Mid-market companies, facing many of the same business challenges as the big guys, are finding that just because they're considered "tier two" doesn't mean that they can't apply top-tier best practices and solutions to rev up their supply and demand chains and gain competitive advantage in a punishing marketplace.
[From Supply & Demand Chain Executive, April/May 2004] Sometimes being a mid-market company can feel, well, like being stuck in the middle, or at least it seems that way sometimes to Thomas Gill.
Gill is director of computer-aided engineering technology and support at Freudenberg-NOK, an auto supplier headquartered in Plymouth, Mich. He says that in the automotive industry, the big tier-one suppliers and original equipment manufacturers (OEMs) that buy Freudenberg-NOK's gaskets, hoses, o-rings, seals and vibration control products are focused on lowering costs while raising quality standards. Meanwhile, the large companies that supply Freudenberg-NOK's raw materials are focused on inching their prices upward. "So," Gill concludes, "we tend to get squeezed in the middle."
Tier-two Revenues, Tier-one Challenges
Definitions of what, exactly, constitutes the mid-market vary, of course. Some analysts suggest that the mid-tier of companies begins somewhere around $50 million in annual revenues and ends just shy of the Fortune 1000, which starts at a little over $1 billion in annual sales. Some include companies in the $10 million to $50 million range, while still others draw the upper line at $500 million, $600 million or $700 million. And then there are divisions of much larger corporations, independent units that might bring in $300 million or $400 million in sales on their own and that might behave, for all intents and purposes, as separate companies, but which technically constitute a box on the org chart of a $20 billion or $30 billion company. Some solutions providers define the mid-market by the number of employees at a company, with different providers' lower and upper limits ranging from 20 to 2,000 or more. Given all this uncertainty, obviously the number of mid-market companies is a moving target, and estimates cover the gamut from about 90,000 in the United States to about 400,000 globally.
Questions of size aside, mid-market companies today operate in the same business environment as the Fortune 500 and face all the same challenges that confront larger organizations. For example, David Caruso, senior vice president and director of research at technology consultancy AMR Research, outlines business forces affecting mid-tier companies in his 2003 report "The World Class Challenge: Six Critical Issues Mid-market Manufacturers Must Address." He points to several trends confronting mid-tier organizations that likely would ring familiar to executives at large enterprises, too: globalization, increasing supply chain complexity, requirements for mass customization and more rapid product innovation, the need to hold the line on costs, and a rising tide of regulatory requirements and customer mandates.
But industry observers also point to several ways in which the mid-market differs significantly from the upper tier of corporations. For instance, Jay Baitler, executive vice president with Staples Contract, a division of office supply giant Staples that caters to both midsize and large organizations, notes that frequently smaller companies do not have the depth of sourcing expertise one might find in a major enterprise. "If you go into a Fortune 1000, you'll find more sourcing specialization," Baitler says. "As you move down-tier into the mid-market, you'll find more generalization among the sourcing folks, so the same person or people responsible for the office supplies relationship will probably be involved in furniture, print and technology."
Smaller organizations also typically are more constrained than large enterprises in the size of their information technology (IT) staff and the amount of capital that they can devote to IT projects, notes Paul Gilmartin, vice president of marketing with Aras Corp., a product lifecycle management (PLM) solution provider specializing in the mid-supply chain market. For that reason, a mid-tier company is more likely to favor low-risk technology projects that don't require lengthy implementations driven by extensive customization and complex integration, or a high level of maintenance after the deployment is complete. "They don't necessarily have the high overhead for supporting IT implementations," Gilmartin says, "They say, 'I just can't afford to have a busload of programmers come through my front door and take six months to look at my business process and write code to do what I need to do.'"
James R. Osman, vice president of marketing for Demand Management, the St. Louis-based developers of Demand Solutions forecasting and demand planning software, says that mid-market companies today often face a challenge in just finding the time to move beyond the daily blocking and tackling necessary for survival to think about how they can be more strategic in their application of technology. "In a price-conscious economy, mid-market companies feel the squeeze," Osman says. "The order of the day is putting out fires as they try to synchronize demand with offshore production sources or materials suppliers using manual, time-intensive processes."
