Changing the Politics of Integration

The growing adoption of service-oriented architectures (SOAs) including SAP’s NetWeaver platform and its related applications are having a significant impact on the politics of integration between manufacturers and distributors. The balance of power has already shifted in a few industries to the channel over the manufacturer, and nowhere is this more visible than in retail, with a case in point being Wal-Mart.

There are many other examples, scattered through financial services, transportation, logistics, high tech and other verticals. The point is that service-oriented architectures are already redefining many business processes that distributors and manufacturers share, and will continue to redefine these trading partnerships into the future.

SOAs Take Over Where Standards Take Off

The acquisition of Viacore by IBM this month made me stop and think about RosettaNet, its high-energy, charismatic founder, Fadi Chehade, and how his vision of integrating supply chain processes really was ahead of its time. In research I’ve done on the adoption of RosettaNet in high-tech distribution channels, and whether it would eventually replace EDI, a couple of interesting insights emerged.

First, the majority of the high-tech distributors interviewed only implemented the order management Partner Interface Process (PIP). In other words, the majority of the 20 distributors interviewed all felt compelled to invest in RosettaNet just to the transaction level. Second, only one company, Intel, completed an intensive RosettaNet integration strategy, including all PIPs that included product information and marketing information management. While Arrow, Nokia, STMicroelectronics and Texas Instruments are founding members and have extensive integration experience with RosettaNet, I didn’t get a chance to speak to them during my survey work.

What is so forward-thinking about RosettaNet’s standards is that they detail the processes by which the information is used, they are real-time, and they deal with much more complex processes than EDI is capable of. RosettaNet’s ability to deliver collaborative forecasting — as is evidenced by the firm’s work with STMicroelectronics and the replacement of EDI by Arrow with RosettaNet — foreshadows the level of change SOAs tailored to the high-tech distribution channels will be able to accomplish.

SOAs promise to do what RosettaNet is doing in high tech, only on a much broader and deeper scale. The initial research on SAP NetWeaver early adopters in the report, Users Speak Out About SAP NetWeaver, shows that selecting business processes that are focused on gaining a competitive advantage in selected channels and markets is a primary driver for many companies moving to service-oriented architectures. Where RosettaNet and standards like it left off, SOAs are taking over.

Channel Priorities for SOAs

With so much hinging on better order management, coordination of all aspects of a product during its introduction, and the many complexities of pricing, a high adoption rate for SOAs in channels is inevitable. In the redefining of these processes for better efficiency between channel partners and manufacturers, however, the balance of power in these relationships is being defined.

It starts with greater visibility and control through supply chains and progresses into classic pick-and-pack distribution operations synchronized with pricing and product content. When you consider even the best distribution organizations average less than 5 percent return on sales, it becomes clear that supply chain synchronization impacts the channels’ financials more than any series of demand generation activities. A lean supply chain is turning into a manufacturers’ greatest competitive advantage, especially if they are relying on indirect channels.

For the distributor, ability to plan for, shape and respond to demand is a competitive strength. In fact, a former student of mine who worked in Wal-Mart’s demand planning section says that demand monitoring is such a high priority that during December there are meetings every morning to review sales-out data network-wide for the previous day. Wal-Mart has that level of integration to monitor demand.

Insights gained from timely analysis is a major competitive advantage, especially for distributors. The following processes are just a few that SOAs including SAP NetWeaver will impact in the coming two years:

• Supply chain integration. Integrating supply chain systems between manufacturers and distributors has in the past been greeted with lukewarm responses, especially in high tech. That’s because product close-outs and the inevitable strategy of dropping prices by 40 percent or more to move discontinued products through channels is easily spotted when supply chains’ visibility is improved. For many distributors, vendor-managed inventory is also a costly manual process. With supply chain integration and greater visibility, vendor-managed inventory processes would also be streamlined.
• Pricing strategies will start happening in real-time. One high-tech distributor has a room of at least 50 people computing price tables, as this specific company generates well over 1,400 pricing tables every month. With an SOA supporting shared applications, the intensely manual processes of creating these pricing tables would become much more streamlined and efficient.
• Product introductions synchronized globally. This is the holy grail for so many manufacturers, yet given the disconnects in their channel strategies, it’s very hard to achieve. With an SOA in place that includes a standardized portal and applications for managing product launches throughout the many layers and roles in channels, this goal becomes achievable. PLM vendors are no doubt thinking about this today.
• Collaborative Planning, Forecasting and Replenishment (CPFR) becomes achievable for more companies. This refers to the sharing of forecasts, related supply chain and business information among partners throughout a supply chain in an effort to automate product replenishment. The purpose of CPFR is to improve in-stock performance for retailers by synchronizing supply chains with manufacturers so that excess inventory and out-of-stock conditions are alleviated. Admittedly a complex area, the sharing of forecasts and supply chain inventories is an area where service-oriented architectures are already making an impact.

Bottom Line: Service-oriented architectures matter more than ever in distribution-centric business, both from the channel and manufacturing side. Look for distributors to attack the most problematic areas including product introductions, pricing and vendor managed inventory first.