Everything as a Service

Yesterday, I attended GigaOM’s Structure ‘09 conference where HP’s CTO of Cloud Services Strategy, Russ Daniels, made a bold prediction.

“Everything as a Service.”

To clarify, Daniels’ believes that the current trends in technology will lead to a world where “information, opportunities and experiences — from computing power to business processes to personal interactions” will be “delivered wherever, however and whenever you need it.”

In practical terms? New cloud technology will revolutionize how businesses operate and interact with each other. Because of how new technology is designed, the cost savings associated with scale will allow more businesses to save money by outsourcing their non-core tasks. Not only will this increase revenue, but it will also allow businesses more time to focus on their core business.

This technology’s impact on the supply chain industry has already started. Many companies today – Oracle, Invensys, SAP – already offer supply chain services. This model is viable because it helps small businesses take advantage of the economies of scale associated with supply chain systems. If your business isn’t large enough to scale, it is ususally more cost effective for you to pay someone who has scale to run your that aspect of your business.

The same trend is already starting to happen in the reverse logistics business. Many companies are beginning to outsource the management of inventory liquidation into the secondary market to companies like B-Stock Solutions because they realize the cost savings associated with our solution can be substantial.

The old protocol of liquidation, where one or two liquidators get everything from a retailer or manufacturer under a fixed price contract, is dying. Technology-enabled services like B-Stock’s are revolutionizing how businesses operate and the reverse supply-chain is no exception.

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Dealing with Forecast Inaccuracies

In my inbox this morning, I found a press release announcing a massive one-day $5 million inventory reduction auction by boating company North Point Water Sports.  Events such as this are not uncommon in the manufacturing industry as excess inventory is a major problem for many companies operating in a make-to-stock environment.

Unfortunately, a fundamental fact about auctions is that if you overwhelm limited demand with too much supply over too short a period you depress pricing.  When a seller needs to liquidate a very large volume of product all at once, they are doomed to suboptimal recoveries as they are forced to trade recovery for velocity of sale. 

This weeks Industry Week’s Manufacturing Business Challenge tackled a similar problem.  The case entitled “Unreliable sales projections ripple through company”, deals with a hypothetical ceramics manufacturing company whose incorrect inventory supply forecasts had led to massive excess inventory in most quarters.

The solution for problems such as the ones faced by North Point Water Sports and the hypothetical ceramics company in the Industry Week case is not to just improve forecast accuracy, but to more importantly, to build a business process that minimizes the financial impact of imperfections in the forecast.  This can be accomplished by improving demand management and putting tools in place now to deal with potential future problems.

In the cases above, B-Stock Solutions’ services are one such tool that would have helped avoid the current “worst case” scenario they are facing by creating a process to manage the ongoing liquidation of smaller quantities on a regular basis throughout the quarter or year.  By continuing to liquidate throughout the year, businesses can avoid the inventory buildups that otherwise occur and drive desperation selling resulting in low recovery rates.  By throttling the availability of their excess inventory over a longer period of time, businesses can realize greater recovery on excess inventory and drive operational efficiencies in their business at the same time.

Forecast accuracy is truly one of the great challenges companies in volatile, dynamic industries face.  No matter how much you invest in forecasting, a forecast is based on historical data or imprecise estimates.  Especially in times of economic uncertainty, the past is not always an accurate indicator of the present or future.  However, by investing in tools today to deal with excess inventory problems down the road, your business will see increased efficiencies and increased returns in the future.

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Preparing for Disruptive Events

Great article by Steve Banker over at Logistics Viewpoint titled Integrating Strategic and Supply Chain Planning at Emerson. In the article, Steve gives a case study of Emerson Process Management, a company that has prepared itself for turbulent times by implementing a robust strategic management planning process.

A major part of Emerson’s risk analysis accounts for disruptive events. These “What if” scenarios ensure that the company is well positioned in case of high impact events such as the recent outbreak of swine flu or the political turmoil in Thailand.

However, it seems that many retail businesses have not prepared for such disruptions to the supply chain, nor the sudden change in consumer spending.  According to the Wall Street Journal, even today, months after the initial slowdown in consumer spending, the inventory-to-sales ratio, a measure of the number of months it would take businesses to deplete their current inventory, still flies high at 1.31 much higher than a year earlier, when the ratio was 1.12. Given the uncertainty around the economic outlook and the effect of additional job losses on consumer spending – there are still significant excess inventories that will need to be worked off.

With more scrutiny from stakeholders pressuring companies to perform at higher levels of efficiency through the downturn, businesses will have to work harder in all aspects of their business to increase returns and lower costs. Companies will need to put more inventory controls in place, creating efficiencies through reverse logistics – turning the excess inventory into cash and maximizing those recovery rates. Moving forward, however, with so much excess inventory on the market, businesses are going to have to look for new and creative to offload inventory – as well as develop contingency plans for disruptive events.

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