Is Enterprise Resource Planning Becoming a Commodity?

Transition of "Value into Volume" Business Model:

Enterprise resource planning: ERP. The three once-paranoid letters are emerging out of their value shell to reach out to the masses. All was fine, methodical, and elegant, until ERP vendors started aspiring to new customer acquisitions in the hundreds per annum. With the advent of ERP for small to medium businesses (SMBs), the numbers are mind boggling.

Product management researchers case-studying the transition of "value to volume" market behavior are having a field day. To what extent is the ERP selection phase and sales cycle shrinking, along with the implementation timeframes? Will the new ERP avatar be easy to learn, adopt, and maintain? There are innumerous questions that remain open for interesting debate. And the master query is a good riddle to crack: "Is ERP becoming commoditized?"

SMBs have been discussed in different media countless times. Cover stories such as "SMB Is Happening" and "The New Wave Called SMB" are most sought after. What do these SMB customers really want? Does the expanding number of companies in this segment make a difference in buying behavior? Is commoditizing ERP the only option for catering to this market?

The first step in commoditizing any product is to standardize. Common availability and greater awareness are also key characteristics of a commodity. Are ERP vendors ready with such an offering?

What Do SMB Customers Want?

What SMB customers want is driven by what they are. Every research organization defines SMB with respect to two main parameters: revenue, and employee size. The range of sizes varies in each region and market. We'll turn now to some of the defining characteristics of SMBs.

"Owner-driven Cars"
SMBs are like "owner-driven cars." The car starts in the garage and runs along corporate freeways—the ones that lead to global destinations. According to some research, trends in the US amount to an amazing 230,000 SMBs exporting nearly $182 billion (USD) annually, a whopping one-third of all US exports. The same trend is emerging in the rest of the world, most notably in emerging economies like China and India.

Enormous growth potential coupled with a changing environment makes for crazy drivers. Very few moments are available to SMB decision leaders to sit back and think.

As for owner-driven cars, resource constraints and limited risk-taking abilities are general characteristics of SMBs. Unlike large enterprises, SMBs operate in "resource sufficiency" mode.

Juggling "too many balls"
SMBs invariably perform under huge pressures, resource constraints, and tight timelines. Juggling too many balls is a common phenomenon in this business segment. For example, an accountant in a SMB organization may process sales orders to ensure timely deliveries. In certain circumstances, even production managers perform the same process. These factors lead to an absence of well defined user roles (for the reason that "fulfillment of tasks" is considered more important than a non-violated workflow rule); time constraints for adopting a new system; and continual resource constraints for operations.

Lack of IT Infrastructure
It is hard to find SMB organizations with a well-defined IT division. Though top management may be IT-savvy, they are hard pressed to find time for software evaluation and implementation. SMB customers in emerging economies face additional challenges such as only occasionally connected environments, due to bandwidth issues, and poor IT literacy among users.

In turn, these characteristics define the basis of the typical SMB needs regarding ERP systems, and we'll explore these next.

A Fully Functional ERP:

The general demand is for a "fully loaded car with no fancy frills." It is a major buying decision, so it had better be good. Is there a "dashboard" control? Can the SMB decision leader determine the driving speed and also have a constant watch on fuel (resource) availability? Yes, one-screen control is vital when momentary decisions need to be made.

Most SMB leaders interviewed agreed that once their organizations choose an ERP system, they will use it for a minimum of three to five years. Growth rates being tremendous, a fully functional and scalable ERP system would be an ideal choice.

"Bought Microsoft Windows, used it as is." "Bought Office Suite, used as is." "Bought accounting software, used as is." ERP should also be usable as is. Configuration yes, but no customization. No fancy frills indeed.

Coexistence of Flexibility and Control
Task fulfillment is key, and hence the ERP system needs to be flexible. At the same time, one of the major drivers for ERP adoption is business control. These contradicting features of "flexibility" and "control" need to coexist. Key users need to have the flexibility for effective fulfillment, and control need to be exercised with respect to the rest of the users. For example, key users should be able to role-play to complete their peer's tasks when the situation warrants, and the system should keep track for business clarity. Role definition in a system thus need to be flexible in order to accommodate these requirements. Flexibility in the sequence of process elements is also needed. A typical need arises when tasks are fulfilled that are followed by procedures to be completed for better business practice and integrity.

Simplicity of Adoption
Can the customer push in a CD and self-install the ERP system? If the customer does not how to go about the setup, does the system incorporate a wizard with business questions to be answered in order to set the entire schema?

As the first IT adoption of any business is simple accounting software, can the ERP system identify and connect to the accounting software in use, and bring in all the data intact to the new screens? Is the ERP solution equipped to connect and talk to the complementary applications that the SMB has invested in?

When the basics are in place, a graphical screen that guides in exploring greater heights of ERP features is an ideal next step. This screen must allow a business user to configure best-in-class features with "drag and drops," relatively few clicks, and basic English. This will transform the customer's business systems into ERP within the constraints of an SMB.

Ease of Maintenance
Adoption is followed by usage and maintenance. While "ease of use" is a default software requirement, "ease of maintenance" is the new jargon being chanted by SMB customers who lack IT resources and infrastructure. Accordingly, there are various critical requirements that need to be satisfied:

• Can customers take backups from the ERP screen through a simple menu? It's better if the backup can be performed while the users are transacting.
• Is there a health monitor that helps in scheduling proactive maintenance calls (so that problems can be averted before they occur and halts the business)?
• Does the ERP solution have self-healing recovery for disaster situations, with the ability to quickly swing back in action for better business continuity?
• Is there a simple click-away backup restore process for emergency situations?
• Can the ERP system perform pull synchronization on demand from various remote locations? It's better if scheduled auto-synchronization happens in a "push mode" without user intervention.
• Is there a dynamic reporting tool that accepts visual drag-and-drop commands and produces desired reports?
• Is the ERP solution agile enough to configure and reconfigure the dynamic changes that haunt the business?

The million-dollar requirement of these SMB customers is that the ERP solution needs to be simple yet powerful, flexible yet with the capacity for control, and easy yet complex.

Affordable and Predictable
When deciding on ERP software, SMB decision makers are daunted by the hourly service rates quoted by vendors and partners. SMB decision leaders need "not only" an affordably priced solution, but also a predictable total cost of ownership (TCO).

