© 2005-2006 the athena consortium. introduction to business interoperability baptiste lebreton,...

© 2005-2006 The ATHENA Consortium.

Introduction to Business

Interoperability

Baptiste Lebreton, INSEAD

Christine Legner, University St. Gallen

2© 2005-2006 The ATHENA Consortium.

Course Structure

• Introduction • The Consequences of Lacking Interoperability –

Examples from Supply Chain Management• How to Assess Your Level of Interoperability? –

Business Interoperability Framework• What is the Value of an Increase in Inter-

operability? – Interoperability Impact Assessment • Summary & Outlook


• Trend 1: Focus on core competencies– increase of external sourcing

The networked economy

Source: DB Research 2004

OEM X

Asus

Foxconn

Flextronics

Schenker

Bax Global

Fnac

Saturn

…

Information flow

Forward physical flow

Reverse physical flow

Contract manufacturers Third/Fourth Party

logistics providers Retailers

TNT

Danzas

Schenker

UPS

FedEx

DHL

–Example: “OEM” orchestrates the electronics supply chain, without touching the MP3 players!


Example: Travel industry

The networked economy

• Trend 2: Bundling of products and services– Value creation through information brokerage– Customer convenience and price transparency

railroadcompany

hotels

carrentals

banks


Consequences

Value chain 1

Value chain 2

• Competition between value chains

• Efficiency increase by specialization

• Coordination and interoperability within the value chain as success factor

• Increasing number of external (inter-organizational) relationships

• From intra-organizational to inter-organizational coordination


Business Interoperability

Business Interoperability

… is the organisational and operational ability of an enterprise to cooperate with its business partners and to efficiently establish, conduct and develop IT-supported business relationships with the objective to create value.

The Foundation - Technical interoperability

… is the ability of two or more systems or components to exchange information and to use the information that has been exchanged.


Scope of this Course

• The scope of this course is– to define the constituents of business interoperability– to assess the impact of interoperability– to apply the concepts to the beer supply chain

• The course is based on two ATHENA key results:


Questions & Answers

• Question 1.1: Which definition does best reflect business interoperability (BI)?– BI = frequency of interaction with business partners– BI = ability of an enterprise to setup electronic relationships in

order to minimize interaction costs with its business partners– BI = number of electronic relationships– BI = integration of two information systems

• Question 1.2: Why does BI become a competitive advantage in the networked economy?– Increasing globalization– Increasing number of external relationships due to

• Focus on core competencies and increase in external sourcing• Bundling of products and services for a customer

– Competitive pressure on the level of the value chain– Move from intra-organizational to inter-organizational coordination


Course Structure






Supply Chain without Interoperability

• Each supply chain partner has an inventory of beer• No coordination between supply chain partners• Limited exchange of information (only orders)• No supply chain transparency

Brewery Brewerywarehouse

Wholesaler Retailer(Store)

Final customer

OrderOrderOrderOrder

GoodsGoodsGoodsGoods

Information flow

Physical goods flow

Legend:

Example: Beer supply chain


Impact of Lacking Interoperability

• Bullwhip effect: A minor change in customer demand disrupts the whole supply chain flows

Brewery

Brewerywarehouse

Wholesaler

Retailer

Final customer


Sources of Lacking Interoperability

• Causal loops

Schedule mismatch

Forecast error

+Inventory level of

“slow-movers”+

Demand unfulfilled @ customer

Demand changes @ customer

+

+

+

Overtime shifts

+

Potential sales+

Available capacity

-

Stockoutprobability

+

Coordination efforts within organization Express shipments

Need for “Out-of-schedule” jobs

++

+

Safety stock level

+

-


Impact of Lacking Interoperability

• Direct consequences of the bullwhip effect:– Excessive inventory – Wrong product forecasts– Capacity shortages– Poor customer service (due to unavailable products or

long backlogs)– Frequent changes in production schedules– High frequency of express shipments


Supply Chain With Interoperability

• Visibility along the supply chain– Upstream transfer of downstream demand

• Coordination of supply chain processes– Collaborative planning, forecasting and replenishment

