Friday, November 6, 2009

Enterprise Incentive Management Leader Responds to Market Demands

San Jose, California (US)-based Callidus Software, founded in 1996 and publicly traded since 2003 on the NASDAQ under the symbol "CALD," is an enterprise incentive management (EIM) provider that benefits from the market dynamics detailed in Thou Shalt Motivate and Reward Workforce Better. The company has several US offices, namely in New York, New York; Austin, Texas; Chicago, Illinois; and Atlanta, Georgia, as well as in London (UK) and Sydney (Australia), with an estimated 330 employees worldwide. Callidus (taken from the Latin word meaning "expert") receives nearly $70 million (USD) in revenue and services over 110 global user corporations across multiple industries. Such industries include retail banking (22 percent of the install base), insurance (21 percent of the install base), manufacturing/high-tech and life sciences (23 percent of the install base), retail/distribution (12 percent of the customer base) and telecommunications (the remaining 22 percent of customers). While its products can serve the pay-for-performance program needs of virtually all companies, Callidus has focused principally on the above six key market segments, which were also described in Sizing the EIM Opportunity.

Part One of the series Enterprise Incentive Management Leader Responds to the Market Demands

In addition to selling directly, Callidus actively promotes and maintains strategic relationships with systems integration (SI) partners, management consulting firms, independent software vendors (ISVs) and technology platform providers. These relationships are formed to provide customer referrals and co-marketing opportunities with the aim of expanding the potential customer base. As well, these relationships leverage the vendor's primary business model by outsourcing integration and configuration services and allowing it to expand and focus on software license sales. To that end, Callidus has established alliances with Accenture and IBM on both a national and a global basis, whereby each provides systems integration, implementation, and configuration services. The vendor has further strengthened its relationship with IBM from a technology perspective by optimizing its products on platforms such as IBM WebSphere, DB/2, and AIX.

Besides working with global business partners, Callidus also maintains relationships with smaller and more specialized companies such as Compensation Technologies and Iconixx Corporation. These relationships provide the company with new business referral bases, compensation consulting, and augmentation of its professional services, including the implementation of Callidus products. Although all of these strategic relationships have been built on solid foundations over the past few years, they are non-exclusive, and either party may enter into similar relationships with other parties.

Callidus Software's global partnerships and alliances continue to grow in number, and today include some of the world's best-known SIs, consulting and technology groups, and software solution providers. Other firms that form the company's partner base: Actuate Corporation (for enterprise reporting applications), The Alexander Group, Atos Origin, Axis Group (a consulting firm in the field of business intelligence [BI]), BEA Systems, CelFocus, Hexaware Technologies (a provider of information technology [IT] and business process outsourcing [BPO] services), Hewlett-Packard (HP), Informatica Corporation, Oracle, Saama Technologies (a consulting and SI firm that provides actionable BI for enterprises and outsourcing services for software product companies), SAP, and Sopra Group, among others.

Ten of the thirty Dow Industrial companies have thus far chosen EIM from Callidus, whereby the vendor's partner programs hope to ensure successful implementation and faster payback for these companies as well as for all of Callidus Software's 112 customers. The consulting services firms and SIs mentioned above work with Callidus to add strategic value to sales performance management and provide integration, evaluation, strategic outsourcing, and hosting services. On the other hand, ISVs and technology platform providers integrate Callidus Software solutions with applications and platforms to maximize customer benefit and help build revenue.

How Flow, Lean and JIT Differ From The Traditional Methods

Flow, like its other lean manufacturing siblings, differs from traditional manufacturing through a pull vs. a push strategy to move goods. Namely, 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 forecasted demand, and thus, production orders stemming from the MPS (master production schedule) 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. To recap, in traditional manufacturing, goods are pushed through production at levels determined by often inaccurate scheduling and forecasting tools common in MRP II (material resource planning)/ERP systems. These levels often exceed demand, resulting in building excessive finished inventory, while in a flow/lean/JIT environment orders are pulled through the process, based on actual demand.

By contrast, rather than emphasizing planning like ERP, lean manufacturing and JIT concepts emphasize the continuous improvement of processes that lead to things such as reduced inventory throughout the supply chain, shorter lead times, and faster cycle times enabling improved response to customer demands. Many vendors have consequently bolstered their commitment to lean manufacturing practices with functionality designed to promote rapid response to customer orders based on demand "pull". This includes kanban, mixed-mode manufacturing (i.e., building a new model every day, according to daily demand in order to make several different parts or products in varying lot sizes allowing a factory to produce close to the same mix of products that will be sold that day), and the flexibility to schedule, and manage flow orders for products within product families, with or without using MRP. Again, the idea is for products to arrive exactly when they are needed in the mix and in required quantities to allow production to begin 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, RIP, and build or supply materials when location needs to be replenished. These features are attractive at least to existing ERP users and particularly automotive suppliers, who have been pinched by a tightening economy and are under pressure to speed up operations and adopt JIT and lean manufacturing practices. The requirements for the automotive industry, which is particularly conducive to the deployment of lean concepts, are critical even in the accounting arena where evaluated receipt settlement, release accounting, self-billing, and retro-billing speedup processes while helping suppliers optimize their limited resources.