• Is there a "product-based" service offering?
• Is there a standard tariff for license fees, implementation fees, and yearly support costs?
• Can the customer pick and choose the features and services as and when required, with the costs agreed well in advance?
• Is there a next-door partner to help in situations of service need?

An affordable yet predictable ERP will open up new horizons for SMBs to embrace ERP systems in growing numbers.

Are Vendors Geared towards Offering "Commoditized ERP"?In simple terms, SMBs want a "commoditized" ERP system, meaning that it is simple to choose and fully functional, with dashboard controls; affordable and predictable; easy to adopt, adapt (to business changes), and maintain; connects to third-party applications; flexible but with strict control capabilities; and with next-door partner service.

What should be the ERP vendor's response to this "value into volume" game? The current efforts of these vendors to make a SMB-fit offering are yielding some results and perhaps some chaos. Let us take a closer look at ERP vendor responses by category.

Traditional ERP Vendors
Vendors such as SAP and Oracle fall into the traditional ERP vendor category. Traditionally catering to large enterprise customers, these vendor's solutions are percolating down to SMBs. Vendors in this category bring the experience of managing the most demanding customer requirements, the expertise of best practices, and deeper domain knowledge. The transition to the value-into-volume business model is more evident with these vendors. However it is important to understand some of their characteristic initiatives (or lack of initiatives) and market responses.

Traditional vendors do have a comprehensive full-functional ERP solution in the rack. They offer a SMB-fit solution and provide a value chain to scale to the comprehensive solution. They also offer third-party partner products integrated "out-of-the-box" to fulfill comprehensive solution requirements on a lower TCO. As far as affordability is concerned, ERP vendors seem to be geared towards satisfying SMB customers. Predictable TCO is offered by products such as Oracle's e-Business Suite, with a comprehensive tariff and a point price which includes license fees and implementation fees.

For instance, SAP has acquired 10,000 SMB clients for its Business One offering. As these SMB customers grow, options are open to move up the value chain by adopting SAP Enterprise solutions. SAP Business One provides dynamic reporting functionalities.

Oracle 10g Database SE1 addresses the "self-healing" and "easy-to-install" requirements of SMBs in the absence of a database administrator (DBA). Applications built on this platform tend to fulfill the SMB requirement of single-click system installation, according to a 2005 IDC white paper sponsored by Oracle Corporation titled "Oracle Database 10g Standard Edition One: Meeting the Needs of Small and Medium Sized Businesses."

Wizard-driven setups, and graphical tools to explore and configure are not commonly seen in this category offering, but traditional vendors are gearing up their partner ecosystems to address the next-door partner service requirements.

Incorporating business changes on the fly for a set of customers or transactions is unheard of in the traditional ERP world. Traditional ERP gurus suggest a detailed business process re-engineering (BPR) report before touching on such changes. However, SMBs aspiring to best practices often find it difficult to devote time for sitting back, analyzing, and adopting these aspects and practices.

Mid-tier Vendors:Sage Software, Microsoft, and 3i Infotech are the kind of vendors in this category. They have been providing extended solutions to SMBs for some years now. Current volume levels achieved by some of these vendors have come about mainly through inorganic growth.

A visual modeling tool for explore-and-configure adaptive processes aspires to be "tomorrow's model-driven design," according to Bill Gates in his presentation at Convergence 2005.

Mid-tier vendors also offer third-party partner products integrated out of the box. However, unlike the traditional vendors, these applications are not an option to reduce TCO. They act rather as complementary products to bring about a comprehensive solution framework.

Like the SAP Business One offering, the mid-tier product Sage ACCPAC provides dynamic reporting functionalities. In terms of affordability, mid-tier products such as ORION Advantage from 3i Infotech offer one-point pricing that includes license fees, implementation fees, a micro-vertical schema, a database license, and server hardware. By and large, the affordability aspect of SMB requirements is well met by these ERP vendors.

Small Business Solution Vendors

Product offerings such as QuickBooks from Intuit, Peachtree from Sage, Tally, and MYOB fall under this category. These product vendors have emerged to respond to SMB customer ERP requirements.

Volume is synonymous with the small business solution (SBS) vendor's business model. Affordable price is well attuned to volume. Customers find easy to make their choice, based on the following reasoning: "there is this vendor who provided us with the accounting software we've been using for years; this vendor has come up with an enterprise-wide application; the simplest choice is therefore to adopt such a business application from the existing vendor." However, it is not as easy as it may seem. There are other unanswered questions such as product comprehensiveness, domain expertise, and product-oriented services.

SBS vendors are scaling up their product functionalities version-on-version to reach the comprehensive enterprise-functional levels. Some of them do have complementary third-party applications. Most SBS vendor products have a single-screen business manager that gives visibility and control to SMB decision leaders. These vendors have provided dashboard, single-click install, and explore-and-configure features in their smaller accounting applications upwards.

Many SBS Vendors do have a large partner network in place. While mid-tier vendor partners have a solution provider business model, SBS vendor partners are still in the distribution mindset.

There are, however, some common issues across the ERP vendor categories. Though the first step to commoditizing any product is to standardize, there seems to be a big lack in this respect. Common availability and greater product awareness are key characteristics of a commodity. This saves the customer's time and money. Simply choosing an ERP system requires conscious know-how of one's own business objectives; a product track record in a similar industry; a, test run in the shortest possible timeframe; knowledgeable human resources; and many other elements. Is there a way to choose an ERP system as we choose potatoes, in other words, as we purchase commodities? No ERP vendor seems to have cracked this requirement.

Most ERP applications support import and export of data in various formats ranging from Excel, CSF, and Access, to extensible markup language (XML). Although this gives the possibility of connecting to other applications, the process of data movement and of avoiding data duplication is still a challenge. There is no single drag-and-drop, click-and-connect solution built into an ERP that allows trouble-free connectivity without sacrificing data integrity levels.

And finally, allowing flexibility yet providing control is as perplexing for ERP vendors as a cold fire. We are yet to come across an ERP product that demonstrates both qualities to the fullest satisfaction of SMB decision leaders.