Brewery Brewerywarehouse

Wholesaler Retailer Final customer

OrderOrderOrder

Forecast Forecast Forecast

GoodsGoodsGoodsGoods

Information flow

Physical goods flow

Legend:

Example: Beer supply chain


The Key: Collaborative Planning, Forecasting and Replenishment (CPFR)

With CPFR, Business partners agree upon a single shared forecast of demand that drives the entire supply chain

Quelle: www.cpfr.org

Source:www.VICS.org


Supply Chain with Interoperability

• Causal loops

Forecast error

Schedule mismatch

Inventory level of “slow-movers”

Coordination efforts within organization

Available capacity

Potential sales

Demand unfulfilled @ customer

Overtime shifts

Express shipments

Stockoutprobability

Demand changes @ customer

Safety stock level

Need for “Out-of-schedule” jobs

+

+

+++

+

++ +

+

-

+

+

-

CPFR: improved interoperability

-


CPFR & Business Interoperability

• Various industries have adopted CPFR, in particular retail and consumer goods, chemical and high-tech industry.

• Realization of a CPFR scenario requires– a collaboration arrangement and joint business plan– the alignment of the business processes of the individual partners

(demand & supply planning, order generation and execution)– electronic information exchange (e.g. forecast data exchanged as

XML or EDI messages)

Business interoperability is key to realizing CPFR.• Typical impact of increased interoperability (VICS 2004)

– in-stock improvements for products in store: 2-8%– Inventory reductions: 10-40% (across the supply chain)


Questions & Answers

• Question 2.1: Which of the following symptoms for lacking interoperability in supply chains?– Express freight costs– Marketing costs– Over-capacities– Safety stocks

• Question 2.2: Which of the following statements are not correct? – The bullwhip effect has only been observed in the retail supply

chain.– Coordination among the different actors in the supply chain can

reduce the bullwhip effect. – CPFR restricts the individual forecast errors and thereby reduces

the bullwhip effect.– CPFR eliminates the manual exchange of order information and

thereby reduces the bullwhip effect.


Course Structure






What We Learned so far ….

Enterprise B(e.g. brewery)

Enterprise R(e.g. retailer)

IT-supported business relationships(electronic

collaboration)

Performance at Firm-level

Supply Chain Performance

Performance at Firm-level

Organizational and operational ability

Organizational and operational ability


How Interoperable is an Enterprise?

• Questions:– How interoperable is retailer R? – Is R more interoperable than

competitor R*?– What is the required level of

interoperability in the case of R dealing with

• a Dutch mass brewery D?• a small Mongolese brewery M?• an independent wholesaler W?

– Is the maximum level of interoperability the optimum level?

R

W

D

M

R*


• We describe business interoperability on a continuum and distinguish five levels*

* In this basic course, we mostly limit our description to the extreme values of (1) – no interoperability and (5) – full interoperability

Interoperability is no Binary Choice

(1) none Ad-hoc interaction with external partners, No IT-supported business relationships

External partnerships are managed,IT-supported business relationships can be established at no or few cost involved

(2) minimum

(3) moderate

(4) qualified

(5) full


Business Interoperability is Multi-faceted

Enterprise R(e.g. retailer)

Enterprise B(e.g. brewery)

Employees & Culture

Management of External Relationship

Collaborative Business Processes

Information Systems


Management of External Relationships

Enterprise B (e.g. brewery)

Enterprise R(e.g. suppliers)

Management of External Relationships

“Where do we need do cooperate and what do we

want to achieve? How do we manage and

control external relationships?”

Targets / Benefit ?

Cooperation model ?


Cooperation Model and Target

Wholesaler Retailer

OrderOrder

GoodsGoods

Brewery

(1) none No cooperation model is defined, external relationships are formed ad-hoc.

…

(5) full

Brewery Wholesaler Retailer

Order

Forecast

GoodsGoods

Order

Fully interoperable enterprises define a cooperation model with their business partners and determine cooperation targets; They establish processes for initiation, realisation, control and monitoring of the cooperation.

Forecast


Employees and CultureEnterprise R (e.g. retailer)


Employees and Culture

“How do we behave towards our external business partners?”Information sharing ?