Osman goes on to note that executives at mid-market companies often aren't even aware that solutions exist to address the supply and demand chain issues confronting their organizations. "The perception of the leadership of these companies is that capable supply chain management systems are out of their reach, costing more than $1 million and requiring 18 months of implementation and training." In reality, Osman asserts, the technology market today does include solutions providers that can provide flexible systems to these mid-market operations for a fraction of that cost and with implementation times of just a few months. Osman notes that while one quarter of Demand Management's customers are Fortune 500 companies, 64 percent of its customers have annual sales in the range of $70 million to $500 million.
In addition, Katherine Jones, managing director within the enterprise business applications practice at technology consultancy Aberdeen Group, points out in her 2003 report "The Small and Middle Market Enterprise: Addressing Today's Business Issues Through Technology" that mid-market companies are not particularly focused on technology itself but rather are more interested in how technology can address particular business pains. "[Mid-market enterprises (MMEs)] look at a business problem, not the technology behind it," Jones writes, "and certainly not technology in isolation. These are, in the main, not technology 'toy' or gadget people ... For the most part, an MME is more interested in flexibility than glitz."
Smaller, But More Agile
Michael Topolovac, CEO and co-founder of Arena Solutions, a PLM company formerly known as bom.com, agrees that mid-tier companies are very sensitive to the value proposition of any technology project they are considering. "They are all very focused on making sure that they're going to get value from whatever they're buying, both in terms of the return on investment and how quickly they get value from it." On the other hand, Topolovac says that mid-market companies often are able to act much more quickly than larger enterprises to deploy new technologies. "The advantage of the mid-tier guys is that they make their decisions a lot more quickly, a lot more efficiently than the large companies do," he says, adding that Arena's sales cycle with mid-market companies frequently wraps up in a couple months, as opposed to six months-plus for large-scale enterprises.
That ability to make decisions quickly may be a saving grace for mid-market companies, according to Navi Radjou, a vice president with technology advisory firm Forrester Research. Radjou believes that the No. 1 issue confronting mid-tier U.S. manufacturers today is the threat of losing business to lower-cost suppliers overseas. With that risk of being "offshored" hanging like a Sword of Damocles over their heads, mid-market companies may be tempted to try to compete primarily on cost, which, ultimately, is a losing proposition to Radjou's mind. "You have to get out of this cost-oriented obsession," the analyst says, "since most companies have already cut to the bone."
Instead, Radjou preaches the benefits of what he views as three ingredients for success in the current manufacturing environment: innovation, flexibility and services. Regarding the first, he says, "You need to focus on coming up with some kind of product innovation that makes your customers feel like you have something unique, something that they haven't seen elsewhere." On flexibility, Radjou says this implies that companies must learn not only to be responsive to rapidly evolving customer requirements but also to combine responsiveness with operational effectiveness, which translates into the ability to "gracefully scale their operations up and down" as demand fluctuates or market circumstances change.
And finally, the analyst calls on manufacturers to find new ways of wrapping services around their products so that they can embed themselves more deeply within their customers' processes. "You need to think about what else you can offer your customer to make that customer feel like you're a solution provider that is an integral part of, say, their product development process or asset management process," Radjou explains. "That requires a mindset where you're not looking at customers and just thinking about them as passive buyers of products, but you're actively thinking about addressing customers' pain-points and helping them better serve their own customers."
Managing Innovation
Naturally, each of these ingredients for success entails specific challenges in its own right. Take innovation. At Freudenberg-NOK, the company has been working to address its customers' future needs by working on such next-generation technologies as fuel cell sealing systems, magnetic encoders for vehicle dynamics systems and active power train mounts. But driving innovation at the company has required bringing together multiple product development teams coming from several different corporate cultures and tackling over-arching project management requirements to ensure product quality and to reduce costs.
Freudenberg-NOK resides at the upper end of the mid-market spectrum, with sales of close to $1 billion. Formed in 1989 as an American partnership between the global Freudenberg Group and NOK, the company is, as Thomas Gill says, caught in the middle between large automotive OEMs focused on lowering costs while raising quality, and raw materials suppliers seeking to raise their own prices. Contending with these market forces, Freudenberg-NOK has continuously undertaken production-oriented initiatives, with a heavy focus on lean manufacturing including through a company project called Growtth, or "Get Rid Of Waste Through Team Harmony," Freudenberg-NOK's company-wide program stressing lean business practices.