Conclusion

SMB are in need of ERP solutions. Growth, change, and "economies of speed" drive this business segment to have a system that provides greater business visibility and control. The requirements of SMB are perhaps unique, and emanate from their business nature, along with their inherent characteristics and constraints. Though idealistic, there is a crying need for a commodity called ERP for SMB.

ERP vendors have started becoming aware of this need, and are moving towards meeting it. While some of the needs are met in fragments through different ERP products, a single product meeting all these needs is not in the vicinity. Commoditizing a product means it must be simple for customers to make a choice. Such a product for SMBs needs still to emerge—at this point, vendors are moving in the right direction but yet to arrive.

Vendor Reservations, a Full-fledged SaaS ERP, and User Recommendations

How About Full-fledged SaaS Enterprise Resource Planning?The previous notes in this series have left us in a quandary: Why has software-as-a-service (SaaS) not been fully embraced by the full-fledged manufacturing enterprise resource planning (ERP) world? Sure, the SaaS Showcase features over a dozen SaaS ERP solutions, but such companies as NetSuite, Intacct, Plexus, Workday (a new venture from former PeopleSoft founder Dave Duffield), or Everest Software are not really forerunners of deep and versatile manufacturing capability. Also, their SaaS-only offerings are not appealing to the many conservative enterprises that tend to prefer the reserve option of going on-premise as required. In fact, many such environments exhibit interest in testing on demand applications in a much narrower functional scope as a ramp-up for full-blown use down the track. One would need to see the likes of SAP, Oracle, Infor, Lawson, Epicor, QAD, IFS, Cincom, Exact, etc. wholeheartedly jump on the bandwagon to really believe the traditional ERP vendors have taken up the SaaS religion. One may want to note that vendors like SAP have a number of customers for whom the vendor (or one of its partners) hosts a manufacturing ERP environment. While we may not consider this SaaS, we can at least recognize it as a step in that direction.

Last part of the series SaaS-ing the Manufacturing Opportunity.

The first step in resolving the quandary would be the enormous re-architecting to make the applications work on the Web and in a multi-tenant mode. While certainly a major hurdle, it is not an insurmountable one. Namely, Epicor, accidentally or not, had its Vantage product (see Examples of Microsoft .NET Enablement) rewritten in a multi-tenant architecture, but is still pondering whether to launch the on demand offering in earnest.

For the previous notes see:
SaaS-ing the Manufacturing Opportunity
Software as a Service: Not Without Caveats
Software as a Service's Functional Catch-up

Lukewarm acceptance from prospective customers and the above transitional growing pains would be other reasons for SaaS ERP tardiness. Also, the industry-specific, end-to-end, and cross-departmental nature of ERP processes is another barrier to SaaS entry, which, as depicted earlier on, has so far flourished in mainly "vanilla" customer relationship management (CRM) and supply chain management (SCM) functionality for a specific department. Where complex orchestration and business process integration is involved, SaaS functionality still trails its on-premise counterpart. It is, hence, ironic (but also poignant) that Salesforce.com runs its back-office business on the "old-school" Oracle E-Business Suite, even though Salesforce.com is used for its front office activities, especially opportunity and partner management and marketing campaigns.

Another problem with an ERP SaaS offering stems from the fact that in order to reduce complexity, most ERP systems have come with many templates to fit specific industries so that a plethora of system parameters needs to be set. But once these parameters have been set, subsequent changes would be difficult. Every SaaS product currently available still offers little ability to convert and cleanse data, run test scripts, or document processes, which are tasks that comprise up to 70 percent of implementation costs irrespective of the software product. One should thus look for the built-in logic within an ERP application that would accommodate different manufacturing or planning environments, but which would not become active until the users define what kind of logic is required at the item level. This would mean that a company could have some parts planned using individual work orders and some via repetitive schedules in the same location, whereby some parts in the location can be automatically back-flushed and others would be issued to the order. Having a system that can support mixed-mode manufacturing without the need for artificial constraints would mean that the technology is available to offer on demand manufacturing ERP to the marketplace.
Veteran Enterprise Resource Planning Vendor Makes a SaaS-y Statement:Consequently, it might be refreshing to see the first full-fledged and versatile manufacturing-oriented on demand ERP SaaS solution come from a veteran vendor whose capabilities seem to have always been far greater than its recognition in the global enterprise applications market. Namely, Glovia International, a provider of extended ERP solutions for both engineer-to-order (ETO) and high-volume/repetitive manufacturers, announced the opening of Glovia Services Inc. in October 2006—a new company that is possibly the industry's first provider of SaaS solutions specifically designed to help small to medium businesses (SMBs) manage their manufacturing processes. With its headquarters in El Segundo, California (US), Glovia International is a subsidiary of Fujitsu Limited (TSE:6702 [Tokyo Stock Exchange listing]), a leading Tokyo, Japan-based provider of information technology (IT) and communications solutions for the global marketplace, with consolidated revenues of over $40 billion (USD) in fiscal 2006.

In conjunction with the launch of Glovia Services Inc., Glovia International introduced GSInnovate, a manufacturing solution based on the company's existing and renowned on-premise glovia.com manufacturing product. With its more innovative delivery model, the solution supports the management of many manufacturing processes on a SaaS technology platform that promises to deliver overall business performance with reduced investment and risk. Glovia Services is the rare company that has a comprehensive SaaS solution specifically designed to help manufacturers in the SMB market manage key processes such as inventory management, order management, procurement, and financial/accounting management.

The solution is based on a SaaS delivery model in which there is no actual software, hardware, or infrastructure for the SMB manufacturer to purchase or maintain. A SaaS application is accessed over the Internet with a browser, eliminating the up-front costs of hardware, licenses, and the expensive technical staff required to maintain these systems. Glovia Services will focus its solutions exclusively on this growing marketplace of smaller manufacturers—a market typically underserved by traditional application solution providers, but which nonetheless represents a multibillion-dollar growth opportunity for enterprise technology. The solution is geared for discrete, job shop, and ETO manufacturers with annual revenues of $10 million to $50 million (USD), or smaller subsidiaries of larger companies. The functional and flexible glovia.com's extended ERP suite provides for the needs of ETO, make-to-order (MTO), high volume, and mixed-mode manufacturing environments through a broad functionality that caters to almost every stage of the entire product lifecycle (that is, from the "design" and "make" to the "fulfill" and "service" phases).

