Meridian Systems’ “Catch Up” Challenge in the Capital Infrastructure Industry – Part 1

Claiming the “Catch us if you can” movie mantra, the quiet Infrastructure Lifecycle Management (ILM) leader Meridian Systems, based in Folsom, California (US), and now owned by the billion-dollar global positioning system (GPS) giant Trimble (NASDAQ: TRMB), is going on the offensive with competitors and industry analysts in its newest round of marketing announcements. To the large bastion of technology vendors, reporters, and research analysts reporting on market requirements for what once was simply the realm of Project Portfolio Management (PPM) and Integrated Workplace Management Systems (IWMS) – the company’s somewhat shy, but technology-precocious, management is issuing a hearty challenge: “Catch up (with us)!”

For long-time followers of the building and construction industry, Meridian has steadily amassed (at a Compound Annual Growth Rate [CAGR] of 15 percent) some 5,000 small, medium, and (more recently) large customers that are in charge of capital building/infrastructure projects. Letting its enterprise software be its calling card, and a highly referenceable install base be its voice, the company grew stealthily against industry-standard PPM competitors like Primavera (recently acquired by Oracle) and Autodesk Constructware.

Today, while the company still maintains market leadership in its original arenas of architecture/engineering/construction (A/E/C) solutions, in order to outflank the market, Meridian has, right after the turn of the millennium, begun appending and building on the feature/benefits/technology of its forerunner Prolog product.

“The capital infrastructure market buyers were telegraphing if not talking about their changing needs at least five to eight years ago – but people analyzing and reporting on this space remain wed to writing about things like PPM,” asserts Meridian Systems’ President and Co-Founder John Bodrozic. “Meridian realized that technology vendors in those solution categories were losing touch with their buyers, and today I’d go so far as to say their relevance might even be teetering on obsolescence. Oracle’s acquisition of Primavera just reinforces that they still don’t get it.”

ILM Defined

In 2004, backed by its then recently launched Proliance native Web solution, Meridian founded the ILM market space to define the larger Plan-Build-Operate (PBO) hat-trick set of solutions demanded by both private and public sector organizations responsible for major capital projects. Today, Meridian has a large customer base of 5,000 companies and over 100,000 users. My estimate of the company’s 2007 revenues is at nearly US$ 30 million.

While I am not too keen on acronyms and buzzwords (and TEC is not in the business of inventing these), some definitions would still be in order here. To that end, ILM would denote the ongoing cycle, which consists of the following three components or phases of any kind of capital infrastructure:

1. Planning — i.e., managing project pipelines, site development, entitlements, etc.;
2. Building — i.e., tracking budgets, contracts, changes, schedules, scopes, and quality; and
3. Operating — i.e., direct asset management, work orders, and maintenance management.

Meridian has long realized that none of its competitors cover all three ILM bases in this tightly integrated, never ending cycle. The market observers’ sticking with much narrower terms like PPM (which mainly takes care of the real estate-oriented planning and building phases) or IWMS (Gartner’s coined term, which mainly takes care of things like property leasing).

Needless to say, the scopes of PPM or IWMS are minor and insignificant components of the ongoing operational needs inherent to capital infrastructure. Namely, they don’t apply to hardly anything outside of the real estate segment, i.e., the things like oil rigs, bridges, cell towers, healthcare infrastructure buildings, and so on. In a nutshell, these acronyms’ footprints fall too short when it comes to capital infrastructure.

Sensing a New Direction – Meridian’s Bold Bet on Proliance

Since its founding in 1993, Meridian’s industry play began with a goal to become the system of record for combining capital expansion budgets, integrated project workflow, and schedules, and all of that in a single integrated system. While Meridian initially carved out its identity within the PPM market space (via the classic planning and building spectrum), the company has since introduced advanced Business Intelligence (BI) capabilities to provide senior executives and mid-level managers visibility into the entire portfolio of projects, programs, and facilities through pertinent role-based key performance indicators (KPI), dashboards, scorecards, alerts, trends analyses, and roll-up reporting.

Since the early 2000s, with Proliance, Meridian has expanded on its initial PPM solution footprint by bringing together the complete “Plan, Build, and Operate” spectrum for “Project-Based Organizations”–- hence its self-applied label of “PBO squared.” By adding Business Process Management (BPM) capabilities and taking an early bet on Microsoft .NET Framework technologies (Meridian is a Microsoft Gold Partner), the vendor has assembled a set of best practices to

* prevent schedule/cost overruns;
* gain global project spend management advantages;
* leverage/optimize/plan around multiple projects;
* reduce costs by consolidating multiple information technology (IT) solutions;
* centralize documentation to establish or refute vendor claims;
* optimize investments in building reconfiguration and retooling;
* improve time to market for new goods/services; and
* respond more quickly to competitive trends and market opportunities.

The Proliance solution aggressively targets the ILM buyer category by adding the “Operate” category to the classic “Plan” and “Build” ones, which it has enriched as well. The Operate capabilities extend Proliance into the following areas: Asset Management, Preventative Maintenance, Predictive Maintenance, and Service Requests. The full combination is suitable for several verticals, such as: A/E/C, Energy, Healthcare, Real Estate, Retail, Education, Government, Transportation, etc.

Why Do the Competitors Largely Miss the ILM Game?

Despite recent market consolidation like Oracle’s acquisition of Primavera, the combination of PPM and enterprise resource planning (ERP) still misses key ILM market needs and falls short of a tightly integrated, web-based PBO triple-solution combination. Specifically, Proliance has a substantial edge over most of its competitors in this category in its combination of the following three areas:

1. It is a native, built from the ground-up service oriented architecture (SOA)-based platform application that already integrates PPM, scheduling, and facilities management on the same platform;
2. It has a well-developed Microsoft Office Business Application (OBA) strategy; and
3. It has made an early bet on Building Information Modeling (BIM).

While the first two advantages are debatable (i.e., many competitors can claim similar traits and strategies), it is the latter one that is truly differentiating. Namely, designing buildings and facilities using data-rich BIM is taking hold in the marketplace. BIM can be described as a design methodology that results in a digital three-dimensional (3D) model.

This model represents the following three key facets: 1) a facility’s geometrical and spatial relationships, 2) building systems and components, and 3) properties of specified equipment and materials. To visualize BIM as part of a technology solution, imagine a 3D visual interface that sits on top of a database of information that describes all of the elements within a building.

In other words, BIM is the new digitized way to gather necessary models. It starts with the conceptual design, iterative designs, architectural BIM, structural BIM and mechanical, engineering & plumbing (MEP) BIM in the “Plan” phase, to end with the as-built model, as-built equipment, and the complete virtual building in the “Operate” phase.

Still, BIM also provides value on the “Build” phase in PBO – and brings a host of analytic, reporting, view (visualization), and modeling capabilities (e.g., construction sequencing, 4D modeling, clash detection, fabrication BIM, spatial BIM installation, etc.). This allows companies to view potential problems, issues, challenges, and plan for unique circumstances before building any infrastructure.

How Do BIM and ILM Relate to Each Other?

Diving deeper into the PBO project lifecycle, one can see many synergistic opportunities for ILM technology and BIM models to come together. For example, during the Plan phase, the building owner determines the financial feasibility of a project and hires architects and engineers to design the project. Corresponding ILM operational processes and business data in the Plan phase are: project pipelines, budget development, scope development, budget approvals, and funding approvals.

During the Build phase, a general contractor is selected to construct the facility, while the owner and design teams provide oversight. ILM operational processes and business data in the Build phase are: contracts & changes, scheduling, bidding and buyout, design distribution, and requests for information (RFIs) & submittals.

