Meet Your New Host

Three years ago, Kawasaki Motors Corp. USA had some unhappy dealers on its hands. The $1.5 billion manufacturer of motorcycles, ATVs and water scooters couldn’t get the products into showrooms when the dealers wanted them—for example, water scooter deliveries promised in early spring arrived too early, when the snow was still falling. As a result, Kawasaki had to offer discounts and rebates to drive sales in the off-season, which ate into the company’s margins, according to Roger Peterson, Kawasaki’s vice president of information systems.

The reason Kawasaki couldn’t get the right products to its dealers at the right time was because, like many small and midsize companies, it lacked the technology for precise collaboration and exchange of demand forecasts with its parent company, Kawasaki Heavy Industries, which manufactures the products that Kawasaki distributes to its dealers. The cost of developing and maintaining traditional supply chain applications is too high for Kawasaki, which spends just over $10 million a year on business applications and IT infrastructure. Peterson estimates that deploying similar software in-house would have cost several million dollars and several years of effort. So in early 2004, Peterson began looking at hosted supply chain collaboration applications that ran on the vendor’s computers and that his company could access over the Internet, through a Web browser.

Early Risk

While so-called hosted or on-demand software was making waves in the CRM space at the time, it was nearly unheard of in supply chain offerings. Beth Enslow, Aberdeen Group’s senior vice president of enterprise research who authored a study this spring on hosted supply chain applications, says concerns about data getting lost or stolen and system reliability prevented companies from entrusting their mission-critical supply chain activities to third parties.

Peterson of course considered the issue of security and reliability of the hosted systems he was evaluating. “I had to wrestle with the concern about putting our supply chain application out with a third party over the Internet. That’s our family jewels,” he says.

But Peterson had another, larger concern: Kawasaki’s three main competitors—Honda, Harley-Davidson and Yamaha—which are respectively two and a half (Honda and Harley) and one and a half times larger than Kawasaki—all have much more sophisticated supply chain software infrastructures. “We’re not one of the big dogs. We’re one of the smaller players. We’re competing with people who have more resources, more people, more dollars than we do, yet we have all the same problems,” he says. So Peterson decided to take a gamble on a hosted collaborative supply chain planning application from Mitrix, which his company deployed in June.

Today, a Viable Solution

Evaluating hosted supply chain management software—whether for collaborative planning, forecasting or transportation management—is much less of a hand-wringing experience for CIOs today than it was a few years ago due to the business model evolving and advances in technology. Analysts say the do-or-die concerns about security have largely dissipated because vendors have beefed up their firewalls, intrusion detection systems and encryption techniques. “Security is a baseline requirement,” says Bill McNee, founder and CEO of Saugatuck Technology. “Whereas that was more of a concern two to three years ago, virtually all software-as-a-service players have overcome that.” Consequently, companies large and small are increasingly using hosted software to automate and run core business activities such as supply chain management.

The same factors that drove companies to embrace hosted CRM—easier and speedier implementations, faster time to benefits and knowing you’ll always be on the most current version of the application since the vendor is responsible for upgrades—are pushing them to adopt hosted software for such aspects of supply chain management as forecasting, collaborative planning, inventory visibility and transportation management.

Still, the hosting option should not be considered lightly, especially if you’re thinking about using it for something as critical as your supply chain. Though the security situation has improved, CIOs still need to vet the vendors for proper security procedures and monitor their adherence to them. And the issues of software reliability and integration that can make or break an in-house implementation are no less important when the software is hosted by an outsider. In fact, those concerns about security, reliability and ease of integration are even more acute in the supply chain world where more parties need to connect.

Read on for examples of how two companies weighed those various considerations.

Consideration 1: Security

At a time when hacking is the new favorite pastime of teenagers, companies have legitimate fears about keeping their data in a hosted software vendor’s systems, because they have no direct control over those systems. Past positive experience using an application service provider helped Kawasaki’s Peterson overcome his concerns about his company sharing its production plans with its manufacturing parent company through a third-party over the Internet. He says his previous experience using an ASP, which forced him to bone up on SSL protocol, public-key infrastructure and two-factor authentication, helped him determine whether Mitrix’s security infrastructure and policies would be adequate. Also, knowing the information his company would be sharing would be limited to a discrete time horizon (no more than a 12-month forward projection of its production plans) mitigated his concerns about the safety of his company’s data. In the event there was a breach, his company’s risk would be lower than if it used the hosted supply chain collaboration application for all of its plans (which go as far as 36 months out).

Consideration 2: Reliability

The reliability of hosted software providers’ systems is debatable. Aberdeen Group’s Enslow says current users of hosted supply chain software that she’s interviewed say it’s just as secure and just as reliable—if not more reliable—than their internal systems. And Mark Koenig, VP at Saugatuck Technology, says there’s no guarantee that an enterprise customer will be any better at running an application internally than a third party “whose business it is [to run that application] and who’s invested heavily in being available 24 by 7 by 365.”