Glovia realizes that in order to attract customers outside its limited ERP customer base, the back-office platform agnosticism of its e-business products should be the company's highest priority. Owing to its recently found flexibility through Java and XML enablement, glovia.com may now function well either as a corporate backbone system or as a solution that executes operations and planning at the plant or unit level. With regards to coexistence with other systems in the latter case, the vendor has lately begun to offer integration adapters to link with other enterprise or legacy systems.

Glovia hopes to become a manufacturing service platform that will connect and integrate various business systems that a user company might currently use. Customers should hereby be able to get the answers to "What? When? How many? How much? How to?" for demand throughout the supply chain via such optimized service platform engines.
How the Software as a Service Offering Fits the Bill:

The initial target for the Glovia Services' sales operation is brand new customers, although this does not rule out smaller operating units of existing customers, if appropriate. The vendor has analyzed the full glovia.com offering and selected the functional set that it believes will best fit the target customer. This is not to say that the SaaS offering will stay as it is now; Glovia may decide to extend the functionality using other Glovia modules down the track.

Currently, GSInnovate is a broad solution suite built for manufacturers in the SMB market and supports critical manufacturing processes such as inventory management; bill of material (BOM) and material requirements planning (MRP); order management; procurement; sourcing; and financial/accounting management. Key attractions for small manufacturers should include an appealing cost of entry, packaged implementation pricing, low monthly fees, and month-to-month contracts. Manufacturers can operate from a single site, multiple sites in a single country, or multiple sites in countries around the world, since the solution also features multi-language and currency capabilities. One minor downside, though, is that since GSInnovate is a comprehensive and functional suite, full deployment may take somewhat longer, though Glovia Services estimates that three months should be the norm.

Glovia also believes GSInnovate is differentiated with a "direct sell-direct support" philosophy in serving such prospective customers. This might be beneficial in the short term, since the SaaS partners' business model and value proposition is yet to be crystallized in the market. Also, unlike commodity providers, Glovia SaaS customers might realize added value from a direct sales team that knows the manufacturing market and the specific challenges faced by small businesses.

Prospective customers and competitors of a vendor offering SaaS should take note, since the idea of paying for software (service) based on usage, quicker deployments, and lower start-up costs cannot be ignored. Still, many customers remain adamant about functional scope and vertical focus and the vendor's viability, and want the (reserve) option of bringing the arrangement in-house for whatever reason.

As issues of Internet security, privacy, and multi-vendor product interfaces are addressed, the number of vendors adopting SaaS and other business models will undoubtedly grow. The prospective customers should not get hung up on the semantics and on vendors' marketing gimmicks, but rather view their SaaS or on demand needs as part of the long-term strategy. After identifying which parts of business that could be served well by SaaS or on demand applications, these should be piloted in an isolated part of operations to test the features and identify any possible flaws.

At their end, vendors will have to define and deliver greater customer choice from among perpetual, term, enterprise, and value-based licensing models, and articulate a road map to bidirectional migrate customers between the licensing models as the business needs change. To replace manual and spreadsheet-based processes, aging custom-developed and homegrown software, or aging legacy ERP systems, smaller manufacturers should explore both SaaS and traditional on-premise ERP alternatives. Given that many small enterprises use only a fraction of the functionality contained within a typical ERP system (see Application Erosion: More Causes and Cures), SaaS deployments may be a way to access this core functionality more quickly and for a lower up-front cost while retaining the ability to "turn-on" more advanced capabilities on an as-needed basis.

In general, using hosted arrangements as solutions (and not only as exercises in cost reduction) will make sense for high-tech/electronics manufacturers and similar complex manufacturing segments that are already outsourcing many portions of their manufacturing operations or that are dispersed geographically with their own manufacturing and distribution centers. The decision to adopt hosted applications service or not requires due diligence, as with any other decision of strategic importance. This is pertinent to both providers and potential customers given that although the promise of reduced implementation risk and time, lower up-front costs, etc. might justify the hosting model, this brings an entire new set of issues for the mid-market organization to consider. Consequently, firms evaluating various deployment options should consider doing so for both SaaS and traditional on-premise options beyond the pure cost trade-offs. Depending on the business models and economic drivers, differences in business benefits, flexibility, vertical focus, and risk management are important when comparing these deployment options. The SaaS delivery model has to be embraced by the users for its broader potential value proposition (rather than a mere start-up cost), such as ease of sharing data with trading partners, availability of backup data centers for disaster recovery, and having access to application services and capabilities that would be prohibitively expensive to achieve and maintain in house.

Some of the issues that need consideration include the technical capability of the provider to administer the program; the provider's industry focus; applications customizability; the ability of the vendor or service provider to guarantee connectivity; the pricing model chosen; and how to negotiate a service level agreement (SLA). These issues need to be addressed in conjunction with evaluating the capabilities of the software package, and understanding whether the hosted offering differs from the traditional licensed offering at all. Clients should diligently and comprehensively weigh the benefits against the potential business constraints of the hosted option, and they should make assessments based on other clients that are eager to provide references.

Before making a final decision, prospective users should understand well their business continuity plans and ask such questions as "Who owns the data and how might the vendor be using it in the future? What happens to data when the SaaS arrangement is discontinued? How is data confidentiality and integrity insured and enforced?" Contesting vendors should be vigilantly prodded about their initiatives with regard to intrusion controls; data privacy standards; support for mobile devices; identifying and preventing potential points of network and server failure (via backup, recovery, or something else); and scalability and redundancy, to name a few. Users should ask vendors what SLA guarantees they can promise and have them disclose recent planned and unplanned outages, especially in light of potential cascading failures from using third-party providers (partners). Also, the strength of a vendor's provisioning, administration, single sign-on, and systems management technology should be ascertained. Users should understand the ramifications of future system and infrastructure upgrades and the likely related disruptions (that is, are these upgrades forced across the board, or there is some support for gradual upgrade paths?).

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

Excess at-risk inventory ultimately impacts a company's bottom line. But because companies are more focused on the development and promotion of new products, the problem of excess inventory is seldom a priority. Companies often resort to high-overhead marketing promotions, rebates, or complete inventory write-offs to unload their excess inventory.