And finally, during the Operate phase, the owner takes over the newly completed facility and manages this new asset through preventative, predictive, and corrective maintenance. ILM operational processes and business data in this phase are: asset management, equipment assets, location assets, maintenance management, and work orders.

Currently, BIM is most prevalent in the Plan phase as architects and engineers can digitally design BIM models that create huge efficiencies in the iterative design process. But once rich BIM models have been designed, significant downstream value can be created for both the contractor and owner through cost reductions, and by providing a more accurate model of the final finished building. For more details on the integration between ILM and BIM, see Meridian’s white paper entitled “BIM and Project Management - Advancing Integrated Project Delivery on Capital Building Programs.”

Given that no one can accomplish everything on its own, Meridian is supporting BIM through a partnership with Horizontal LLC, a leader in implementing BIM methodology. Horizontal Glue Server is a Web-based BIM solution that allows bi-directional data flow between BIM models and Meridian ILM solutions. Support of BIM, combined with the complete PBO spectrum, OBA interface, and aggressive anywhere/anytime/any device SOA deployment have combined to give Meridian the advantage in staking out the ILM space. This holistic approach seems to be lost on much of the rest of the market.

Part 2 of this blog series will focus on the Meridian’s original Prolog PPM product, a desktop solution for the small-to-medium business (SMB) market, and the soon to be launched Prolog Connect PPM Web services-enabled product for the mid-market. Your views, comments, opinions, etc. about any above-mentioned solution and abut the PPM, ILM and BIM software categories per se are welcome in the meantime.

As always, we would also be interested in hearing about your experiences with these software solutions (if you are an existing user) or your general interest to evaluate these solutions as prospective customers.

The Strategic Importance of Asset Management Part Three: A New Framework

As the level of understanding of these areas begins to rise, so too do the expectations that managers and companies will be able to meet modern requirements.

In the past, maintenance strategy has frequently been treated in a highly reactive manner. Maintenance regimes are often created in response to machine breakdowns or incidents. Often, in the aftermath of disasters, there are public statements made demanding, or promising, "more intensive maintenance."

While the intention is laudable, the result of such reactive actions is often either non-effective or counter productive. Either way it is too late to stop the original incident from having occurred.

Managing assets needs to be done in a truly proactive approach, one that ties the management of physical assets to the corporate objectives.

A modern approach to asset management can be visualized as a series of dominoes. Each domino needs the momentum from the previous area, and then proceeds to pass this momentum to the next domino in the line. Starting at any point other than the beginning will leave some dominoes standing.

Modern asset management can be seen in the same way. Each of the dominoes represents one of the decision-making areas that are required to adequately manage assets.

The initial momentum to begin the sequence comes from the vision of a future state. This needs to clearly represent the corporate objectives and goals, and expressing how asset management can play a part in achieving these goals.

This energy is then carried forward to impact on the remaining areas of decision-making. As with the dominoes, a decision to begin in the middle of this chain reaction will omit areas important to the end result.

Perhaps more than any other management initiative, asset management is heavily driven by the corporate requirements and objectives. Yet it is often overlooked or summed up in global statements regarding "improved efficiency" or "improved quality."

One of the more recent tools in a manager's arsenal is the balanced scorecard. This proven tool has been used successfully throughout the world as a means of communicating corporate strategy, and converting strategy into results. However specific asset management goals and causality links are rarely included in corporate scorecards. Including asset management at this level of corporate objective setting, sets two powerful dynamics in motion. Firstly, it raises the level of understanding, throughout the company, of this area and its importance. Secondly, it provides guidelines for future decisions that will need to be taken regarding the following steps in the chain reaction.

The Strategic Importance of Asset Management Part Two: Implications

The changing attitudes, understandings of physical assets, and market conditions bring a broad array of implications for those responsible for asset management. The majority of these can be explained as "new accountabilities." Many of these are accountabilities leveled at, or within, corporations themselves. However many will also be directed at the individuals taking or overseeing these decisions, often with daunting consequences for failure.

New Levels of Accountability

As previously highlighted, asset managers are beginning to find themselves increasingly called to account for the decisions that have been taken.

Decisions will increasingly be judged against:

* Higher standards for legislative and regulatory compliance

* Increased understanding of the role of assets in areas of productivity, cost, and quality

* Risk of damage to the corporate image of the company

* Failures to adequately understand production needs

* Failure to accurately determine capital planning requirements, based on current physical assets and future requirements

This leads to two conclusions. Firstly those responsible for taking decisions regarding physical assets need to have a deep understanding of all of the issues and implications of those decisions, as well as the necessary authority to act on them.

Secondly it will require the ability to adequately defend decisions taken. Not only in terms of considerations internal to the company, but also in terms of defence in the case of potential legal actions. It is this second conclusion that has the most impact for maintenance managers of the future.

The ability to state that asset management decisions are defendable is paramount. This means that they have been taken by qualified and experienced people; in a manner that is in line with internationally accepted standards on the issue; and in a manner that provably complies with the first two premises. That is to say, a manner that is totally auditable.

Although these may stretch into many areas of corporate management, there are three "in vogue" elements of today's market that are particularly of concern.

They are:

* ERP/EAM decision making and management

* Outsourcing of asset management functions

* The use of call centers as viable asset management tools

The Strategic Importance of Asset Management Part One: Changing Attitudes

As a result of a handful of events, 2003 has been a benchmark year in the discipline of asset management, the implications of which are reverberating around the world. All of these events were, in some manner, due to a failure of physical assets.

* The Colombia Space Shuttle disaster

* The New York blackout, the London blackout, and the blackout in Italy

* Six people, responsible for the management and maintenance of the rail lines, were charged with manslaughter regarding the Hatfield train disaster in the United Kingdom


The global reaction to these events has been the culmination of a continuous series of changes in this area since the early 1970s. These changes have encompassed attitudes within society, heightened levels of understanding as well as the competitive market forces acting on the function of physical asset management.

Society has become increasingly intolerant of industrial incidents, particularly in the areas of safety and environmental integrity. It is no longer considered acceptable to cause harm to either the environment or to people and the communities that they live in.

In the past ten years this has been reflected in various changes in legislation and regulation in countries around the world. Some of the recent developments in these areas include:

* Changes to the regulations governing electricity providers in the United Kingdom—now providing a high degree of focus on risk management and mitigation.

* Wide ranging fraud legislation by the federal government of Canada in response to the Westray disaster

* Legislation in response to the Longford disaster in Australia

It is becoming obvious that in the future those responsible for the management of physical assets will be more likely to be called to account when there is a failure, and as can be seen by recent history, it is likely that it will not be companies but individuals.

In extreme cases incidents can also mean irreversible damage to a company's public image. Think of such disasters as the Exxon-Valdez environmental incident, the Union Carbide disaster in Bhopal in India or more recently the linking of Powergen to the New York blackout. All of these incidents have remained chained to these companies in the public mind.

Heightened Level of Understanding

The publication of the report Reliability-centred Maintenance, prepared by Stan Nowlan and Howard Heap, has enabled a quantum leap in the way in which we understand how maintenance should be managed.

Many of the findings of this report fly in the face of long-held, "common-sense" type beliefs and have exposed the true complex nature of asset management. They also force companies to look at their physical asset base in an entirely different manner. At a high level these can be summarized in the following points:

* Changes to our understanding of how maintenance contributes to a company's strategic advantage

* Changes to the way in which we understand equipment failures

* The maintenance department alone is not capable of developing a sustainable and adequate maintenance strategy regime

* Maintenance is not about preventing failures, it is about preventing the consequences of failure

* An understanding of the ability of operational maintenance to drive capital expenditure

* More protection is not necessarily better

* An understanding of new ways of maintaining items, particularly those that don't fail according to long-held views

* Extensive data is not required to take decisions on maintenance policies


Many of these new ways of thinking have challenged long held industry views. So much so that they are often difficult for industry professionals to easily assimilate. They are even less likely to be understood by those outside of the field of asset management.


