QAD Pulling Through, Patiently But Passionately Part Four: Market Impact Continued

Market Impact Continued

On August 20, QAD Inc. (NASDAQ: QADI), a global provider of collaborative enterprise applications for manufacturing and distributing organizations, reported upbeat financial results for the fiscal 2004 second quarter and six-month period ended July 31, 2003. The improved financial performance has not come without astute moves with regard to product functionality enhancements. These moves include:

• A partnership with Johnson Controls (NYSE:JCI) to develop a next-generation Just-In-Time (JIT) Sequencing software module for MFG/PRO
  
  
• Announcement of Kanban Visualization, which enhances QAD's existing Supply Visualization (SV) solution
  
  
• More than two dozen important new functions and enhancements to MFG/PRO eB2, specifically designed in collaboration with QAD's manufacturing customers to help address their specific needs
  
  
• Announcement of healthy sales momentum in Asia, with the MFG/PRO suite becoming a platform of choice for automotive manufacturers in China to automate business operations and collaborate with partners worldwide

The "fortune favors the bold" and "patience is a virtue" adages would be applicable to QAD's endeavor of finally getting far beyond its most trying days. "Patience" would stand for the reason of QAD staying true (and being finally vindicated) even during its most difficult times in the last few years (see Figure 2), to what had made it successful in the first place—solving manufacturers' real-world problems.

Figure 2

This is Part Four of a six-part note.

Part One detailed the above moves.

Part Two presented the Company Background.

Part Three began a discussion of the Market Impact.

Part Five will cover Challenges and

Part Six will make User Recommendations.

QAD Strategy for Lean and JIT Manufacturing

While MFG/PRO eB2 supports traditional manufacturing (MRP-based) methods of planning, it also incorporates many enhancements in support of lean and JIT manufacturing. Traditional manufacturing methods rely on the movement of materials through functionally-oriented work centers or production lines, and are designed to maximize efficiencies and lower unit cost by producing products in large lots. Production is planned, scheduled, and managed to meet a combination of actual and forecast demand, and thus, production orders stemming from the MPS and MRP planned orders are "pushed" out to the factory floor and in stock. External suppliers also work to support planned production, while materials management often relies on maintaining sufficient inventory, using a make-to-stock (MTS) rather than make-to-order (MTO) or assemble-to-order (ATO) approach. In traditional manufacturing, the time and cost of changeover to produce different products is high, as are the costs of inventory, planning, and expediting.

Lean manufacturing and JIT concepts, by contrast, emphasize reduced inventory throughout the supply chain, shorter lead times, and faster cycle times, all enabling improved response to customer demands. QAD has again bolstered its commitment to lean manufacturing practices with functionality designed to promote rapid response to customer orders based on demand "pull", including kanban, mixed-mode manufacturing, and the flexibility to schedule and manage flow orders for products within product families, with or without using MRP. The idea is for products to arrive exactly when they are needed, in the mix and quantities that are required, while production begins immediately after a customer order is confirmed, without having to run MRP, or create and release a work order.

Materials are consumed from point-of-use locations or raw-in-process (RIP) locations, whereby both internal and external material suppliers receive replenishment signals at point-of-use locations and RIP, and build or supply material when the location needs to be replenished. To that end, enhancements in MFG/PRO eB2 that should promote lean and JIT manufacturing include: Available to Promise (ATP), Distribution Order Entry, EDI Ecommerce, Supplier Consignment Inventory, Enterprise Material Transfer (EMT), Kanban Management Phase II (allows users to track and manage the move of Kanban-controlled items into and out of inventory), Linked Site Costing (allows users to specify default source cot sites for items held at multiple sites but in one database), Purchase Order/Work Order Accounting and Logistics Accounting. These features will have been attractive at least to existing QAD customers, particularly automotive suppliers, who have been pinched by a tightening economy and under pressure to speed up operations and adopt JIT and lean manufacturing practices. Even in the accounting arena, the requirements for the automotive industry are critical with evaluated receipt settlement, self-billing and retro-billing, all speeding up processes while helping suppliers optimize their limited resources.