Pull vs Push: a Discussion of Lean, JIT, Flow, and Traditional MRP Part 1: Tutorial

The lean manufacturing support philosophy has recently received increased interest, potentially allowing it to break like a huge wave across industry. The Enterprise Resource Planning (ERP) systems of the 1990s have been burdened with the liability of carrying on some well-publicized Material Requirements Planning (MRP) problems like complex bills of material (BOMs), inefficient workflows and unnecessary transactions, activities, and data collections. While several years ago prospects were tentatively inquiring about lean capabilities, now they seem to be increasingly requesting them.

Companies such as John Costanza Institute of Technology (JCIT) have been the pioneering source of the philosophies and techniques behind flow manufacturing, which replaces shop-floor silos, such as machines grouped by their function, and traditional scheduling and forecasting with process or product family-based production lines (often referred to as cells) designed to fill orders based on actual daily demand. The idea is to be flexible enough as to keep work-in-progress (WIP) moving smoothly and continuously, eliminating bottlenecks and underutilizing capacity. This particular flow derivative of the lean philosophy was developed and refined by John Costanza, who leveraged what he learned from his exposure to the Toyota Production Model and what he had subsequently applied while working at Hewlett-Packard. He developed specific disciplines and mathematical techniques to implement "demand pull" and "continuous flow" concepts. He named this methodology Demand Flow Technology (DFT), and in 1984, started JCIT, an Englewood, Colorado, (USA) based company, to educate thousands manufacturers ever since.

The term flow manufacturing is closely related to and thus often confused with other demand-driven manufacturing strategies, such as agile, just in time (JIT), and lean manufacturing. They also streamline processes, eliminate waste, use kanban signals to replenish supplies and are subject to continuous improvement. (The Japanese word kanban, according to the APICS Dictionary, loosely translated, means card, billboard, or sign, and the term is often used synonymously for the specific JIT scheduling system developed and used by the Toyota Corporation in Japan. It is a pull system where workstations signal with a card or something similar when parts are to be withdrawn from feeding operations or suppliers.) For more detail on JIT and lean manufacturing and on their impact on ERP, see Trends Affecting Manufacturers and ERP.

Consequent Vendor Responses

More recently, most vendors have further focused on their solutions for supply management and visualization. In other words, while still adding to their ERP capabilities (for example lean manufacturing and JIT management modules), many ERP and SCM vendors have been fleshing out the components of the extended enterprise (distributed order management, flexible schedules, customer self-service, consignment inventory, vendor managed inventory [VMI] and supplier managed inventory [SMI], replenishment management, and business-to-business [B2B] e-commerce). They have also been exploring the manufacturing community (i.e., consolidated visibility via a portal of inventory, production, product life cycle, payments, and invoices).

While forecasting might have had a poor reputation in manufacturing, recently there has been an increased awareness that with good collaborative planning and forecasting software, which would support collaborative sales and operations planning (SOP) processes, many manufacturers could improve their business performance (see Sales and Operations Planning). Like with the production planning, manufacturers need to remain on top of forecasting by leveraging much shorter review intervals than traditional quarterly updates. By taking forecasting more seriously and supporting it with smart, interactive tools, all the parties within the manufacturing businesses should be on the same page at the end of the day, which should result with agility. For manufacturers in volatile markets or with products with short life cycles, forecasts based on history only, often mean missing the true demand signals from customers or distribution channels.

Any supply chain planning (SCP) endeavor starts with a demand forecast based on a consolidated view of sales and operations plans from across the organization, remote manufacturing sites, and distribution centers. These demand plans are common to all manufacturing environments alike, and are instrumental for annual planning of resources, to monitor demand mix variations, and even as data for preliminary/rough-cut line balancing and kanban planning. Enterprises use SCP for strategic purposes such as to plan for resources across an organization, prepare for promotions, negotiate long-term contracts, establish objectives, and coordinate multisite operations, whereby sales and operations, inventory, distribution, collaborative demand management, transportation planning and other departments are all involved. Flow manufacturing does not address synchronizing around the supply chain, multiple partners, and suppliers, since it is merely a shop-floor execution tool.