As we move into the 21st century many are beginning to look towards asset management as a source of strategic advantages. To achieve this the organization will need to have a deep understanding of these issues, and others like them, integrated into their thinking and corporate cultures.

Enterprise Asset Management Systems: Your Manufacturing Organization’s Underrated Superstar

For all you baseball fans living in the US and Canada, you can probably appreciate that we are quickly approaching what is referred to as “the dog days of August.” This is when the pennant races are close, and almost every game has added significance for a team’s chances of making it to the playoffs.

As I was enjoying one of those rare idyllic days lying in the backyard hammock and reading the sports page, it occurred to me how the good teams are not just about one or two great players. Rather, they are comprised largely of players whose natural athletic ability may not necessarily match that of the few superstars on the team, and who may not be found basking in the limelight, but who consistently work hard and practice on a daily basis. These are the players that, when given the opportunity, can deliver the key play or get the big hit when the game is on the line.

This made me think about how in a manufacturing environment, the most unlikely areas can contribute in a critical situation. In many organizations, it is the maintenance department that, much like the unsung heroes of the baseball team, manages to keep aging equipment running flawlessly. When a machine unexpectedly breaks down, it is this department that knows what is required to repair it. And just like the baseball season, summertime is a busy time for maintenance departments, as companies choose to use the summer holiday period to shut down in order to install, repair, or replace equipment in their production facility.

In this blog post, I thought it would be a good idea to take an inside look at the challenging world of enterprise asset management (EAM), and find out how this unheralded software can give your company the winning edge.

Factors Leading to Critical Failure of Assets

• poor maintenance practices
• undocumented maintenance logs
• poor budget planning
• inability to track known rates of failure for equipment

What Is EAM

Because competition within industries is fierce, any downtime in a facility can make the difference between profit and loss for the organization’s bottom line. In many organizations that are capital equipment-intensive (i.e., mining, oil and gas, utilities, aerospace manufacturing, etc.), the ability to plan maintenance or replacement of such physical assets as machinery is controlled through an EAM system.

An EAM system generates analytical data to optimize machine-operating efficiency, and calculates costs to support and maintain single pieces or a series of physical assets. EAM also works closely with the computerized maintenance management system (CMMS). CMMS provides predictive maintenance schedules and, by analyzing available inventory, assigns physical resources (inventory and labor) to a scheduled work order for equipment pieces. This generates replenishment purchasing requisitions for maintenance, repair, and overhaul (MRO) spare parts.

In the diagram below, you can see how EAM works as part of a three-pronged approach with EAM, CMMS, and production to gather data for analysis. This analysis helps managers to decide whether to repair equipment, schedule resources, or plan for new capital equipment purchase and installation.

Benefits of EAM

• Ensures compliance with government-legislated health and safety programs by demonstrating tool and machinery reliability through the tracking of all historical maintenance.
• Develops life cycle management systems to identify known or predictive mean time between failure (MTBF) and root cause analysis.
• Allows the ability to implement continuous process improvements in the areas of tools and identification, to properly calibrate tools and equipment as part of a predictive maintenance program. This is done with the help of radio frequency identification (RFID).
• Allows the ability to schedule maintenance and installation of new equipment and to manage repair budgets and schedules, through integration of EAM with CMMS.
• Enables streamlined procurement management policies for MRO spare parts.
• Enables trend analysis to determine when maintenance is cost-prohibitive and to plan for replacement of capital equipment.

EAM Products to Consider

At TEC’s web site, you can review different vendors’ products as well as obtain white papers and vendor comparison reports. In this section, I offer a brief overview of some EAM products worth consideration.

IFS EAM

IFS’s product offerings include over 30 modules of enterprise solutions, many of which that can be purchased as either an overall integrated solution or as a bolted-on best-of-class solution. IFS has a unique add-on available that includes both IFS EAM and IFS ERP called IFS OEE (with “OEE” standing for overall equipment effectiveness). This solution performs analytics while equipment assets are running (which avoids downtime), and it makes the necessary adjustments to maintain an optimum level of production. IFS EAM allows organizations to proactively manage assets and maintenance activites. It combines unique features to permit data modeling on equipment in order to determine whether equipment is near the end of its production life cycle. For further details, visit IFS’s vendor showcase.

Infor EAM Enterprise Edition

Infor EAM delivers a unified solution for monitoring and managing the performance, maintenance, and deployment of company assets. With Infor EAM, the maintenance and plant engineering practitioner is able to perform maintenance optimization, staff productivity analysis, budget forecasting, and strategic planning. There are five separate modules which, combined together, form a complete EAM solution.

• maintenance
• inventory/warranty
• uptime
• reliability risk management
• strategic planning

For further details, visit Infor’s vendor showcase.

A Final Thought

Today’s manufacturers are fighting for any edge that will lower their costs and that will allow them to meet the challenges of global manufacturing and ever-stringent regulatory and compliance legislation. One paradigm shift has been to conduct maintenance based on an actual condition, and not on aggregate rates of failure. This departure from the traditional approach is a result of systems now being able to track real-time performance of equipment. Through EAM, condition-based maintenance (CBM ) is now a reality, and it will permit your maintenance department to perform like champions.

The Total EAM Vision Strategic Advantages in Asset Management

Enterprise Asset Management systems (EAM) continue to point the way into the future for capital intensive industries. The combination of functionalities, asset focussed business intelligence and advanced management consulting have allowed some vendors to provide consistently high results to those industries whose operating model involves the management of large numbers of physical assets.

This specifically refers to industries in the areas of Mining, Oil and Gas, Defense, Utilities and Transport although it does also offer positive benefits for companies in some areas of manufacturing.

The Gartner Group defines EAM as the following:

"EAM consists of asset management, materials management, HRMS and financials"

Figure 1: Complimentary Effects between Managerial Functions in Capital Intensive Industries

The focus and structure of an EAM system recognises the strategic importance of asset management and provides a structure and depth of functionality dedicated to providing clear strategic advantages in these areas. It is for this reason that it is directed at the central role played by maintenance and includes the three additional functional areas in capital intensive industries that have a synergistic relationship with asset management. They have truly evolved into solutions for enterprise performance management in this industry sector.

It represents a key strategy to increase plant capacity, using information technology in lieu of new construction in large, asset-intensive enterprises. It integrates key plant control systems (PCS) and ERP with maintenance activities and functions to reduce downtime and minimize maintenance spending

Case Study: Heinz Frozen Food Co.

Located in Pocatello, Idaho, Heinz Frozen Food Co. is a division of H.J. Heinz Co. LLP. Sharing the corporate Heinz passion for serving up good food, the frozen food division strives to provide delicious and nutritious products that consumers can easily make at home. It is one reason that the Heinz brand has become a staple in homes for nearly 140 years. The company is renowned for being one of the world's leading producers of healthy and convenient foods for every eating occasion.

Heinz Frozen Food Co. manufactures food products that include entres, snacks, and desserts. With its location in Idaho, the division produces Ore-Ida frozen potato varietiesfrench fries, hash browns, and mashed potatoes.

To learn more about Heinz Frozen Food Co., visit www.heinz.com.
Setting the strategy.