Let the (Excess) Inventory Flow!

Rather than falling back on these detrimental practices under duress, many have wondered whether there might be better, more deliberate ways of dealing with the conundrum of excess inventory instead of customarily writing it off against financial reserves, which directly impacts the bottom line. The advent of the Internet and the well-embraced auction paradigm to drive competitive bidding (which has in some cases proven to increase recoveries by 20 percent or more) has prompted the foundation of companies like FreeFlow. Chief executive officer (CEO) and founder of FreeFlow, Alan Scroope, had long felt there is a gap in the systems and tools that would allow his former employers to deal properly with this continual problem. Namely, there was no systematic or transparent solution that would allow companies to promote their stock to their existing customers. Neither was there one to help these companies liquidate their stock into emerging markets or into geographies where this inventory could be cannibalized.

It is certainly no news today that the Internet has been a disruptive technology that has irreversibly changed many of our habits. One change for sure comes from the convenience of leisurely Web browsing and online shopping from our cozy places, albeit sometimes unfortunately bundled with the inconvenience of late or incorrect delivery and lack of order visibility and status tracking, followed by annoying and costly returns (and then unnecessary trips to the postal office, just to negate any promised convenience in the first place). Other Internet-based phenomena include business-to-business (B2B) auctions and reverse auctions. Namely, given the success of eBay in the consumer arena, one might wonder whether some eBay-like practices can help B2B sales too, since Web-based auction portals should allow users to seize the power of the Internet for speed and anytime, anywhere access. To refresh our memories, according to Wikipedia, reverse auction (also called procurement auction, e-auction, sourcing event, e-sourcing, or eRA) is a B2B tool used in industrial procurement. It is a type of auction in which the roles of the buyer and seller are reversed with the primary objective of driving purchase prices downward. While in an ordinary auction buyers compete for the right to obtain a good, in a reverse auction, sellers compete for the right to obtain money (by providing a good or service).

FreeFlow believes that there should be alternate channels for a company's excess inventory, representing significant opportunistic sales opportunities without creating the channel conflict described in Let the (Excess) Inventory Flow! The trick is in finding those opportunities without distracting the sales force. The first logical step would be to engage the existing channel by establishing a private auction platform to post the inventory. Members of the sales team—or selected channel partners and retailers—could then bid competitively on the inventory. Minimum price thresholds would be set and bidding activity would take prices upward from there. These opportunities would afford sales representatives and retailers alike the opportunity to generate upside sales revenue by buying in inventory at a discounted price (with the price still being above contractual price protection thresholds). In addition, they would allow for creative sell-through programs (for example, truckload sales at a regional big-box retailer—without the cost and overhead of marketing promotions).

Similar principles would apply to excessive spares inventory or global spares inventory balancing. Traditionally, due to the age and condition of the product, the usual destination for excess spares inventory is to the scrap bin. However, with recycling legislation—and costs—on the increase, scrapping excess inventory is not as smart or as easy as it once was. Imagine the convenience of having a 24x7 intranet marketplace within a global service organization, where each location can advertise excess spares inventory or flag shortages to all other locations. The intranet provider can immediately send an e-mail to the other registered member locations, alerting them to the excess components. Or, if the host company wishes, an e-mail can be sent only to those registered members requiring the product. If another location needs the inventory, it can enter a bid for the excess inventory, whereby the user company will receive an e-mail that a bid has been entered and, after accepting it, the inventory will be on its way to the buyer. In the case that such a simple solution to global spares inventory balancing within the organization does not work, again, a flexible bidding technology should allow the user company to take its excess spares inventory to the open market to solicit as many brokers or buyers as needed to ensure competitive bidding, while ensuring that freight costs do not further erode recovery margins.

This brings us to the second step of active product inventory disposition (PID), which can run sequentially or in parallel to the first. Companies would again use the private auction platform to market their inventory to alternative channels, which may consist of some or all of the following: non-contracted retailers interested in making an opportunistic buy, buyers in emerging markets, or the tens of thousands of e-tailers doing business on eBay, Amazon, or Yahoo. Owing to its industry expertise and connections (currently with 3,500 approved brokers on board), FreeFlow helps user companies find the right market for their products and brings those candidates to its private auction, where competitive bidding drives the maximum market price on the inventory.

Finally, any residual inventory remaining in stock following the first two alternate channel programs can be automatically rolled over to the liquidation site. Bidders on the private liquidation site may be brokers and liquidators the company currently uses, or it may ask FreeFlow for recommendations of wholesalers specializing in the product categories. In the course of seventy-two hours, the inventory is listed and sold to the highest bidder (although the host company may decline all bids if not satisfied with the pricing). FreeFlow handles all credit, collection, settlement, and logistics, and the inventory can be out of the host company's warehouse almost immediately. More details of how the likes of FreeFlow can help companies improve recovery on excess components include

• Ensuring competitive bidding across the entire preapproved broker audience
  
  
• Providing market intelligence on fair market value of the excess inventory (the user company receives a monthly performance review with regards to bid history, margin analysis, and open market intelligence to ensure that the user company is getting the best market price available)
  
  
• Allowing the user company to go to market anonymously (with FreeFlow as a proxy bidder), if desired, or branded
  
  
• Bidding by lot or by line item, with package conditions being clearly visible to bidders as "new," "package defect," etc.
  
  
• Providing accuracy with part number cross-reference (internal to industry) and extensive attribute defaults
  
  
• Enabling bid visibility and bid approval to designated personnel, password-protected
  
  
• Ensuring complete transparency with full bid history and audit trail (maintaining an audit trail of bidding activity and award history can be required for the US Sarbanes-Oxley Act [SOX] compliance).