On the product development side, the company has focused on advanced product quality planning (APQP), the automotive product development standard. However, implementing APQP company-wide prompted Freudenberg-NOK to re-examine how it managed its nearly two-dozen geographically dispersed product development teams. Viewing its capacity for managing those teams as a critical factor for the success of its innovation strategy, the company opted to implement a product lifecycle management solution, Aras PLM, in order to get its various development projects under better control.
Freudenberg-NOK's own IT staff worked with Aras specialists to create a "stage-gate" product development template for use across the company, introducing a standard process for all the product teams to follow as they work their way through projects. "The thought is," Gill explains, "that this will help us both on the quality side because we end up with electronic check lists to ensure that we get everything done and we don't forget anything in development and then, ideally, reduce our costs as well, because we won't be missing these steps and having to expedite things and do things over again." Importantly, in addition to these benefits, the PLM solution, which will ultimately be rolled out to some 400 users at 20 different sites, can provide executives at the company with a higher degree of visibility into Freudenberg-NOK's portfolio of development projects through built-in reports and performance metrics.
Building Flexibility
Like Freudenberg-NOK, the graphite electrode business of Wilmington, Del.-based GrafTech International historically has faced downward price pressure on the customer side and upward price pressure on the supply side. The graphite electrode business which operates six plants around the world accounts for about 65 to 70 percent of GrafTech's total revenues, which in 2003 amounted to $713 million. GrafTech formerly was a part of Union Carbide.
The steel industry uses GrafTech's graphite electrodes in mills where the electrodes burn at temperatures of up to 5,000 degrees Fahrenheit or half the temperature of the surface of the sun in electric arc furnaces to melt tons of scrap steel at a time. GrafTech really only has one main competitor with global manufacturing capability, along with various local competitors that also have global supply capacity, but the paucity of players in the market has not, historically, helped the company in supporting the prices it can charge for its electrodes. In fact, tied as the company has been to the fortunes and misfortunes of the global steel sector, and with electrode supply at times outpacing demand among steel companies, GrafTech and its competitors often have had to contend with downward pressure on electrode prices (although more recently the global market for graphite electrodes has been more in balance and actually has seen some price strengthening). At the same time, the company has faced cost increases for raw materials and energy across all its business, putting the squeeze on its margins. Not surprisingly, GrafTech has made cost control a top priority, targeting, and achieving, $16 million in savings last year and setting the bar at $30 million for 2004.
In terms of responsiveness to changing customer requirements, the graphite electrode side of GrafTech certainly has gone the extra mile. Its customers the steel companies, themselves operate in a very dynamic demand environment, and they have become, of necessity, increasingly agile in how they respond to changes in the marketplace, ramping up and shutting down production very rapidly. Naturally, that variability flows back up the supply chain, and the steel companies want their own suppliers, including GrafTech, to be able to ramp up and down equally as quickly, no mean feat considering that it takes GrafTech close to two months to manufacture an electrode that a steel mill can burn through in a matter of hours. (The electrodes, which can be up to 30 inches in diameter and 10 feet long, are produced using petroleum coke and coal tar pitch, and they go through several different curing processes to eliminate volatile gases and create stability in the structure of the material not a process that leaves room for shortcuts.) As a result, to maintain its high service levels, GrafTech has had to maintain substantial finished goods inventory to meet sudden spikes in demand. The company also has a policy of not imposing cancellation penalties on customers that order material but subsequently do not fulfill that order.
From a systems standpoint, Tim Boardman, manager of global demand management for GrafTech, says that while the company operates as a global business, each of its plants in different countries has, in the past, operated very independently, free to choose its own manufacturing systems. With each plant able to run its own preferred enterprise resource planning (ERP) system, Boardman says, the company has tended to optimize on a local level rather than globally. "So that has been a challenge as we take a look at the global market and try to compete in the global space," he says.