When Heinz Frozen Food Co. set its sights on improving its manufacturing and maintenance process efficiency with leading-edge technology, the company knew that implementation of a new system would require a monumental change in culture for its employees. After careful analysis of several competitive applications, Heinz chose an enterprise asset management (EAM) application by Infor for several reasons. Milton Slagowski, maintenance manager at Heinz Frozen Food Co., explains, "It was not only a web-based enterprise system that met all of our maintenance functions, but, more importantly, it was the most cost-effective solution."

As manufacturing and maintenance employees began using Infor EAM after implementation, the company gained better visibility into their processes and realized that more progressive lean manufacturing and lean maintenance practices would enable more significant efficiencies.
Getting business specific.

Heinz Frozen Food Co. began incorporating lean manufacturing and maintenance practices that brought improved results in a short time. "We started to identify maintenance waste elementsthose that didn't add valueand to use Infor EAM as it was meant to be used: in concert with lean manufacturing and lean maintenance," says Slagowski. "And we started to understand change enablers such as awareness of what needs to change, understanding of our goals and objectives, and engagement by everyone from top management to those performing the tasks."

Once all of the change enablers aligned to achieve the targeted results, the company began realizing efficiency improvements. "What we learned was that lean practices are instrumental in implementing an EAM application to achieve excellent results quickly and cost-effectively," Slagowski emphasizes, "and that asset reliability is a key tool for successful lean manufacturing operations. They have a mutual relationship. And Infor helped us understand the process to achieve our goals and get consistent results."

Challenges and Future Plans of a Product Inventory Disposition Vendor

As seen thus far, FreeFlow's Internet-based bidding technology solutions and related business services have been deployed across the broad technology sector including computer hardware, consumer electronics, telecommunications equipment, and electronics companies. However, the vendor is certainly keen to expand into other areas where a limited product shelf life is a common trait. The best candidates would seemingly be the industrial, apparel, and grocery retail markets. To that end, FreeFlow has recently negotiated a deal with a pest control company, and is designing a promotional site for a supermarket chain in Ireland that will allow franchise holders to view what is available online before the stock becomes obsolete.

There is certainly no shortage of Internet inventory liquidation sites available to manufacturers, as brokers on every continent stand ready to consign or post someone's excess inventory. Some of FreeFlow's potential competitors are Liquidity Services (which is publicly held), HedgeHog.com, and LiquiBiz.com. However, FreeFlow believes that its auction approach is fundamentally different starting with its focus on high-tech manufacturers versus a plethora of different industries with differing needs. Also, FreeFlow auctions provide a private forum for a manufacturer's approved brokers to view and bid on the available inventory, whereby auction and "member privilege" dynamics go to work to improve bidding performance, thus returning higher margin recovery to the user manufacturing company.

Another challenge for FreeFlow comes from both prospective users' do-it-yourself (DIY) approaches (at least at first) and from others' beliefs that eBay can do the same job. eBay has been enabling its users to buy pallets of end-of-lifecycle (EOL) products and then sell individual items to buyers, whereby the eBay traders use shippers like UPS or FedEx to move these products from their garages (or other stocking places) to consumers. This is despite the fact that eBay targets consumers, whereas FreeFlow might create and feature a web site too, but for a business to business (B2B), high-touch environment (see Differences in Complexity between B2C and B2B E-commerce). In fact, in late 2006, FreeFlow announced a service partnership with eBay that unites both companies' solutions to help enterprise customers maximize sales of excess, aging, returned, and refurbished inventory. This global offering of eBay's private marketplace technology and FreeFlow's pre-auction and post-auction business services presents customers with an increased number of options for maximizing inventory asset recovery and provides end-to-end services to customers desiring a turnkey asset disposition solution.

By linking with eBay's private auction platform, FreeFlow's customers should benefit from eBay's feature set, which includes a broad range of auction format types, buyer classifications, customization, and data reporting capabilities. Most notably, FreeFlow's customers will gain the ability to sell into eBay's Reseller Marketplace, and thus access the tens of thousands of eBay PowerSellers registered to purchase there. eBay's Reseller Marketplace (which is owned and operated by eBay but is separate from eBay.com) is a marketplace where eBay PowerSellers can bid on inventory for resale. Open only to eBay PowerSellers, this marketplace provides access to inventory in lots for purchase directly from manufacturers, liquidators, and wholesalers.

Different Strokes for Different Folks (and Different Product Life Cycles)

Working in conjunction with the FreeFlowAuctions.com platform are two cornerstone applications to FreeFlow's integrated inventory asset management suite. While aiming at different product life cycle phases (that is, still active inventory and EOL or obsolete inventory), both are fully hosted solutions that require no internal IT involvement and offer pay-as-you-use services that are easier on the budget. The solutions can be used on a monthly, flat fee subscription basis or on a transaction fee basis. As a business services provider, FreeFlow hosts the software application and provides all related administrative and operational process support. The user enterprise is in charge of the key decisions (such as what inventory to liquidate and at what target price), but the business services provider takes care of everything else. There is no software to install and maintain, and with a pay-as-you-use software-as-a-service (SaaS) model, users have no lengthy payback period to justify on a software license. Further, the user's staffers can remain focused on their core tasks, not on managing brokers and juggling spreadsheets, e-mails, and phone calls (see What Is Software as a Service?).

The first application, ChannelFlow, is a monthly, subscription-based intranet system (with fee structures based on throughput volume) for still active but at-risk inventory. Such excess inventory is promoted (offered) using channel partner direct bidding or the client's sales force to proxy bid on behalf of their accounts. The solution is a Web-based, private auction that provides inventory visibility and preapproved discounting to channel partners. Bidders are typically company sales personnel acting on behalf of the retailers and distributors they support. Data is uploaded manually or through system integration from the user company's inventory system, and extracted based on criteria agreed upon by the sales, finance, and supply chain management (SCM) organizations. The criteria are typically inventory policy (inventory in excess of an agreed number of weeks of supply) and product life cycle status (current, active products). Once the inventory listing is uploaded, authorized finance personnel will update the system with minimum pricing and, together with the sales organization, finalize the target quantities to be promoted. Visibility to the items' condition (new, re-boxed, etc.) allows promotion of new products as well as products not in original packaging. The turnkey convenience of ChannelFlow eliminates the inevitable administrative overhead related to marketing promotions, and saves time and money by moving product through the channel faster. Another major feature of the system includes the provision of sales representatives' performance tracking.

The secret to improved financial returns for any enterprise is its awareness of its product's pricing history, the current market, and its competition. This knowledge, which is critical to the manufacturer's go-to-market strategy for excess inventory, comes to the user enterprise in the form of FreeFlow Market Intelligence. FreeFlow Market Intelligence can be used to set price minimums, determine auction lot sizing, and (most importantly) identify the best buying community for the products. FreeFlow's ClearFlow-managed broker auctions provide the combination of flexible, Internet-based technology and years of market experience with a common result of consistently higher recovery and reduced inventory management overhead for the user. The solution is deployed as part of an enterprise's routine inventory review cycle and is integrated with the S&OP process. FreeFlow also provides optional system integration, approval automation, and list management to standardize and automate the inventory management workflow processes.

In addition, ClearFlow is a transaction fee based (although there is an average onetime setup fee of $20,000 [US]), extranet, private auction liquidation platform that efficiently moves EOL, obsolete, returned, or refurbished inventory that is otherwise sitting idle in warehouses and costing companies money. Its key features include secure private auctions (whereby web sites can be branded or anonymous); comprehensive market intelligence (broker performance reporting and recommended pricing, for example); competitive bidding for improved recovery and managed logistics; credit; collections; and settlement.

