Strategic Management of Information Technology

Strategic Management of Information Technology

The evolution and current practice of IS/it Strategy: A Critical Review

Service Oriented Architectures (SOA) in Manufacturing

SOA in Manufacturing: A Theoretical Overview

The Relationship of Web Services and XML

Current Practices: SOA in Manufacturing

Evaluation of SOA in Manufacturing

Quantifying the Impact of Web Services on Quote-to-Order Workflows

Best Practices in Measuring the Financial Impact of SOA

Global manufacturers are often caught in the dilemma of on the one hand needing to pursue a continual low-price strategy to attain profitability, yet on the other being called upon to increase their agility to respond quickly and accurately to increasingly unique customer requests. Needing to maintain profitability yet also be agile enough in production processes to meet unique customers' requirements forces many manufacturers into a paradox of how to align their Information technologies (it) initiatives and programs to support both objectives. Manufacturers are resolving this dilemma through the use of SOA architectures and strategies, relying on Business Process Execution Language (BPEL), Web Services, XML and its many variants, Business Process Management, and Workflow Management (W3C XML Working group, 2004). Manufacturers are synchronizing these many components into strategies that pervade every aspect of their operations, hence the need for a robust and scalable Service-Oriented Architecture (Fu, Xiang and Bultan, Tevfik and Su, Jianwen, 2004). Jutras (2006) states that SOA process redefinition in manufacturing is less about cost reduction and more about BPR to re-align it systems to support key objectives by making processes more efficient. This paper evaluates SOA in manufacturing and concentrates on the streamlining of customer-facing processes.

Introduction

The role of it departments has become increasingly strategic from the standpoint of redefining business processes that give companies a competitive advantage in execution of their strategies and initiatives. Far from being the custodians of a company's information systems the role of the it department today is that of strategy enabler and supporter, and as a result is in the midst of a transition from being simply a collection of cost centers to a hub of business centers. The intent of this paper is to show how Service Oriented Architectures (SOA) is redefining how it drives business process change throughout manufacturing companies. SOA is by definition inclusive of Web Services, Business Process Management (BPM) modeling languages including BPEL, in addition to support for Event Driven Architectures (EDA) that provide for constraint- and event-based logic that makes it possible to complete process and scenario automated responses within an SOA architecture, according to Masson, Smith & Gaughan (2006). The use of SOA architectures has become more commonplace as manufacturers have had to contend with continual price erosion in their core markets while customers increasingly ask for tailored and configured-to-order products specific to their own needs. The quote-to-order process is the predominant one that manufacturers specifically focus on to attain both cost efficiencies in addition to product customization globally. This specific process area will be the focus of the SOA discussions in the context of this paper, with both theoretical research and practical examples underscoring how SOA's most major contributions to streamlining this process are making the Return on Investment (ROI) in SOA technologies measurable and significant, according to Study in Contrasts (2006). SOA delivers competitive advantages by synchronizing supply chains, manufacturing systems, fulfillment, pricing and services to align manufacturers' processes to the needs of customer demands.

SOA in Manufacturing: Theoretical Review

SOA frameworks successful in manufacturing today rely on the integration of Web Services, BPEL-based programming and development languages, and the development of Web Services for specific processes in the manufacturer. Integrating all of these components together is XML, which acts as the integration technology across SOA frameworks (Usdin 2006). More precisely, XML and its many commands and sub-languages form the foundation for how Web Services communicate and execute commands across applications and systems (Vasudevan, 2001). XML forms the messaging and communications platform, while Web Services are the actual shared applications. XML further makes data integration possible in Web Services, enriching applications by making data available from many different types of systems as is shown by research completed by Barry & Associates, (2005). XML has formed the basis of Web Services and according to the latest standard definitions from W3C, is the "backplane" of the Web Services architecture itself according to Walsh (1998). There are additional standards including SOAP, a standard on which Microsoft has built much of its.Net architecture, or WSDL (Barry & Associates, 2005). Compared to these two standards however, XML is more aligned with the communications needs of users who want to share data and applications pervasively through networks and over the Internet. XML is the basis of the growth of Web Services in many organizations today.

XML's role in the growth of shared, hosted and Software-as-a-Service applications continues to be proven with every new application launched in these specific areas (Walsh 1998). The growth of XML is also attributable to its flexibility in providing a backbone for Web Services, specifically due to XLinks and XPointers adaptability to connecting with and using content, commands, and data from other XML-based documents. The future of XML is in the further development of this standard as the basis of object-oriented programming and the integration with more complex data sets including databases, ERP, CRM, supply chain, and analytics data and ultimately the development of entire SOA architectures and platforms (Vasudevan 2001).

