© 2005-2006 the athena consortium. introduction to business interoperability baptiste lebreton,...
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© 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
3© 2005-2006 The ATHENA Consortium.
• 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!
4© 2005-2006 The ATHENA Consortium.
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
5© 2005-2006 The ATHENA Consortium.
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
6© 2005-2006 The ATHENA Consortium.
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.
7© 2005-2006 The ATHENA Consortium.
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:
8© 2005-2006 The ATHENA Consortium.
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
9© 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
10© 2005-2006 The ATHENA Consortium.
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
11© 2005-2006 The ATHENA Consortium.
Impact of Lacking Interoperability
• Bullwhip effect: A minor change in customer demand disrupts the whole supply chain flows
Brewery
Brewerywarehouse
Wholesaler
Retailer
Final customer
12© 2005-2006 The ATHENA Consortium.
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
+
-
13© 2005-2006 The ATHENA Consortium.
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
14© 2005-2006 The ATHENA Consortium.
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
15© 2005-2006 The ATHENA Consortium.
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
16© 2005-2006 The ATHENA Consortium.
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
-
17© 2005-2006 The ATHENA Consortium.
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)
18© 2005-2006 The ATHENA Consortium.
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.
19© 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
20© 2005-2006 The ATHENA Consortium.
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
21© 2005-2006 The ATHENA Consortium.
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*
22© 2005-2006 The ATHENA Consortium.
• 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
23© 2005-2006 The ATHENA Consortium.
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
24© 2005-2006 The ATHENA Consortium.
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 ?
25© 2005-2006 The ATHENA Consortium.
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
26© 2005-2006 The ATHENA Consortium.
Employees and CultureEnterprise R (e.g. retailer)
Enterprise B (e.g. brewery)
Employees and Culture
“How do we behave towards our external business partners?”Information sharing ?
External visibility?
27© 2005-2006 The ATHENA Consortium.
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
28© 2005-2006 The ATHENA Consortium.
Collaborative Business ProcessesEnterprise R(e.g. retailer)
Enterprise B (e.g. brewery)
Public process ?
Business semantics?Collaborative
Business Processes“How do we interact
with external partners?”
29© 2005-2006 The ATHENA Consortium.
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)
30© 2005-2006 The ATHENA Consortium.
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)
31© 2005-2006 The ATHENA Consortium.
Information SystemsEnterprise B (e.g. retailer)
Enterprise A (e.g. brewery)
Information Systems“How do we connect
with business partners?”
Interaction type?
32© 2005-2006 The ATHENA Consortium.
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)
33© 2005-2006 The ATHENA Consortium.
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
34© 2005-2006 The ATHENA Consortium.
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”)
35© 2005-2006 The ATHENA Consortium.
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.
36© 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
38© 2005-2006 The ATHENA Consortium.
• 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
39© 2005-2006 The ATHENA Consortium.
Impact Assessment Basics
• 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
40© 2005-2006 The ATHENA Consortium.
Impact Assessment Basics
• 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
41© 2005-2006 The ATHENA Consortium.
Impact Assessment Basics
• 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
42© 2005-2006 The ATHENA Consortium.
Impact Assessment Basics
• 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
43© 2005-2006 The ATHENA Consortium.
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
44© 2005-2006 The ATHENA Consortium.
Operational Impact Assessment
• 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
45© 2005-2006 The ATHENA Consortium.
Operational Impact Assessment
• 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
46© 2005-2006 The ATHENA Consortium.
Strategic Impact Assessment
(operational impact)
transaction costs
(oper. excell.)production costs
(suppliers)procurement
costs
(customers)revenues
47© 2005-2006 The ATHENA Consortium.
Strategic Impact Assessment
• 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
48© 2005-2006 The ATHENA Consortium.
Strategic Impact Assessment
• 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
49© 2005-2006 The ATHENA Consortium.
Strategic Impact Assessment
• 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
50© 2005-2006 The ATHENA Consortium.
Strategic Impact Assessment
• 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
51© 2005-2006 The ATHENA Consortium.
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
52© 2005-2006 The ATHENA Consortium.
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)
53© 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
54© 2005-2006 The ATHENA Consortium.
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
55© 2005-2006 The ATHENA Consortium.
More on Business Interoperability
More information available on www.athena-ip.org
Deliverable D.B3.1 Deliverable D.B3.3
56© 2005-2006 The ATHENA Consortium.
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 rg@uninova.pt. 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.
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