Whereas some customers elect to go to market anonymously with inventory sold on the standard www.FreeFlowAuctions.com site, other FreeFlow customers might elect to have branded sites powered by FreeFlow in a private label fashion. Powerful brands generate additional interest, which translates into measurable percentage point improvement in returns. A good example of a branded, private labeled auction site is one from ModusLink Corporation, a subsidiary of CMGI, Inc. In late 2005, ModusLink announced the official launch of its online auctions service, enabling clients to more systematically and proactively manage the high cost of product excess and obsolescence. By leveraging ModusLink's online auction portal, ModusLinkAuction.com, to solicit competitive bids from prequalified buyers, clients have been able to liquidate excess, obsolete, returned, and refurbished inventory more quickly, and to mitigate the high cost of traditional disposition methods. ModusLink's online auction service complements its existing remarket services, thereby providing clients with more choice and greater flexibility in determining how to eliminate excess inventory from the books.

Auctioning Process Explained

To best illustrate the auctioneering service for FreeFlow's clients in the electronics or telecommunications industries, the process overview for an inventory liquidation event starts with FreeFlowAuctions, allowing members (who do not pay any subscription fees, but that have to be preapproved by the manufacturer) to view, bid, and purchase discounted inventory directly from manufacturers. FreeFlow, along with its strategic partners, has developed a target-pricing model that forms the underlying bidding process of the auction site. Thus, all inventory advertised on the site will have a target price assigned to it which will enable the bidding party to ascertain what the minimum expected recovery is on certain items. By bidding on or above the target price, bidding members will secure their allocation of this inventory automatically on the assumption that the inventory is still available.

However, by bidding below the target price, allocation is not guaranteed and the inventory will remain on the auction site until the strategic partner either decides to accept the lower bid or wait for another member to bid the target price. All target price bids are answered within twenty-four hours. If multiple bids for the same inventory are received within a twenty-four-hour period, the strategic partner (that is, the seller or manufacturer) will ultimately either allocate the inventory to the highest bid or to the oldest bid if all bids are equal. Once a bid is accepted, the successful bidding member will be contacted, and upon receipt of a purchase order (PO) and payment, the inventory will be dispatched from the strategic partner's facility via its carrier. Standard freight fees apply to all dispatches from the partner's facility, with the buyer absorbing freight costs.

All new users (in this case prospective buyers) must open an account with FreeFlowAuctions, which is a fairly simple process. All it requires is filling in a few customary details (company name, address, e-mail address, etc.), and each applicant can decide its own user identification (ID) and password. Still, in addition to restricting access to approved buyers or brokers only, this step allows the manufacturer to screen each applicant from a trade and compliance perspective. After a user has successfully logged in, the user must click on the "Search Product" tab to search for available product, and will then be asked to enter the search criteria. Although it is compulsory to click on at least one tab to bring up a result, it is however, better to enter the manufacturer and the description or part ID, as the description tabs will only return results if the name the user enters is part of the product name. The "Packaging" tab has two separate categories: "Generic Boxed" (classified as refurbished material; product that has been returned but legally cannot be sold again as new) and "Retail Boxed" (a new and factory-sealed product). The process for searching components via the "Search Component" tab is basically the same, with the difference being that the search engines for components are "Packaging" (for example, reel, tape, tube, etc.), "Component Type" (SDRAM, linear, logic, chips, etc.), and "Manufacturing Date" (that is, date of manufacture).

Once the user or bidder has located the product or component of interest, he or she can enter a bid which is placed based on the target price requested by the manufacturer (in this case, the seller). Once a bid is placed, FreeFlowAuctions will return with a response within twenty-four hours via an e-mail that will highlight whether a bid was successful or not. If the bid is accepted, then the member must submit a PO via prescribed fax or e-mail accounts. Upon receipt of a PO, FreeFlow will arrange for the manufacturer to ship the product, and in turn will provide tracking details for its shipping. The tracking number is provided by the manufacturer to the auctioneer and is placed up on the web site next to the shipment. Once this is completed, FreeFlow will request payment from the buyer (a minimum order value of $3,000 [USD]). Payment up to $4,000 (USD) can be made by credit card (Visa and Mastercard only), and for amounts over $4,000 (USD), by wire transfer. A currency converter is provided online to assist the conversion of US dollars into the member's own currency.

Once shipping details are issued by the manufacturer, a tracking number is provided and is uploaded to the site. The member can then track the shipment by logging onto the site and clicking on the tracking link relevant to the bid. The inventory is shipped out using the manufacturer's current freight forwarders only, whereby freight fees will be applied to each shipment using the preferential rates that the manufacturer has agreed upon with its forwarder. All shipments from the partner's facilities are on a delivery duty unpaid (DDU) basis, and once a bid is accepted, shipments will be dispatched within forty-eight hours. FreeFlow's commission ranges from 8 percent to 50 percent depending on the level of support it gives to the auction process. That is to say, some companies might require pre- and post-auction support (where, for instance, products need to be catalogued and counted so that they can be advertised properly), while others simply provide a list of available stock. FreeFlow administers the auction, but the client ships out the inventory. All FreeFlow auctions are private auctions, and the customer approves the members or bidders. Getting started is fairly easy, as upload templates are populated with simple extracts from the customer's inventory management system.

Auction at the Core of Inventory Asset Management

Initially known as Web Component Trading (WCT) and operating as WCTbid.com, the company name was changed to FreeFlow in late 2005. The new name underscores the company's focus on not only identifying at-risk inventory for its customers, but also on allowing that inventory to "flow freely" through the sales channels. In mid-2006, expanding from its inventory liquidation and recycling roots, FreeFlow announced FreeFlowAuctions.com, a hosted, online, private auction solution that customers can use to standardize their sales and operations planning (S&OP) process of identifying at-risk inventory. This standardization drives all constituents to act on moving the idle inventory before it loses its market value, and to automate the disposition of the inventory. With the solution, user companies should be better able to manage active and idle inventory in order to maximize the life cycle profitability of their products, as the solution aims at enabling user companies to lower the amount of financial reserves needed, reduce the overall amount of write-offs (sometimes by several million dollars), and improve their bottom line every quarter.

Featuring a fairly user-friendly dashboard, FreeFlowAuctions integrates with a user company's S&OP process, providing automated list upload and approval routing capabilities. Password security access gives executives control over update capabilities for inventory quantities and pricing. The dashboard provides executives with at-a-glance views of key metrics such as product revenue performance, price recovery performance, and margin analysis of active and idle inventories by region or by product. Automated triggers notify executives of critical changes and provide significant time savings that would have previously been spent seeking approvals for inventory liquidations by phone or fax. FreeFlowAuctions also provides management with audit trails that show comprehensive bid histories and transactions.

This solution is in sharp contrast to the dominant, customary practices of so many enterprises that continue to address at-risk inventory on an ad hoc basis, thereby missing the opportunity to maximize the life cycle profitability of each product. In other words, FreeFlowAuctions platform aims at helping customers to implement decisive operational processes on a regular, repeatable basis to accomplish this very goal. To that end, FreeFlow will build the auction site for clients and take responsibility for the site and the sale. The user company effectively outsources all of the administration hassle to FreeFlow, who assumes the risk and does not allow credit to any participating bidding party.

Zooming into an Inventory Free Flow

The convenience of a 24x7 intranet marketplace may be the answer to a company's end-of-lifecycle (EOL) inventory ills. Entering their products into an online auction portal, companies can sell off their excess inventory to the highest bidder, and buyers can purchase needed items for a "steal."

Is There a Smarter Way to Handle Excess Active and Obsolete Inventory?