Current Practices: SOA in Manufacturing

Historically manufacturers are conservative with regard to spending on it in general and on process redefinition specifically. Globalization, increasing cost pressures, and the need to increase the speed at which new products are introduced are all factors changing the conservative mindset of manufacturers to adopt newer technologies more readily than they had in the past. The role of the SOA frameworks in manufacturers is to increase the accuracy, efficiency, integration, and synchronization of these processes company-wide, resulting in greater performance in the market. As a result of the impact of these macroeconomic factors manufacturing spending has been predominantly focused on the efficiencies of manufacturing processes, leaving customer-facing processes to sales and marketing, SOA Success (2005).To get an understanding of how manufacturing companies are adopting SOA, it's best to look at the results SAP AG is making globally with their NetWeaver platform.

The following key results of SOA adoption into manufacturing companies worldwide are exemplified by the SAP NetWeaver early adopters (LWC Research, 2005). In accessing the adoption of SOA platforms into manufacturing companies, using SAP's NetWeaver as the barometer of early adopter success, the emerging role of SOAs as a point of key differentiation over and above just being a strategy for ERP systems consolidation is beginning to emerge. SOAs form the foundation of Web Services and Event Driven Architectures (EDAs) throughout the manufacturing companies who have already passed through the experimentation with Web Services as part of their SOA architectural plans and moved directly to piloting Web Services for such mission critical tasks as order capture, order management, return material authorization, special pricing request management, and quote-to-order process workflows. This view is substantiated by much of the research completed in this area including Jackson (2006). Of these, the Web Services that are revolutionizing manufacturing the most effectively today is the streamlining of the quote-to-order process. This is the process by which manufacturers work with both their direct and indirect channels to have each respective sales force create accurate quotes for customized products. Both business-to-business (B2B) and business-to-consumer (B2C) companies rely on quote-to-order strategies in conjunction with product configurators to accurately quote the pricing and availability for complex products. Figure 1, Manual Quote-to-Order Workflow in Manufacturing, shows an example of the typical quote-to-order workflow in a manufacturing company that relies heavily on manually-based processes to manage integration.

Figure 1: Manual Quote-to-Order Process Workflow Based on Analysis and sources from AMR Research (2003); LWC Research (2005)

Figure 1 quantifies the performance (over 20 days) and shows the highly manual series of steps required by most manufacturers to complete the process. Using an SOA framework that includes BPEL-based applications that can create streamlined workflows, a significant cost and time savings can be achieved. Figure 2: SOA Enables Business Process Management through Re-Engineering graphically illustrates the areas of improvement made possible when an SOA framework is applied to this specific manufacturing process.

Figure 2: Quote-to-Order Process Workflow with an SOA framework used to streamline specific processes

Based on Analysis and sources from AMR Research (2003); LWC Research (2005); Quote-to-Order Process; Siemens NEMA Quote-to-Cash Process

Event Driven Architectures (EDA) and Business Process Management (BPM) in conjunction with Web Services as operational structure of SOA in manufacturing is beginning to take shape in targeting the processes with the complexity of quote-to-order, supported by the research of Saia (2005). The majority of manufacturers also have become accustomed to measuring their progress according to specific key performance indicators (KPIs). SOA early adopters including Trane, United Technologies and Siemens AG use the combination of KPIs shown in Table 1, SOA Framework Results by Area of KPI Measurement. These KPIs are consistent with the research stating the majority of SOA adoption is for sell;-side processes and strategies. The KPIs shown in Table 1 illustrate this fact.