While QAD uses MRP for mid- and long-term planning, on the execution side, however, it caters to both JIT that is used for build-to-order or final assembly manufacturing, and to lean manufacturing, which is suitable for build-to-demand pull for finished and component items. Namely, most companies will still use MRP to ascertain longer-term dependent demand (i.e., based on forecasts), but replenishment will be based on independent demand (i.e., actual customer orders), with closely managed inventory buffers.

To illustrate the differences between these three methods, Mrs. Lopker, who was recently hailed by the IT press as "the queen of elegant software", during her keynote presentation at Explore 2003, compared the AMPM Convenience stores with Wendy's and McDonalds burger chains modes of operation.

• For one, AMPM, whose slogan is "Always there to serve your needs", is an MRP-based planning operation, whereby hamburgers are made in daily batches, which often results with scrap leftovers and lost sales.
  
  
• McDonalds, with the "Serving 46 million customers each day" motto, has done well at lean execution and dishing burgers out fast (often in one minute), but the problem occurs with MTO requests like "I would like no onions, with five tomatoes instead, and I want American cheese instead of Swiss cheese, please". Thus, the franchises still have to stock finished goods buffers that cater for the demand pull, and the replenishment tact is adjusted to the buffer. Consequently, standard finished products are served from stock, while any special orders will take some time to be delivered.
  
  
• Finally Wendy's, whose slogan is "Made fresh, tastes best", has done a pretty good job at MTO because the final assembly of the final item does not happen until the actual order. Single customer line therefore creates pull, there are no stocked finished goods, and the buffer is only at the component level (e.g., pickles, cheese leaves, etc.).
  

The above burgers' example would be quite applicable to e.g., computer or automobile manufacturers, where QAD really figures. The issue becomes much more complex when the customer would say, "I don't want a beef burger, but rather an ostrich burger" or "I would like a car with a sunroof and painted with the US flag motif" and these peculiar instructions would have to be ordered and propagated down the supply chain. Consequently, more recently, the vendor has focused on its solutions for supply management and visualization. In other words, while still adding to ERP (e.g., lean manufacturing and JIT management modules), the vendor has been fleshing out the components of extended enterprise (e.g., distributed order management, flexible schedules, customer self-service, consignment inventory, vendor managed inventory (VMI) and supplier managed inventory (SMI), replenishment management, and B2B eCommerce) and of manufacturing community (i.e., consolidated visibility via a portal of inventory, production, product lifecycle, payments and invoices).

Execution Becomes Critical

Particularly during these calamitous times, manufacturing and distribution companies continue their effort to meet high customer expectations for on-time delivery by achieving general responsiveness, speed and agility. While core back-office ERP and not any less-cumbersome SCP systems might have traditionally excelled at planning, conceptual optimization and financial integration functions, they have not, however, addressed warehousing, distribution network planning, or transportation/logistics management aspects of replenishment. The execution side is therefore gaining increasing awareness among companies that realize that planning can do only so much without the ability to make the right and timely decisions and execute on the shop floor, in the warehouses and/or within the entire distribution chain.

To be able to react to fluctuating demand, respond to customer specifications, and coordinate real-time event messages from multiple disparate systems, these systems are being further enhanced with decision support capabilities and planning engines aimed at order fulfillment and inventory and order status visibility. Therefore, the most regular and justifiable enhancements have been Web-based order-fulfillment modules, which typically include real-time supply chain event management (SCEM), alert messaging, order tracking, and complicated workflow management. Harnessing this technology should lead to the so-called "self-healing" or adaptive supply chain — when a software engine monitors all the numerous events taking place supply-chain-wide, identifies and escalates exceptions, sends notification, and reacts appropriately to those exceptions, ideally without human intervention.

QAD has jumped on this bandwagon since its focus has also evolved to target collaborative e-Business and event-driven manufacturing. These markets need support for demand events such as a customer order, supply events such as a supply disruption, process events, product events, or others. QAD has thereby created a notable business-to-business (B2B) collaboration vision to appeal to its mid-market user base, but it acknowledges that it will take much more doing for the vendor to capture the entire replenishment order model whereby every link in the supply chain will react to the demand pull, create the needed product and then drive the demand pull all the way down the supply chain.

Nevertheless, QAD has long shifted its focus from being a mere ERP vendor dedicated to the industrial mid-market to fully leveraging the Internet in the applications it provides to manufacturers and distributors to link their back-office systems to those of their business partners via private trading exchanges. To that end, QAD eQ product, might be viable for some focused areas such as direct materials procurement and/or replenishment and sales order fulfillment.

