scarcity, urgency, and limited sourcing on costs, with the numbers speaking for themselves.

FreeFlow's online auction platforms and comprehensive, inventory asset management suite places the vendor in a unique position in the global marketplace of business service providers. Still, the vendor strives for improvement and expansion in its business services, and continues to make progress to this end.

Part Three of the series Let the (Excess) Inventory Flow!

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