Further, as a business services provider (whereby a user company is entitled to hosted, secure, stand-alone solutions with no in-house information technology [IT] staff involvement required), FreeFlow undertakes the management of the administrative and operational aspects of liquidating excess inventory via

• A single accounts receivable (AR) and customer master data set-up, whereby FreeFlow handles all further account management with the broker community, regardless of their numbers
  
  
• Managing freight and logistics, thereby ensuring delivery to the user company's terms (the user company no longer has to add the cost of freight to already thin excess inventory recoveries)
  
  
• Managing collections from all sales and paying the user company in a single monthly payment

Whether a user company is an original equipment manufacturer (OEM) or a contract manufacturer, excess component inventory severely impacts its bottom line. Still, liquidating these excess components is seldom on a buyer's priority list, at least not until the accrued dollar amount comes to management's attention. Only then comes a flurry of frenzied activity to pull together the excess inventory list, whereby the inventory customarily goes to the broker who can clear the books the fastest. As an alternative solution, business service providers like FreeFlow aim at helping companies work smarter. Specifically, enterprises should be able to improve the overall product life cycle profitability or recovered value (reportedly by 5 to 10 percent) by moving to a systematic process of continuously identifying and disposing of excess inventory as early in the product life cycle as possible. Also, proactive and routine disposition of excess inventory should take place wherever it may be—components or finished goods, in the factory, distribution centers, or in the channel (dealers, retailers, distributors, OEMs), with the likely results of bringing top dollar and eliminating redundant inventory moves which add cost and damage product.

The key here, for any company, is to establish processes to routinely identify excess inventory as well as a go-to-market strategy (including pricing intelligence and best-fit buying community)—all with a low-overhead execution. One way to achieve these goals is via private, online, competitive auction portals directed to the specific buying channel that should

1. eliminate the administrative and operational costs of shortage procurement and excess liquidation;
2. strictly adhere to competitive bidding for component shortages and excess liquidation; and
3. ensure complete transparency and a full audit trail of all transactions.

What about Shortages? (They Can Happen Too):With component shortages, however, time (a proven inventory managers' foe) leads to scarcity, exposure to appalling production line downtime situations, and increased cost. When demands unexpectedly change, or delivery, quality, or availability problems arise, buyers must rush to the open (broker) market to source components wherever they can. Sure, one can logically turn first to a 24x7 intranet marketplace within the global service organization, whereby each location can advertise excess spares inventory or flag shortages to all other locations. If there were such a portal platform, it could automatically e-mail other registered member locations to notify them of the shortage. Should an alerted location have the needed inventory, it can enter a "bid" for the shortage, triggering an automatic e-mail to the buyer that a "bid" has been made. The buyer then accepts the bid, and the inventory is sent out to the buyer.

But, unless there is some spares inventory in another service organization within the company (often without a viable way for anyone to know about it), the company's buyer must go to the open market to source it in a firefighting fashion. Yet, seldom are companies more exposed to price gouging than when they have exhausted all internal inventory sources and must resort to the open market to source their needed spares—fast and desperately. Manufacturers that deal with clever and well-versed brokers one-on-one typically are outwitted whether they want to sell or buy something. The problem of not following a specific procedure (other than buyers following their own instincts and preferences) is often compounded by a broker diversity based on the personal relationships of new buyers joining the buying team. Further, there is often no transparency in quotations (owing to phone and e-mail correspondence mostly). An added confusion is with the mapping of the internal part number versus external vendor part number, along with alternative component cross-numbers that have been approved by the engineering department on the approved supplier list.

There is always the option of having some hedge inventory, a form of inventory buildup to buffer against some unpredictable event that may not happen at all. Hedge inventory planning involves speculation related to potential labor strikes, price increases, unsettled governments, and other events that could severely impair a company's strategic initiatives. However, risk and consequences are unusually high, and top management approval is thus often required. Again, a more elegant solution could be a buyer portal acting as a private reverse auction or bidding platform that allows the company to go to the open market and solicit as many sources as needed to ensure competitive bidding, yet go anonymously under the banner of the portal provider.

That is to say that, as a surrogate bidder, service providers like FreeFlow would buy the products in its name on behalf of the user company, and drop-ship the products to the client (see Drop-Shipping—Internet Retailers' "Little Helper"?) so that the user company's identity alone does not signal an opportunity for runaway prices. The service provider could even conduct some quality control, value-added services (packaging, testing, etc.) should user companies need them. Ideally, the buying and selling portal should be fully interfaced with the engineering department so that the buyer simply keys in the required internal component number and the portal would then populate the appropriate external vendor part numbers that are required. Also, a full audit trail should be provided for each purchase, whereby a multi-digit bid number is assigned to every bid that a broker logs into the system. In this case, a purchase order (PO) would not be issued until a bid number is submitted into the system by the buyer. Occasionally, there would be a need for an optional secondary bid approval should approval from the engineering department be needed.
Returns and Refurbished Materials Adding Oil to the Fire:

Thus far, one conclusion would unequivocally be that inventory challenges exist at every stage of the product life cycle, since product phase-in/phase-out, missed sales, and basic forecast errors result in excess active inventory. The end-of-life (EOL) stock and obsolete inventory are the inevitable results of unsold active inventory that has since been displaced by newer-generation products, or otherwise discontinued. But what about inventory returns, the items that are returned to the manufacturer as defective, obsolete, over aged, etc.? An inventory item record transaction records the return or receipt into physical stores of materials from which the item may be scrapped. To make things even more painful, returns inventory comes in all shapes and sizes, with "new/unopened," "new/package-defect," "quality defect," and "consumer returns/used" being typical classifications.

Hidden in the darkest nooks and crannies of the warehouse, returned inventory accumulates until the aisles are virtually impassable. And many companies otherwise rigorous in their accounting standards do not manage warranty reserves effectively. Thus, when a liquidation action is taken, it is a hasty, ad hoc process, and millions of dollars in inventory asset recovery are swept out the door with the residue of the last damaged carton. It is but a small comfort that at least the things are out of the way and are no longer incurring the storage costs—a subset of inventory carrying costs. Storage costs include the cost of warehouse utilities, material handling personnel, equipment maintenance, building maintenance, and security personnel.

The phenomenon has even introduced the notion of reverse logistics, a complete supply chain dedicated to the reverse flow of products and materials for the purpose of returns, repair, remanufacture, or recycling. Many retailers have the proverbial problem of how to move inactive, "grey market" stock (irrespective of condition) that they cannot return to the manufacturer for full credit. Return rates in some industry sectors can be as high as 20 percent, although through targeted initiatives and channel cooperation, some nimble companies have managed to attain only a few percentile rates. Whether the return rate is high or low, across the board one fact remains constant—no one in the reverse supply chain wants to add a penny more to the cost of managing returns. Aside from treating a return as an additional opportunity to make a favorable customer impact, the entire process is viewed as a "necessary evil," a cost of doing business with customers ranging from OEM relationships to end consumers.