The eQ is a PTX (Private Trade Exchanges) suite that contains four applications: Commerce Foundation Management, Sell-Side, Buy-Side, and Replenishment, providing the backbone to allow a manufacturer to establish a private trading exchange among its suppliers and/or customers, with support for XML messaging, Java, HTML, and no need for a client side of the software. QAD eQ is also devised to support private Internet exchanges that are connected to multiple sites, run on diverse ERP systems, and to accommodate a rule-based order management functionality. Particularly notable is eQ Commerce Foundation Management framework (formerly Commerce Relationship Management), which allows users to define the collaborative, many-to-many relationships and accompanying business rules supporting personalized buying and selling on the Internet among trading partners along the supply chain.

One potential virtue of private trade exchanges is that enterprises should automate procurement without necessarily opening up sensitive information to unwanted eyes. Increasing velocity, visibility and accuracy—and subsequent cost savings—is what makes PTX attractive as a B2B application framework. Moreover, while most Internet exchange strategies rely heavily on procurement software, QAD eQ acts as a holistic order management hub by including commerce relationship management (relationship modeling), sell-side, buy-side, and replenishment applications. Through this hub, user can make the sales, purchase, and replenishment orders issued by MFG/PRO, even advance ship notices (ASN), available to the entire supply chain. The latest version of eQ includes eQ Replenishment, which lets real-time consumption about material usage drive the flow of material through production to customer sites. In other words, the actual customer usage, not the receipt of purchase orders, not min/max economic order quantities (EOQs), is driving replenishment. Similarly, real downstream demand, not forecasts, triggers production and procurement processes.

By combining eQ (for supply chain management requirements) and MFG/PRO (for traditional manufacturing ERP requirements), QAD often additionally competes with SAP, Oracle and PeopleSoft in its sectors of focus, where it provides the individual factory level ERP solution while these giants remain the preferences at the corporate level. Additionally, QADs 'collaborative commerce' eQ system not only works with its flagship MFG/PRO, but also with others ERP and legacy systems. It also connects with supply chain planning systems like QAD's partner Adexa, and demand planning systems like Demantra. Thus, there is the potential to build functionality on the usual heterogeneous mix of systems one may find in multi-national companies at this level. Look for QAD continuing to build on its early to market 'collaborative commerce' suite which might be ever appealing as more upper mid-market manufacturers seek to improve their external trade partner interactions to realize efficiency, responsiveness and reduced costs.

QAD also offers MFGx.net, a manufacturing-based network already integrated into QAD, which includes hosted Internet application services such as basic alert-based management. SV lets suppliers see all the information regarding the items they supply to the customer and which have been authorized to see through browser and password only. SV gets this information for inventory, purchase orders, supplier schedules, and receipts from a customer's ERP system using an XML interface called "the poller," which sends the ERP information to the SV web server. Suppliers can also load information for shipping forecasts and ASNs directly into SV, as well as export information from SV to their external systems. Suppliers without EDI can import their shipping forecasts and ASNs into SV using spreadsheet.

Essentially, it is a basic vendor-managed inventory solution that lets suppliers monitor how items are consumed. QAD plans to add a link to its eQ Replenishment application, which will add more complex algorithms allowing suppliers to determine when to replenish stock to its customers. To execute the portal-based applications, the supplier will need a Web browser such as Internet Explorer or Netscape, and the customer must install a small poller on their MFG/PRO server. From MFGx.net, users that are not necessarily the MFG/PRO users can download the software, which updates the system at certain time intervals by replicating data from the QAD MFG/PRO database and uploading it to SV. The result of this, ideally, is streamlined material replenishment up and down the supply chain. QAD SV is the first application made available on a subscription basis through QAD's new MFGx.net manufacturing exchange, and it comes pre-integrated with the most recent versions of MFG/PRO, namely eB and 9.0 releases. QAD MFGx.net is the vertical exchange, which also offers associated education and services, while QAD provides full consulting, implementation, migration and support services.

This concludes Part Four of a six-part note.

Part One detailed the events.

Part Two presented the Company Background.

Part Three began a discussion of the Market Impact.

Part Five will cover Challenges and

Part Six will make User Recommendations.