External visibility?


Information Sharing

(1) none No visibility of the internal processes is provided to external partners

…

(5) full

only order signals

Supply chain visibilityforecasts (sales, orders), sales,inventories,orders and order status,shipments,…

Full visibility to external partners


Collaborative Business ProcessesEnterprise R(e.g. retailer)


Public process ?

Business semantics?Collaborative

Business Processes“How do we interact

with external partners?”


Public Processes

Brewery Retailer

Production planning

Delivery fo retailer

Demand & supplyplanning

Replenishment /Order generation

Store replenishment

Goods receipt

(1) none Unclear responsibilities of business partners, business processes are not aligned

(3) mo-derate

(5) full

Production

Order fulfillment

No public process defined

Brewery Retailer

Production planningDemand & supply

planning

Delivery fo retailer

Store replenishment

Goods receipt

Public CPFR process

Production Replenishment /Order placement

Order receipt and confirmation

Enterprises bilaterally agree on a public process (1:1)

Interoperable enterprises base their collaboration on a public processes which is well documented, practical and reflects industry standards (m:n)


Business Semantics

(1) none Proprietary terminology, every partner uses own vocabulary

(3) mo-derate

(5) full

Business semantics in the CPFR scenario: e.g. forecast information

sent when (daily / weekly)horizonup-date

Enterprises bilaterally agree on common business semantics (1:1)

Business semantics defined by CPFR industry standarde.g. EAN.UCC standards business documents item identification (EAN) location identification (GLN)

Interoperable enterprises base their collaboration on common business semantics which are well documented, practical and reflect industry standards (m:n)


Information SystemsEnterprise B (e.g. retailer)

Enterprise A (e.g. brewery)

Information Systems“How do we connect

with business partners?”

Interaction type?


Interaction Type

(1) none Human-human: Traditional forms of interacting between humans, supported by fax, phone, or e-mail communication

(3) mo-derate

(5) full

Brewery

…

Retailer

Human-to-machine: Internet portals bundle relevant information and access to applications for external partners

Brewery RetailerXML

Message

Machine-to-machine: Consistently automated processes through the inter-organizational linkage of applications (e.g. using EDI or Web Services)


Some Observations on Interoperability

• The level of business interoperability varies on firm and industry level– E.g. high-tech industry with a

high level of interoperability due to standardization (e.g. RosettaNet) and platforms (e.g. Viacore)

• The maximum level of business interoperability (i.e. level 5) is not necessarily the optimum level – E.g. enterprises can over-invest in business and

technical interoperability

A

B

C


Dimension (Sub criteria)

5 (fully interoperable)

4 (qualified)

3 (moderate)

2 (minimum)

1 (none)

Cooperation Model / Scenario

Cooperation model is defined and documented, cooperations are established according to cooperation model

Cooperation model is defined and documented (e.g. in company strategy)

Established cooperations; but no defined cooperation model

Occassional ad-hoc cooperations; no clear cooperation model

No cooperation, focus on inhouse capabilities

…

Cooperation management

A steering board conducts periodic reviews of the cooperation

0 unregular reviews of cooperation are performored; no steering board defined

0 no cooperation management

…

Cooperation process ("Public Process")

"public" processes (n:m) are co-defined with business partners, documented and reflect industry standards

0 Defined and documented private process exists, but it is used inconsistently, and is not manageable or practical

0 cooperation processes with partners are performed ad-hoc

…

Trust Blind faith (mutual sense of trust and confidence, appreciation on both sides of continuing value)

Good working relationship (Growing sense of trust and confidence)

Information is shared "Better the devil you know…"

Mistrust (Them and us attitude, new skills jealously protected)

…

Electronic channel Machine - machine 0 human - machine (e.g. portal, …)

0 human - human (e.g. phone, fax, e-mail)

…

Employee & Culture - "How do we behave?"

Information Systems - "What are the enabling technologies we use?"

Level of Business Interoperability

Strategy & Business Model - "What do we want to achieve?"

Governance - "How are we organised?"

Business processes - "How will it be executed?"