Again, like in the case of active excess inventory, well-orchestrated auctions can be tools to remarket inventory to a specific or a global audience with minimal resources or input required from the retailer or manufacturer. However, new best practices in returns inventory asset management involve outsourcing as much of the material handling and disposition process as possible. FreeFlow touts a number of returns material remarketing programs with global manufacturers in the high-tech and telecommunications industries. In turn, these manufacturers can reap both operational and financial benefits from off-loading this category of inventory as soon as the customer interaction is complete. In the case of such certified pre-owned programs for inventory that was often previously scrapped or liquidated at cents on the dollar, some financial impact should come from improved cash flow (less cash locked in idle inventory assets), better inventory turns (fewer weeks of inventory being on hand), better recovery, and reduced warehouse space. The process steps are depicted below:

1. Returns Processing—In this step, customer and channel returns are processed to the company's returns center as usual, with customer return material authorization (RMA), credit, replacement, and all customer-related activities being conducted by the manufacturer or designated third party logistics (3PL) provider.
   
   
2. Material Sorting—Once the inventory is in house, the primary objective is disposition velocity and elimination of unneeded touches. During the put-away process, inventory is segregated as "new/unopened" and all other classifications. Some companies at this point also sort out components or modules that are to be returned to the manufacturer directly. All other inventory is compiled on a liquidation sale list for FreeFlow.
   
   
3. Material Valuation—Once FreeFlow receives the listing, a market analysis is conducted to determine a rough estimate of the remarketing opportunity for the particular lot of product. FreeFlow then initiates a PO in an amount of 10 percent (or other pre-negotiated ratio) of the estimated value and the inventory is sold and shipped to FreeFlow. The inventory is off the user company's books and out of the warehouse in a matter of days from the time it was returned.
   
   
4. Remarketing and Revenue Share—Upon receipt of the inventory at regional locations in Europe, Asia, or North America, FreeFlow proceeds with detailed inspection and sorting of the inventory. Some value-added processes may be performed, ranging from testing to repackaging to repair depending on the manufacturer agreement. Through its global network of fulfillment partners, FreeFlow can help with repackaging, re-labeling, and testing when it is appropriate to add value to increase recovery. All saleable inventory is remarketed through FreeFlow's auction platform, and at the conclusion of each auction cycle, the sales revenue is split along the pre-agreed revenue sharing agreement, such as a 60-40 percentage (manufacturer-FreeFlow). The revenue split is determined based on factors such as scrap ratios, value-add processing required, etc.

In a nutshell, the above would be an attractive revenue-sharing model (with a predictable revenue stream that allows a significant reduction in returns and scrap financial reserves for the manufacturer), whereby returned products are inspected, refurbished, and certified by the manufacturer. After these processes are completed, inventory ownership and operational responsibility is then transferred to FreeFlow. FreeFlow repackages and prepares the pre-owned products as necessary for the market, and can even provide package design services if required. FreeFlow works in tandem with manufacturers to clearly identify the condition of items and the terms of sale, and to determine decisive channel strategies for the pre-owned inventory to avoid conflict of inventory flow into primary markets. Using the auction portal, inventory is then sold according to this strategy, which often includes second tier channels, emerging markets, and e-tail arenas. The right target price is based on FreeFlow's market intelligence, while by way of drop-shipping, the manufacturer can even disposition the returns directly from its channel partner's facility, thus avoiding the additional transport costs of bringing the material back to its premises. This program, which can be tailored to the needs of each manufacturer (who specifies and audits all refurbishment processes, but remains free from having to manage them), is the result of consumers showing an increasing appetite for refurbished inventory from well-known manufacturers that have a constant flow of returns.

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 (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 (US) 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 histories and transactions.

This solution is in sharp contrast to the dominant, customary practices 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 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 include www.appleexcess.com, www.sandiskexcess.com, www.logitechexcess.com, and 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 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

Challenges and Future Plans of a Product Inventory Disposition Vendor

A product inventory disposition vendor that offers online auction portals where companies can sell their at-risk and excess inventory, FreeFlow aims to help companies improve their product life cycle profitability. The vendor also offers a comprehensive, inventory asset management suite to meet the needs of its customers.

Zooming into an Inventory Free Flow

Room for Expansion and Improvement Remains

As seen thus far, FreeFlow's Internet-based bidding technology solutions and related business services have been deployed across the broad technology sector including computer hardware, consumer electronics, telecommunications equipment, and electronics companies. However, the vendor is certainly keen to expand into other areas where a limited product shelf life is a common trait. The best candidates would seemingly be the industrial, apparel, and grocery retail markets. To that end, FreeFlow has recently negotiated a deal with a pest control company, and is designing a promotional site for a supermarket chain in Ireland that will allow franchise holders to view what is available online before the stock becomes obsolete.

There is certainly no shortage of Internet inventory liquidation sites available to manufacturers, as brokers on every continent stand ready to consign or post someone's excess inventory. Some of FreeFlow's potential competitors are Liquidity Services (which is publicly held), HedgeHog.com, and LiquiBiz.com. However, FreeFlow believes that its auction approach is fundamentally different starting with its focus on high-tech manufacturers versus a plethora of different industries with differing needs. Also, FreeFlow auctions provide a private forum for a manufacturer's approved brokers to view and bid on the available inventory, whereby auction and "member privilege" dynamics go to work to improve bidding performance, thus returning higher margin recovery to the user manufacturing company.

Another challenge for FreeFlow comes from both prospective users' do-it-yourself (DIY) approaches (at least at first) and from others' beliefs that eBay can do the same job. eBay has been enabling its users to buy pallets of end-of-lifecycle (EOL) products and then sell individual items to buyers, whereby the eBay traders use shippers like UPS or FedEx to move these products from their garages (or other stocking places) to consumers. This is despite the fact that eBay targets consumers, whereas FreeFlow might create and feature a web site too, but for a business to business (B2B), high-touch environment (see Differences in Complexity between B2C and B2B E-commerce). In fact, in late 2006, FreeFlow announced a service partnership with eBay that unites both companies' solutions to help enterprise customers maximize sales of excess, aging, returned, and refurbished inventory. This global offering of eBay's private marketplace technology and FreeFlow's pre-auction and post-auction business services presents customers with an increased number of options for maximizing inventory asset recovery and provides end-to-end services to customers desiring a turnkey asset disposition solution.