That may be true, but the service outages that Salesforce.com customers experienced in late 2005 and early 2006 renewed the focus on reliability, which was a primary concern for Paul Rizzo, PepsiAmericas’ director of logistics, when he deployed a transportation management system from LeanLogistics in 2002. To quell his worries, his company’s IT and supply chain groups piloted the system to make sure it provided the functionality and reliability he was expecting, and that it integrated well with other systems inside Pepsi. The IT group also discussed with LeanLogistics the number of transactions its transportation management system could handle and wrote financial penalties into service-level agreements in the event of system downtime. That’s a good thing because he has experienced outages. Fortunately, he says, the outages are few and far between (he says he can count the number on one hand), and the one that lasted the longest was only a few hours, which hardly crippled his organization.

Consideration 3: Integration

Integration is never a picnic, whether you’re deploying software in-house or using hosted software. But the idea of linking your internal systems with a hosted system and then needing external business partners to tie in to that system can seem particularly mind-boggling for some potential users of hosted supply chain software. That wasn’t the case for Peterson, however. Integrating his ERP system with Mitrix’s hosted supply chain collaboration system was less of a concern for him for two related reasons. First, in the 1980s he created a metadata repository that identifies all of the relationships between Kawasaki’s data structures, programs, and jobs for online and batch programs. His IT staff uses this data repository when analyzing which applications will need to be modified as a result of any integration or enhancement effort. Once they’ve determined the interface points between a new application and existing applications, they use the data repository to identify all the existing data structures and processes that may require changes to integrate with a new system. Peterson knew he could rely on this resource to help the integration proceed more smoothly. Second, having been through a complicated integration project in 1999 that involved hooking up his company’s back-end mainframe systems to a new front-end e-commerce system, he knew his staff was up to the task of linking with the third-party system.

At PepsiAmericas, Rizzo says integrating his company’s existing inventory management and deployment systems with LeanLogistics’ transportation management system required just 40 hours of two of his company’s IT workers. “I’ve done a lot of systems implementations in my career. This was by far and away the easiest one we ever did,” says Rizzo. “We flipped the switch, the integration worked flawlessly, and we never looked back.” Had PepsiAmericas built its own transportation management system in-house, its IT staffers would have had to connect all 50 of its carriers to the system on their own.

Consideration 4: Customization

If you have any desire to customize a supply chain application, you should forget about using a hosted provider. Customization defeats the purpose of an on-demand solution, which is designed to be one-size-fits-all in order to provide the vendor with the economies of scale it needs to keep its costs low and make upgrades easy. “Hosted solutions are built to be very configurable, so you can have your own role-based views and flexible user interface, but if you’re looking to do hard-core customization of an application, they aren’t a good fit,” says Enslow.

Hosted collaborative supply chain planning software suited Kawasaki because it reduces the development time and minimizes the need for customization. He didn’t see the point of customizing what he perceives as an infrastructure solution. “So much of the supply chain is really just plumbing. It doesn’t have any effect on what you decide the market is really demanding and what product you actually build,” he says. “You can always make an argument that a custom solution will let you differentiate yourself more from a competitive standpoint, but I think it’s more important to have your design engineers coming up with innovative product designs to differentiate yourself as opposed to tweaking your application infrastructure.”

Consideration 5: Compliance and Data Access

In the post Sarbanes-Oxley world, a company’s ability to certify the integrity of its financial systems and the data contained in them is of paramount importance (if you don’t want anyone to go to jail, that is). Because you don’t own the software you’re using, executives see the hosted model as a risky proposition because they have little control over the process and timing of upgrades, and keeping documentation up to date is more difficult. Saugatuck’s Koenig says chief compliance officers are particularly wary of hosted software because they’re the ones who are on the hook for the integrity of the systems used by their company, regardless of who is supplying those systems.

So if you’re using hosted software, you have to make sure your vendor can vouch for the integrity of its systems because if your company or your vendor comes under attack by the Securities and Exchange Commission, there’s going to be a lot of finger-pointing, and you need to do your due diligence before that happens. Ensure ahead of time that you can get access to your data in the event you need to for legal reasons or if your vendor goes belly up.

Data access was critical for Rizzo, who contracted with LeanLogistics while the transportation management software provider was still a relative newcomer. Rizzo wasn’t so much worried about Sarbanes-Oxley, which wasn’t yet law when he implemented, as he was concerned about LeanLogistics’ longevity. Since his company’s contracted rates with its 50 transportation providers are stored in LeanLogistics’ transportation management system, he didn’t want to have to re-create from scratch all of those nuanced contracts if LeanLogistics went under, so he made sure he’d be able to get that information in a flat file from LeanLogistics by writing it into PepsiAmericas’ contract with the vendor.

So Far, So Good

Aside from a few outages, only good things have come from PepsiAmericas’ partnership with LeanLogistics. Rizzo says his company has saved money on staffing in its accounts payable department because the transportation management system also pays invoices automatically, electronically. He says dispatchers are more productive because the system relieves them of mundane tasks like identifying which transportation provider can bring a truckload of Pepsi cans to a particular warehouse on a particular day. The hosted system has reduced such “nonvalue added” work by as much as 15 percent, he says.

As for the business benefits Kawasaki is seeing from using Mitrix’s hosted supply chain collaboration application, Peterson says, it’s too early to tell (at the time this story was reported, Kawasaki had just started deploying the software), but he’s hopeful that next spring the water scooters won’t start arriving until after the snow has stopped.