Given that one man's challenge often presents another man's opportunity, this brings us again to FreeFlow (www.FreeFlow.com). FreeFlow is a privately held provider of business services and patented technology whose stated mission is to help customers improve product life cycle profitability through the proactive identification and systematic reduction of at-risk and excess inventory. Founded in 2001, self-funded, and profitable virtually from the word go, FreeFlow has since provided many renowned high-tech manufacturers with business services and technology in a subscription-based, turnkey solution. These services and technology have enabled some customers to yield higher margins, increase their inventory throughput, and improve their cash flow while avoiding channel conflict, and to reduce overall reverse logistics costs. Most important, these benefits have reportedly been achieved quickly and with minimal overhead, since FreeFlow's solution requires no users' internal information technology (IT) involvement and uses a pay-as-you-go pricing model for a more immediate and apparent return on investment (ROI).

In brief, some of the vendor's practices for proactive identification of at-risk inventory are via establishing target market and pricing, hosted online private marketplaces, and supporting pre-auction and post-auction business services. Companies that use FreeFlow's technology are able to promote their inventory to clients, auction it to liquidators, and reprocess it using recycling companies. The technology allows the customer to control everything that happens online, and FreeFlow has the global patent on it. Started up during a rather depressed economic climate in the upstairs bedroom of the chief executive officer's (CEO) mother-in-law's house in Tralee, Ireland (currently awaiting a new 20,000 square foot headquarters), FreeFlow now has its United States (US) headquarters in San Jose, California. The company most recently expanded its operations with the opening of its new offices in Hong Kong (China) in early 2006. This expansion into Asia, given the company's existing locations in Europe and the US, has given FreeFlow a strategic, worldwide presence in three key geographical locations, and has enhanced the service provided to clients within a global supply chain.

Given that FreeFlow preaches IT outsourcing to its clients, the company demonstrates the "eat own dog food" principle by attributing its own success to keeping its cost model varied (for example, the company has always had a variable cost-based and motivated sales force) and outsourcing where possible. To that end, the vendor does the administration in house, but it outsources the IT, Web development, and programming. In the company's early days, the founder could not possibly afford to take on a head count, so he approached some senior executives whom he had worked for and offered them a stockholding in the business along with a commission based on the business that would be generated from the high-tech companies (prospective users) they introduced him to. Consequently, the company now counts a dozen of the world's biggest multinationals as clients, and expects turnover to almost double in 2007, continuing five straight years of double growth in throughput. Some of FreeFlow's fully hosted inventory asset management solutions customers include Microsoft, Apple, Motorola, 3Com, Fujitsu, Logitech, Creative Labs, Trimble, SanDisk, and logistics provider partners ModusLink and ArvatoUSA. As an approximate breakdown, the company generates 70 percent of its revenue from the US and the remainder from Europe and Asia. The company remains intent on continuing its operations without any venture capital (VC) funding.

In October 2006, FreeFlow announced that its founder and CEO, Alan Scroope, was named the Emerging Entrepreneur of the Year by Ernst & Young in Ireland. Scroope was recognized for FreeFlow's innovation and the patented technology that transforms its customers' business processes by automating the identification and liquidation of at-risk inventory. This award came on the heels of two industry awards previously bestowed to FreeFlow for its pioneering technology. Namely, the company was chosen by Manufacturing Business Technology (MBT) magazine as one of the forty Emerging Software Vendors in 2006. This award recognizes leading entrepreneurial IT vendors based on dynamic criteria including growth statistics, recent customer wins, product innovation, and overall company direction. Additionally, Gartner recognized FreeFlow as Best Service Provider at its 2006 Fall RetailVision, a premier global event for the retail consumer channel.

Newsflash—Excess Active and Obsolete Inventory Is a Money Drain

Excess inventory, which ties up working capital and whose value is declining by the day, does not necessarily come from new product introductions only. Namely, nowadays the manufacture of most goods is largely carried out in the Far East, which comes with a nominal item price advantage, but also with many potential downsides (see The Gain and Pain of Global Retail Sourcing). In addition to the inevitable quality, communication, and cultural issues, manufacturing product in such lower cost, remote locations means a sizeable lead time increase, as the goods will need to be transported from the Far East back to the company's warehouse. This in turn means that a planner will have to forecast the demand before placing an order with a remote supplier far away. In the high-tech and electronics world today, it is a common industry fact that forecast accuracy is at about 80 percent. This means that often 20 percent of everything that is manufactured is deemed to be "at risk" immediately and may never sell. In other words, potentially 80 percent of a company's inventory is active product that is currently selling. The remaining 20 percent is either slow-moving or will never sell simply because of the inevitably inaccurate forecast. Also, excess inventory scenarios often exist within worldwide services and warranty repair organizations. This can mean one of two things: One can have excess spares inventory that another service organization within the company or the distributor channel needs, but hardly anyone has any way of knowing about it; or there is excess stock of the product throughout the company and one must go to the open market to dispose of it. Other sources of excess inventory come from safety stocks, inventory buildups for seasonal and promotional items, bigger order sizes due to volume-based discounts, consignment inventories, returned goods, and so on.

To rub salt into the wound, excess active inventory is arguably the most difficult life cycle category to get rid of. If it is still on the original equipment manufacturing (OEM) company's price list, it is often contractually price-protected, and creating channel conflict by selling off discounted inventory to competing wholesalers is categorically not an option. In addition to the price protection that precludes the use of any form of broker liquidation, potential channel conflict restricts wholesale and retail options. Companies may sometimes resort to ineffective, high-overhead marketing promotions to move this inventory, but more often than not, significant quantities remain in the warehouse until eventually the product is rendered obsolete. Then it is eventually liquidated for several pennies on the dollar. While such marketing programs as promotions and rebates may move some excess inventory, profitability analysis reflects not only the margin impact of discounting, but the significant overhead costs of program management to develop, launch, and manage each distinct program as well. Hidden are the costs of claims matching, invoice reconciliation, credit resolution, and write-offs. Creating hefty financial reserves against product obsolescence, writing off the inventory, and ultimately recovering only a small fraction of the original value is the inevitable result of most companies' inventory asset management processes. Their focus, naturally, is on new product introduction.

There must be a smarter, more cost-efficient way for a company to increase its inventory asset recovery dollars. And there is. FreeFlow, a provider of business services, offers a way for businesses to off-load their inventory in the form of an online auction portal.

Let the (Excess) Inventory Flow!

The conundrum of inventory management and the notion of inventory as a "necessary evil" (or the "asset versus liability" dilemma) have long been haunting and bedazzling operations and financial and accounting managers. It is a well-known fact that managing inventory risk is about managing the cost of maintaining unnecessarily high levels of inventory against the risk of running out of stock at a crucial moment of truth (MOT) when a customer actually wants something. In a variety of aspects, inventory management is at the heart of the supply chain management (SCM) realm. Supply chain organizations are responsible for all the processes from sales and operations planning (S&OP) to customer fulfillment, inventory optimization, and new product delivery and introduction (NPDI)—all of which involve the planning and movement of inventory. Profit margins are also directly proportional to operational excellence in each of the above processes.

While cherished by material management folks as supply chain "grease," inventory is not that beloved by financial managers. For one, owing to dreaded inventory costs, start with carrying costs. APICS Dictionary (formerly standing for American Production and Inventory Control Society, but recently renamed the Association for Operations Management) defines carrying cost as follows:

The cost of holding inventory, usually defined as a percentage of the dollar value of inventory per unit of time (generally one year). Carrying cost depends mainly on the cost of capital invested as well as such costs of maintaining the inventory as taxes (based on the value of inventory on hand at a particular time) and insurance, obsolescence, spoilage, and space occupied. Such costs vary from 10 percent to 35 percent annually, depending on type of industry. Carrying cost is ultimately a policy variable reflecting the opportunity cost of alternative uses for funds invested in inventory.