Thus, it would be too nave to dismiss the need for proper planning, because regardless of how responsive an execution system may be, waiting for a chaos to happen and only then trying to act, would be as much of a disaster as it has been with compiling nearly ideal plans (through cumbersome algorithms) and never doing anything about executing or obtaining feedback about the plans' outcomes. As supply chains become more dynamic and operate in near real-time, the lines between planning and execution continue to blur, which bode well for their functional convergence. Companies need real time information from execution systems to develop and adjust optimal plans, while the execution side should benefit from more realistic plans for the sake of readiness, rather than to merely react after the fact in a firefighting fashion.

Pull vs Push: a Discussion of Lean, JIT, Flow, and Traditional MRP

Still, while some tout that flow manufacturing principles can be implemented successfully, regardless of the industry, type of manufacturing environment, or product volumes, the concept has not been everything to all people so far. It is still challenging or even unsuitable to use in a jobbing shop producing highly configure-to-order (CTO) or engineer-to-order (ETO) products with high setup and long lead times, although when it has been occasionally deployed there, it has met almost as much success as in high-volume, more repetitive make-to-demand environments.

The fact is also only a minority of all ERP vendors properly supports the ETO environments, let alone flow manufacturing concepts. Cincom is one notable exception, given its Flow Manager product handles kanban replenishment and demand smoothing (but not line design and operation method sheets (OMS), because these features do not bring much benefit to ETO manufacturers). Their customers often specify product families that include products requiring one or two unique and expensive components in addition to common parts that could benefit from flow methods of smoothing spikes in demand.

Also, only certain industries like high-tech, aviation and defense (A&D), and consumer packaged goods (CPG) have been the best candidates to adopt flow manufacturing, because they can most feasibly achieve feedback from reconfiguring the shop floor into dedicated production lines for product families, around which flexible and cross-trained work teams are established. However, for other organizations, that feat will not happen overnight, since achieving flow manufacturing takes more than moving equipment into product family production lines, creating flexible workstation teams, establishing quick changeovers, or introducing kanban signals. It also requires specific flow manufacturing training, continuous discipline and process improvement mindsets (e.g., zero defects, zero setup, the use of standardized components, and zero inventory).

Until relatively recently, there have not been many off-the-shelf software applications to help manufacturers institute flow processes, other than cumbersome spreadsheets and internally developed packages or practices to handle some flow techniques, such as line design, line balancing, kanban management, and mixed-model production. In addition to the lack of consensus regarding what exact set of features constitutes the flow manufacturing software, there has also been a philosophical debate about what flow manufacturing software should do in relation to ERP/MRP.

On one hand, John Costanza Institute of Technology (JCIT) has been advocating the misfit of ERP's concepts of planning and scheduling, which do not allow a manufacturer to use a demand forecast as the basis for a reliable materials purchasing plan. Conversely, flow-oriented manufacturing starts with the earlier-mentioned process called demand smoothing, which technique involves looking at a forecast over a certain period of time (anywhere from one week to several weeks) to determine how many products must be built each day to fill the total amount of orders expected over that time. The flow manufacturer will then ask its suppliers to deliver parts every day, with each shipment amounting to only enough parts to satisfy that day's quota.

On the other hand, there are some indications that flow systems cannot handle demand variability, variable product mix, shared resource constraints, or complex products with long lead times, thus limiting flow for items where variability is only at the end item mix, and not with frequent content variations of option mixes. For this, and all the above reasons, most manufacturers implement this method gradually and use flow to make one product family, which necessitates ERP, MRP, or APS (advanced planning and scheduling) for the rest of the business. While lean/flow manufacturing leverages practices to stay ahead of actual demand, the traditional approaches better coordinates secondary, back-office systems like accounting and human resources (HR) management. Moreover, flow should be a company-wide strategy that does not only impact manufacturing.

Thus, many prospects will be more amenable to the flow manufacturing product designed to complement an MRP II or ERP system rather than replace it. To that end, for example, Oracle's and American Software's system offer full support for demand flow techniques on the shop floor while also providing a standard interface to the rest of the business systems for activities like purchasing, accounting and order management. A further example would be QAD that uses MRP for mid- and long-term planning, on the execution side however, it also 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. Customer demand cannot be predicted months ahead, since nothing is that certain. Thus, many ERP systems are employing heuristics, algorithms, and even simulations to estimate the uncertainty in demand and effects of constraints on the shop floor. Understanding these variations then allows enterprises to assign flexible boundaries around material and capacity plans.