Table 1: SOA Framework Results by Area of KPI Measurement

Areas of Measurement

Baseline: What to Measure

SOA Performance Evidence

Company-specific

Project costs and expenses

Use as a baseline for defining ROI

Number of orders per year

Determine configuration's impact on inventory turns

Current inventory and costs

Inventory turn savings

Customer Data

Lifetime cost per customer; avg. deal size by customer

Sales

Order cycle time

Order cycle times reduction of 65% or more recorded with mftrs contacted

Cost of Sales

Days Sales Outstanding reduction from 60 to 29 days on average

Cross-sell and up-sell revenue

Increase of 33% on aggregate

Average sales price per order

Increase from 9% to 26%

Quoting and Ordering

Average costs to complete an order

95% reduction in cost per order

Special Pricing Requests

Over 100% ROI on automating Special Pricing Requests

Bad or incomplete orders

Incomplete order reductions of 20%

Customer Service

Number of customer complaints

98% reduction in cost of simple requests

Revenue lost to churn

60% when cross-selling is used with quote-to-order

Number of calls on order status

Median level of 500 per week to 70

Warranty and Returns

Reduction in warranty cost on customized products

10% reduction at a minimum

Labor cost reductions

Decrease order re-work from 15% to 2%

Evaluation of SOA in Manufacturing

Based on an analysis of the secondary research used for the completion of this paper, approximately 40% of all companies today with SOA frameworks which serve as the foundation of their strategies are actively tracking the ROI of these activities according to Gaughan, Gannon and Swanton (2006). The development of transaction-based APIs is necessary for many manufacturers, as their order management systems are significantly different than their trading partners, distribution channel partners, service and support third-party organizations as well. This aspect of SOA adoption in manufacturing is comparable to the development of transaction-based private trading exchanges (PTX), where transactions were the only element everyone could agree on (AMR Research 2001). The use of these APIs to enable transactions has however become much more pervasive and agile compared to their previous-era PTX counterparts. Transaction-based APIs require the use of XML to ensure pervasive synchronization of all systems using the communication protocol according to Alonso, Kuno, Casati, and Machiraju, (2004). Abrams and Andrews (2005) also make the point that ERP system integration is increasingly be completed to ensure real-time transaction data as a result of XML's growth and the use of transaction-based APIs. The highly transaction-oriented approach to integration is a catalyst for the adoption of Web Services throughout manufacturing today, as the majority has multiple sourcing, production and fulfillment locations, and further increasing adoption of SOA frameworks throughout manufacturing companies. SOA's reliance on XML, EDA, and Web Services in conjunction with composite applications is what makes this strategy differentiated and agile, according to Andrews (2005).

From the research completed within this paper, there is evidence on the greater the maturity of the SOA framework within a manufacturer the more precisely Web Services align to customer-facing strategies. In the case of the objective of Increasing Revenues for example, it's clear that to attain the metrics defined in Figure 3 there must be tight process integration across, Sales, Engineering, Manufacturing, Pricing, Service and Management. This is also supported by the extensive work of Austvold, Carrillo, Preslan (2003).

Sources: LWC Research Study on the Quote-to-Order Process; Siemens NEMA Quote-to-Cash Process; Results from AMR Research Surveys (2003-2006)

Based on the research completed to define the KPis and their results in Figure 3 it was found that a manufacturer's ability to capture and re-define processes is just as important as the build-out of an SOA architecture including its many components. The results of Forrester's Business Technographics Survey (2005) also support this assertion. For those manufacturers that has started measuring the financial impact of their SOA strategies, the role of business process re-engineering in conjunction with EDA and the selective use of Web Services has made this task more aligned with business objectives, supported by research by Gibbins, Nicholas and Harris, Stephen and Shadbolt, Nigel (2003).

Order capture, one of the critical steps in the overall quote-to-order process profiled in this paper, has seen significant improvements through the use of SOA frameworks. This specific research finding is supported by research from the Aberdeen Group, AMR Research, Gartner Group and others who have quantified the gains of SOA integration in the context of order capture. These research and advisory firms report that the net effect has been a drop of order cycle times from, worst case 33 hours, to less than 1 hour, also supported by research by Baghdadi (2005). In aggregate the order cycle times dropped significantly as a result of the combined effects of integration, creating an EDA-based structure for exception handling (which is the part of any process that takes the majority of time to complete manually in an order capture and order management system), and the development of business process exception handling using BPEL-based applications. It is also a significant finding from this research that integrating the quote workflows to reflect both Available-to-Promise (ATP) and Capable-to-Promise (CTP) on each customers' quote and order minimizes follow-on order inquiries while increasing the likelihood of a customer ordering again. Giving supply chain visibility to customers alleviates uncertainty while increasing trust and re-purchase, especially when the orders, however complex, are delivered on time (Manes 2003), (Columbus 2003).

Conclusion

Manufacturers are embracing SOA architectures and strategies to revolutionize and make more efficient the most complex processes in fulfilling customer requirements. Globalization, increasing pressure on pricing, and the need for increasing the speed of new product introductions are all macroeconomic factors that are forcing manufacturers to embrace SOA frameworks to unify, synchronize and ultimately strengthen their ability to attract, sell, serve and retain customers. From the research completed for this paper, a significant finding emerges that the majority of manufacturers are moving to SOA frameworks to streamline their customer-facing processes first. The quote-to-order process has been critically analyzed in this paper to illustrate the quantifiable gains manufacturers are making to one of their most complex customer-facing processes. From this analysis another key finding emerged from the research, and that was that the greater the complexity of customer-facing processes the greater the need for process and system integration, the higher the Return on Investment (ROI) as a result.