To address these challenges maintaining the kind of flexibility its customers need while allowing GrafTech to reduce its own costs the company has adopted both some new enterprise solutions and a new philosophy. First, GrafTech adopted J.D. Edwards Strategic Network Optimization solution (SNO, now known as PeopleSoft EnterpriseOne Strategic Network Optimization, since the acquisition of J.D. Edwards by PeopleSoft last year) in a move designed to give the company a more global view of its supply and demand balance. SNO, Boardman says, helps the company determine which plant in the GrafTech network should be assigned to satisfy demand from any given customer, based on the specifications of the required graphite electrode, current capacity, geographical considerations and so on. "In the past," Boardman explains, "it was really kind of a gut feel. The SNO model tells us the optimal way to satisfy whatever demand we impose upon the model."
Boardman says that adopting SNO has not only helped the company more effectively meet demand and plan operating levels at its plants, the system also has helped in understanding where, based on its plants' capacity, GrafTech should be targeting its marketing and sales efforts for best effect. But perhaps most importantly, Boardman says, "SNO has been very helpful in forcing us to take a look at our total business as a system, not as individual parts. We're now trying to optimize the total system, not just the sum of the individual parts."
Similarly, the company has taken another step toward unifying its operations by adopting PeopleSoft's EnterpriseOne (formerly J.D. Edwards' OneWorld) as the systems backbone of its plants worldwide, with plans to have all its manufacturing locations converted to the same system by the end of 2005.
Finally, Boardman says that GrafTech is now standardizing on a Theory of Constraints (TOC) philosophy. "We're using the drum-buffer-rope system as a demand pull," Boardman explains, "where we set target buffer and safety-stock levels, taking a look at constraints and running the system that way." He added that the company is not using a lower-level optimization scheduling solution because of its 60-day lead times. "It runs at a pretty slow pace," he says. "There aren't a whole lot of decisions that we have to make every day." To top it off, the company is applying lean manufacturing techniques to make sure that they are keeping inventory moving through the production system as fast as possible.
As a result of these initiatives, the company has been able to cut its total inventory, from raw material through work-in-process, as well as finished goods inventory, by about 45 percent, while still maintaining a very high customer on-time delivery metric, in the range of 95 to 97 percent, according to Boardman. The demand manager says that the company has not necessarily tried to nail down a concrete dollar figure for its return on investment in these global changes, in part because the fluidity of its market segment makes it difficult to ascribe changes in inventory one way or another entirely to one influencing factor. But, he adds, "intrinsically, we just know that we're doing a much better job on our decision-making."
Keeping a Customer-Focus
For Carlsbad, Calif.-based sports equipment manufacturer K2 Inc., keeping the company's retail dealer customers happy means ensuring that its boards, bikes, skis and other gear are delivered on time. "We are totally focused on delivery to our customers," says Jeff Harley, IT applications manager of the company's K2 Sports division. "That starts with being able to tell them when we can deliver their product." And therein lies the challenge for the company, which saw its 2003 sales rise to $718.5 million from $582.2 million in 2002, primarily through acquisitions.
Interviewed by e-mail for this article, Harley outlined the company's efforts to provide its customers with reliable delivery dates for the 8,000 to 10,000 new stock-keeping units (SKUs) that K2 Sports comes out with every year. "We have been sourcing product from Asia for years so we have some vendors who ... can give us manufacturing schedules and delivery dates based on our demand," he explains. "But there are others who are challenged in this regard."
Synchronizing delivery information is also a complex undertaking, since K2 Sports orders all its SKUs for the world (including its European, Japanese and Canadian distribution arms) through the U.S. world headquarters of K2 Sports, located in Seattle, Wash. "We then direct ship to those other distribution centers from our vendors," Harley says. "That is a lot of information being tossed around, but we need that information to be made available to our [customer service representatives (CSRs)] so that they can give accurate delivery dates to our customers. By increasing the speed and accuracy of the information, we can provide to our customer service representatives the ability to quote more exact delivery dates."
K2 Sports' efforts over the past year have included identifying key metrics to help the company uncover delivery weak spots. Each step in the company's supply chain process from forecasting, design and purchase order to delivery to K2 Sports' distribution centers and, finally, end delivery to the company's customers has been identified. K2 Sports says it tracks goods by SKU, delivery date for each stage and quantity delivered, generating separate analyses for the company's different product lines. "By recording this information we will be able to identify our weaknesses and improve in those areas," says Harley.