By linking with eBay's private auction platform, FreeFlow's customers should benefit from eBay's feature set, which includes a broad range of auction format types, buyer classifications, customization, and data reporting capabilities. Most notably, FreeFlow's customers will gain the ability to sell into eBay's Reseller Marketplace, and thus access the tens of thousands of eBay PowerSellers registered to purchase there. eBay's Reseller Marketplace (which is owned and operated by eBay but is separate from eBay.com) is a marketplace where eBay PowerSellers can bid on inventory for resale. Open only to eBay PowerSellers, this marketplace provides access to inventory in lots for purchase directly from manufacturers, liquidators, and wholesalers.

Also, although FreeFlow has no problem pointing out the tangible benefits it provides its users, ironically, some of its existing customers might be reluctant to publicly and officially brag about their success with using FreeFlow. That is, they might rather keep FreeFlow as their best kept secret in the market and as a competitive weapon rather than share it with their direct competitors.

In any case, FreeFlow might want to further differentiate its offerings and services by adding some potentially "nice to have" features that are not currently available to bidders. For instance, bidders cannot use their own freight forwarders, since all shipments are dispatched using the manufacturers approved freight forwarders only (as these are the only freight forwarders permitted on the manufacturer's premises). Also, each member is required to provide details of their customs clearing agent or house on each individual purchase order (PO). A PO is required to be submitted directly to FreeFlowAuctions prior to the dispatch of the inventory. The manufacturer does not cover all door-to-door expenses, but rather charges for all freight expenses excluding import duties, taxes, and customs clearance fees. These excluded fees remain the sole responsibility of the member. The US dollar is currently the only accepted currency by the portal, which is not a major sophistication in this global environment. Also, each member is required to notify FreeFlow within twenty-four hours of receipt of the inventory if there is a problem with the shipment, which will be investigated and resolved on a case-by-case basis—making the solution still look a bit pedestrian.

To this end, both FreeFlow and its users could benefit from using certain specialized software applications to address a range of activities, including product information management (PIM); category planning and review; promotions; warehouse replenishment; multichannel ordering; distributed order management (DOM); forecasting; inventory optimization; pricing optimization; supply chain event management (SCEM); global trade management (GTM) and international trade logistics (ITL); and so on. FreeFlow might want to explore the opportunities of expanded functional scope and services to its customers by developing them internally or by partnering with product specialists in these realms. For more information on some of these potentially handy applications, see The Case for Pricing Management, International Trade Logistics Challenge Automated Global E-Trading, The Role of PIM and PLM in the Product Information Supply Chain: Where is Your Link? and Using Visibility to Manage Supply Chain Uncertainty.

Actually, in the long term, FreeFlow holds the promise of playing a larger role in user enterprises' collaborative planning, forecasting, and replenishment (CPFR); trade promotions; new product delivery and introduction (NPDI); sourcing; procurement; and other processes. But, given its current size, prudent expansion approach, and budding global brand recognition, time will only tell whether the vendor will become a notable player within these enterprise applications areas.

Certainly, one way to mitigate the excess inventory problem would be to deploy build-to-order and build-to-demand practices in shorter time horizons (see Demand-driven Versus Traditional Materials Requirement Planning). Still, for many reasons mentioned earlier on, some excess inventory is inevitable, and there might be a better way to deal with excess inventory than to simply scrap "slobs" products.

Every little bit helps, and any high-tech manufacturer entangled in frequent, new product introductions, global sourcing, and the consequent piles of quickly devaluing inventory worldwide might want to explore how vendors like FreeFlow can help their bottom line. Manufacturers in similar industries but with limited shelf life products can also benefit from the offerings of business service providers like FreeFlow to salvage some recovery dollars from inventory that would typically be dumped out of the back door (and this only after using antiquated, labor-intensive "pedestrian" systems of routing excess inventory lists to brokers). The principle is well depicted in figure 3. As products mature and reach declining sales, prices plummet while inventory risks and promotional expenses skyrocket as companies try to dispose of such inventory. But the trick is not only in creating a fancy, intuitive, and flexible auction portal; it is also in having core knowledge and offering services such as market pricing intelligence, preapproved broker connections, advice and discussions on the best ways to handle the at-risk inventory, and so forth. Prospective user enterprises should investigate the contesting service providers with regards to the above capabilities.

Figure 3: Product Life Cycle Profitability Curve, with and without structured disposition process (FreeFlow)

With such useful services and solutions, manufacturers should be able to improve product life cycle profitability with continuous identification and disposition of at-risk inventory. The chosen auction software and service provider has to bring the right combination of process consulting, auction technology, and business services to help the user company tune up its inventory management game. A good way to achieve increased product life cycle profitability is through proactive, progressive inventory asset management, with establishing set target inventory levels and routinely disposing of inventory that exceeds those levels. Another is by ensuring that manufacturers have the appropriate channels to disposition inventory for better financial recovery, more rapid throughput, and channel agreement. Last but not least, one should define the right go-to-market strategy for the inventory depending on its condition, status, and location.

Management of excess inventory should lend itself well to outsourcing, given that no matter its value, excess inventory is seldom the manufacturer's top priority. Also, owing to the complexity of underlying product data management (PDM) issues and other long lead time issues, product recovery management under the Waste Electrical and Electronics Equipment (WEEE) Directive would be best handled by outsourcing. Instead of getting involved in the ever-changing legislative and compliance issues associated with WEEE, outsourcing allows the manufacturing company to stay focused on product development and production. Those organizations that decide to pursue an outsourcing option should make sure to find a partner that is qualified to negotiate the legislative landscape, and competent to define a program that fits their products, customers, and cost objectives. Companies should look first within their existing supply chain, since many third party logistics (3PLs) and inventory asset management service providers have added WEEE compliance solutions to their service offerings, and then they should leverage their infrastructure to optimize cost.