The topic here is not traditional inventory optimization. That issue has already been tackled in previous articles (see Inventory Planning & Optimization: Extending Your ERP System and Lucrative but "Risky" Aftermarket Business—Service and Replacement Parts SCM). It enables clients to reduce investment in stock while at the same time maintain or improve customer service levels. Given that most inventory optimization techniques work on the premise of stock items being in their prime time, the focus here rather is on the tricky effect of product life cycles on inventory.

The motto "time is money" certainly holds true when it comes to inventory valuation. Well, maybe in a reverse (negative) manner, because typically neglected in the continuous battle for executives' focus and priority is the management of at-risk, aging inventory—be it excess active, obsolete, returns, or refurbished inventory. Some refer to these items as "slobs," which stands for "slow moving and obsolete" ones. In other words, most companies in the sectors of high-tech, consumer electronics, retail, and consumer packaged goods (CPG) are focused on new product introductions. Given that everybody is most excited in the early stages of product life cycles (that is, devising and delivering the brand new, "coolest" products), much less attention is paid to the languishing, "totally so not cool" older product lines, with millions of accompanying inventory asset recovery dollars slipping away annually as a consequence.

The S&OP process is chartered with aggregating demand from all sources, translating that demand into a production plan, and ensuring that the sellable product is in the right place at the right time for the duration of its active life (see Sales and Operations Planning Part One: Identifying and Forecasting Demand). In this process too, little time is afforded to the continuous assessment and disposition of excess active inventory, which comes from the ever-quicker pace of new product introduction that drives constant product turnover. Further, the rate of customer returns—reportedly up to 20 percent in consumer electronics—results in returned and refurbished inventory. Industry estimates of inventory excess in the high-tech sector alone reportedly approaches $2 billion (USD) annually, whereby most companies, in the best case scenario, are liquidating that excess "asset" at 20 percent of its original cost. Therefore, possibly the most hated notion for any financial manager is the one of inventory write-off, a deduction of inventory dollars from the financial statement because the inventory is of less value. An inventory write-off may be necessary because the value of the physical inventory is less than its book value or because the items in inventory are no longer usable.

Returns and Refurbished Materials Adding Oil to the Fire

Thus far, one conclusion would unequivocally be that inventory challenges exist at every stage of the product life cycle, since product phase-in/phase-out, missed sales, and basic forecast errors result in excess active inventory. The end-of-life (EOL) stock and obsolete inventory are the inevitable results of unsold active inventory that has since been displaced by newer-generation products, or otherwise discontinued. But what about inventory returns, the items that are returned to the manufacturer as defective, obsolete, over aged, etc.? An inventory item record transaction records the return or receipt into physical stores of materials from which the item may be scrapped. To make things even more painful, returns inventory comes in all shapes and sizes, with "new/unopened," "new/package-defect," "quality defect," and "consumer returns/used" being typical classifications.

Hidden in the darkest nooks and crannies of the warehouse, returned inventory accumulates until the aisles are virtually impassable. And many companies otherwise rigorous in their accounting standards do not manage warranty reserves effectively. Thus, when a liquidation action is taken, it is a hasty, ad hoc process, and millions of dollars in inventory asset recovery are swept out the door with the residue of the last damaged carton. It is but a small comfort that at least the things are out of the way and are no longer incurring the storage costs—a subset of inventory carrying costs. Storage costs include the cost of warehouse utilities, material handling personnel, equipment maintenance, building maintenance, and security personnel.

The phenomenon has even introduced the notion of reverse logistics, a complete supply chain dedicated to the reverse flow of products and materials for the purpose of returns, repair, remanufacture, or recycling. Many retailers have the proverbial problem of how to move inactive, "grey market" stock (irrespective of condition) that they cannot return to the manufacturer for full credit. Return rates in some industry sectors can be as high as 20 percent, although through targeted initiatives and channel cooperation, some nimble companies have managed to attain only a few percentile rates. Whether the return rate is high or low, across the board one fact remains constant—no one in the reverse supply chain wants to add a penny more to the cost of managing returns. Aside from treating a return as an additional opportunity to make a favorable customer impact, the entire process is viewed as a "necessary evil," a cost of doing business with customers ranging from OEM relationships to end consumers.

Again, like in the case of active excess inventory, well-orchestrated auctions can be tools to remarket inventory to a specific or a global audience with minimal resources or input required from the retailer or manufacturer. However, new best practices in returns inventory asset management involve outsourcing as much of the material handling and disposition process as possible. FreeFlow touts a number of returns material remarketing programs with global manufacturers in the high-tech and telecommunications industries. In turn, these manufacturers can reap both operational and financial benefits from off-loading this category of inventory as soon as the customer interaction is complete. In the case of such certified pre-owned programs for inventory that was often previously scrapped or liquidated at cents on the dollar, some financial impact should come from improved cash flow (less cash locked in idle inventory assets), better inventory turns (fewer weeks of inventory being on hand), better recovery, and reduced warehouse space. The process steps are depicted below:

1. Returns Processing—In this step, customer and channel returns are processed to the company's returns center as usual, with customer return material authorization (RMA), credit, replacement, and all customer-related activities being conducted by the manufacturer or designated third party logistics (3PL) provider.

2. Material Sorting—Once the inventory is in house, the primary objective is disposition velocity and elimination of unneeded touches. During the put-away process, inventory is segregated as "new/unopened" and all other classifications. Some companies at this point also sort out components or modules that are to be returned to the manufacturer directly. All other inventory is compiled on a liquidation sale list for FreeFlow.

3. Material Valuation—Once FreeFlow receives the listing, a market analysis is conducted to determine a rough estimate of the remarketing opportunity for the particular lot of product. FreeFlow then initiates a PO in an amount of 10 percent (or other pre-negotiated ratio) of the estimated value and the inventory is sold and shipped to FreeFlow. The inventory is off the user company's books and out of the warehouse in a matter of days from the time it was returned.

4. Remarketing and Revenue Share—Upon receipt of the inventory at regional locations in Europe, Asia, or North America, FreeFlow proceeds with detailed inspection and sorting of the inventory. Some value-added processes may be performed, ranging from testing to repackaging to repair depending on the manufacturer agreement. Through its global network of fulfillment partners, FreeFlow can help with repackaging, re-labeling, and testing when it is appropriate to add value to increase recovery. All saleable inventory is remarketed through FreeFlow's auction platform, and at the conclusion of each auction cycle, the sales revenue is split along the pre-agreed revenue sharing agreement, such as a 60-40 percentage (manufacturer-FreeFlow). The revenue split is determined based on factors such as scrap ratios, value-add processing required, etc.

In a nutshell, the above would be an attractive revenue-sharing model (with a predictable revenue stream that allows a significant reduction in returns and scrap financial reserves for the manufacturer), whereby returned products are inspected, refurbished, and certified by the manufacturer. After these processes are completed, inventory ownership and operational responsibility is then transferred to FreeFlow. FreeFlow repackages and prepares the pre-owned products as necessary for the market, and can even provide package design services if required. FreeFlow works in tandem with manufacturers to clearly identify the condition of items and the terms of sale, and to determine decisive channel strategies for the pre-owned inventory to avoid conflict of inventory flow into primary markets. Using the auction portal, inventory is then sold according to this strategy, which often includes second tier channels, emerging markets, and e-tail arenas. The right target price is based on FreeFlow's market intelligence, while by way of drop-shipping, the manufacturer can even disposition the returns directly from its channel partner's facility, thus avoiding the additional transport costs of bringing the material back to its premises. This program, which can be tailored to the needs of each manufacturer (who specifies and audits all refurbishment processes, but remains free from having to manage them), is the result of consumers showing an increasing appetite for refurbished inventory from well-known manufacturers that have a constant flow of returns.