But the company also has undertaken an initiative to automate the process by which its planners feed updates into K2 Sports' manufacturing backbone, Epicor's Avanté, a solution designed specifically for mid-market companies with complex manufacturing environments. "We have some talented people in K2 Sports' planning group," Harley says. "They are, however, managing lots of [purchase orders (POs)], with literally hundreds of lines on each PO." Because of the sheer number of POs that the planners must handle, they have found it easier to build and view the purchase orders in an Excel spreadsheet, but that forces them to spend inordinate amounts of time doing the "swivel-chair integration" necessary to get the PO information into the Avanté planning system.
To streamline this process, K2 Sports' IT team used Visual Basic in Excel to build a tool that could export the PO information into an XML file, which, through Epicor's iConnect solution, can then be uploaded into Avanté. The next stages of the initiative will involve sending the POs to the company's suppliers using the Excel template, having K2 Sports' subsidiaries adopt the template for communicating information back to the U.S. headquarters, and then passing out the XML file specifications so that the suppliers can provide K2 Sports with files to be loaded directly into the Avanté system. "The end goal," Harley says, "is to automate the PO process so that we can have our vendors updating their delivery schedules automatically." As the process becomes increasingly automated, K2 Sports' planners will be able to spend more time reviewing and communicating PO changes rather than doing data entry chores. And as the information in the Avanté system becomes increasingly close to real time and increasingly accurate, K2 Sports' CSRs should be able to provide customers with increasingly accurate delivery dates.
Best Practices for the Mid-market
Is what's good for the tier-one goose also good for the mid-market gander? Industry observers appear to agree that, generally speaking, best practices applied among large enterprises can be as effective, or even more so, among mid-tier companies.
For example, Forrester's Navi Radjou points out that best practices around improved demand visibility can benefit any organization, regardless of size, but for those midsize companies further upstream in the supply community, the "bullwhip effect" whereby the impact of demand variability reverberates up the supply chain, growing in strength from tier to tier makes having good visibility into demand signals more important for tier-two companies. The solution that a mid-market company might apply to improve its visibility need not be overly complex, Radjou adds, suggesting that a simple customer portal to collect orders, or even just an improved demand forecasting process using spreadsheets, could be sufficient in a make-to-stock environment. In an engineer-to-order environment, on the other hand, the solution might be a basic tool for collecting requests for proposals from customers, as well as a streamlined process for rapidly responding to customer requests. "And that means having a workflow in place that connects the sales guys to engineering, sourcing and manufacturing so that they can quickly find out what resources are needed, come up with a price and then respond to the customer," Radjou adds.
As for the success factors crucial to supply and demand chain transformation at mid-market enterprises, the practitioners interviewed for this article cited best practices that would be familiar to any executive leading a change initiative at a large enterprise. For instance, Freudenberg-NOK's Gill points to high-level sponsorship as a top priority. "Executive commitment is key," he says, "not just to get the money, but to make sure that when you put in a system, it gets used." Gill also suggests that a dedicated project manager or project team is necessary at all stages of an initiative to implement and sell the project and to provide support after the implementation to ensure internal customer satisfaction and adoption.
Clearly mid-market companies with an eye on the future are continuing to develop their capabilities to remain competitive in an economy that is becoming increasingly punishing for those unwilling to "adapt, improvise, overcome" (to quote an old Clint Eastwood movie). In a world where the customer remains, to a large extent, king, mid-market leaders are looking to leverage their slim resources not only to drive greater efficiencies but also to make themselves more invaluable to their client base. As Radjou says, "Overall, the focus should be on how quickly or how flexibly you can respond to customer requirements, because cost-efficiency will no longer save you."
SIDEBAR: How Tech Savvy Is the Mid-market?
Are mid-market companies as sophisticated as tier-one enterprises in their expectations for how they can benefit from new technologies? Jay Baitler thinks they are. Baitler, executive vice president at Staples Contract, suggests that while expectations around technology typically arise first among the top tier, Fortune 1000 companies, those expectations "migrate" downstream to mid-tier companies over time. In addition, Baitler believes that the Internet has helped accelerate that "expectation migration" for solution providers that can make their offerings available over the Web. "The service offering, the technology offering, or the value-add or shared value that you offer for a Fortune 1000 company now is, within the past year, not wholly differentiated from the value proposition that mid-market customers expect," he says.