Contingencies Impact the Optimum Level of Interoperability

External contingenciese.g. e-business maturity, industry standards, regulation / legislation

Internal contingencies e.g. specificity of transaction,

frequency of transaction

Optimum level of business interoperability (“fit”) As-is level of interoperability (“mis-fit”)


Questions

• Question 3.1: Which elements constitute business interoperability?• Question 3.2: Which of the following are signs of maximum business

interoperability?– Bilateral agreements on business processes between 2 companies– Use of multilateral agreements and widely used standards– No or ad-hoc interaction with external partners– Full visibility on inventories and forecasts to external partners– Supplier portals

• Question 3.3: How interoperable should an enterprise be? Which of the following statements are correct?– Enterprises should always strive for the maximum level of business

interoperability.– Environmental factors impact the maximum level of interoperability.– The level of business interoperability has to fit internal and external

contingencies.– Enterprise do not have to be more interoperable than their business

partners.


Course Structure






• Identify supply chain stakeholders– Actors

• Suppliers• Company• Customers

– Businesses• Current value chain• Potential ones

– CPFR case• Actors: Brewery > Retailer• Potential value chains (Retailer): all suppliers• Potential value chains (Brewery): all mass retailers

Impact Assessment Basics

Potential value chain

Current value chain

Suppliers

Company’s businesses

Customers



• Single company’s impact assessmentInteroperability

improvement (CPFR)

Impact at a company’s boundaries

(operational impact)

Transaction costs

Speed

Quality

Transparency

Overall impact(strategic impact)

Customers

Operational excellence

Suppliers

Profits



• Operational assessment– Estimate transaction costs

• At a company’s boundaries, interoperability determines the level of transactions costs.

• These costs can be divided into three cost types, the 3 C’s, one for each transaction phase

– Connectivity

“Setup or expand a business relationship”Cost driver: Business relationship (Brewery/Retailer)

– Coordination

“Execute the transaction(s)”Cost driver: Transaction (1 delivery)

– Control

“Monitor the contract completion”Cost driver: Transaction (1 delivery)

c

cc



• Operational assessment– Identify business relationships and transaction

objects to segregate transaction costs• Connectivity costs depend on the number of

business relationships• Coordination/Control costs depend on the number

of transactions

– CPFR example• Transaction unit = Beer delivery

timeSetup

Connect.

Transaction #1

Coord. Control

Transaction #n

Coord. Control

… Improve

Connect.

Transaction #n+1

Coord. Control

…

Brewery X

Retailer Y

Relationship

Beer delivery



• Identify the value proposition– The main quantifiable impact is the value created by

improved interoperability• How to measure value?

– Comparison between low/no interoperability (as-is) and improved interoperability (to-be)

– Return on investment formulaa: value chain actor

t: year

Value of improvedinteroperability for

actor a=

Salestobe(a,t) – Prod. coststobe(a,t) – Input coststobe(a,t) – Trans. Coststobe(a,t)

– [Salesasis (a,t) – Prod. costsasis(a,t) – Input costsasis(a,t) – Trans. Costsasis(a,t)]

(1+cost of capital)tΣt=1

t=T

t=1

SalesΔ(a,t) – Prod. costsΔ(a,t) – Input costsΔ(a,t) – Trans. CostsΔ(a,t)

(1+cost of capital)tΣt=T


Operational Impact Assessment

• Operational impact– Connectivity phase

• Costs (€ / business relationship)– Partner finding / contractual negotiation

– Setup of electronic business relationship (process design, IS design, implementation, integration, organizational rollout and change)

– Incremental costs: Additional partner

– Incremental costs: Additional functionalities

• Speed to run first transaction (days)– Find transaction partner

– Establish organizational connectivity

– Establish technical connectivity

connectivity

cc



• Operational impact– Coordination phase

• Costs (€ / transaction)– Data processing costs (workforce)

– Human interaction costs (data retrieval)

– Transaction-based fees (software)

– Opportunity costs (avoidable sequel costs of wrong information)