What about Shortages? (They Can Happen Too)

With component shortages, however, time (a proven inventory managers' foe) leads to scarcity, exposure to appalling production line downtime situations, and increased cost. When demands unexpectedly change, or delivery, quality, or availability problems arise, buyers must rush to the open (broker) market to source components wherever they can. Sure, one can logically turn first to a 24x7 intranet marketplace within the global service organization, whereby each location can advertise excess spares inventory or flag shortages to all other locations. If there were such a portal platform, it could automatically e-mail other registered member locations to notify them of the shortage. Should an alerted location have the needed inventory, it can enter a "bid" for the shortage, triggering an automatic e-mail to the buyer that a "bid" has been made. The buyer then accepts the bid, and the inventory is sent out to the buyer.

But, unless there is some spares inventory in another service organization within the company (often without a viable way for anyone to know about it), the company's buyer must go to the open market to source it in a firefighting fashion. Yet, seldom are companies more exposed to price gouging than when they have exhausted all internal inventory sources and must resort to the open market to source their needed spares—fast and desperately. Manufacturers that deal with clever and well-versed brokers one-on-one typically are outwitted whether they want to sell or buy something. The problem of not following a specific procedure (other than buyers following their own instincts and preferences) is often compounded by a broker diversity based on the personal relationships of new buyers joining the buying team. Further, there is often no transparency in quotations (owing to phone and e-mail correspondence mostly). An added confusion is with the mapping of the internal part number versus external vendor part number, along with alternative component cross-numbers that have been approved by the engineering department on the approved supplier list.

There is always the option of having some hedge inventory, a form of inventory buildup to buffer against some unpredictable event that may not happen at all. Hedge inventory planning involves speculation related to potential labor strikes, price increases, unsettled governments, and other events that could severely impair a company's strategic initiatives. However, risk and consequences are unusually high, and top management approval is thus often required. Again, a more elegant solution could be a buyer portal acting as a private reverse auction or bidding platform that allows the company to go to the open market and solicit as many sources as needed to ensure competitive bidding, yet go anonymously under the banner of the portal provider.

That is to say that, as a surrogate bidder, service providers like FreeFlow would buy the products in its name on behalf of the user company, and drop-ship the products to the client (see Drop-Shipping—Internet Retailers' "Little Helper"?) so that the user company's identity alone does not signal an opportunity for runaway prices. The service provider could even conduct some quality control, value-added services (packaging, testing, etc.) should user companies need them. Ideally, the buying and selling portal should be fully interfaced with the engineering department so that the buyer simply keys in the required internal component number and the portal would then populate the appropriate external vendor part numbers that are required. Also, a full audit trail should be provided for each purchase, whereby a multi-digit bid number is assigned to every bid that a broker logs into the system. In this case, a purchase order (PO) would not be issued until a bid number is submitted into the system by the buyer. Occasionally, there would be a need for an optional secondary bid approval should approval from the engineering department be needed.

Is There a Smarter Way to Handle Excess Active and Obsolete Inventory

Excess at-risk inventory ultimately impacts a company's bottom line. But because companies are more focused on the development and promotion of new products, the problem of excess inventory is seldom a priority. Companies often resort to high-overhead marketing promotions, rebates, or complete inventory write-offs to unload their excess inventory.

Let the (Excess) Inventory Flow!

Rather than falling back on these detrimental practices under duress, many have wondered whether there might be better, more deliberate ways of dealing with the conundrum of excess inventory instead of customarily writing it off against financial reserves, which directly impacts the bottom line. The advent of the Internet and the well-embraced auction paradigm to drive competitive bidding (which has in some cases proven to increase recoveries by 20 percent or more) has prompted the foundation of companies like FreeFlow. Chief executive officer (CEO) and founder of FreeFlow, Alan Scroope, had long felt there is a gap in the systems and tools that would allow his former employers to deal properly with this continual problem. Namely, there was no systematic or transparent solution that would allow companies to promote their stock to their existing customers. Neither was there one to help these companies liquidate their stock into emerging markets or into geographies where this inventory could be cannibalized.

It is certainly no news today that the Internet has been a disruptive technology that has irreversibly changed many of our habits. One change for sure comes from the convenience of leisurely Web browsing and online shopping from our cozy places, albeit sometimes unfortunately bundled with the inconvenience of late or incorrect delivery and lack of order visibility and status tracking, followed by annoying and costly returns (and then unnecessary trips to the postal office, just to negate any promised convenience in the first place). Other Internet-based phenomena include business-to-business (B2B) auctions and reverse auctions. Namely, given the success of eBay in the consumer arena, one might wonder whether some eBay-like practices can help B2B sales too, since Web-based auction portals should allow users to seize the power of the Internet for speed and anytime, anywhere access. To refresh our memories, according to Wikipedia, reverse auction (also called procurement auction, e-auction, sourcing event, e-sourcing, or eRA) is a B2B tool used in industrial procurement. It is a type of auction in which the roles of the buyer and seller are reversed with the primary objective of driving purchase prices downward. While in an ordinary auction buyers compete for the right to obtain a good, in a reverse auction, sellers compete for the right to obtain money (by providing a good or service).

FreeFlow believes that there should be alternate channels for a company's excess inventory, representing significant opportunistic sales opportunities without creating the channel conflict described in Let the (Excess) Inventory Flow! The trick is in finding those opportunities without distracting the sales force. The first logical step would be to engage the existing channel by establishing a private auction platform to post the inventory. Members of the sales team—or selected channel partners and retailers—could then bid competitively on the inventory. Minimum price thresholds would be set and bidding activity would take prices upward from there. These opportunities would afford sales representatives and retailers alike the opportunity to generate upside sales revenue by buying in inventory at a discounted price (with the price still being above contractual price protection thresholds). In addition, they would allow for creative sell-through programs (for example, truckload sales at a regional big-box retailer—without the cost and overhead of marketing promotions).

Similar principles would apply to excessive spares inventory or global spares inventory balancing. Traditionally, due to the age and condition of the product, the usual destination for excess spares inventory is to the scrap bin. However, with recycling legislation—and costs—on the increase, scrapping excess inventory is not as smart or as easy as it once was. Imagine the convenience of having a 24x7 intranet marketplace within a global service organization, where each location can advertise excess spares inventory or flag shortages to all other locations. The intranet provider can immediately send an e-mail to the other registered member locations, alerting them to the excess components. Or, if the host company wishes, an e-mail can be sent only to those registered members requiring the product. If another location needs the inventory, it can enter a bid for the excess inventory, whereby the user company will receive an e-mail that a bid has been entered and, after accepting it, the inventory will be on its way to the buyer. In the case that such a simple solution to global spares inventory balancing within the organization does not work, again, a flexible bidding technology should allow the user company to take its excess spares inventory to the open market to solicit as many brokers or buyers as needed to ensure competitive bidding, while ensuring that freight costs do not further erode recovery margins.

This brings us to the second step of active product inventory disposition (PID), which can run sequentially or in parallel to the first. Companies would again use the private auction platform to market their inventory to alternative channels, which may consist of some or all of the following: non-contracted retailers interested in making an opportunistic buy, buyers in emerging markets, or the tens of thousands of e-tailers doing business on eBay, Amazon, or Yahoo. Owing to its industry expertise and connections (currently with 3,500 approved brokers on board), FreeFlow helps user companies find the right market for their products and brings those candidates to its private auction, where competitive bidding drives the maximum market price on the inventory.