Baitler points to Staples' own experience with its online offering through Staples Contract. When Staples established B2B online presence a few years ago, its online customer base skewed essentially entirely to the Fortune 1000. Now roughly 40 percent of its online business is among the top-tier companies, while the remaining 60 percent comes from mid-market companies.
Interestingly, Baitler, who started his career some 30 years ago as an assistant manager of purchasing with insurance company Prudential, says that although he sees little difference between how top-tier and mid-market companies use technology, he believes that large enterprises are somewhat "stickier." In the Fortune 1000 segment, an executive sponsor within an enterprise will have leapt through various hoops to establish a relationship with a solution provider or supplier like Staples, and they'll sign up for a multi-year contract because they'll view the barriers to switching to a different solution as being too costly. But for the mid-market, those barriers frequently are much lower, in part because the Internet has made it easier, in many cases, to identify and move to alternative sources of supply.
That has prompted solution providers that cater to both the mid-market and large enterprises to devise ways to keep their offering compelling for those fickle mid-tier companies. Staples Contract, for instance, has focused on providing tools that let mid-market companies capture the maximum amount of their office supplies spend within the agreed-upon contract, driving savings that can be shared back with customers and ensuring the ease-of-use of its online tool for the mid-market, StaplesLink Plus. Notes Baitler: "The mid-market says, 'You better please me on every order, or I'm out of here.' They perceive that they have a lower threshold to move, so we're really only as good as their next emergency."
SIDEBAR: Solutions for the Mid-market
With the mid-market constituting perhaps several hundred thousand separate enterprises worldwide, it comes as no surprise that a host of enterprise software companies are offering supply and demand chain solutions targeted at this segment.
Starting from the top, Katherine Jones, managing director within the enterprise business applications practice at technology consultancy Aberdeen Group, notes in a report from last year, "The Small and Middle Market Enterprise: Addressing Today's Business Issues Through Technology," that tier-one solution providers such as Oracle, PeopleSoft, SAP and Siebel have "down-market" programs to reach this segment. (PeopleSoft, of course, expanded its reach into this segment in 2003 when it bought mid-market manufacturing specialist J.D. Edwards.) What is driving these top-tier providers to look at the mid-market? Well, as Michael Topolovac, CEO and co-founder of PLM specialist Arena Solutions, says, "The biggest problem with the Fortune 500 is that there are only 500 of them."
Microsoft, which has traditionally owned the desktop in large and midsize enterprises alike, has more recently been building a portfolio of enterprise-class solutions for the mid-market with its own offerings through Great Plains and Navision. Navi Radjou, vice president at Forrester Research, believes that while Microsoft might not have the best overall capabilities for the mid-market, the company will be able to partner with select solution providers to fill blank spots in its own product lineup (for PLM functionality, for example), and the Redmond giant can bring to bear its vast value-added reseller (VAR) network to sell into the mid-market. In addition, Microsoft can lower the cost of acquisition for its offerings by providing financing to mid-market clients as well.
Beyond these big names, a number of companies are targeting the mid-market with a variety of solutions. Aberdeen's Jones cites the following players in her report: ACCPAC International, Unit 4 Agresso, Best Software, Icode, Lawson Software, NetLedger, SSA Global Technologies and Ultimate Software. Other players include those mentioned in the main article including Aras and Arena Solutions for PLM; Demand Management for forecasting, demand planning, and inventory and replenishment; and Epicor for enterprise business systems and many not mentioned, including Adonix and Made2Manage Systems (for ERP); companies like IQR International (for inventory management in manufacturing and distribution); HighJump, Logility and Manhattan Associates (for supply chain management); Aurorex, for spend management services; and Prorizon, Resources Connection and others for business process outsourcing.
In short, the market offers no shortage of solution providers stepping up to the plate for the mid-market. The challenge for mid-tier companies, as for large enterprises, will be in identifying the provider with the solution that best address their specific business requirements.