– Maintenance costs

• Speed (hrs / transaction)– Man-hours spent on data processing

– Man-hours spent on human interactions

– Response time to requests

– Delivery lead-time

• Quality (errors)

coordination c

c



• Operational impact– Control phase

• Costs (€ / transaction)– Data processing costs (workforce)

– Human interaction costs (data retrieval)

– Transaction-based fees (software)

• Speed (hrs / transaction)– Man-hours spent on data processing

– Man-hours spent on human interactions

– Time required to detect discrepancies from contract

– Time to react to these discrepanciescontrolc

c


Strategic Impact Assessment

(operational impact)

transaction costs

(oper. excell.)production costs

(suppliers)procurement

costs

(customers)revenues



• Strategic impact– Brewery: Customers dimension

• Strengthening of business relationship to retailer

– Minimization of retailer’s inventory and monitoring costs

– Seamless integration (lock-in?)

• Improvement of product and service portfolio– Does it provide a unique advantage?

» No, since retailer benefits from more CPFR suppliers, might become standard

– CPFR is a future order qualifier» Ignoring it might reduce future sales or oblige

to grant higher rebates

Brewery X

Retailer Y

relationship

Beer delivery



• Strategic impact– Brewery/retailer: Operational excellence

• Agility– CPFR enables partners to quickly adapt to

demand disruptions» Impact on asset utilization and productivity

• Productivity– Increase of total production capacity

» Less supply/demand mismatches» More capacity available for required products

– Less human interactions for planning, controlling and troubleshooting

• Asset utilization– Less work-in-process inventories (esp. safety

stocks)

Brewery X

Retailer Y

relationship

Beer delivery



• Strategic impact– Retail: Suppliers dimension

• Sourcing power increase– Non CPFR compliant suppliers are excluded

from business

– Low supplier switching costs when all suppliers have CPFR connections

» Exchange of goods and information predefined

• Strengthening of supplier relationship– Significant reduction of transaction costs

– Better service

Brewery X

Retailer Y

relationship

Beer delivery



• How does value get distributed along the value chain?– Empirical study on CPFR (2001, AMR research)

• Inventory levels decrease by 10 to 40%• Sales increase for first movers (up to 10% for

manufacturers)• Nevertheless, m:n interoperability has not been reached

– Manufacturers have to invest in one CPFR channel per retailer– Retailers reuse their CPFR solution for all suppliers

• Value and costs are seldom fairly shared between partners– Risks of interoperability “unwillingness” without

• Shared-profits scheme, or• A focal company or a legislator setting the rules


Questions and Answers

• Question 4.1: Why separate operational and strategic impact?– Supply chains are networked– Operational assessment misses important aspects

such as strategic positioning

• Question 4.2: What are the three transaction phases analyzed?– Ex-ante, execution, ex-post– Source, make, deliver– Connectivity, coordination, control


Questions and Answers

• Question 4.3: Why is it important to integrate potential partners and businesses?– To complicate the analysis– To assess the future costs of the interoperability

solution– To understand whether partners have an incentive to

comply to the interoperability solution

• Question 4.4: On which basis should interoperability investments be judged?– Value created– Costs savings– Service performance improvements (quality, time)


Course Structure






Summary

• Business interoperability extends the technically focused notion of interoperability

• Constituents of business interoperability are– Management of external relationships– Employees & culture– Collaborative business processes– Information systems

• Business interoperability impacts – Connectivity costs– Coordination costs– Control costs


More on Business Interoperability

More information available on www.athena-ip.org

Deliverable D.B3.1 Deliverable D.B3.3


This course has been developed under the funding of the EC with the support of the EC ATHENA-IP Project.

Disclaimer and Copyright Notice: Permission is granted without fee for personal or educational (non-profit) use, previous notification is needed. For notification purposes, please, address to the ATHENA Training Programme Chair at [email protected]. In other cases please, contact at the same e_mail address for use conditions. Some of the figures presented in this course are freely inspired by others reported in referenced works/sources. For such figures copyright and all rights therein are maintained by the original authors or by other copyright holders. It is understood that all persons copying these figures will adhere to the terms and constraints invoked by each copyright holder.

© 2005-2006 the athena consortium. introduction to business interoperability baptiste lebreton,...

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